nep-eec New Economics Papers
on European Economics
Issue of 2022‒12‒19
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro area inflation and a new measure of core inflation By Claudio Morana
  2. Euro area monetary policy and TARGET balances: a trilogy By Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
  3. Navigating the housing channel of monetary policy across euro area regions By Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
  4. Medium-term investment responses to activity shocks: the role of corporate debt By Barrela, Rodrigo; Lopez-Garcia, Paloma; Setzer, Ralph
  5. Bank lending rates and the remuneration for risk: evidence from portfolio and loan level data By Durrani, Agha; Metzler, Julian; Michail, Nektarios; Werner, Johannes Gabriel
  6. The rise and fall of global financial flows in EU 15: new evidence using dynamic panels with common correlated effects By Mariam Camarero; Silviano Alejandro Muñoz; Cecilio Tamarit
  7. The market for short-term debt securities in Europe: what we know and what we do not know By Darpeix, Pierre-Emmanuel
  8. Who's got the power? Wage determination and its resilience in the Great Recession By Hugo Reis; Hugo de Almeida Vilares
  9. Price setting before and during the pandemic: evidence from Swiss consumer prices By Rudolf, Barbara; Seiler, Pascal
  10. The scarring effects of major economic downturns: The role of fiscal policy and government investment By Larch, Martin; Claeys, Peter; Van Der Wielen, Wouter
  11. The dynamic effects of competition on investment: the case of the European mobile communications industry By Bahia, Kalvin; Castells, Pau
  12. The impact of air pollution on labour productivity in France By Clara Kögel
  13. COVID-19 and the resilience of European firms: The influence of pre-crisis productivity, digitalisation and growth performance By Teruel, Mercedes; Amaral-Garcia, Sofia; Bauer, Péter; Coad, Alexander; Domnick, Clemens; Harasztosi, Péter; Pál, Rozália
  14. Collective bargaining in seven European countries throughout the pandemic By Molina, Óscar,; Pedersini, Roberto,

  1. By: Claudio Morana (Center for European Studies, University of Milano-Bicocca, Italy; Rimini Centre for Economic Analysis; CeRP, Collegio Carlo Alberto, Italy; CES, Harvard, USA)
    Abstract: This paper introduces a new decomposition of euro area headline inflation into core, cyclical and residual components. Our new core inflation measure, the structural core inflation rate, bears the interpretation of expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been on a downward trend, landing at about 3% in 2022. Cyclical and residual inflation -associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might be lurking ahead. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.
    Keywords: headline inflation, core inflation, Russia's war in Ukraine, COVID-19 pandemic, sovereign debt crisis, subprime financial crisis, dot-com bubble, euro area, ECB monetary policy, trend-cycle decomposition
    JEL: C22 C38 E32 F44 G01
    Date: 2022–12
  2. By: Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
    Abstract: The growth in TARGET balances after 2009 has given rise to intense academic and public debate. Our paper offers a systematic exposition of the necessary conditions for TARGET balances to emerge and provides a clear link to monetary policy. We show that large TARGET balances can only arise with excess liquidity. The interpretation of TARGET balances therefore depends on the monetary policy context in which excess liquidity is created. We distinguish three phases of TARGET balances growth and propose some easy-to-derive metrics for policy makers and academics to assess developments in TARGET balances. We develop a comprehensive econometric framework to account for relevant factors driving TARGET balances in the different phases. We find that while financial market stress and economic imbalances were the drivers of TARGET balances during the great financial and sovereign debt crises, the implementation of Eurosystem asset purchases was the driving force since March 2015. As excess liquidity is likely to persist on account of higher demand for central bank reserves compared to the pre-crisis period, TARGET balances have the potential to remain sizeable in the future. JEL Classification: E42, E58, F32
    Keywords: asset purchase programme, balance of payments, excess liquidity, TARGET2
    Date: 2022–11
  3. By: Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
    Abstract: This paper assesses the role of the housing market in the transmission of conventional and unconventional monetary policy across euro area regions. By exploiting a novel regional dataset on housing-related variables, a structural panel VAR analysis shows that monetary policy propagates effectively to economic activity and house prices, albeit in a heterogeneous fashion across regions. Although the housing channel plays a minor role in the transmission of monetary policy to the economy on average, its importance increases in the case of unconventional monetary policy. We also explore the determinants of the diverse transmission of monetary policy to economic activity across regions, finding a larger impact in areas with lower labour income and more widespread homeownership. An expansionary monetary policy can thus be effective in mitigating regional inequality via its stimulus to the economy. JEL Classification: D31, E32, E44, E52, R31
    Keywords: business cycles, conventional and unconventional monetary policy, housing market, regional in-equality
    Date: 2022–11
  4. By: Barrela, Rodrigo; Lopez-Garcia, Paloma; Setzer, Ralph
    Abstract: This paper analyses the implications of corporate indebtedness for investment following large economic shocks. The empirical analysis is based on a large Orbis-iBACH firm-level data set for euro area countries from 2005 to 2018. Our results suggest that investment of high-debt firms is significantly depressed for an extended period in the aftermath of economic crises. In the four years after a negative economic shock, the cumulative loss of capital of high-debt firms is around 15% higher than that of firms with lower debt burdens. The negative impact of high debt on investment is most evident for firms in Southern and Eastern Europe and for micro firms. These findings suggest a potentially significant negative impact of increased corporate indebtedness on investment in the post-COVID-19 recovery. JEL Classification: E22, F34, G31, G32
    Keywords: corporate debt, COVID shock, investment, leverage, local projections
    Date: 2022–11
  5. By: Durrani, Agha; Metzler, Julian; Michail, Nektarios; Werner, Johannes Gabriel
    Abstract: We employ interest rates and expected loss probabilities from the 2021 EBA Stress Test dataset and euro area credit registries to examine whether the risk-return relationship holds in banking. After controlling for bank, loan, and debtor characteristics as well as macroeconomic conditions, results indicate that a risk-return relationship in bank lending is present but varies significantly across and within borrower segments. While bank lending rates appear to be quite responsive to risks towards households, results suggest that banks only significantly increase interest rates towards non-financial corporations that reside in the riskiest quantiles of the distribution. This potentially implies the presence of a cross-subsidization effect of credit risk. JEL Classification: E51, E52, E58
    Keywords: banking, credit register, interest rates, loans, risk-return
    Date: 2022–11
  6. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain).); Silviano Alejandro Muñoz (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).)
    Abstract: This paper assesses capital mobility for a panel of 15 European countries for the period 1970- 2019 using dynamic common correlated effects modeling (DCCE) as proposed in Chudik and Pesaran (2015). In particular, we account for the existence of cross section dependence, slope heterogeneity, nonstationarity and endogeneity in a multifactor error correction model (ECM) that includes one homogeneous break. The analysis also identifies the heterogeneous structural breaks affecting the relationship for each of the individual countries. The ECM setting allows for a complete assessment of the domestic saving-investment relationship in the long-run as well as two other elements usually neglected: short-run capital mobility and the speed of adjustment. When we account for a single homogeneous break, this is found at the euro inception. We obtain that long-run capital mobility is high but not perfect yet. We also provide empirical evidence for the Ford and Horioka (2017)’s hypothesis, who argue that goods market integration is a necessary condition to obtain zero correlation between domestic saving-investment. Our results stress the role played by the euro as a booster for both financial and real integration. However, a complete degree of economic integration has not been fully achieved. Short-run capital was highly mobile for the whole period, with some exceptions, coinciding with turmoil episodes. Additionally, from the application of the CS-DL threshold analysis proposed by Chudik et al. (2016), we find that economic risk and openness play a key role in capital mobility.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Structural Breaks; Cross-sectional dependence; Cointegration, unit roots.
    JEL: F36 F45 O16
    Date: 2022–11
  7. By: Darpeix, Pierre-Emmanuel
    Abstract: In March 2020, against the backdrop of a worsening Covid crisis, some segments of the money market fund (MMF) industry faced severe redemption pressures. Given their central role within the short term funding market, MMFs were at the heart of financial stability concerns, and legitimately underwent careful reviews by macroprudential bodies and market supervisors to assess their vulnerabilities and propose policy options to remediate them. Yet it is clear that MMFs are only one part of a wider ecosystem. These funds collect excess cash from some economic agents, which is predominantly invested in the markets for short-term debt securities, thus providing funding to a wide array of entities in need for short-term funding (banks, non-financial corporates, States, local governments, etc.). And clearly, beyond funds, vulnerabilities were also identified both on the underlying market and on the investors’ side. In order to complement the recommendations issued in January 2022 by the ESRB ahead of the scheduled revision of the MMF Regulation, and so as to provide a better understanding of vulnerabilities still widely unaddressed, the AMF conducted a stock-take analysis of the public information available on the very fragmented and opaque market for short-term debt instruments in Europe. Thanks to a fruitful collaboration with ESRB who shared internal databases, it was able to fill in some data gaps and provide new insights on this market. In particular, this stock-take gives the first comprehensive and consolidated estimate of the outstanding in question (more than EUR 2.2 trillion as of Dec.2020), with a breakdown according to issuer types, instrument types and currencies. The analysis highlights the still unaddressed vulnerabilities such as the fragmentation of the market and of its supervision as well as the lack of a robust identification of Euro-CP and emphasizes the lack of transparency in the secondary market operations. JEL Classification: D53, E58, E65, G15, G18, G23, H63
    Keywords: Certificates of deposit, Commercial paper, Euro-CP, NEU-CP, Short term funding market, STEP, Treasury bills
    Date: 2022–12
  8. By: Hugo Reis; Hugo de Almeida Vilares
    Abstract: Whereas wage inequality has risen markedly in most OECD countries in recent decades, it has fallen in several Southern European economies. To shed light on this phenomenon, we embed sectoral bargaining, which is common in Southern European economies, in a dynamic search and matching model. We estimate the model using comprehensive employer-employee data from Portugal for the last two decades and its data on collective bargaining agreements in different sectors, which allows us to assess the evolution of rent sharing. We find that since the mid-2000s, worker bargaining power has grown slightly at the bottom of the skill distribution while shrinking at the middle and top, contributing to the compression of the wage distribution. These changes, which persisted even during the Great Recession, increased the importance of sectoral bargaining in wage determination, weakened the relationship between wages and firm productivity, and reduced the assortative matching of workers to firms.
    Keywords: search and matching, wage determination, collective bargaining and trade unions, rent sharing, bargaining power, assortative matching, wage inequality
    Date: 2022–11–17
  9. By: Rudolf, Barbara; Seiler, Pascal
    Abstract: We provide new evidence on price rigidity at the product level based on microdata underlying the Swiss consumer price index from 2008 to 2020. We find that the frequency of price changes has increased over the last decade, particularly among products where collection switched to online prices, reflecting the rise of e-commerce. Furthermore, price changes tend to be synchronized within rather than across stores. Time variations in inflation can be attributed mainly to variations in the frequency of both price increases and price decreases. In the first year of the pandemic, the frequency of price adjustments changed little on average, while temporary sales responded countercyclically to the respective demand conditions across sectors. JEL Classification: E31, E5, L11
    Keywords: consumer prices, COVID-19 pandemic, inflation, price-setting behavior, price rigidity
    Date: 2022–11
  10. By: Larch, Martin; Claeys, Peter; Van Der Wielen, Wouter
    Abstract: Long shunned as slow and ill timed, the response to the Covid-19 pandemic initiated a reassessment of fiscal policy as stabilisation tool. At the same time, there is ample evidence that major economic downturns produce lasting effects on real GDP in spite of active fiscal policy interventions. This paper takes a fresh look at economic scarring in 26 OECD countries, including 14 EU member states, since 1970 and examines the role played by fiscal policy. We find that higher current expenditure - the favoured active response - does not mitigate the lasting impact of major economic downturns on real GDP. In contrast, more government investment could help but generally receives little attention. As a result, scarring effects are significant confronting governments with higher debt levels, which in turn weigh on the room for manoeuvre in subsequent downturns. In sum, fiscal policy makers face two difficulties in the event of a major economic downturn: (i) adopt the right type of fiscal expansion, and (ii) find the right time to pivot from short-term stabilisation to fiscal consolidation while protecting investment. Both challenges are fraught with political economy issues.
    Keywords: scarring effects,major economic downturn,fiscal policy,fiscal stabilisation,public investment
    JEL: E60 E62 E65 H62
    Date: 2022
  11. By: Bahia, Kalvin; Castells, Pau
    Abstract: We evaluate the impact of competition on investments in Europe's mobile communications market during the 2011-2021 period. There are stark and sustained differences in market outcomes between three- and four-player markets in Europe, and economic theory suggests these could be partly explained by the dynamic effects of competition on the ability and incentives to invest by market players. We find strong evidence that market concentration in Europe is below optimal levels that would maximise investments, especially in four-player markets. The dispersion of fixed costs and assets among a greater number of players can result in diseconomies of scale and a less efficient use of resources. We also find evidence that investment incentives to improve quality and innovate are lower in markets with lower concentration indices and profit margins.
    JEL: K20 L10 L40 L96
    Date: 2022
  12. 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
  13. By: Teruel, Mercedes; Amaral-Garcia, Sofia; Bauer, Péter; Coad, Alexander; Domnick, Clemens; Harasztosi, Péter; Pál, Rozália
    Abstract: We analyse how the COVID-19 crisis impacted firms' employment levels and digitalisation efforts differently depending on their pre-crisis productivity, digitalisation and growth performance. We match the EIB Investment Survey with firm-level financial statements from the ORBIS database for 27 EU Member States and the United Kingdom. Following the sales decline during the crisis, we show that: (1) Higher productivity firms are less prone to reduce the number of employees both in the short and in the long term; (2) High-growth enterprises are also less prone to reduce the number of employees in the long term; (3) Firms in highly digitalised sectors are less likely to reduce the number of employees; (4) Firms are more likely to increase their use of digital technologies, especially those that were already more digitalised before the crisis.
    Keywords: HGE,labour productivity,digitalisation,COVID-19,Mercedes Teruel,Sofia Amaral-Garcia,Peter Bauer,Alex Coad,Clemens Domnick,Péter Harasztosi,Rozália Pál
    JEL: L22 O47
    Date: 2022
  14. By: Molina, Óscar,; Pedersini, Roberto,
    Abstract: This Working Paper investigates developments in social dialogue and collective bargaining during the first two years of the COVID-19 pandemic in a selection of European countries. The paper provides an overview of government and social partner responses. In describing responses, the main goal of this paper is to identify the dimensions that can help explain the variety of responses, but also their commonalities. The paper also aims at understanding the factors that may have promoted the activation of social dialogue over economic and social policies and broaden the role of collective bargaining and industrial relations, as opposed to unilateral interventions designed by national governments. The paper lays out an analytical framework based on the COVID impact in each country, national industrial relations institutions and the nature of the government in office. In this general framework, we observe how national industrial relations institutions play a key role in explaining the responses in terms of the level and quality of social dialogue and the role of collective bargaining. Particularly important has been the role of strong sectoral collective bargaining institutions, allowing sectoral actors to negotiate specific responses considering the impact and the needs of the sector.
    Keywords: collective bargaining, social dialogue, COVID-19
    Date: 2022

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