nep-eec New Economics Papers
on European Economics
Issue of 2022‒11‒28
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Assessing the Impact of Country-Specific Sovereign Risk on Financial and Banking System in EMU: the Role of Italy By Capasso Salvatore; D’Uva Marcella,; Fiorelli Cristiana; Napolitano Oreste
  2. An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound By Haderer, Michaela
  3. Evolution of fiscal systems: Convergence or divergence? By Paloma Péligry; Xavier Ragot
  4. Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities By Andrejs Zlobins
  5. Determinants of cost of equity for listed euro area banks By Gabriel Zsurkis
  6. What’s that noise? Analysing sentiment-based variation in central bank communication By Bernd Hayo; Johannes Zahner
  7. The solvency and funding cost nexus - the role of market stigma for buffer usability By Helena Carvalho; Lucas Avezum; Fátima Silva
  8. The effects of cross-border acquisitions on firms’ productivity in the EU By Wildmer Daniel Gregori; Maria Martinez Cillero; Michela Nardo
  9. MARKUPS, TAXES, AND RISING INEQUALITY By Stéphane Auray; Aurélien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
  10. Start-up types and macroeconomic performance in Europe By De Haas, Ralph; Sterk, Vincent; Van Horen, Neeltje
  11. The impact of air pollution on labour productivity in France By Clara Kögel
  12. Lessons from the EU effort sharing decision for supranational climate cooperation: A firm-level analysis By Gavarda, Claire; Diethelm, Lukas
  13. Health Shocks and Housing Downsizing: How Persistent Is 'Ageing in Place'? By Joan Costa-i-Font; Cristina Vilaplana-Prieto
  14. Measuring the Carbon Content of Wealth Evidence from France and Germany By Yannic Rehm; Lucas Chancel
  15. Is There a Green Dividend of National Redistribution? By Eren Gürer; Alfons Weichenrieder
  16. A tail of labour supply and a tale of monetary policy By Cantore, Cristiano; Ferroni, Filippo; Mumtaz, Hroon; Theophilopoulou, Angeliki

  1. By: Capasso Salvatore (Università di Napoli Parthenope, ISMed-CNR, and CSEF.); D’Uva Marcella, (Università di Napoli Parthenope); Fiorelli Cristiana (Università di Napoli Parthenope); Napolitano Oreste (Università di Napoli Parthenope)
    Abstract: This work investigates the bank-sovereign risk transmission across EMU countries, assessing how sovereign risk in Italian government bonds can affect the sovereign and credit risk of non-stressed countries. We employ a GVAR technique and measure spatial proximity by using the cross-country “distance” in debt-to-GDP ratio. Our results confirm the hypothesis of a sovereign-bank loop: a shock in Credit Default Swaps spread of one country propagates to other CDS and bank indices. The effects are stronger in more fragile financial systems. Overall, our findings highlight the importance of spillover effects and suggest a monetary policy tailored on “back-door” propagation of shocks.
    Keywords: sovereign CDS, GVAR, spillovers, euro area.
    JEL: C31 C58 E44
  2. By: Haderer, Michaela
    Abstract: I investigate the implications of the zero lower bound (ZLB) in a structural New-Keynesian model for the euro area. The medium-scale DSGE model accommodates forward guidance by treating the expected durations of the ZLB constraint as free parameters in estimation. Incorporating professional forecasters’ expectations about the future path of the policy rate provides well-identified estimates of the durations. These estimates indicate that unconventional monetary policy becomes increasingly important from 2018 on. Furthermore, when monetary policy is expected to be passive in its response to inflation after liftoff, forward guidance has weaker effects with deflationary pressures on the economy. Finally, including data from the Covid-19 pandemic in estimation leads to stable estimates and allows an assessment of monetary policy during that period.
    Keywords: monetary policy; zero lower bound; forward guidance; liftoff; Covid-19
    Date: 2022–11
  3. By: Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this article is to analyze, more than ten years after the financial crisis of 2007, the convergence or divergence of the diversity of capitalism, focusing on the fiscal systems. Studying 29 countries, we first analyse the evolution of the taxation of households, firms, labour, consumption and capital. Then we use recent statistical method to indentify three types of fiscal systems: liberal, intermediate, and social-democratic, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. The first result of this analysis is that only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates, on labour or capital tax on households, show rather signs of divergence. Second, we show the divergence of the liberal and social-democratic group over the period. The European countries are converging towards the social-democratic model, with the exception of Great Britain, which is moving towards the liberal model over the period. Hence, the analysis shows that the divergence of fiscal systems is compatible with the convergence of certain taxes on the most mobile factors during a strong period of trade internationalization. Thus, the financial crisis does not seem to contribute to the convergence, but to the divergence of fiscal systems.
    Keywords: fiscal systems,globalization,capital taxation
    Date: 2022–02–03
  4. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the interaction among non-standard monetary policy measures – the negative interest rate policy, forward guidance and quantitative easing – and their ability to substitute conventional policy rate setting when it is constrained by the effective lower bound. In this paper, the euro area serves as our laboratory since the European Central Bank has deployed all three unconventional measures in the past decade to bypass the binding effective lower bound constraint and stabilize the inflation trajectory towards the target. Our empirical setup makes use of a smooth-transition structural vector autoregression, while identification of monetary innovations is done via fusion of high frequency information with narrative sign restrictions, first introduced in Zlobins (2021b) and now further extended to isolate rate cuts in positive/negative territory, allowing to simultaneously identify the impact of both conventional and unconventional policy actions. Our findings show that unconventional measures can substitute the standard policy rate setting but their effectiveness is highly dependent on the overall policy mix and the state of the economy. However, the evidence also suggests that non-standard measures serve as complements to the conventional policy as they are particularly powerful in circumstances when standard policy rate setting loses its stabilization properties, for example, during market turbulence or when the risk of de-anchoring of inflation expectations is elevated.
    Keywords: quantitative easing, negative interest rate policy, forward guidance, monetary policy, non-linearities
    JEL: C54 E50 E52 E58
    Date: 2022–11–11
  5. By: Gabriel Zsurkis
    Abstract: The objective of this paper is to identify the banks’ cost of equity determinants. We rely on a two-step approach. First, we estimate the cost of equity (COE) for listed euro area banks through multi-factor models, which are widely used in the asset pricing literature. We propose a new specification with overall market, banking sector and country risks and conclude that it has the best performance among all considered alternatives to mimic the bank’s realized returns dynamics. Then, this specification is employed to estimate the banks’ return sensitivities to each of the common risk factors and the COE. In the second step, we consider bank-specific and country-level variables and infer whether they explain the estimated COE time series dynamics and differences in COE across banks. We conclude that changes in ECB’s interest rates and government bond rates were crucial to explain the evolution of the COE between 2012 and 2020. Moreover, we find that some variables related to business and financial cycles, and bank-specific variables such as Nonperforming Loan ratio, Tier1 ratio and Return on Assets are also important.
    JEL: E44 G1 G20 G21
    Date: 2022
  6. By: Bernd Hayo (Marburg University); Johannes Zahner (Marburg University)
    Abstract: To which degree can variation in sentiment-based indicators of central bank communication be attributed to changes in macroeconomic, financial, and monetary variables; idiosyncratic speaker effects; sentiment persistence; and random ‘noise’? Using the Loughran and McDonald (2011) dictionary on a text corpus containing more than 10,000 speeches and press statements, we construct sentiment-based indicators for the ECB and the Fed. An analysis of variance (ANOVA) shows that sentiment is strongly persistent and influenced by speaker-specific effects. With about 80% of the variation in sentiment being due to noise, our findings cast doubt on the reliability of conclusions based on variation in dictionary-based indicators.
    Keywords: Sentiment index, monetary policy, central banks, Loughran and McDonald (2011) dictionary, information content of sentiment indices
    JEL: C55 E58 E61 Z13
    Date: 2022
  7. By: Helena Carvalho; Lucas Avezum; Fátima Silva
    Abstract: In this paper, we investigate the relationship between the banks’ solvency ratio and their funding costs using a proprietary dataset from Banco de Portugal for 21 Portuguese banks from 2006 to 2020. In light of the discussion on impediments to capital buffer usability by banks, we focus on the importance of market discipline to this relationship. Our results suggest that the relationship between solvency and funding costs is negative and state-dependent, i.e. market participants become more sensitive to changes in solvency during economic downturns. The relationship is stronger for market-based financing sources in comparison to deposits. Finally, we use a breakpoint analysis and find that investors are more likely to penalize the same absolute deterioration in solvency levels when banks are already in a fragile position. Our findings support the hypothesis that fear of market stigma may make banks reticent to use buffers in times of stress.
    JEL: G00 G21 G28
    Date: 2022
  8. By: Wildmer Daniel Gregori (European Commission); Maria Martinez Cillero (European Commission); Michela Nardo (European Commission)
    Abstract: This study empirically investigates the extent to which firms in the European Union, once acquired through a cross-border acquisition, show different productivity levels as compared to those firms that have not been acquired. Our identification strategy relies on the combination of Propensity Scores and the Staggered Difference-in-Difference estimator, using firms’ balance sheet for the years 2008-2018. We find that cross-border acquisitions decrease the productivity of the acquired firms, especially in the manufacturing sector, both high- and low-tech. We find evidence of origin and sector heterogeneity. Firms targeted by acquirers with ultimate owners originating in emerging market economies and Offshore Financial Centres also decrease productivity of target firms in high-tech manufacturing.
    Keywords: Cross-border M&As, TFP, European Union, Propensity Score, DiD
    JEL: G
    Date: 2022
  9. By: Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], CREST-THEMA - CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Aurélien Eyquem (UNIL - Université de Lausanne = University of Lausanne); Bertrand Garbinti (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ENSAE - Ecole Nationale de la Statistique et de l'Analyse Economique - Ecole Nationale de la Statistique et de l'Analyse Economique); Jonathan Goupille-Lebret (CNRS - Centre National de la Recherche Scientifique, GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique, ENS Lyon, Université de Lyon)
    Abstract: How to explain rising income and wealth inequality? We build an original heterogeneous- agent model with three key features: (i) an explicit link between firm's market power and top income shares, (ii) a granular representation of the tax and transfer system, and (iii) three assets with endogenous portfolio decisions. Using France as an illustration, we look at how changes in markups, taxes, factor productivity, and asset prices affect inequality dynamics over the 1984-2018 period. Rising markups account for the bulk of rising income inequality. Wealth inequality dynamics result mostly from changes in saving rate inequality but only in response to the exogenous changes in taxation and markups. Our results point to the critical importance of endogenous saving decisions in response to exogenous shocks as a key driver of wealth inequality.
    Date: 2022–10–27
  10. By: De Haas, Ralph (European Bank for Reconstruction and Development, CEPR and KU Leuven); Sterk, Vincent (University College London and CEPR); Van Horen, Neeltje (Bank of England)
    Abstract: Can policymakers improve macroeconomic performance by encouraging the entry of high‑performance start‑ups? To answer this question, we construct a novel and comprehensive data set on 1.3 million start‑ups in 10 European countries. We apply cluster analysis to identify distinct start‑up types and trace their development over time. Three stylised facts transpire. First, we uncover five well‑separated start‑up types that are consistently present across countries, industries, and cohorts. We label these basic, large, capital‑intensive, cash‑intensive, and high‑leverage. Second, the initial differences between these start‑up types are persistent. Third, each start‑up type displays a characteristic life cycle in terms of productivity, employment generation, and exit rates. We feed these empirical results into an agnostic firm dynamics model to quantify how much structural policy could improve macroeconomic performance by shifting the composition of start‑ups. We find that substantial gains in aggregate employment and productivity can be made through policies that benefit high‑performance start‑ups (such as large and capital‑intensive ones) while discouraging the entry of underperforming firms (such as highly leveraged ones).
    Keywords: Start‑ups; firm entry; productivity; corporate tax; entrepreneurship; cluster analysis.
    JEL: D22 D24 G32 L11 L25 L26 O47
    Date: 2022–06–17
  11. By: Clara Kögel (OCDE - Organisation de Coopération et de Développement Economiques = Organisation for Economic Co-operation and Development, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates the effect of air pollution on labour productivity in French establishments in both manufacturing and non-financial market services sectors from 2001 to 2018. An instrumental variable approach based on planetary boundary layer height and wind speed allows identifying the causal effect of air pollution on labour productivity. The finding shows that a 10% increase in fine particulate matter leads, on average, to a 1.5% decrease in labour productivity, controlling for firm-specific characteristics and other confounding factors. The analysis also considers different dimensions of heterogeneity driving this adverse effect. The negative effect of pollution is mainly driven by service-intensive firms and sectors with a high share of highly skilled workers. This finding is in line with the expectation that air pollution affects cognitive skills, concentration, headache, and fatigue in non-routine cognitive tasks. Compared to an estimation of the marginal abatement cost of PM 2.5 reductions by the Air Quality Directive 2008/50/EC, gains only from the labour productivity channel are equivalent to one-third of the abatement cost over the implementation period. All in all, these estimates suggest that the negative impact of air pollution is much larger than previously documented in the literature.
    Keywords: air pollution,labour productivity,planetary boundary layer height
    Date: 2022–10
  12. By: Gavarda, Claire; Diethelm, Lukas
    Abstract: As an example of supranational climate policy coordination for sectors not covered by carbon trading, the European Effort Sharing Decision set national targets for emission reductions for the time period 2013-2020. Member States were free to decide the national policies to implement to achieve these objectives. This is the first quantification of the impact this regulation had on the emissions of the corresponding firms. We exploit the differences along three variables: a national-level treatment intensity, an exposure index defined at the firm level and a time dimension (before or after the introduction of the policy). We find that, even in countries with no stringent target, emissions from exposed firms tended to decrease more than emissions from non-exposed firms. In addition, each percentage point increase in the stringency of the treatment leads to a 6.1% reduction in emissions for an average exposed firm. This provides interesting insights for other supranational climate agreements.
    Keywords: carbon emissions,effort sharing decision,firms,climate policy
    JEL: D22 F53 L51 Q54 Q58
    Date: 2022
  13. By: Joan Costa-i-Font; Cristina Vilaplana-Prieto
    Abstract: Individual preferences for ‘ageing in place’ (AIP) in old age are not well understood. One way to test the strength of AIP preference is to investigate the effect of health shocks on residential mobility to smaller size or value dwellings, which we refer to as ‘housing downsizing’. This paper exploits more than a decade worth of longitudinal data to study older people’s housing decisions across a wide range of European countries. We estimate the effect of health shocks on the probability of different proxies for housing downsizing (residential mobility, differences in home value, home value to wealth ratio), considering the potential endogeneity of the health shock to examine the persistence of AIP preferences. Our findings suggest that consistently with the AIP hypothesis, every decade of life, the likelihood of downsizing decreases by two percentage points (pp). However, the experience of a health shock partially reverts such culturally embedded preference for AIP by a non-negligible magnitude on residential mobility (9pp increase after the onset of a degenerative illness, 9.3pp for other mental disorders and 6.5pp for ADL), home value to wealth ratio and the new dwelling’s size (0.6 and 1.2 fewer rooms after the onset of a degenerative illness or a mental disorder). Such estimates are larger in northern and central European countries.
    Keywords: ageing in place, housing downsizing, health shocks at old age, Europe, residential mobility, mental degenerative mental illness, mental disorder
    JEL: I18 G51 J61 R31
    Date: 2022
  14. By: Yannic Rehm (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Lucas Chancel (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, WIL - World Inequality Lab)
    Abstract: This paper estimates the distribution of annual wealth-related greenhouse gas (GHG) emissions in France and Germany, using a novel method to combine newly released air emission accounts, national accounts, and survey data on wealth. In our proposed framework, wealth holders are responsible for the emissions that occur in production processes they implicitly control. Our findings suggest that wealth-related emissions are at least as much concentrated at the very top than wealth itself, possibly even more. In addition, wealth-related emissions appear to be more even more concentrated in Germany than in France. Large emissions inequalities persist even when individuals are attributed a combination of direct and indirect GHG emissions. Wealth-related emissions of the average top 10% wealth holder exceed total emissions (including direct and indirect emissions from consumption) of the average individual in the bottom 50% in France and Germany. All emissions considered, the life of the average top 10% wealth holder appears to be 3-5 times more carbon-intensive than the average individual in the bottom 50%. Finally, we discuss the paper's findings implications for a per-ton tax on the carbon content of wealth.
    Keywords: Capital,Carbon tax,Emissions,Inequality,National accounts,Survey,Taxation,Wealth
    Date: 2022–09
  15. By: Eren Gürer; Alfons Weichenrieder
    Abstract: CO2 emissions are disproportionately caused by more affluent consumers. In the political debate, this fact has triggered the demand for income redistribution and wealth taxes not only to reduce inequality but also to reduce CO2 emissions. This paper calculates the possible size of such a green dividend of redistribution in 26 countries and concludes that, for most EU countries, it is negative if the redistribution is efficient, in the sense that it keeps average incomes constant. If the redistribution introduces inefficiencies that lead to total income losses, the negative green dividend, otherwise associated with additional redistribution, may be avoided.
    Keywords: environment, redistribution, CO2 emissions, inequality, green dividend
    JEL: Q56 D12 D30
    Date: 2022
  16. By: Cantore, Cristiano (Bank of England); Ferroni, Filippo (Chicago Fed); Mumtaz, Hroon (Queen Mary, University of London); Theophilopoulou, Angeliki (Brunel University London)
    Abstract: We study the interaction between monetary policy and labour supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong income effect on labour supply in the left tail of the income distribution, following a monetary policy shock in the US and the UK. That is, while aggregate hours and labour earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with a lower intertemporal elasticity of substitution for the Hand-to-Mouth households. This setup has important implications for the impact of inequality on the transmission of monetary policy. We unveil a novel dampening effect on aggregate demand generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Therefore we show that the impact of inequality on the transmission mechanism of monetary policy is highly dependent on the different layers of heterogeneity on the household side and the different combinations of nominal and real frictions. More inequality does not necessarily generate a stronger response of aggregate demand after a monetary policy shock.
    Keywords: Monetary policy; household survey; FAVARs; TANK; hand to mouth
    JEL: C10 E32 E52
    Date: 2022–07–21

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