nep-eec New Economics Papers
on European Economics
Issue of 2023‒04‒10
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro area consumers' payment behaviour and banking digitalisation By Justus Meyer; Federica Teppa
  2. Analyzing and forecasting economic crises with an agent-based model of the euro area By Cars Hommes; Sebastian Poledna
  3. Know your (holding) limits: CBDC, financial stability and central bank reliance By Barbara Meller; Oscar Soons
  4. Derivative margin calls: a new driver of MMF flows By Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
  5. Interdependence between assets and liabilities in the banking system: changes in the last two decades By Valentina Michelangeli; Fabio Massimo Piersanti
  6. BEMGIE: Belgian Economy in a Macro General and International Equilibrium model By Gregory de Walque; Thomas Lejeune; Ansgar Rannenberg; Magne Mogstad
  7. Natives' Attitudes and Immigration Flows to Europe By Di Iasio, Valentina; Wahba, Jackline
  8. The Impact of Minimum Wages on Income Inequality in the EU By Stefano Filauro; Klaus Grünberger; Edlira Narazani
  9. Which Energy Solidarity Union? By Nicoli, Francesco; Burgoon, Brian; van der Duin, David
  10. Inflation Dynamics in the Western Balkans By Gohar Minasyan; Magali Pinat; Ezgi O. Ozturk; Mengxue Wang; Zeju Zhu
  11. Housing Policy Impacts on Poverty and Inequality in Europe By Guillaume BERARD; Alain Trannoy
  12. Interaction between Ownership Structure and Systemic Risk in the European financial sector By Carlo Bellavite Pellegrini; Rachele Camacci; Laura Pellegrini; Andrea Roncella
  13. Was the German fuel discount passed on to consumers? By Mats Petter Kahl
  14. A NUTS-2 European Union interregional system of Social Accounting Matrices for the year 2017: The RHOMOLO V4 dataset By Abián García Rodríguez; Nicholas Lazarou; Giovanni Mandras; Simone Salotti; Mark Thissen; Erwin Kalvelagen
  15. The Last Mile of Monetary Policy: Inattention, Reminders, and the Refinancing Channel By Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
  16. Labour market tightness and matching efficiency in different labour market segments – do differences in education and occupation matter? By Alka Obadić; Mislav Viktor Viljevac
  17. Inflation expectations in the wake of the war in Ukraine By Afunts, Geghetsik; Cato, Misina; Schmidt, Tobias
  18. The complex regional effects of macro-institutional shocks: Evidence from EU economic integration over three decades By Mitze, Timo; Breidenbach, Philipp
  19. The importance of escape clauses. Firm response to thin capitalization rules By Martin Eckhoff Andresen; Lars Thorvaldsen

  1. By: Justus Meyer; Federica Teppa
    Abstract: This paper contributes to understanding consumers' payment behaviour and digitalisation in personal finances. We study individuals' payment choices, the availability of cashless payments in everyday situations and the use of banking apps in the euro area. Using the European Central Bank (ECB) Consumer Expectations Survey (CES), we find that most people prefer to use only one payment instrument, mostly cash, partly due to supply constraints in accepting non-cash payments. We also find substantial cross-country heterogeneity. Our results highlight the prominent role of demographic factors in choosing non-cash payment options and app-based tools in managing personal finances. While mobile banking is already popular among euro area consumers, using smart (device) payment methods remains very limited.
    Keywords: Consumer Payment Behaviour; Banking Digitalisation; Consumer Expectations Survey (CES)
    JEL: D12 C13 O33
    Date: 2023–03
  2. By: Cars Hommes (University of Amsterdam); Sebastian Poledna (International Institute for Applied Systems Analysis)
    Abstract: We develop an agent-based model for the euro area that fulfils widely recommended requirements for nextgeneration macroeconomic models by i) incorporating financial frictions, ii) relaxing the requirement of rational expectations, and iii) including heterogeneous agents. Using macroeconomic and sectoral data, the model includes all sectors (financial, non-financial, household, and a general government) and connects financial flows and balance sheets with stock-flow consistency. The model, moreover, incorporates many features considered essential for future policy models, such as a financial accelerator with debt-financed investment and a complete GDP identity, and allows for non-linear responses. We first show that the agent-based model outperforms dynamic stochastic general equilibrium and vector autoregression models in out-of-sample forecasting. We then demonstrate that the model can help make sense of extreme macroeconomic movements and apply the model to the three recent major economic crises of the euro area: the Financial crisis of 2007-2008 and the subsequent Great Recession, the European sovereign debt crisis, and the COVID-19 recession. We show that the model, due to non-linear responses, is capable of predicting a severe crisis arising endogenously around the most intense phase of the Great Recession in the euro area without any exogenous shocks. By analysing the COVID-19 recession, we further demonstrate the model for scenario analysis with exogenous shocks. Here we show that the model reproduces the observed deep recession followed by a swift recovery and also captures the persistent rise in inflation following the COVID-19 recession
    Keywords: agent-based models, behavioural macro, macroeconomic forecasting, microdata, financial crisis, inflation and prices, coronavirus disease (COVID- 19).
    JEL: E70 E32 E37
    Date: 2023–03–15
  3. By: Barbara Meller; Oscar Soons
    Abstract: How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, minimizing their costs subject to bank-specific and system-wide reserve and collateral availability and different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2, 000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. For the case of the digital euro, Bindseil (2020) and Bindseil and Panetta (2020) have suggested a €3, 000 digital euro holding limit per person. We illustrate that with such a limit, even in extremely pessimistic scenarios, the impact on banks’ liquidity risk and funding structure and on the Eurosystem balance sheet would have been contained.
    Keywords: digital currency; financial intermediation; financial stability; liquidity risk; euro area
    JEL: E52 E58 G21
    Date: 2023–03
  4. By: Ghio, Maddalena; Rousová, Linda; Salakhova, Dilyara; Bauer, Germán Villegas
    Abstract: During the March 2020 market turmoil, euro area money-market funds (MMFs) expe-rienced significant outflows, reaching almost 8% of assets under management. This paper investigates whether the volatility in MMF flows was driven by investors’ liquidity needs re-lated to derivative margin payments. We combine three highly granular unique data sources (EMIR data for derivatives, SHSS data for investor holdings of MMFs and Refinitiv Lip-per data for daily MMF flows) to construct a daily fund-level panel dataset spanning from February to April 2020. We estimate the effects of variation margin paid and received by the largest holders of EUR-denominated MMFs on flows of these MMFs. The main findings suggest that variation margin payments faced by some investors holding MMFs were an im-portant driver of the flows of EUR-denominated MMFs domiciled in euro area. JEL Classification: G13, G15, G23
    Keywords: big data, interconnectedness, liquidity risk, money market funds, non-bank financial intermediaries
    Date: 2023–03
  5. By: Valentina Michelangeli (Bank of Italy); Fabio Massimo Piersanti (Bank of Italy)
    Abstract: Asset and liability management deals with the joint evaluation of assets and liabilities in a bank’s balance sheet; it is a traditional tool used by intermediaries to limit financial risks. Building on a measure of the extent of asset-liability management practices, which we name interdependence index, we show that the intensity of asset-liability linkages decreased between the beginning of the century and the onset of the COVID-19 pandemic for all three main classes of Italian banks (larger, smaller, and BCCs). The monetary policy operations introduced in the wake of the sovereign debt crisis, the 2012 reform of the tax treatment of bank bond yields and the protracted low interest rate environment meant there was less need for banks to closely link assets and liabilities in their balance sheets, thus fostering greater independence between investing and financing decisions.
    Keywords: asset-liability management, banks, interdependence index
    JEL: G21 G32
    Date: 2023–03
  6. 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); Magne Mogstad (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper outlines the three-country New Keynesian Dynamic Stochastic General Equilibrium model of the National Bank of Belgium. The model is named BEMGIE for Belgian Economy in a Macro General and International Equilibrium model. It features imperfect market competition, standard real and nominal rigidities, local currency pricing, energy in consumption and oil and foreign inputs in production. The model is estimated using Bayesian econometric techniques on Belgian, euro area and US data. BEMGIE is designed to provide quantitative simulations of macroeconomic shocks and policies, and to be used in the context of the Eurosystem projection exercises.
    Keywords: production networks, endogenous formation, fixed costsDSGE model, Open economy model, Multi-country model, International spillovers, Monetary policy, Exchange rate pass-through, Bayesian estimation.
    JEL: E10 E17 E30 E40 E52 F41 F45 F47 C11 C32 C51
    Date: 2023–03
  7. By: Di Iasio, Valentina (University of Southampton); Wahba, Jackline (University of Southampton)
    Abstract: This paper examines the effects of natives' anti-immigration attitudes on migration flows to EU countries. We use panel data for migration to the EU between 1995-2018. We address the potential endogeneity between public attitudes and migration flows using instrumental variable techniques. We also control for the dependence between the attractiveness of alternative EU destinations. Our findings suggest that there is a negative causal relationship between anti-immigration attitudes and migration inflows to the EU from both EU and non-EU countries; i.e. natives' hostility discourages immigration. However, the elasticity of immigration to public attitudes is higher than the elasticity of immigration to economic factors for EU migrants.
    Keywords: EU migration, public attitudes, migration drivers
    JEL: J61 F22
    Date: 2023–02
  8. By: Stefano Filauro (European Commission – DG ECFIN); Klaus Grünberger (European Commission - JRC); Edlira Narazani (European Commission - JRC)
    Abstract: A number of studies documents that minimum wage policies have the potential to reduce income inequality. The recently adopted EU Commission’s proposal for a Directive on adequate minimum wages was supported by a detailed analysis of the social impacts of hypothetical minimum wage levels in countries with a statutory minimum wage. This paper extends these country-level analyses by exploring the impact of minimum wage policies on EU-level income inequality. To our knowledge, this is the first study that uses a microsimulation model such as EUROMOD to assess the impact of EU-promoted policies on the distribution of income in the EU, beyond their national effects. Assuming no employment effects, static simulation results show that a hypothetical minimum wage corresponding to 60% of the national median wage would bring about a small but significant reduction in EU-level disposable income inequality (by 0.75% in 2019 as measured through the Gini index). This result stems primarily from a reduction in the within-country component of income inequality as the effect on inequality between countries is rather muted. The reduction in EU-level income inequality is the highest in disposable incomes, but some reduction is detectable also in market incomes. In turn, the withdrawal of social benefits because of higher minimum wages seems to neutralise part of this inequality reduction.
    Keywords: Minimum wage, Microsimulation, European Union, Income inequality, EUROMOD
    JEL: H31 I32 J31
    Date: 2023–02
  9. By: Nicoli, Francesco; Burgoon, Brian; van der Duin, David
    Abstract: The Russian invasion of Ukraine caught the European Union (EU) off-balance. Many European member-states were, on the onset of the war, heavily reliant on energy supplies provided by Russia. Against this background, some have proposed a unified approach for the creation of EU-wide strategic energy reserves, which would ensure a buffer against future energy shocks, but also provide temporary relief to the participating countries should some of them experience temporary issues with their energy supply. However, the political feasibility of such programmes remain disputed, as any EU-wide approach to energy will entail both additional financial costs and a share of responsibilities and sovereignty on the matter. Furthermore, any such policy design is inherently multidimensional, differing over scope, governance, source of financing among other dimensions. To determine public support for energy security cooperation, we conduct the first conjoint experiment ever fielded on public support for alternative energy union design. We field a pre-registered, randomized conjoint experiment on a highly representative sample of the French, German, Italian, Dutch and Spanish population in November 2022. This multidimensional conjoint experiment allows us to determine the causal link between policy features of potential energy solidarity pacts, and public support or opposition to such policy. Our results show that policy packages meeting the most support require higher levels of ambition, joint EU-level governance, joint purchases and procurement, and progressive taxation as a form of financing. All in all, our results not only show that there is considerable cross-border support for energy solidarity, but also that citizens in different western European countries have generally converging preferences regarding the actual design of such policy, indicating that a compromise policy is feasible and publicly supported. Furthermore, our results support ongoing research on the nature of European solidarity at times of crisis, suggesting that European citizens are willing to support the creation of joint institutions and policies to face issues of common concern, and therefore indicating that major crises open important windows of opportunity to re-shape EU-level policies and institutions.
    Date: 2023–02–20
  10. By: Gohar Minasyan; Magali Pinat; Ezgi O. Ozturk; Mengxue Wang; Zeju Zhu
    Abstract: After trailing Euro Area inflation closely in the recent past, inflation in the Western Balkans has accelerated faster since early 2022 on the back of the shocks to global commodity prices, strong recovery from the pandemic, and lingering supply bottlenecks. This paper employs two complementary empirical approaches of an augmented Phillips curve and structural VAR, adapting them to the data availability and country specificities of the Western Balkans, to analyze the inflation dynamics in the region. It finds that international food prices affect not only headline but also core inflation as well as inflation expectations. Further, inflation in the Western Balkans is not just determined by foreign shocks, and domestic factors, aggregate demand shocks in particular, have a significant impact on inflation. These findings imply a possible role for policies to temporarily limit an immediate and complete pass-through of international to domestic food prices while also stressing the importance of an appropriate domestic macroeconomic policy mix to keep inflation expectations anchored and safeguard credibility in the face of high inflation persistence.
    Keywords: Inflation; Western Balkans; international food price shocks; commodity price shocks; Phillips curve; panel data; structural VAR; inflation expectation; inflation dynamics; inflations determinant; inflation development; inflation in the Western Balkans; Food prices; Energy prices; Nominal effective exchange rate; Global; Europe
    Date: 2023–03–03
  11. By: Guillaume BERARD (Luxembourg Institute of Socio-Economic Research (LISER)); Alain Trannoy (AMSE)
    Abstract: Poor housing conditions are detrimental to household members' health, schooling, and social interactions. Developed countries have responded to the challenge of improving housing for the poor using two main instruments: cash housing benefits and/or social housing. In this paper, we assess how effective they are in reducing households' housing poverty and inequality by comparing them separately and combined, with a counterfactual situation with no housing policies, examining 27 European countries by using harmonized data from the EU-SILC. We find that (1) cash housing benefits are more effective than in-kind housing benefits (social housing) and more effective in reducing poverty than inequality. (2) Some countries, and especially Finland, achieve a higher reduction in inequality and poverty while spending only half of the UK. (3) Based on an econometric estimate, we show evidence that in almost all countries outright ownership is the most advantageous tenure status. (4) Inequality in housing expenses is comparable to that in consumption expenditure (excluding housing costs), which is, in turn, much higher than inequality in housing services (a difference of 10 Gini points on average).
    Keywords: Housing policy, Housing consumption, Inequality, Poverty
    JEL: D63 I32 D31 H23
    Date: 2023–03
  12. By: Carlo Bellavite Pellegrini (Dipartimento di Politica Economica, DISCE, & Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Rachele Camacci (Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Laura Pellegrini (Dipartimento di Scienze Aziendali, Università di Bergamo, Bergamo, Italy - Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy); Andrea Roncella (Centro Studi Economia Applicata (CSEA), Università Cattolica del Sacro Cuore, Milano, Italy)
    Abstract: This paper aims to empirically test the interaction between systemic risk and corporate governance factors in the European banking framework on a balance panel data of 96 listed banks from 19 countries during the period 2011-2020. The purpose is to understand the role of a corporate governance’s specific issue for the systemic risk, throughtout a period that saw Europe been signed by financial turmoil’s long tail and the ‘whatever it takes’ recovery. Among the available possible governance features we focus on the ownership structure, as the literature shows that it affects the performance of the firm, both on profitability and risk. We choose the European context since its eterogeneity and the presence of a high level of institutional ownership. To measure systemic risk, we will adopt the CoVaR approach (Adrian and Brunnermeier, 2016). Our results show that ownership concentration decreases systemic risk over the period analized, meanwhile institutional investors’ high presence increases it.
    Keywords: Corporate Governance, Ownerhsip Structure, Institutional Investors, Systemic Risk
    JEL: G10 G21 G32
    Date: 2023–02
  13. By: Mats Petter Kahl (Leuphana Universität Lüneburg, Institut für Volkswirtschaftslehre)
    Abstract: In this article, I analyze whether German gasoline stations passed on the gasoline tax reduction to consumers. I use a difference-in-differences approach with France as the control group, as well as data for all countries in the European Union. The German fuel discount was in effect from June to August 2022. It was intensely debated in the general public whether German gasoline stations had increased prices before the tax reduction. Such a price increase would have made it easier for gasoline stations to disguise a price increase. Further questions follow: How long did it take for the full tax reduction to be passed on to consumers? Did gasoline stations reduce the pass-on after a few weeks? As I am the first to use complete French and German high-frequency data for the entire treatment period, I can examine how the pass-through of the tax cut evolved over time. I find substantial variance in pass-through rates over time. The average pass-through is very high but remains incomplete for all fuel types.
    Keywords: pass-through, gasoline market, tax reduction, fuel taxes, petrol prices
    JEL: H22 L13 L41
    Date: 2023–03
  14. By: Abián García Rodríguez (European Commission - JRC); Nicholas Lazarou (European Commission - JRC); Giovanni Mandras (Cassa Depositi e Prestiti); Simone Salotti (European Commission - JRC); Mark Thissen (PBL); Erwin Kalvelagen (Amsterdam Optimization)
    Abstract: We describe the procedure used to construct a set of interregional NUTS-2 European Union Social Accounting Matrices for the year 2017, using official Eurostat national and regional account data, and auxiliary data on business and interregional trade flows derived from transport survey data. This procedure builds on the one presented by Thissen et al. (2019) for the year 2013. The new dataset is described by presenting some relevant features and the results of some characteristic simulations obtained with a new version of the RHOMOLO model, referred to as RHOMOLO V4, based on the new 2017 data.
    Keywords: Regional data, Input-Output, social accounting matrices, trade flows, general equilibrium.
    JEL: C82 E16 R15 F14 F47
    Date: 2023–03
  15. By: Shane Byrne; Kenneth Devine; Michael King; Yvonne McCarthy; Christopher Palmer
    Abstract: Under-refinancing limits the transmission of accommodative monetary policy to the household sector and costs mortgage holders in many countries a significant fraction of income annually. We test whether targeted communication can reduce the attention frictions that inhibit transmission by partnering with a large bank to analyze a field experiment testing messages sent to 12, 000 Irish households. While we find only small effects of disclosure design improvements, a reminder letter increases refinancing by 76%, from 8.9% to 15.7%. To interpret this reminder effect, we extend and estimate a mixture model of inattentive financial decision-making to allow for disclosure treatment effects on attention. We find that reminders increase the likelihood mortgage holders are attentive by over 60%, from 24% to 39%. A conservative back-of-the-envelope cost-effectiveness calculation implies that the average reminder letter generated €42 of mortgagor consumption (€605 per refinancing household). Our results illustrate that targeted central bank communication such as refinancing reminders could have a larger effect on refinancing than a standard policy rate cut. Reminders could further strengthen the refinancing channel and stimulate local consumption even when policy rates are at the zero-lower bound or set in a monetary union.
    JEL: D83 E58 G21 G28 G51
    Date: 2023–03
  16. By: Alka Obadić (Faculty of Economics and Business, University of Zagreb); Mislav Viktor Viljevac (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper analyses the existing educational and occupational structures of several EU member countries and their alignment with the needs of the labour market. Such a situation may indicate a structural mismatch in labour market in which the mismatch between the skills taught in schools and universities and the skills needed in the workplace appears. To evaluate this mismatch, the paper investigates the matching needs of employers and unemployed job seekers by disaggregating the registered employment office data by education and occupation groups in selected EU countries separately. More educated workers, as well as workers in more complex and better-paid occupations, might fare better when it comes to the aggregate labour market trends. For example, economic downturns and increases in unemployment might be felt more heavily by workers with lower education and those who work in professions requiring fewer skills. In this paper, we analyse the data for a selected group of countries (Austria, Croatia, Estonia, Slovenia, and Spain) from 2010 till 2022, using the Beveridge curves and estimate the labour market tightness and matching efficiency for different education and occupation groups. Our results show that differences in education levels and occupation result in relatively small deviations from aggregate trends in the labour market. Aggregate labour market trends therefore strongly impact all groups in the labour market, whether the market is segmented by education levels or by occupation. In other words, both the improvements in the labour market conditions and the worsening of labour market conditions have similar effects across different labour market segments.
    Keywords: educational structure, structural unemployment, Beveridge curve, matching efficiency, labour market tightness, EU
    JEL: J21 J22 J23 J63
    Date: 2023–03–27
  17. By: Afunts, Geghetsik; Cato, Misina; Schmidt, Tobias
    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 24 th 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
  18. By: Mitze, Timo; Breidenbach, Philipp
    Abstract: We use four subsequent EU enlargement waves over three decades (1980s, 1990s, 2000s) to assess the regional effects of macro-institutional changes. Our focus is set on EU internal border regions which are specifically exposed to international integration, but it remains unclear how they benefit from this exposure. Treatment effects for different outcomes (per capita GDP, labor productivity, employment, population, night light emissions) are estimated by comparing the performance of EU internal border regions to overall regional development trends in the EU. We find significant border effects that build up over time and decay with spatial distance to the enlargement border. While per capita GDP, labor productivity levels and night light emissions develop positively on average, negative effects are found for the employment rate in border regions. However, effects can be specific to enlargement waves and country groups considered: Border regions in established member countries mainly gain from EU enlargement in terms of increasing their GDP per capita and labor productivity levels but face lower employment rates and population decline. However, border regions in new member countries, particularly in 2004 and 2007, most significantly gain through population and employment increases. This complex pattern of effects makes a straight 'winner-loser' categorization difficult and poses challenges to policy support for EU border regions.
    Keywords: Economic integration, EU enlargement, internal border regions, regional development, treatment effect estimation
    JEL: C23 F15 O47 R11
    Date: 2023
  19. By: Martin Eckhoff Andresen (Statistics Norway); Lars Thorvaldsen
    Abstract: Escape clauses, where small firms are exempt from particular tax rules, is a crucial feature of a number of corporate tax schemes, but creates incentives to avoid taxation by manipulating the measures that determine inclusion. We evaluate the impact of thin capitalization rules, which commonly feature such escape clauses, by exploiting the introduction of these rules in Norway in 2014. Combining difference-indifferences, regression discontinuity and bunching estimates, we show that what appears to be a strong response in the capital structure among exposed firms primarily reflect within-group reallocation of debt to avoid exposure to the rules through escape clauses. We observe sharp bunching among both new and existing subsidiaries at both thresholds for rule inclusion, and find that internal corporate group debt is offloaded to these bunching subsidiaries in order to avoid additional tax costs. As a result, significant and large effects on firm-level capital structure in response to the thin capitalization rules is driven by reshuffling of capital within corporate groups with little real effects. Re-estimating the difference-indifference specification at the corporate group level confirms this finding, questioning the extent to which thin capitalization rules have the intended effect due to the presence of escape clauses.
    Keywords: Thin capitalization rules; capital structure; escape clauses; difference-in-differences; bunching
    JEL: H25 H26 G30
    Date: 2023–02

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