nep-eec New Economics Papers
on European Economics
Issue of 2023‒02‒06
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal policy orientation in the euro area in real-time By Katja Schmidt; Antoine Sigwalt
  2. The Fiscal Consequences of Missing an Inflation Target By Michele Andreolli; Hélène Rey
  3. The EA-BDF Model and Government Spending Multipliers in a Monetary Union By Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
  4. The Dutch disease of the Euro Area peripheral member states By João Alcobia; Ricardo Cabral
  5. The macroeconomic effects of global supply chain disruptions By Finck, David; Tillmann, Peter
  6. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  7. The impact of high inflation on trust in national politics and central banks By Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
  8. The Financing Structure of NonFinancial Corporations and MacroFinancial Implications in France By Stéphane Dees; Stefan Gebauer; Thomas Goncalves; Camille Thubin
  9. From Macro to Micro: Large Exporters Coping with Common Shocks By Jean-Charles Bricongne; Juan Carluccio; Lionel Fontagné; Guillaume Gaulier; Sebastian Stumpner

  1. By: Katja Schmidt; Antoine Sigwalt
    Abstract: This paper analyses the orientation of fiscal policy in the euro area in real-time, using a new real-time dataset including 11 euro area countries for the 1999-2019 period. We compare the cyclicality of the fiscal stance, measured as the change in the cyclically-adjusted total and primary budget balance, established during budgetary planning with their ex-post outturns. We find empirical evidence for pro-cyclical fiscal plans and a more a-cyclical behaviour of fiscal outcomes on average for euro area countries. We show hence that the tendency to run a pro-cyclical policy is already anchored in fiscal plans and not just an outcome of surprises on cyclical conditions. This result is robust to different specifications and estimation methods. We observe pro-cyclicality at budget planning especially during tightening episodes and a more a-cyclical fiscal stance during fiscal loosening. We also find that fiscal plans are pro-cyclical outside of crisis years of the Global Financial crisis and the European Debt crisis. We detect strong country heterogeneity in the orientation of fiscal policy ex-ante and ex-post in the euro area.
    Keywords: Fiscal Policy, Cyclicality, Real-Time Data, Fiscal Forecast.
    JEL: C33 E32 E63
    Date: 2022
  2. By: Michele Andreolli; Hélène Rey
    Abstract: The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary-fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect the reliability of the European Central Bank's monetary policy on public finances. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries. For comparison we also estimate the fiscal consequences of the Federal Reserve and the Bank of England missing their inflation targets. They are also sizeable.
    JEL: E31 E44 E52 E60 F45 H63
    Date: 2023–01
  3. By: Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
    Abstract: We develop in this paper a new two-country model of the euro area (EA-BDF), based on the large-scale FR-BDF model of France and a new medium-scale block of the rest of the euro area (STREAM). This new block follows an approach close to FR-BDF, being a semi-structural model with the same type of adjustment costs and that we can use with different types of expectations. Both countries of EA-BDF share a common endogenous monetary policy and, thanks to our multi-country setup, we can deal with both symmetric and asymmetric shocks. Our illustrations about the effects of a government spending shock in a monetary union deliver two key results, which are robust whatever the type of expectations. First, by studying symmetric and asymmetric shocks on government spending, kept constant for 2 years, we find that, at this 2-year horizon, trade spillovers would compensate monetary policy spillovers within the euro area. Second, we also find, in the case of a symmetric shock, that the government spending multiplier is smaller under a monetary policy rule based on price-level targeting than on inflation targeting.
    Keywords: Semi-Structural Modeling, Expectations, Monetary and Fiscal Policies
    JEL: C54 E37
    Date: 2022
  4. By: João Alcobia; Ricardo Cabral
    Abstract: This paper analyzes explanations identified in the literature for the subpar economic performance of the so-called peripheral member states of the Euro Area since the mid-1990s. It argues that a key factor was a Dutch disease-like transmission mechanism, as the adoption of the euro led to a capital inflow shock. This resulted in a structural shift in the productive structure of the peripheral economies away from technologically advanced manufactured goods, which are characterized by higher productivity growth. As a consequence, the peripheral member states specialized in non-tradable sectors, and in low-technology and labor-intensive tradable goods sectors, which largely explains the peripherals’ low economic growth, low productivity growth, and growing macroeconomic imbalances.
    Keywords: Financial Dutch disease; peripheral member states of the Euro Area; non-price competitiveness; Euro Area architecture
    JEL: O11 O14 O20 O41 O52 E12 F15
    Date: 2023–01
  5. By: Finck, David; Tillmann, Peter
    Abstract: Highly interconnected global supply chains make countries vulnerable to supply chain disruptions. This paper estimates the macroeconomic effects of global supply chain shocks for the euro area. Our empirical model combines business cycle variables with data from international container trade. Using a novel identification scheme, we augment conventional sign restrictions on the impulse responses by narrative information about three episodes: the Tohoku earthquake in 2011, the Suez Canal obstruction in 2021, and the Shanghai backlog in 2022. We show that a global supply chain shock causes a drop in euro area real economic activity and a strong increase in consumer prices. Over a horizon of one year, the global supply chain shock explains about 30% of inflation dynamics. We also use regional data on supply chain pressure to isolate shocks originating in China. Our results show that supply chain disruptions originating in China are an important driver for unexpected movements in industrial production, while disruptions originating outside China are an especially important driver for the dynamics of consumer prices.
    Keywords: Container Trade, Supply Chain, Inflation, Narrative Identification, Sign Restrictions
    JEL: E32 F14 F62
    Date: 2023
  6. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2022–12
  7. By: Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
    Abstract: Little is known about the impact of high inflation on public trust. Using a survey in the Netherlands, we find that the recent increase in inflation is associated with a decline in trust in the Dutch central bank and Dutch politics. The higher individuals’ perceived inflation is and the harder it is for them to make ends meet, the lower their trust in the European Central Bank, the Dutch central bank, and Dutch politics. We also find that people trust authorities considered responsible for bringing inflation down less. Quite remarkably, most people think government is responsible for maintaining price stability.
    Keywords: inflation; trust; financial stress; central banks; national politics
    JEL: D12 D83 E31 E58
    Date: 2023–01
  8. By: Stéphane Dees; Stefan Gebauer; Thomas Goncalves; Camille Thubin
    Abstract: How does the corporate funding mix affect economic and financial stability in France? To address this question, we develop a model for the financing structure of French non-financial corporations (NFCs) and incorporate it in the Banque de France's semi-structural macroeconomic model (FR-BDF). We document that while on average more than half of external financing for French NFCs is provided by bank credit, the share of bond financing has increased markedly after the great Financial Crisis of 2008/2009. We then use the augmented model to simulate several macro-financial stress scenarios and show that the new macro-financial linkages imply a non-negligible financial accelerator effect that affects corporate investment decisions and matters for the transmission of monetary policy. In particular, corporate leverage plays a key role for investment, and we discuss the relative strength of shocks affecting the leverage ratio via corporate credit and equity.
    Keywords: Semi-Structural Models, Non-Financial Corporation Financing, Corporate Debt.
    JEL: E51 C32
    Date: 2022
  9. By: Jean-Charles Bricongne; Juan Carluccio; Lionel Fontagné; Guillaume Gaulier; Sebastian Stumpner
    Abstract: Since Gabaix (2011), the role of changes in the performance of some very large firms in shaping aggregate outcomes has been intensively studied in the economic literature. Changes in the performance of a few large firms can arise due to idiosyncratic shocks or idiosyncratic reactions to common shocks. This paper provides direct evidence for the second channel using data on the universe of French firm-level exports and imports over 1993-2020. Granularity matters for the micro-dynamics of aggregate French exports over the long run: the granular residual explains 42% of the variance in aggregate export growth during the period. Moreover, it co-moves with the macro shocks: the largest firms do better than average in good times and worse in bad times. Studying firm-level performance during the Great Financial Crisis and the Pandemic reveals that top exporters contributed to the export collapses disproportionably more than their pre-crisis share of exports, even within finely defined markets. We investigate the reasons for such over-reaction of the top exporters using the Pandemic as a natural experiment. We find that a higher elasticity to demand shocks explains the larger reaction of top exporters to the Pandemic, with GVC exposure having weak explanatory power. Our findings have macro implications, as they help understand the macro reaction to foreign shocks, and micro implications, since they can inform micro models of exports.
    Keywords: Granularity; Exports; COVID crisis
    JEL: F14
    Date: 2022

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