nep-eec New Economics Papers
on European Economics
Issue of 2023‒04‒24
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  2. Fiscal policy in the semi-structural model ECB-BASE By Bańkowski, Krzysztof
  3. Preferred habitat investors in the green bond market By Martijn Boermans
  4. Public money as a store of value, heterogeneous beliefs, and banks: implications of CBDC By Muñoz, Manuel A.; Soons, Oscar
  5. Italy and the trap of GVC downgrading: labour dependence in the European geography of production By Lorenzo Cresti; Giovanni Dosi; Federico Riccio; Maria Enrica Virgillito
  6. Does a Progressive Wealth Tax Reduce Top Wealth Inequality? Evidence from Switzerland By Samira Marti; Isabel Martínez; Florian Scheuer; Isabel Z. Martínez
  7. BEFIT - Formulary Apportionment in the European Union By Marketa Mlcuchova
  8. Employment Effects of Offshoring, Technological Change and Migration in a Group of Western European Economies: Impact on Different Occupations By Michael Landesmann; Sandra M. Leitner
  9. CCP initial margin models in Europe By Boudiaf, Ismael Alexander; Scheicher, Martin; Vacirca, Francesco
  10. European Low-Carbon Policy: Impact on fossil energy markets By Jacques Minlend
  11. Do firm expectations respond to monetary policy announcements? By Di Pace, Federico; Mangiante, Giacomo; Masolo, Riccardo
  12. Five Countries, Five Models – A Comparison of Fiscal Frameworks and Lessons for Finland By Begg, Iain; Kuusi, Tero; Kylliäinen, Olavi
  13. The determinants of Public Grants and Venture Capital financing: Evidence from Europe By Andrea Bellucci; Gianluca Gucciardi; Daniel Nepelski
  14. Pensions and the Nordic Welfare Model By Torben M. Andersen

  1. By: Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the ultimate underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    Date: 2023–03–25
  2. By: Bańkowski, Krzysztof
    Abstract: Fiscal policy constitutes a key tool for business cycle stabilisation next to monetary policy. In this context, having a well-suited macroeconomic model for analysing fiscal policy at a central bank is of primary importance. This paper documents the fiscal block of the ECB-BASE, which is a semi–structural model for the euro area developed at the ECB for projections and policy analysis. The set-up of the fiscal block ensures comprehensive coverage of the government sector and tight links to the quarterly fiscal accounts. Thanks to this design, it is possible to simulate the model with a wide range of fiscal shocks, which, as shown in the paper, have distinct propagation mechanisms. Having discussed the set-up and the potency of fiscal policy in the model, this paper also includes the following applications for fiscal policy analysis: counterfactual scenarios with alternative fiscal rules, assessment of fiscal policy conducted in the euro area in the past and stochastic fiscal projections. JEL Classification: C3, C5, E1, E2, E6
    Keywords: euro area, fiscal policy, forecasting, semi-structural model, simulations
    Date: 2023–03
  3. By: Martijn Boermans
    Abstract: In recent years, the green bond market has seen significant growth as a means of financing environmentally-friendly projects. However, while much research has focused on pricing, little attention has been given to the investors who hold these bonds. This paper uses a preferred habitat framework to analyze the preferences of European investors for green bonds. By analyzing a confidential dataset of portfolio holdings from 2016-Q4 to 2022-Q4, the study finds that European investors, particularly mutual funds and pension funds, show a high demand for green bonds. In contrast, insurance corporations and households tend to avoid green bonds. The research also suggests that the demand for green bonds among mutual funds and pension funds is price inelastic, while banks and insurance corporations display an elastic demand. The findings highlight the presence of a preferred habitat for green bonds among European mutual funds and pension funds. These findings are robust for potential endogeneity concerns when we apply matching techniques, are stronger for domestic green bonds, and also apply to sustainability-linked bonds.
    Keywords: green bonds; preferred habitat; institutional investors; securities holdings statistics; greenium; climate change; environmental impact; sustainability-linked bonds; portfolio holdings
    JEL: G11 G15 G23 Q54 Q56
    Date: 2023–04
  4. By: Muñoz, Manuel A.; Soons, Oscar
    Abstract: The bulk of euro-denominated cash is held for store of value purposes, with such holdings sharply increasing in times of high economic uncertainty. We develop a Diamond and Dy-bvig model with public money as a store of value and heterogeneous beliefs about bank stability that accounts for this evidence. Consumers who are sufficiently pessimistic prefer to hold cash. In our model, the introduction of a central bank digital currency (CBDC) as a store of value that is superior to cash leads to bank disintermediation as some depositors opt for switching to CBDC based on their beliefs. While CBDC partially replaces deposits, long-term lending decreases less than proportionally as remaining depositors are, on aver-age, more optimistic about bank stability and banks re-balance their portfolio accordingly. The appropriate calibration of CBDC design features such as remuneration and quantity limits can mitigate these effects. We study the individual and social welfare implications of introducing CBDC as a store of value. JEL Classification: E41, E58, G11, G21
    Keywords: bank disintermediation, bank stability, cash, central bank digital currency, welfare
    Date: 2023–03
  5. By: Lorenzo Cresti; Giovanni Dosi; Federico Riccio; Maria Enrica Virgillito
    Abstract: How does Italy position inside the European structure of trade relationships? How labour bilateral flows have changed over time? Which type of employment activity has been outsourced? Which insourced? Focusing on a three-country perspective, what are the employment bilateral relationships between Italy-Germany-Poland (descending periphery-core-ascending periphery)? To address these questions we develop a novel set of bilateral labour dependence indicators inside I-O production networks. Overall, we provide evidence of the reconfiguration of Italy as falling into the trap of GVC downgrading, with an increasing number of trade relationships in employment requirements, particularly in the most strategic productions, as insourced from abroad. The offshoring strategy conducted so far has resulted in a weakening of its internal production capacity and employment absorption, even more harshly when compared to other European countries.
    Keywords: Input-output; global value chains; international division of labour; core-periphery.
    Date: 2023–04–02
  6. By: Samira Marti; Isabel Martínez; Florian Scheuer; Isabel Z. Martínez
    Abstract: Like in many other countries, wealth inequality has increased in Switzerland over the last fifty years. By providing new evidence on cantonal top wealth shares for each of the 26 cantons since 1969, we show that the overall trend masks striking differences across cantons, both in levels and trends. Combining this with variation in cantonal wealth taxes, we then estimate an event study model to identify the dynamic effects of reforms to top wealth tax rates on the subsequent evolution of wealth concentration. Our results imply that a reduction in the top marginal wealth tax rate by 0.1 percentage points in-creases the top 1% (0.1%) wealth share by 0.9 (1.2) percentage points five years after the reform. This suggests that wealth tax cuts over the last 50 years explain roughly 18% (25%) of the increase in wealth concentration among the top 1% (0.1%).
    Keywords: wealth tax, inequality, top wealth shares
    JEL: H23 H24 D31
    Date: 2023
  7. By: Marketa Mlcuchova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno, Zemedelska 1, 613 00 Brno, Czech Republic)
    Abstract: This paper seeks to contribute to the current debate on EU wide corporate taxation, steered by the impending BEFIT Proposal. The objective of this paper is to verify whether the inclusion of intangible assets will enhance the ability of the current proposals for Formulary Apportionment (FA) to explain variability in profitability. The research question addressed is “What is the explanatory power of the FA, for factors such as tangible assets, intangible assets, labour and sales by destination, to describe the variability in the profitability of companies active within the EU internal market?†. The research reveals that the inclusion of intangible assets fails to enhance the explanatory power of the FA and that factoring in intangible assets does not appear to have a statistically significant effect in the model.
    Keywords: Formulary Apportionment, BEFIT, Separate Accounting, EU corporate taxation
    JEL: F23 H25 K34
    Date: 2023–03
  8. By: Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper estimates conditional demand models to examine the impact of offshoring, technological change, and migration on the labour demand of native workers differentiated by four different types of occupational groups managers/professionals, clerical workers, craft (skilled) workers and manual workers. The analysis is conducted for an unbalanced panel of five economies Austria, Belgium, France, Spain, and Switzerland covering the period 2005-2018. Our results point to important and occupation-specific effects offshoring seems to have beneficial employment effects for native craft workers in this set of economies, while negative effects for native manual workers across a wide set of industries (including manufacturing and services industries) and managers/professionals in manufacturing. Furthermore, there are important distinctions whether offshoring occurs in other advanced economies, in the EU13 or in developing countries. The analysis of the impact of technological change shows the strong positive impact which the additional IT equipment has on most occupational groups of native workers (with the exception of manual workers), while robotisation in manufacturing showed strongly negative impacts on the employment of all groups of workers and especially of craft workers. Increasing immigrant shares in the work forces showed strongly negative impacts on native workers – however, considering only the partial substitution effects and not including the potential for productivity and demand effects – and this is mostly accounted for by immigration from low- to medium-income source countries.
    Keywords: Employment, occupational groups, offshoring, technological change, immigration
    JEL: F16 F22 F66 O33
    Date: 2023–03
  9. By: Boudiaf, Ismael Alexander; Scheicher, Martin; Vacirca, Francesco
    Abstract: In this paper we aim to provide a holistic understanding of the Initial Margin (IM) models used by Central Counterparties (CCPs) in Europe. In addition to discussing their relevance in terms of CCP risk management and their importance for the functioning of financial markets, we provide an overview of the main modelling frameworks used, including Standard Portfolio Analysis of Risk (SPAN) and Value at Risk (VaR) models.By leveraging on publicly available data, we provide an up-to-date picture of current modelling practices for specific cleared product classes, as well as various trends in IM modelling practices in Europe. We show how IM model frameworks vary materially, depending on the CCP’s past choices and the products it clears. Despite a propensity to switch to VaR models, idiosyncrasies and differences across CCPs are likely to persist.We conclude by highlighting current and upcoming challenges and risks to CCP IM model frameworks and linking the current status quo with ongoing and upcoming regulatory work at European and international level. JEL Classification: G15, G18, G19, G23, G28, G32
    Keywords: Central Counterparties, initial margin models, model governance and validation., risk management
    Date: 2023–04
  10. By: Jacques Minlend (Université de Rennes, CNRS, CREM-UMR6211, F-35000 Rennes, France)
    Abstract: This paper proposes text-as-data methods relying on unsupervised machine learning algorithms applied to European Union (EU) law acts and newspapers. These are used to construct two monthly indices over a reference period 1997-2021: (i) First, a news-based index which underlies a conjunctural uncertainty about the international context in which the global energy and environment policy evolves (EnvPU). (ii) Second, a laws-based index which reflects structural changes of the European energy and environment regulations (EnvP). The main findings suggest both indices display, in some extent, a common evolutionary pattern around salient events in the history of the EU energy and environment policy. Moreover, EnvPU index appears to be more volatile and is driven in the short-run by EnvP index. Given the support of such a policy to carbon phase-out, we further examine, in what extent, each index relates to price uncertainty dynamics in fossil energy markets (oil, gas, and coal). As a result, we uncover that, increase in news-based EnvPU index has a positive impact on price uncertainty of all fossil energy markets, the effect being stronger and more significant for gas and coal markets. In contrast, while an exogenous shock in laws-based EnvP index has a negative effect on price uncertainty in oil and gas markets, it tends to increase the coal price uncertainty. Overall, EnvP index depicts a stabilizing effect on fossil energy prices.
    Keywords: Energy and Environment Policy; News and media; Text-mining; Unsupervised machine learning; Commodity markets; Structural VAR.
    JEL: Q58 C55 C80 D80 Q02 C32
    Date: 2023–02
  11. By: Di Pace, Federico (Bank of England); Mangiante, Giacomo (HEC Lausanne); Masolo, Riccardo (Catholic University of the Sacred Heart)
    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 survey filed immediately before and after a Monetary Policy Committee 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 inducing a reduction in price expectations and uncertainty surrounding them.
    Keywords: Central bank communication; firm expectations; high-frequency identification; survey data
    JEL: D84 E52 E58
    Date: 2023–02–10
  12. By: Begg, Iain; Kuusi, Tero; Kylliäinen, Olavi
    Abstract: Abstract In recent years, many countries have sought to transform their fiscal frameworks, with the aim of rendering their public finances more sustainable and preventing the emergence of fiscal problems. This report presents the findings of comparative research into the fiscal frameworks of five countries (Denmark, Ireland, the Netherlands, New Zealand and Sweden). All five countries have developed effective fiscal frameworks in the last two decades, and it is evident that they reflect both reactions to past episodes of fiscal laxity and the fostering of a broad consensus on the necessity of a more disciplined and robust framework. There are noteworthy differences of approach, with the implication that rather than there being an optimal framework, successful ones can take different forms. It is never easy to transplant what works in one national setting to another, but there are several insights from experience in the comparator countries which could help to enhance the Finnish fiscal framework. See also publication General Government Fiscal Frameworks and Their Development Needs in Finland.
    Keywords: Fiscal policy, Fiscal rules, Expenditure ceilings
    JEL: E62 H30 H61 P52
    Date: 2023–04–11
  13. By: Andrea Bellucci (University of Insubria, Department of Economics); Gianluca Gucciardi (UniCredit and University of Milan); Daniel Nepelski (European Commission - JRC)
    Abstract: This analysis compares the characteristics of firms supported by public and private sources in early-stage financing to investigate funding patterns for innovative companies. It examines whether the two sources of funding target similar firms in the period 2008-2017 using a portfolio approach on EU-based firms raising either Venture Capital financing, public grants under the Horizon 2020 ‘SME Instrument’ scheme, or both. The findings show that venture capitalists finance more innovative and younger firms, whereas public investors focus on smaller companies. This pattern is supported by robustness checks and expansions that address multiple dimensions of heterogeneity behaviours in the interaction of private and public funding.
    Keywords: Venture Capital, Investment, Public Grants, Horizon 2020, SME Instrument, Entrepreneurial Finance
    JEL: O30 O38 L20 L53 G20
    Date: 2023–02
  14. By: Torben M. Andersen
    Abstract: Within the frame of the Nordic welfare model, pension system design has taken very different routes. While the overall aims in terms of distribution and replacement rates are similar, the division of labour between defined benefit and contribution as well as pay-as-you-go versus funded schemes differs significantly. The main characteristics of the pension systems in the Nordic countries are presented, and outcomes relating to pension adequacy in terms of poverty and replacement rates are discussed. Specific design issues related to achieving distributional goals and financial robustness via automatic adjustment mechanisms are highlighted. Finally, the overall financial sustainability of pension systems and the macroeconomic implications are discussed.
    Keywords: pension systems, pension adequacy, fiscal sustainability, distribution, insurance, incentives
    JEL: G51 H60 J26
    Date: 2023

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