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on European Economics |
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Issue of 2023‒03‒06
fourteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Xiaoshan Chen; Spyridon Lazarakis; Petros Varthalitis |
| Abstract: | This paper builds a two-country Heterogenous Agents New Keynesian (HANK) model for the Euro Area (EA). The two countries differ in the degree of public indebtedness, i.e., the Periphery has a relatively higher public debt-output ratio vis-Ã -vis the Core. The model captures some key features of the EA's cross- and within-country heterogeneity over the 2010-2020 period. We use this model as a vehicle to study fiscal consolidation policy and reforms of EA fiscal targets. We find that public debt asymmetry can explain qualitatively, and to some extent quantitatively, EA macroeconomic imbalances and within-country disparities. We find that a fiscal consolidation scenario that mimics the current EA institutional arrangements, i.e., the Maastricht Treaty and the Stability Growth Pact Agreement, would result in significant welfare losses, especially for the wealth-poor and wealth-median in the Periphery; the welfare losses amount to 2.42% and 2.21% of their lifetime consumption in the status quo stationary equilibrium, respectively. A revision of EA fiscal targets closer to their current values, e.g., 100% for the Periphery and 70% for the Core, does not generate a conflict of interest between wealth-rich and -poor households across and within countries. Thus, our analysis provides a strong rationale for reforming EA debt targets. Such reform could make more affordable fiscal consolidation for the large proportion of households in the Periphery, e.g., it reduces the welfare losses from 2.42% to 1.24% for the wealth-poor households in the Periphery. Surprisingly, a Core expansion (i.e., a higher public debt-output ratio) while the Periphery consolidates would not benefit a large proportion of households in the Periphery, especially those with relatively fewer asset holdings in the status quo stationary equilibrium. Such a reform generates a conflict of interest between the Core's households and the wealth-poor/median households in the Periphery. Furthermore, a hawkish monetary policy reaction against inflation during fiscal consolidation generates a conflict of interest between the wealth-rich in the union and the wealth-poor households in the Periphery. Such policy disproportionately benefits households who hold more assets in the status quo equilibrium. Regarding fiscal policy mix, fiscal consolidation via spending cuts instead of tax hikes disproportionally harms the households with relatively higher asset holdings in the status quo stationary equilibrium, but it is less harmful for the wealth-poor households in the Periphery. |
| Keywords: | Fiscal Consolidation, Debt Targets, Monetary Policy, Inequality, Welfare |
| JEL: | E21 H31 E52 E62 H50 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:374162075&r=eec |
| By: | Blanchflower, David G. (Dartmouth College); Bryson, Alex (University College London) |
| Abstract: | Unemployment is notoriously difficult to predict. In previous studies, once country and year fixed effects are added to panel estimates, few variables predict changes in unemployment rates. Using panel data for 29 European countries collected by the European Commission over 444 months between January 1985 and October 2022 in an unbalanced country*month panel of just over 10000 observations, we predict changes in the unemployment rate 12 months ahead. We do so using individuals' fears of unemployment which predict subsequent changes in unemployment 12 months later in the presence of country fixed effects and lagged unemployment. We also use industrial firm's expectations of future employment, which are also predictive of what happens to unemployment three months later. Using our preferred model specification, we present out-of-sample predictions based on replications from 1, 000 random samples. These track actual movements in unemployment rates closely over a period in which there were two major recessions and unemployment shifted by a factor of two. |
| Keywords: | unemployment, fear, business sentiment, expectations, forecasting recession, COVID-19, supply shocks |
| JEL: | J60 J64 J68 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp15905&r=eec |
| By: | Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Alexander A. Popov (Monetary Policy Research Division, European Central Bank) |
| Abstract: | We study how monetary policy affects local market competition in a union of countries experiencing different economic conditions: the euro area. We find that when monetary conditions tighten (loosen), from the point of view of an individual economy, market concentration increases (declines). This effect is more pronounced when interest rates have been low-for-long, and it is stronger in sectors that are relatively more sensitive to changes in financing conditions. The underlying mechanism is a decline (increase) in short-term debt and investment by smaller and medium-size firms, relative to large firms, following monetary policy tightening (easing). |
| Keywords: | Eurozone, Monetary Union, Monetary Policy, Low Interest Rates, Competition |
| JEL: | E2 G1 G12 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp333&r=eec |
| By: | Lorenzo Caliendo; Luca David Opromolla; Fernando Parro; Alessandro Sforza |
| Abstract: | European countries experienced a large increase in labor supply due to the influx of Ukrainian refugees after the 2022 Russia invasion. We study its dynamic effects in a spatial model with forward-looking households of different skills, trade, and endogenous capital accumulation. We find that real GDP increases in Europe in the long term, with large distributional effects across countries and skill groups. In the short run, an increase in the supply of labor strains the use of capital structures that takes time to build. Over time, countries that build capital structures increase output, resulting in potential long run benefits. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10236&r=eec |
| By: | de Almeida Vilares, Hugo; Reis, Hugo |
| 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 |
| JEL: | C50 C61 C62 C78 J31 J51 J53 |
| Date: | 2022–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118036&r=eec |
| By: | Gregory de Walque (Economics and Research Department, National Bank of Belgium); Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium) |
| Abstract: | We estimate a DSGE model with Preferences Over Safe Assets (POSA) on Euro Area macroeconomic data and interest rate expectations measures. The model with POSA has much better empirical fit than the otherwise identical model without, especially once interest rate expectations are added to the data set. Including measures interest rate expectations strongly improves the model forecast of GDP and its components, with the best forecast delivered by the POSA model. Finally, with POSA, ECB forward guidance increased GDP and inflation by 1.9 % and 0.1 percentage points by 2019Q4, respectively, much less than without POSA. |
| Keywords: | DSGE estimation with interest rate expectations in the data set, forecasting, forward guidance, preferences over safe assets |
| JEL: | E37 E43 E47 E52 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:202302-433&r=eec |
| By: | Magdalena Petrovska (National Bank of the Republic of North Macedonia); Jasna Tonovska (Faculty of Economics – Ss. Cyril and Methodius University in Skopje); Miso Nikolov (IUTE Credit Macedonia); Рртан Сулејмани (National Bank of the Republic of North Macedonia) |
| Abstract: | This paper has adopted a Bayesian FAVAR approach to examine the monetary transmission mechanism in North Macedonia. The model is based on a broad data set that encompasses 140 monthly time series spanning between January 2010 and January 2019. In particular, the impact of policy on bank portfolio variables, and the impact of policy on economic activity variables have been evaluated. Our findings show that monetary tightening, causes a fall in output, inflation rate, employment, bank lending, the stock of government securities held by banks, and equity prices. On the other hand, it increases short-term money market rates, lending rates, deposits, and only in the immediate aftermath of the key policy rate rise, the share of non-performing loans in the loan portfolio. The study is expected to provide useful input to monetary policy implementation in North Macedonia. The study as well enriches the literature in this domain by discussing the challenges facing monetary authorities of small open economies with fixed exchange rate regimes in understanding how their policy instruments work through the economy. |
| Keywords: | Monetary transmission mechanism, FAVAR, Bayesian estimation, Monetary policy |
| JEL: | E52 E47 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2023-01&r=eec |
| By: | Kai Carstensen; Felix Kießner; Thies Rossian |
| Abstract: | In this paper we augment the Bayesian unobserved components model of the EU Commission to estimate the cyclical component of total factor productivity (TFP gap) with a factor structure to include a wide array of business cycle indicators. We demonstrate that this model extension considerably stabilizes the estimate of the of the TFP gap. Specifically, consider the usual autumn forecast of the EU Commission in October of a year T. For the last two “in-sample” years T − 2 and T − 1, and for the “now-cast” year T, the year-to-year revisions can be reduced by up to 30 percent. Improvements for the two “out-of-sample” years T + 1 and T + 2 also considered relevant by the EU Commission are quantitatively smaller (up to 10 percent) but still relevant. The results do vary across countries but are qualitatively robust with respect to different indicator sets, model specifications or vintages considered. |
| Keywords: | trend-cycle decomposition, unobserved components model, factor model, Bayesian estimation, total factor productivity, EU Commission |
| JEL: | C32 E37 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10245&r=eec |
| By: | Roberto Ganau; Andres Rodriguez-Pose; ; |
| Abstract: | We analyse the firm-level labour productivity growth returns of social capital —defined as a synthetic measure of ‘generalised trust’, ‘active participation’, and ‘social norms’— using a large sample of manufacturing firms in France, Germany, Italy, Portugal, and Spain. We find that firms’ labour productivity growth is higher in areas with a better social capital endowment. The positive returns of social capital are, nevertheless, unevenly distributed across firms, with smaller, less productive, less capital-endowed, and low-tech firms benefitting the most from operating in strong social capital ecosystems. |
| Keywords: | Firm labour productivity growth; Social capital; Manufacturing industry; Western Europe. |
| JEL: | C36 D24 R10 Z13 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:egu:wpaper:2305&r=eec |
| By: | Maximilian Konradt (IHEID, Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | This paper investigates the financial risk-taking behavior of pension funds since 2000. I assemble a new database containing portfolio holdings of more than 100 pension funds from 14 advanced economies. The study reveals three key findings. First, I show that pension fund portfolios have become riskier over that period, with an average increase in risky asset weights of 4 percentage points since 2008. European pension funds tend to invest more in public equities while North American and Asian funds focus on alternative assets. Second, I find evidence that declining domestic risk-free rates play a significant role in driving the trend, with pension funds increasing their risky asset exposure in response to falling short-term interest rates. Third, I demonstrate that less underfunded pension funds with fewer risky assets tend to reach for yield more aggressively, which is exacerbated during periods of low risk-free rates. This is most pronounced for European pension funds, particularly after the global financial crisis. |
| Keywords: | Low interest rates; Pension funds; Risk-taking; Reach for yield |
| JEL: | E43 F21 G11 G23 |
| Date: | 2023–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp01-2023&r=eec |
| By: | Konradt, Maximilian |
| Abstract: | This paper investigates the financial risk-taking behavior of pension funds since 2000. I assemble a new database containing portfolio holdings of more than 100 pension funds from 14 advanced economies. The study reveals three key findings. First, I show that pension fund portfolios have become riskier over that period, with an average increase in risky asset weights of 4 percentage points since 2008. European pension funds tend to invest more in public equities, while North American and Asian funds focus on alternative assets. Second, I find evidence that declining domestic risk-free rates play a significant role in driving the trend, with pension funds increasing their risky asset exposure in response to falling short-term interest rates. Third, I demonstrate that less underfunded pension funds with fewer risky assets tend to reach for yield more aggressively, which is exacerbated during periods of low risk-free rates. This is most pronounced for European pension funds, particularly after the global financial crisis. |
| Keywords: | Low interest rates, Pension funds, Risk-taking, Reach for yield |
| JEL: | E43 F21 G11 G23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116209&r=eec |
| By: | Fabien Petit; Florencia Jaccoud; Tommaso Ciarli |
| Abstract: | This paper examines the labor market adjustments to four automation technologies (i.e. robots, communication technology, information technology, and software/database) in 227 regions across 22 European countries from 1995 to 2017. By constructing a measure of technology penetration, we estimate changes in regional employment and wages affected by automation technologies along with the reallocation of workers between sectors. We find that labor market adjustments to automation technologies differ according to i) the technology involved, ii) the sector of penetration, iii) the sectoral composition of the region, and iv) the region’s technological capabilities. These adjustments are driven largely by the reallocation of low-paid workers across sectors. |
| Keywords: | automation technology, labor market, employment reallocation, sectoral composition |
| JEL: | J21 O33 R23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10237&r=eec |
| By: | Luca Giangregorio (Universidad Pompeu Fabra); Davide Villani (European Commission - JRC) |
| Abstract: | This paper studies income distribution and inequality in Germany, Spain and Italy by applying the approach described in Fana and Villani (2022a). This framework provides a novel classification of labourers and capitalists that considers some features of contemporary capitalism, namely the fact that individuals/households can receive multiple types of incomes and the role of managers in shaping class belonging. First, we perform a decomposition of the Gini index to study which sources of income contribute to inequality. A marginal increases in wages would contribute to the reduction of the overall level of inequality, while profits and property income augment it. Furthermore, only the growth of wages received by labourers would help to lower inequality, whereas those received by capitalists would increase it. Second, we discuss how our approach links to the literature on wages at the top of the distribution of income, assessing whether the growth of wages at the top of the distribution of income is evident in our dataset and we explore who receives these wages at the top of the distribution of income. We find that there is a growing presence of wages at the top of the distribution on income. However, this growth corresponds mostly to wages received by what we call capitalists, not labourers. We conclude that despite a linear correspondence between income source and class location is more blurred today than it was 200 years ago but, nonetheless, a class divide is still clear, at least in the three countries analysed. |
| Keywords: | Income distribution, Social classes, Top shares of income, Inequality |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:dclass:202305&r=eec |
| By: | Edlira Narazania (JRC Sevilla); Ana Agundez Garcia (JRC Sevilla); Michael Christl (JRC Sevilla); Francesco Figari (University of Eastern Piedmont) |
| Abstract: | This paper contributes to the debate on the revision of the Barcelona targets on childcare, as promoted by the European Commission in 2022, that aims to provide childcare for children below the age of 3. Using EUROLAB, a structural model of labour supply that can also accounts for labour demand constraints, we estimate female labour market participation reactions to alternative scenarios of formal childcare policies in European countries with very low child care provision for children below 3. We quantify the potential increases in the labour supply of mothers (at the extensive and intensive margins) in the case of fulfilling potential new targets of childcare provision (40%, 50%, 60% and 65%). Achieving these targets would lead to significantly increased labour supply of mothers especially in countries like Hungary and Poland where the current share of formal childcare and/or female labour participation is low. In countries like Portugal, that are far beyond the existing childcare target, changes in labour supply incentives are instead expected to be moderate. We further show that when accounting for labour demand, the expected final employment effects will be less pronounced, but still positive. |
| Keywords: | Labour market equilibrium, labour supply, labour demand, structural models, discrete choice, childcare |
| JEL: | J20 J22 J23 J13 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2023-636&r=eec |