nep-eec New Economics Papers
on European Economics
Issue of 2023‒01‒02
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The rebalancing channel of QE: New evidence at the security level in the euro area By Tom Hudepohl
  2. Growth Effects of European Monetary Union: A Synthetic Control Approach By Lucke, Bernd
  3. You’ll never talk alone- what media narratives on European reforms reveal about a polity in the making By Emmanuel Mourlon-Druol; Henrik Müller; Giuseppe Porcaro; Tobias Schmidt
  4. Pay and unemployment determinants of migration flows in the European Union By António Afonso; José Alves; Krzysztof Beck
  5. Enforcing 'Equal Pay for Equal Work' in the EU: what would it take? By DE POLI Silvia; MAIER Sofia
  6. Estimating financial integration in Europe: How to separate structural trends from cyclical fluctuations By Lake, Alfred; Maurin, Laurent; Minnella, Enrico
  7. Perceived income positions and attitudes towards EU inequality: A cross-country survey experiment By Bublitz, Elisabeth; Wang, Hequn; Jäger, Julian; Beblo, Miriam; Lohmann, Henning
  8. Inflationary household uncertainty shocks By Ambrocio, Gene
  9. Bond convenience curves and funding costs By Nissinen, Juuso; Sihvonen, Markus
  10. Systems of Innovation in Central and Eastern European countries: Path of Economic Transition and Differences in Institutions By Mariia Shkolnykova; Lasse Steffens; Jan Wedemeier
  11. Price setting before and during the pandemic: evidence from Swiss consumer prices By Barbara Rudolf; Pascal Seiler
  12. Populists and Fiscal Policy: The Case of Poland By Maciej Wysocki; Cezary Wojcik; Andreas Freytag
  13. Regional general equilibrium modelling with forward-looking agents: an application to the 2014-2020 European structural regional investments By Francesca Crucitti; Patrizio Lecca; Philippe Monfort; Simone Salotti
  14. The effects of monetary policy across fiscal regimes By Roben Kloosterman; Dennis Bonam; Koen van der Veer
  15. Monetary policy and inequality: The Finnish case By Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
  16. ESG compliant optimal portfolios: The impact of ESG constraints on portfolio optimization in a sample of European stocks By Costanza Torricelli; Beatrice Bertelli
  17. Welfare and Distributional Impact of Soaring Prices in Europe By Sologon, Denisa Maria; O'Donoghue, Cathal; Linden, Jules; Kyzyma, Iryna; Loughrey, Jason
  18. Financial Stocks and Flows in the Time of Covid-19 By Stephen Millard; Nicholas Jackson
  19. The Political Costs of Austerity By Gabriel, Ricardo Duque; Klein, Mathias; Pessoa, Sofia
  20. New Estimate of the Elasticity of Marginal Utility of Consumption for Europe: Implications for the Social Discount Rate By Milan Scasny; Matej Opatrny

  1. By: Tom Hudepohl
    Abstract: This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (APP). Search for yield via portfolio rebalancing is one of the possible channels through which Quantitative Easing (QE) may affect real economic activity. This paper shows that during QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies. In addition, a significant rebalancing has taken place within the euro area, as investors increased their relative holdings of debt issued by vulnerable European countries. This increase has been driven by investors located in peripheral countries, while investors in other countries were net sellers. QE thus has a heterogeneous impact on security holdings across euro area countries and sectors. These findings are relevant for policymakers to assess the (side-)effects of QE and the potential impact of monetary tightening.
    Keywords: Portfolio rebalancing; Quantitative Easing, Asset purchases; Unconventional monetary policy;Heterogeneity
    JEL: E52 E58 G10 G11 G15
    Date: 2022–12
  2. By: Lucke, Bernd
    Abstract: After more than 20 years of European Monetary Union (EMU), surprisingly few scientific studies exist which study the growth effects of introducing a common currency in large parts of the European Union. I do so using a large panel (NUTS3 data) of regional data for the EU-15. Some 800 (treated) regions were subject to a policy intervention when their country joined the Euro, while some 200 control regions were not. In a synthetic control approach as explored e. g. by Abadie, Diamond and Hainmueller (ADH, 2010), I estimate the causal effects of EMU both with the standard ADH-methodology and with a novel approach which estimates counterfactuals from the control group in post-treatment time. The results from both approaches are very similar: EMU has benefited regions with export-oriented and highly competitive companies e. g. in Germany, while it has had sizable detrimental growth effects on most French and Mediterranean Eurozone regions. Over eighteen years, these losses in growth cumulate to losses in per-capita income of between 15% and 30% vis-à-vis the non-EMU counterfactual.
    Keywords: European Monetary Union, synthetic control methods
    JEL: C12 C13 C21 C23 E65 F33 N14
    Date: 2022–11–03
  3. By: Emmanuel Mourlon-Druol; Henrik Müller; Giuseppe Porcaro; Tobias Schmidt
    Abstract: In this paper, we have analysed the coverage of reforms in a European context in the leading business newspapers in the three biggest EU member states
    Date: 2022–12
  4. By: António Afonso; José Alves; Krzysztof Beck
    Abstract: We analyze the migration drivers within the European Union countries. For a set of 23 EU countries over the 1995-2019 period, we use Bayesian Model Averaging and quantile regression to assess notably the relevance of unemployment and earnings. We find that the existence of a common border increases the number of net migrants by 172 people per 1000 inhabitants. In addition, 1000 PPP Euro increase in the difference in net annual salaries increases net migration by approximately 50 and 42 people per 1000 inhabitants in a working age of both countries under uniform and binomial-beta model prior, respectively. Moreover, one percentage point increase in the difference in the unemployment rate is associated with an increase in net immigration by approximately 6 and 3 persons by 1000 inhabitants in both countries. These results are also corroborated with the quantile regression results. Hence, human capital inside the EU is moving in search of higher cross-country earnings.
    Keywords: Migration flows; Earnings; Unemployment; Bayesian Model Averaging; Quantile regression; EU
    JEL: J61 J62 E24 F15 F22
    Date: 2022–12
  5. By: DE POLI Silvia (European Commission - JRC); MAIER Sofia (European Commission - JRC)
    Abstract: The European Parliament has recently approved new binding pay transparency measures to promote ``Equal Pay for Equal Work'', a EU founding principle which is at the heart of the European Pillar of Social Rights Action Plan towards 2030. Using harmonized microdata for the EU 27 countries and a novel estimation approach -based on blocking with regression adjustments- we provide new comparable estimates of the gap in gross hourly wages between women and men performing similar work. This gap ranges from about 6% in Germany to 18% in Estonia. We also shed new light on the (heterogeneous) distributional consequences of a hypothetical enforcement of equal pay for equal work, simulating an upward shift in women's gross hourly wage. The strongest impact on the distribution of labour earnings would take place in countries with high gender pay gaps for equal work and small gender gaps in employment and hours worked (mainly Central and Eastern European countries), whereas only marginal effects are identified in countries with large gaps in hours worked and gender segregation in the type of work done (Western European countries), and also in countries with large employment gaps (Southern European countries). We also identify income poverty-reducing and inequality-increasing effects. The latter is driven by a composition effect (under-representation of employed women in low-income households), which is only partly offset by the tax-benefit system.
    Keywords: equal pay
    Date: 2022–11
  6. By: Lake, Alfred; Maurin, Laurent; Minnella, Enrico
    Abstract: We construct a new indicator of de facto financial integration in the EU. The resulting indicator is pro-cyclical as it evolves along the cyclical pattern of economic activity in the European Union. It is then appended to a set of relevant financial and macroeconomic variables, within a FAVAR framework, to allow us to separate the impact of cyclical boom-bust shocks from structural integration shocks. Increasing structural financial integration tends to improve risk absorption and reduce income disparities among European countries. However, our analysis suggests that most of the movements in the indicator reflect business cycle dynamics, not proper integration. Given the estimated beneficial effects of stronger structural financial integration, these results highlight the need to develop further policies to foster it in the EU.
    Keywords: Business Cycle,FAVAR Models,Financial Markets,Macroeconomic Shocks
    JEL: E44 F36 F44 G15
    Date: 2022
  7. By: Bublitz, Elisabeth; Wang, Hequn; Jäger, Julian; Beblo, Miriam; Lohmann, Henning
    Abstract: We examine the relationship between perceived income positions and attitudes towards inequality at a supranational-level. Conducting a survey in four EU Member States (Germany, Italy, Poland, and Sweden), we confirm that their citizens misperceive their own income position in the EU. Once we account for these misperceptions, we find that those with a lower income rank assess EU income differences as more unjust and are more supportive of an EU minimum wage. When we inform a randomized subsample about their actual income position in the EU, those who learn to be richer than they initially thought assess EU income differences as less unjust. Respondents in Italy, Poland, and to a lesser extent Sweden drive these results whereas income misperceptions of German respondents have opposing effects.
    Keywords: Income,Misperceptions,Inequality,EU Minimum Wage,European Union,Survey Experiment
    JEL: D31 D63 F55
    Date: 2022
  8. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks do not universally behave like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. Further analysis, including a comparison of results across countries, suggest that factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. These results lend support to a pricing bias mechanism as an important transmission channel.
    Keywords: uncertainty,inflation,surveys of expectations
    JEL: D84 E30 E52 E71
    Date: 2022
  9. By: Nissinen, Juuso; Sihvonen, Markus
    Abstract: A convenience yield represents a difference between yield on a safe bond and yield on a synthetic safe bond, constructed by combining a risky bond with a CDS contract. We explain the shapes of eurozone sovereign convenience curves using a model in which arbitrageurs face higher funding costs on bonds with credit risk and bond demand shocks induce funding risk. We provide novel causal evidence for our mechanism using variation in funding costs generated through exogenous haircut category changes. Changes in convenience yields represent a key transmission channel of unconventional monetary policy to bond yields.
    Keywords: Sovereign bond convenience yields,money markets,asset pricing with frictions,monetary policy
    JEL: G12 G15
    Date: 2022
  10. By: Mariia Shkolnykova; Lasse Steffens; Jan Wedemeier
    Abstract: Against the background of the current political developments in Central and Eastern European (CEE) countries, like Ukraine, Poland, and Romania, the question arises what role the transformation of the economy and the resulting innovation linkages have played in these countries. This paper addresses this issue by exploring the impact of economic and institutional dimensions on the development of CEE countries, thereby explicitly distinguishing between European Union (EU) members and non-members. First of all, the performance development of the Gross Domestic Product (GDP) of the CEE countries and Western European countries is observed. In a further analysis step, the development of EU members is compared with that of CEE countries that are non-members of the EU. This paper estimates the impact of such factors as innovation, institutions, and political practices on the economic development of 37 European countries for the period from 2000 until 2020 by using a panel regression. The results of the analysis show that institutions matter, especially for non-EU-member CEE countries. Stable institutions—such as freedom of the press, freedom of expression, but also high levels of the Human Development Index—help countries to achieve a higher income development over time. The role of the innovative ability of countries is also decisive for a positive development.
    Keywords: Central and Eastern European Countries, Economic growth, Innovation, Institution, GDP
    JEL: O40 O47 R11
    Date: 2022–11
  11. By: Barbara Rudolf; Pascal Seiler
    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.
    Keywords: Price rigidity, price-setting behavior, consumer prices, inflation, COVID-19 pandemic
    JEL: E31 E5 L11
    Date: 2022
  12. By: Maciej Wysocki (SGH Warsaw School of Economics); Cezary Wojcik (SGH Warsaw School of Economics, Center for Leadership, and CESifo); Andreas Freytag (Friedrich-Schiller-University Jena, University of Stellenbosch, CESifo, and STIAS)
    Abstract: The past decade has witnessed an increase in populist movements across the world. Some of those movements have gained strong political support and formed populist governments promising new sets of economic and fiscal policies. This raises the pertinent policy question: how do such populist governments influence fiscal policy outcomes? We approach this question by looking at the case of Poland which according to several recent studies has experienced the highest level of populist rhetorics in recent years. Indeed, when the new populist government took power, between 2015-2019, Poland experienced a major social and fiscal policy shifts: the new government decreased the statutory retirement age despite sever aging problem and launched one of the biggest social programs in Europe which resulted in sharp increase in political support for the government. In the paper we provide some first evidence of the impact of such policies on fiscal outcomes. Our analysis reveals that fiscal sustainability parameters have significantly deteriorated sharply after 2015 when the new government undertook populist policies, despite the fact that current (observable) deficit and debt levels remained stable. Specifically, our estimates suggest that just after a year since the introduction of the new fiscal program, the strength of reaction of the primary balance to a change of the public debt decreased by nearly 50% in 2017 and the parameter turned negative and statistically insignificant thereafter which means that from 2018 fiscal policy lacked long-term sustainability. Overall, our estimations show that in the period of 2016-2019 fiscal sustainability parameters were the lowest since Poland joined the EU in 2004. While our analysis has several limitations, the case of the populist government in Poland provides some early evidence that populists do have negative impact on long-term fiscal sustainability.
    Keywords: fiscal sustainability, fiscal and social policy, populism
    JEL: C22 E60 H63
    Date: 2022–12–07
  13. By: Francesca Crucitti (European Commission - JRC); Patrizio Lecca (Comillas Pontifical University); Philippe Monfort (European Commission - DG REGIO); Simone Salotti (European Commission - JRC)
    Abstract: We investigate the effects of the 2014-20 European structural funds with a general equilibrium model calibrated on the NUTS 1 regions of the EU. We assume forward-looking agents to account for expectations and long-lasting effects of the policy. The almost €260 billion of investments lead the European GDP to be 0.3% higher in 2022 than it would be in the absence of the policy. Interestingly, this effect is lower than what a model with myopic agents would suggest. The regional distribution of the differences in the GDP impacts between the two settings indicates that the largest deviations are recorded for the net recipient regions, with interesting implications regarding the policy credibility, the nature of the interventions and their duration.
    Keywords: General equilibrium modelling, forward-looking behaviour, regional economics, cohesion policy.
    JEL: C68 D58 R13
    Date: 2022–10
  14. By: Roben Kloosterman; Dennis Bonam; Koen van der Veer
    Abstract: We estimate the effects of monetary policy shocks across contractionary and expansion- ary fiscal regimes in the euro area. An expansionary monetary policy shock leads to an increase in inflation and output growth, but only when it occurs in the expansionary fiscal regime. In a contractionary fiscal regime, the responses to a monetary easing are insignificant or even negative. Similarly, a monetary tightening only reduces inflation and output in the contractionary fiscal regime. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the monetary transmission mechanism.
    Keywords: regime-dependent effects of monetary policy; fiscal policy regimes, local projection methods
    JEL: E52 E62 E63
    Date: 2022–12
  15. By: Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha
    Abstract: We use Finnish household-level registry and survey data to study the effects of ECB's monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households' gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90th percentile to the 50th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile.
    Keywords: monetary policy,income inequality,wealth inequality
    JEL: D31 E32 E52
    Date: 2022
  16. By: Costanza Torricelli; Beatrice Bertelli
    Abstract: The introduction of the Environmental, Social, Governance (ESG) dimensions in setting up optimal portfolios has been becoming of uttermost importance for the financial industry. Given the absence of consensus in empirical literature and the limited number of studies providing performance comparison of ESG strategies, the aim of this paper is to assess the impact of ESG on optimal portfolios and to compare different approaches to the construction of ESG compliant portfolios. Following Varmaz et al. (2022) optimization model, we minimize portfolio residual risk by imposing a desired level of portfolio average systemic risk and ESG (measured by Bloomberg ESG score) over both an unscreened and a screened sample based on the 586 stocks of the EURO STOXX Index in the period January 2007 – August 2022. Three are the main results. First, regardless of the level of portfolio systemic risk, the Sharpe ratio of the optimal portfolios worsens as the target ESG level increases. Second, the Sharpe ratio dynamics of portfolios with the highest average ESG scores follows market phases: it is very close to/higher than other portfolios in bull markets, whereas it underperforms in stable or bear markets suggesting that ESG portfolios do not seem to represent a safe haven. Third, negative screenings with medium-low threshold reduce the performance of optimal portfolios with respect to optimization over an unscreened sample. However, when adopting a very severe screening we obtain a superior performance implying that very virtuous companies allows investors to do well by doing good.
    Keywords: sustainable portfolio, portfolio optimization, investor preferences, ESG score, negative screening, portfolio performance
    JEL: C61 G11 M14 Q01
    Date: 2022–10
  17. By: Sologon, Denisa Maria (LISER (CEPS/INSTEAD)); O'Donoghue, Cathal (National University of Ireland, Galway); Linden, Jules (LISER (CEPS/INSTEAD)); Kyzyma, Iryna (LISER (CEPS/INSTEAD)); Loughrey, Jason (Teagasc Rural Economy Research Centre)
    Abstract: This paper disentangles the distributional and welfare impact of price changes since the start of the cost of living crisis for a subset of European countries with different welfare regimes and price changes. It decomposes the impact of inflation and measures welfare changes using the compensating variation and equivalent incomes in a cross-national comparative perspective. The impact of inflation depends on good-specific price increases and budget shares. Budget shares for necessities (e.g. food, domestic fuel, electricity) are higher in poorer countries and for poorer people. Higher price growth in these necessities has resulted in higher inflation in poorer countries. Counter to the media narrative, the distributional impact is less substantial than expected. A significant cross-country variability exists, however, in inflation levels, composition and relative rates across the distribution. Similar levels of inflation regressivity result from different interplays between the level and disproportionality of inflation along the income distribution. We quantify the compensating variation of inflation with a relatively small behavioural component due to the preponderance of necessities among the goods with high price changes. An important factor concerning the potential impact on households is the savings rate. Households with already low savings are disproportionally feeling the impact on their expenditure.
    Keywords: inflation, distributional effect, welfare effect
    JEL: D12 D31 D60 E31 I30
    Date: 2022–11
  18. By: Stephen Millard; Nicholas Jackson
    Abstract: In this paper we examine the economic effects of the Covid-19 shock in the United Kingdom and the various policy responses that were put in place. We do this through the lens of a 'stock-flow consistent' model in which financial flows between the various sectors, and the effects of these flows on the stocks of financial assets and liabilities, are carefully tracked. We find that the lockdown, imposed in response to the Covid-19 outbreak, led to large falls in consumption, investment, output and employment together with a rise in inflation. The increase in non-performing loans associated with the lockdown led to a fall in bank capital, which, in turn, led to rises in bank lending rates, as banks sought to bring their capital back to target, and falls in bank lending. We find that the Job Retention Scheme went some way to maintaining employment through the lockdown; the increases in government spending and the additional Quantitative Easing carried out by the Bank of England (to the extent this led to a fall in bond rates) helped support consumption, investment and output; the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme, by underwriting a proportion of the non-performing loans, greatly reduced the rise in bank lending rates; and that the cut in the Bank rate also helped keep lending rates lower than they would have been otherwise.
    Keywords: Sectoral balances, Covid-19, flow of funds, macroeconomic modelling
    JEL: E12 E21 E22 E25 E37
    Date: 2022–11
  19. By: Gabriel, Ricardo Duque (Bonn Graduate School of Economics and Department of Economics, University of Bonn); Klein, Mathias (Research Department, Central Bank of Sweden); Pessoa, Sofia (Bonn Graduate School of Economics and Department of Economics, University of Bonn)
    Abstract: Using a novel regional database covering over 200 elections in several European countries, this paper provides new empirical evidence on the political consequences of fiscal consolidations.To identify exogenous reductions in regional public spending, we use a Bartik-type instrument that combines regional sensitivities to changes in national government expenditures with narrative national consolidation episodes. Fiscal consolidations lead to a significant increase in extreme parties’ vote share, lower voter turnout, and a rise in political fragmentation. We highlight the close relationship between detrimental economic developments and voters’ support for extreme parties by showing that austerity induces severe economic costs through lowering GDP, employment, private investment, and wages. Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment.
    Keywords: Fiscal policy; Austerity; Voting behavior; Political economy
    JEL: D72 E62 H53
    Date: 2022–11–01
  20. By: Milan Scasny (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Matej Opatrny (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We provide the first estimate of the elasticity of marginal utility of consumption, µ, for Europe and for thirty individual European countries, using the income-tax individual-level data. Specifically, we rely on the absolute equal-sacrifice approach and CRRA utility function to elicit the revealed preferences of income tax payers on their acceptance of the tax schedule. Our central estimate of µ equals to 1.42. With few exceptional cases, µ´s for European countries exceed unity, ranging between 1.2 and 1.90. We further discuss the implications of our estimate of µ for the social discount rate and Social Cost of Carbon. We conclude that the social discount rate might be slightly higher than traditionally assumed, implying lower magnitude of Social Cost of Carbon, at least for Europe.
    Keywords: elasticity of marginal utility of consumption; equal-sacrifice approach; income tax schedules; marginal tax rate; social discount rate
    JEL: D60 D61 H24 R13
    Date: 2022–12

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