nep-eec New Economics Papers
on European Economics
Issue of 2023‒03‒27
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The optimal quantity of CBDC in a bank-based economy By Lorenzo Burlon; Carlos Montes-Galdón; Manuel A. Muñoz; Frank Smets
  2. Sovereign bond market integration in the euro area: a new empirical conceptualization By Gilles Dufrénot; Fredj Jawadi; Zied Ftiti
  3. Breaking Monetary Policy News: The Role of Mass Media Coverage of ECB Announcements for Public Inflation Expectations By Patrick Hirsch; Lars P. Feld; Ekkehard A. Köhler
  4. Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector By Daniel Dimitrov; Sweder van Wijnbergen
  5. Political Ideology, Policy Preferences and Public Support for European Integration By Toshkov, Dimiter
  6. Nowcasting GDP using tone-adjusted time varying news topics: Evidence from the financial press By Dorinth van Dijk; Jasper de Winter
  7. Long-term impacts of coastal floods in Europe: a probabilistic analysis By MONGELLI Ignazio; VOUSDOUKAS Michail; FEYEN Luc; SORIA RAMIREZ Antonio; CISCAR MARTINEZ Juan Carlos
  8. Do firm expectations respond to Monetary Policy announcements? By Federico Di Pace; Giacomo Mangiante; Riccardo Masolo
  9. Automation, Global Value Chains and Functional Specialization By Lionel Fontagné; Ariell Reshef; Gianluca Santoni; Giulio Vannelli; Lionel Gérard Fontagné
  10. Price Effects of Temporary VAT Rate Cuts: Evidence from Spanish Supermarkets By AMORES Antonio F.; BARRIOS Salvador; SPEITMANN Raffael; STOEHLKER Daniel
  11. The climate and the economy By Breckenfelder, Johannes; Maćkowiak, Bartosz; Marqués-Ibáñez, David; Olovsson, Conny; Popov, Alexander; Porcellacchia, Davide; Schepens, Glenn
  12. Inflation Expectations in the Wake of the War in Ukraine By Geghetsik Afunts; Misina Cato; Tobias Schmidt
  13. Mapping Circular Economy projects funded by ERDF in 2014-2020 By MARQUES SANTOS Anabela; CONTE Andrea; OJALA Tauno
  14. Digitalisation and productivity: gamechanger or sideshow? By Anderton, Robert; Botelho, Vasco; Reimers, Paul
  15. Assessing Digital Leadership: Is the EU Losing out to the US? By Dario Guarascio; Roman Stöllinger

  1. By: Lorenzo Burlon; Carlos Montes-Galdón; Manuel A. Muñoz; Frank Smets (-)
    Abstract: We provide evidence on the estimated effects of news about the introduction of a digital euro on bank valuations and lending and find that the effects depend on the reliance on deposit funding and design features aimed at calibrating the quantity of the central bank digital currency (CBDC). Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e. imperfect substitutability across CBDC, cash and deposits and a number of financial constraints such as a collateral requirement for central bank funding), the issuance of CBDC yields non-trivial welfare trade-offs between, on one side, the positive expansion of liquidity services and the improved stabilization of deposit funding and lending and, on the other side, a negative bank disintermediation effect. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. The optimal amount of CBDC in circulation for the case of the euro area lies between 15% and 45% of quarterly GDP in equilibrium.
    JEL: E42 E58 G21
    Date: 2023–02
  2. By: Gilles Dufrénot (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Fredj Jawadi (RIME-Lab - Recherche Interdisciplinaire en Management et Économie Lab - ULR 7396 - UA - Université d'Artois - Université de Lille); Zied Ftiti (EDC - EDC Paris Business School)
    Abstract: This paper proposes a new empirical conceptualization of financial integration of sovereign bond markets in the euro area. We introduce a methodology based on the joint testing of the assumptions of efficient market and convergence/divergence of the yield spreads. We test these assumptions by proposing parametric and non-parametric techniques. We find that markets have been more fragmented than usually advocated in the literature. We also show that the information contained in the fundamentals are not always fully reflected in the spreads, which suggests that either they have insignificant effects, or that their coefficients in the spread equations appear with the wrong sign.
    Keywords: Financial integration, Euro area, Sovereign bonds, Fundamentals
    Date: 2022–11
  3. By: Patrick Hirsch; Lars P. Feld; Ekkehard A. Köhler
    Abstract: Using the variation in national television news of four major member states in the Eurozone, we find causal effects of coverage of high-frequency identified monetary policy announcements on households’ inflation expectations in an event study and a generalized Difference-in-Differences approach with stacked data. If a monetary policy decision receives news coverage, the adaptation of inflation expectations is stronger than without coverage. Second, we find that coverage of ‘delphic’ monetary policy announcements, which are primarily informational in nature, leads to an inverse adjustment, i.e., expansionary shocks lead to households lowering their inflation expectations, as opposed to coverage of a textbook, ‘odyssean’, monetary policy shock.
    Keywords: inflation expectations, media coverage, transmission of monetary policy, quasi-experimental evidence
    JEL: E31 E52 E58 C83 D84
    Date: 2023
  4. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We propose a credit portfolio approach for evaluating systemic risk and attributing it across institutions. We construct a model that can be estimated from high-frequency CDS data. This captures risks from publicly traded banks, privately held institutions, and cooperative banks, extending approaches that rely on information from the public equity market only. We account for correlated losses between the institutions, overcoming a modeling weakness in earlier studies. We also offer a modeling extension to account for fat tails and skewness of asset returns. The model is applied to a universe of banks where we find discrepancies between the capital adequacy of the largest contributors to systemic risk relative to less systemically important banks on a European scale.
    Keywords: systemic risk; CDS rates; implied market measures; financial institutions; fat tails; O-SII buffers
    JEL: G01 G20 G18 G38
    Date: 2023–03
  5. By: Toshkov, Dimiter
    Abstract: How does support for European integration relate to left-right political ideology? Studies of political parties and elites often find that the relationship resembles an inverted U-curve, with support highest at the center of the scale and falling both towards the extreme left and extreme right ends. The same ‘horseshoe’ pattern has been observed with respect to public opinion as well, but recent studies question its generalizability across countries, time periods and measures of support for European integration. This article reports the most comprehensive study to date of the relationships between support for European integration (operationalized in several different ways) with self-placement on the left-right ideological scale and policy preferences for redistribution, immigration and gay rights. Based on data from the European Social Survey and Eurobarometer, I chart the patterns of covariation for all countries in the European Union between 2004 and 2020. The analysis introduces the use of flexible non-parametric methods (generalized additive models) and more appropriate measures of dependence (the distance correlation coefficient) than the usually-employed Pearson’s correlation and regression coefficients. I find that the relationship between public support for European integration and left-right ideology is weak and extremely heterogeneous across countries. The exact form of the relationship depends on the operationalization of European integration support, the country and the time period, but it rarely resembles the classic inverted U-curve. In fact, EU support is typically highest at the moderate left rather than at the center. The relationship of support for European integration with immigration attitudes is much stronger, stable and almost linear; with support for gay rights is also linear but considerably weaker than with immigration; with support for redistribution there is practically no relationship at all. There is some evidence that the strength of the link with different policy preferences peaks when the salience of the policy issue is highest. But there is much remaining variation that calls for an explanation.
    Date: 2023–02–06
  6. By: Dorinth van Dijk; Jasper de Winter
    Abstract: We extract tone-adjusted, time-varying and hierarchically ordered topics from a large corpus of Dutch financial news and investigate whether these topics are useful for monitoring the business cycle and nowcasting GDP growth in the Netherlands. The financial newspaper articles span the period January 1985 up until January 2021. Our newspaper sentiment indicator has a high concordance with the business cycle. Further, we find newspaper sentiment increases the accuracy of our nowcast for GDP growth using a dynamic fac- tor model, especially in periods of crisis. We conclude that our tone-adjusted newspaper topics contain valuable information not embodied in monthly indicators from statistical offices.
    Keywords: Factor models, topic modeling, nowcasting
    JEL: C8 C38 C55 E3
    Date: 2023–03
  7. By: MONGELLI Ignazio (European Commission - JRC); VOUSDOUKAS Michail (European Commission - JRC); FEYEN Luc (European Commission - JRC); SORIA RAMIREZ Antonio (European Commission - JRC); CISCAR MARTINEZ Juan Carlos (European Commission - JRC)
    Abstract: In this report, we quantify the long-term economic impacts of coastal flooding in Europe, in particular, how the direct coastal damages generate long-term economic losses that propagate and compound throughout the century. We integrate a set of probabilistic projections of inundation-related monetary impacts (to residential buildings, firms’ physical assets and agriculture production) into a stochastic dynamic economic model. The uncertainty related to the economic agents’ behaviour and other relevant macroeconomic assumptions, i.e. how would consumers finance the repairing of their homes, how long does it take for a firm to reconstruct, do firms decide to build-back-better after the inundation and possibly compensate the losses with a productivity gain, is explicitly considered. The results show that the long-term total impacts of coastal floods are larger than the direct damages generated by the inundations: by the end of the century EU27 plus UK could lose every year between 0.25% - 0.91% of GDP, under a high emission scenario (RCP8.5). The results present a strong regional variation and in some countries the losses for the economy could reach worrying proportions.
    Keywords: climate change, coastal impacts, uncertainty, economic analysis
    Date: 2023–01
  8. By: Federico Di Pace; Giacomo Mangiante; Riccardo Masolo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We study whether firms’ expectations react to the Bank of England’s monetary policy announcements by comparing the responses to the Decision Maker Panel (DMP) survey filed immediately before and after a Monetary Policy Committee (MPC) meeting. On the one hand, we find that firms’ expectations and uncertainty about their own business for the most part do not respond to high-frequency monetary policy surprises. On the other hand, announced changes in the monetary policy rate induce firms to revise their price expectations, with rate hikes resulting in a reduction in price expectations and the uncertainty surrounding them.
    Keywords: Central bank communication, firm expectations, high-frequency identification, survey data.
    JEL: D84 E52 E58
    Date: 2023–02
  9. By: Lionel Fontagné; Ariell Reshef; Gianluca Santoni; Giulio Vannelli; Lionel Gérard Fontagné
    Abstract: We study how technology adoption and changes in global value chain (GVC) integration jointly affect labor shares and business function specialization in a sample of 14 manufacturing industries in 14 European countries in 1999–2011. Our main contribution is to highlight the indirect effect of robotization on relative demand for labor via GVC integration. To do this, we develop a methodology to separately account for robots in the total capital stock. Increases in upstream, forward GVC participation directly reduce labor shares, mostly through reductions in fabrication, but also via management, marketing and R&D business functions. We do not find any direct effects of robot adoption; robotization affects labor only indirectly, by increasing upstream, forward GVC integration. In this sense robotization is “upstream-biased”. We also study novel channels through which rapid robotization in China shaped robotization in Europe and, therefore, GVC participation. This highlights an understudied way by which the global integration of China has affected relative demand for labor in its trading partners.
    Keywords: labor share, functional specialization, global value chains, upstreamness, technological change, automation, robots
    JEL: E25 F14 F16 O33
    Date: 2023
  10. By: AMORES Antonio F. (European Commission - JRC); BARRIOS Salvador (European Commission - JRC); SPEITMANN Raffael (European Commission - JRC); STOEHLKER Daniel (European Commission - JRC)
    Abstract: The Spanish government has implemented a temporary VAT rate cut on basic food products as part of its anti-inflationary measures to protect households' purchasing power. Starting from January 2023, and for six months, bread, flour, milk, cheese, eggs, fruits, vegetables, legumes, tubers and cereals are taxed at a 0% VAT rate (down from 4%), while pasta and cooking oil are subject to a new super-reduced rate of 5% (down from 10%). This paper analyses the extent to which such measure led to an effective reduction in final consumer prices. This is done by comparing the prices of affected products in Spain with those in Germany, where such measure has not been taken. Our results suggest that the prices of products concerned have dropped significantly in January 2023, indicating a high pass-through to consumer prices, and therefore an effective application of the policy reform.
    Keywords: Tax policy, pass-through analysis, inflation
    Date: 2023–01
  11. By: Breckenfelder, Johannes; Maćkowiak, Bartosz; Marqués-Ibáñez, David; Olovsson, Conny; Popov, Alexander; Porcellacchia, Davide; Schepens, Glenn
    Abstract: Climate change and the public policies to arrest it are and will continue reshaping the global economy. This Discussion Paper draws on economic research to identify some key medium- and long-run economic implications of these developments. It explores implications for growth, innovation, inflation, financial markets, fiscal policy, and several socio-economic outcomes. The main message that emerges is that climate change will cause income divergence across individuals, sectors, and regions, adjustment in energy markets, increased inflation variability, financial markets stress, intensified innovation, increased migration, and rising public debt. These challenges appear manageable for EU member states, especially under an early and orderly transition scenario. At the same time, the direction, scope, and speed of economic transformation is subject to large uncertainty due to two separate factors: the wide range of climate scenarios for a given trajectory of greenhouse gas emissions and the exact policy path governments choose, especially in the context of the ongoing Russian aggression in Ukraine. JEL Classification: D6, E3, F2, G2, O1, Q5
    Keywords: climate change, financial markets, growth, inflation, socio-economic implications
    Date: 2023–03
  12. By: Geghetsik Afunts; Misina Cato; Tobias Schmidt
    Abstract: Russia's invasion of Ukraine is posing a range of new challenges to the global economy, including affecting the inflation expectations of individuals. In this paper, we aim to quantify the effect of the invasion on short- and long-term inflation expectations of individuals in Germany. We use microdata from the Bundesbank Online Panel - Households (BOP-HH), for the period from February 15th to March 29th, 2022. Treating the unanticipated start of the war in Ukraine on the 24th of February 2022 as a natural experiment, we find that both short- and long-term inflation expectations increased as an immediate result of the invasion. Long-term inflation expectations increased by around 0.4 percentage points, while the impact on short-term inflation expectations was more than twice as large - around one percentage point. Looking into the possible mechanisms of this increase, we suggest that it can be partially attributed to individuals’ fears of soaring energy prices and increasing pessimism about economic trends in general. Our results indicate that large economic shocks can have a substantial impact on both short and long-term inflation expectations.
    Keywords: inflation expectations; Russian invasion of Ukraine; survey; natural experiment;
    JEL: D84 D12 E3
    Date: 2023–02
  13. By: MARQUES SANTOS Anabela (European Commission - JRC); CONTE Andrea (European Commission - JRC); OJALA Tauno (European Commission - JRC)
    Abstract: The circular economy approach aims to contribute to achieve the EU's environmental and climate objectives by ensuring a more efficient, rational and sustainable use of resources. Around €22.9 billion of the ERDF in 2014-2020 was used to support projects related to the development or adoption of circular economy technologies, and more eco-friendly business models (12% of total ERDF). ERDF projects implemented by textiles, construction and energy-intensive industries are around 2 times more likely to be associated with circular economy approaches than the average. Regions in Eastern European countries and Greece are the ones with a higher concentration of ERDF circular economy-related projects.
    Keywords: ERDF, Circular Economy, EU
    Date: 2023–01
  14. By: Anderton, Robert; Botelho, Vasco; Reimers, Paul
    Abstract: Is digitalisation a massive gamechanger which will deliver huge gains in productivity, or is it more of a sideshow with only limited impacts? We use a large balance sheet panel dataset comprising more than 19 million European firm-level observations to empirically investigate the impact of digitalisation on productivity growth via various previously unexplored chan-nels and mechanisms. Our results suggest that for two otherwise identical firms, the firm that exhibits on average a higher share of investment in digital technologies will exhibit a faster rate of TFP growth, but not all firms and sectors experience significant productivity gains from digitalisation. Digitalisation does not seem to have relatively stronger impacts on the productivity of frontier firms compared to laggards, nor does it help to turn laggards into frontier firms. Overall, firms should not regard digital investment as a ‘one-size-fits-all’ strategy to improve their productivity. Digital technologies are a gamechanger for some firms. But they seem more like a sideshow for most firms, who attempt to be increasingly digital but are not able to adequately reap its productivity gains. JEL Classification: D22, D24, D25, O33
    Keywords: digital technology/transition, productivity growth, technology adoption/diffusion
    Date: 2023–03
  15. By: Dario Guarascio; Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Since Leontief’s (1953) seminal work on the factor content of trade, the validity of the Heckscher-Ohlin-model has been judged not only on the basis of formal tests of the theory but also tested against prior expectation. In this vein, this paper uses the Heckscher-Ohlin-Vanek (HOV) approach to investigate whether supposed US leadership in the digital domain can be traced back to digital task endowments embodied in labour services. In a comparison between EU member states and the US, we find that the latter is more intensive in digital tasks than the EU and that this difference is explained by both an intensity-effect (US occupations being more digital-task intensive) and a structural component (relatively more digital-task intensive occupations). Viewed through the lens of the HOV theorem we find that the US is abundant in digital tasks relative to non-digital tasks, while the opposite is true for the EU. The standard tests for the predictive power of the HOV theorem are high and in line with the results for labour in previous literature.
    Keywords: Comparative advantages, digitalisation, Heckscher-Ohlin-Vanek theorem, digital tasks
    JEL: F11 F14 D57
    Date: 2023–03

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