nep-eec New Economics Papers
on European Economics
Issue of 2023‒05‒08
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Medium-term growth-at-risk in the euro area By Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
  2. Forecasting housing investment By Martínez, Carlos Cañizares; de Bondt, Gabe; Gieseck, Arne
  3. How to Limit the Spillover from an Inflation Surge to Inflation Expectations? By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  4. Quantitative analysis on selected deposits insurance issues for purposes of impact assessment By BELLIA Mario; CALÈS Ludovic; DI GIROLAMO Francesca; JOOSSENS Elisabeth; PETRACCO GIUDICI Marco
  5. The Evolution of Inequality of Opportunity in Europe By Stefano Filauro; Flaviana Palmisano; Vito Peragine
  6. Politicians' Social Welfare Criteria: An Experiment with German Legislators By Sandro Ambuehl; Sebastian Blesse; Philipp Doerrenberg; Christoph Feldhaus; Axel Ockenfels
  7. Deglobalisation? The reorganisation of global value chains in a changing world By Alexander Jaax; Sébastien Miroudot; Elisabeth van Lieshout
  8. The climate change challenge and fiscal instruments and policies in the EU By Avgousti, Aris; Caprioli, Francesco; Caracciolo, Giacomo; Cochard, Marion; Dallari, Pietro; Delgado-Téllez, Mar; Domingues, João; Ferdinandusse, Marien; Filip, Daniela; Nerlich, Carolin; Prammer, Doris; Schmidt, Katja; Theofilakou, Anastasia
  9. The Transmission Mechanism of Stress in the International Banking System By Alexis Stenfors; Lilian Muchimba
  10. Employment shifts in Europe from 1997 to 2021: from job upgrading to polarisation By Sergio Torrejón Pérez; John Hurley; Enrique Fernández-Macías; Elisa Staffa
  11. Are digital technologies reshaping trade patterns? Evidence from European industries By Marco Sforza
  12. Endogenous frequencies and large shocks: price setting in Greece during the crisis By Huw Dixon; Theodora Kosma; Pavlos Petroulas
  13. Seeking Shelter in Times of Crisis? Unemployment, Perceived Job Insecurity and Trade Union Membership By Chadi, Adrian; Goerke, Laszlo
  14. Analysys of the implementation of the Spanish Financial Transaction Tax in equity markets By Ramiro Losada, Albert Martínez Pastor
  15. Public Employment Agency Reform, Matching Efficiency, and German Unemployment By Christian Merkl; Timo Sauerbier
  16. The Consumption Response to Labour Income Changes By Kris Boudt; Koen Schoors; Milan van den Heuvel; Johannes Weytjens
  17. Do firms react to supply-chain disruptions? By Juan de Lucio; Carmen Díaz-Mora; Raúl Mínguez; Asier Minondo; Francisco Requena
  18. Bringing Them In or Pushing Them Out? The Labor Market Effects of Pro-cyclical Unemployment Assistance Changes By Gerard Domènech-Arumí; Silvia Vannutelli
  19. Banks vs. Firms: Who Benefits from Credit Guarantees? By Alberto Martin; Sergio Mayordomo; Victoria Vanasco

  1. By: Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
    Abstract: Financial stability indicators can be grouped into financial stress indicators that reflect heightened spreads and market volatility, and financial vulnerability indicators that reflect credit and asset price imbalances. Based on a panel of euro area countries, we show that both types of indicators contain information about downside risks to real GDP growth (growth-at-risk) in the short-term (1-year ahead). However, only vulnerability indicators contain information about growth-at-risk in the medium-term (3-years ahead and beyond). Among various vulnerability indicators suggested in the literature, the Systemic Risk Indicator (SRI) proposed by Lang et al. (2019) outperforms in terms of in-sample explanatory power and out-of-sample predictive ability for medium-term growth-at-risk in euro area countries. Shocks to the SRI induce a rich ”term structure” for growth-at-risk: downside risks to real GDP growth are reduced in the short-term, but over the medium-term the effect reverses and downside risks to real GDP growth go up considerably. We also show that using cross-country information from the panel of euro area countries can improve the out-of-sample forecasting performance of growth-at-risk for the euro area aggregate. JEL Classification: E37, E44, G01, G17, C22
    Keywords: financial stress, financial vulnerabilities, growth-at-risk, local projections, quantile regression
    Date: 2023–04
  2. By: Martínez, Carlos Cañizares; de Bondt, Gabe; Gieseck, Arne
    Abstract: This study applies a model averaging approach to conditionally forecast housing investment in the largest euro area countries and the euro area. To account for substantial modelling uncertainty, it estimates many vector error correction models (VECMs) using a wide set of short and long-run determinants and selects the most promising specifications based on in-sample and out-of-sample criteria. Our results highlight marked cross-country heterogeneity in the key drivers of housing investment which calls for country-specific housing market policies. A pseudo out-of-sample forecast exercise shows that our model averaging approach beats a battery of ambitious benchmark models, including BVARs, FAVARs, LASSO and Ridge regressions. This suggests that there is ample scope for model averaging tools in forecast exercises, notably as they also help to reduce model uncertainty and can be used to assess forecast uncertainty. JEL Classification: C32, C51, C52, C53, E22
    Keywords: Housing investment, model and forecast averaging, Tobin’s Q, VECM
    Date: 2023–04
  3. By: Lena Dräger; Michael J. Lamla; Damjan Pfajfar
    Abstract: We study the effects of forward-looking communication in an environment of rising inflation rates on German consumers’ inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward-looking information about inflation. Among these information treatments, professional forecasters’ projections seem to reduce inflation expectations by more than policymaker’s characterization of inflation as a temporary phenomenon.
    Keywords: short-run and long-run inflation expectations, inflation surge, randomized control trial, survey experiment, persistent or transitory inflation shock
    JEL: E31 E52 E58 D84
    Date: 2023
  4. By: BELLIA Mario (European Commission - JRC); CALÈS Ludovic; DI GIROLAMO Francesca (European Commission - JRC); JOOSSENS Elisabeth (European Commission - JRC); PETRACCO GIUDICI Marco (European Commission - JRC)
    Abstract: The EU bank crisis management and deposit insurance (CMDI) framework lays out the rules for handling bank failures, while preserving financial stability, protecting depositors, and aiming to avoid the risk of excessive use of public financial resources. Notwithstanding the progress achieved in promoting a stable and integrated financial system, the objective of shielding public money from the effect of bank failures is only partially achieved. The evaluation of the current rules to handle a banking failure has in fact identified potential issues with the framework’s design, implementation, and application. The review of the CMDI framework should provide solutions to address these issues and enable the framework to fully achieve its objectives and be fit for its purpose. Notably, the revision calls for a further harmonization of insolvency law to increase its efficiency and overall coherence to manage bank crises in the EU, as well as to enhance the level of depositor protection, including the creation of a common depositor protection mechanism (European Deposit Insurance Scheme, EDIS). The following report covers in particular three aspects closely related to the Deposit Insurance design and efficiency which are mentioned in the review: the potential coverage of temporary high deposit balances (THDBs), the effectiveness and pooling effect of the EDIS, and the assessment of alternative methodologies to compute risk-based contribution to a common European Deposit Insurance Fund.
    Keywords: Financial Stability, European Deposit Insurance Scheme, EDIS
    Date: 2023–04
  5. By: Stefano Filauro (Bocconi University); Flaviana Palmisano (Sapienza University of Rome); Vito Peragine (University of Bari)
    Abstract: This paper analyses the effect of inherited individual circumstances such as gender, family background, birth location on individual earnings in Europe. By using three waves of the EU Statistics on Income and Living Conditions (2005, 2011, 2019) we study the extent, the evolution, and the sources of inequality of opportunity in labour income in 27 European countries. We provide both country-specific estimates and a novel, pan-European analysis, in which the European Union is treated as a single entity and the country of birth is used as additional individual circumstance. The cross-country analysis reveals that on average about 40 per cent of earnings inequality is explained by pre-determined circumstances, although the data reveal some degree of heterogeneity, both in terms of levels and trends. Gender and parental education emerge as the most relevant circumstances in most countries. Pan-European inequality of opportunity, estimated through a multilevel model, appears much higher than any other country specific estimates: in the last wave about 60 per cent of total earnings inequality is explained by circumstances, although there has been a clear decreasing trend in the last 15 years, showing a sharp process of convergence within Europe.
    Keywords: inequality, equality of opportunity, earnings, labour market, Europe
    JEL: D31 D63 J31 O15
    Date: 2023–04
  6. By: Sandro Ambuehl; Sebastian Blesse; Philipp Doerrenberg; Christoph Feldhaus; Axel Ockenfels
    Abstract: Much economic analysis derives policy recommendations based on social welfare criteria intended to model the preferences of a policy maker. Yet, little is known about policy maker’s normative views in a way amenable to this use. In a behavioral experiment, we elicit German legislators’ social welfare criteria unconfounded by political economy constraints. When resolving preference conflicts across individuals, politicians place substantially more importance on least-favored than on most-favored alternatives, contrasting with both common aggregation mechanisms and the equal weighting inherent in utilitarianism and the Kaldor-Hicks criterion. When resolving preference conflicts within individuals, we find no support for the commonly used “long-run criterion” which insists that choices merit intervention only if the lure of immediacy may bias intertemporal choice. Politicians’ and the public’s social welfare criteria largely coincide.
    Keywords: positive welfare economics, politicians, preference aggregation, paternalism
    JEL: C90 D60
    Date: 2023
  7. By: Alexander Jaax; Sébastien Miroudot; Elisabeth van Lieshout
    Abstract: New evidence is presented on the evolution of global value chains (GVCs) since the Great Financial Crisis. Drawing on novel OECD inter-country input-output tables in previous year’s prices, it shows there was no general trend towards deglobalisation in the period up to 2020. The fragmentation of production remained at a historically high level in 2019 and close to the level of 2011, confirming a stabilisation of the depth of global economic integration. Different trends are observed across economies: in the European Union, the import intensity of production grew before the COVID-19 pandemic, while China increasingly relied on domestic inputs. To explain these trends, bilateral trade costs are estimated and their cumulative impact along value chains is then calculated; structural changes and higher uncertainty seem to be the main drivers of increasing cumulative trade costs for some GVCs. To preserve the benefits of GVCs, policy makers should seek to increase the ease of trade and reduce uncertainty.
    Keywords: Fragmentation of production, Global Value Chains, Trade costs
    JEL: F14 F15 C67
    Date: 2023–04–25
  8. By: Avgousti, Aris; Caprioli, Francesco; Caracciolo, Giacomo; Cochard, Marion; Dallari, Pietro; Delgado-Téllez, Mar; Domingues, João; Ferdinandusse, Marien; Filip, Daniela; Nerlich, Carolin; Prammer, Doris; Schmidt, Katja; Theofilakou, Anastasia
    Abstract: Fiscal policy plays a prominent role in climate change mitigation and adaptation. An optimal combination of revenue policies, in particular taxes, and expenditure policies, such as subsidies and investment, is essential in order to achieve greenhouse gas emissions targets. This paper analyses the main fiscal instruments in place in European Union Member States, focusing on specific issues, such as the fiscal impact of extreme weather events, the interaction between debt sustainability and climate change, the green investment gap and the distributional impact of climate policies. The paper aims to provide an overview of existing fiscal policies and of the main fiscal challenges for a comprehensive European climate change strategy. JEL Classification: H2, H5, H6, Q54, Q58, D63
    Keywords: carbon tax, climate change, debt sustainability, extreme weather events, green investment, redistribution
    Date: 2023–04
  9. By: Alexis Stenfors (University of Portsmouth); Lilian Muchimba (University of Portsmouth)
    Abstract: Significant and volatile deviations from the covered interest parity (CIP) are indicators of stress in the international banking system. This paper uses a TVP-VAR model to investigate the dynamic connectedness and spillovers of such stress between the US, the UK, Japan and the Eurozone from 4 July 2006 to 9 June 2022. To do so, we use daily price data on cross-currency basis swaps (CRSs), typically used to trade and express CIP deviations for maturities of 1 year and beyond. We also incorporate a yield curve dimension by including prices representative of the short-term (1Y), medium-term (5Y) and long-term (10Y) to obtain a more nuanced picture of the role of market expectations. Our findings suggest that overall connectedness is highly event-dependent and peaks during periods of high volatility and market stress. However, the transmission mechanism across banking systems and yield curve maturities has evolved considerably over time, which has significant implications for policies attempting to mitigate future crises.
    Keywords: Banks, CIP deviations, Cross-currency basis swaps, Dynamic connectedness, TVP-VAR, Yield curves
    JEL: C32 C5 F3 G15
    Date: 2023–04–24
  10. By: Sergio Torrejón Pérez (European Commission – JRC); John Hurley (Eurofound); Enrique Fernández-Macías (European Commission – JRC); Elisa Staffa (ESRI)
    Abstract: This article analyses shifts in employment structures in a selection of eight EU countries, as well as employment dynamics at the aggregate EU level. This is done for four periods, separated by the financial crisis and the outbreak of the COVID-19 crisis. Results show that there is a wide diversity of patterns of structural change across periods and countries in Europe. During the expansive phase of the business cycle, the pattern that was more widespread was job upgrading, with the number of workers increasing more in high-paid jobs (especially in private and public services). During the financial crisis (2008-2010) and the following period (2011-2019), the patterns of structural change were much more diverse. Still, some general lines can be traced. Workers that were hardest hit by the financial crisis were located in the middle of the wage structure. The global financial crisis impacted hardest on male workers and workers that were employed in construction and manufacturing, while the number of workers in public services continued increasing. From 2011, net employment growth was mainly driven by the increase in the size of service jobs, with employment in private services growing in a polarised way and public services promoting upgrading. Finally, the COVID-19 crisis had an asymmetric impact, impacting mainly employment in low-paid in-person service activities and agriculture.
    Keywords: job polarisation; economic restructuring; structural change; employment growth
    Date: 2023–03
  11. By: Marco Sforza (Department of Economics, Roma Tre University)
    Abstract: The paper explores the relationship between the industry-level diffusion of digital technologies and the regionalisation of trade in value added. Theoretical literature underlines two potential effects of these technologies. They may facilitate coordination, favouring higher fragmentation, but also redefine comparative advantages, pushing toward relocation. The aim of the paper is to provide empirical evidence on the relationship between digital technologies and trade regionalisation, for a panel of selected European countries and sectors over the period 2005-2018. I build a dataset combining data from TiVA-OECD, EU-KLEMS and Eurostat SBS. I define two regionalisation measures, comparing intra-EU against extra-EU trade flows, to capture the relative importance of the two regions for input sourcing and output destination. The econometric analyses show a differentiated effect on the two measures: digital capital reduces regionalisation of the input sourcing, while positively correlating with the regionalisation of the intermediate output. Finally, a differentiated effect is also found in magnitude between technologies, namely, physical ICT and software.
    Keywords: Digital technologies; Global Value Chains; Trade regionalisation
    JEL: O33 F10 F15
    Date: 2023–04
  12. By: Huw Dixon (Cardiff Business School); Theodora Kosma (Bank of Greece); Pavlos Petroulas (Bank of Greece)
    Abstract: We utilize a unique micro price data set for Greece that underpins the Greek CPI. It spans almost two decades, during which Greece suffered a large economic shock. We find that during this time there were significant changes in the pricing behavior of Greek firms. We also find macro-economic developments such as annual inflation and output growth are important factors in determining the frequency and size of price changes. This leads to an intertemporal inflation dynamic linking current inflation to future price behavior and inflation. Utilizing the empirical estimates from the data, we combine a Taylor rule and Euler equation with the inflation dynamic resulting from the asymmetric impact of inflation on the frequency of price increases and the frequency of price decreases. The results of the simulations capture the Greek inflation developments well. Moreover, they also capture developments in the frequency of price increases and decreases seen in other economies and over different time-periods.
    Keywords: inflation dynamics; frequencies; prices; microdata
    JEL: E31 E37 C26 C41
    Date: 2023–02
  13. By: Chadi, Adrian (University of Konstanz); Goerke, Laszlo (IAAEU, University of Trier)
    Abstract: Do trade unions benefit from economic crises by attracting new members among workers concerned about job security? To address this question, we provide a comprehensive empirical investigation based on panel data from Germany, where workers individually decide on their membership. We analyse whether exogenously manipulated perceptions of job insecurity encourage individuals to join a union. Firm-level workforce reductions serve as the first trigger of perceived job insecurity. Regional unemployment rates represent a second source of exogenous variation. Third, we propose a novel identification approach based on plant-closure-induced job losses of other workers in the same region. In each case, we exploit the longitudinal nature of the data to analyse the implications of changes in labour market conditions for changes in union membership using an instrumental-variable approach. We consistently find that perceived job insecurity, as triggered by labour market turmoil, increases the likelihood of individual union membership. Analysing data on media coverage about downsizing in a complementary investigation, we add further evidence to the notion of trade unions as beneficiaries of labour market crises. Finally, we consider workers who lose their jobs and find no evidence of adverse effects on union membership among those directly affected by the labour market situation.
    Keywords: job security, German Socio-Economic Panel, workforce reduction, trade union membership, regional labour markets, media coverage
    JEL: D84 J51 J63
    Date: 2023–03
  14. By: Ramiro Losada, Albert Martínez Pastor
    Abstract: This paper evaluates the effect of the introduction of the ITF on Spanish shares in secondary markets, focusing on the potential costs. For this purpose, it considers several dimensions of liquidity (measured through the bid-ask spread and the Amihud ratio), volatility (both intraday and historical) and trading volume of the secondary markets in which Spanish shares are traded. The paper uses two models: one based on difference-in-differences and another wich relies on a regression discontinuity design. This approach tries to capture two types of effects: firstly, the impact of the introduction of the tax by comparing the evolution of the variables of Spanish shares subject to the FTT with those of other countries with similar characteristics and not subject to the FTT. Secondly, the evolution of the variables linked to the trading of shares of Spanish companies subject to tax whith those are not. The paper reveals that the effect of the tax on the trading of Spanish shares have been limited in absolute terms and were mostly temporary. Two opposing effects are detected: on the one hand, the trading of taxed Spanish shares decreased after the introduction of the tax. On the other hand, these shares recovered part of the trading volume that was carried out in OTC markets. With respect to volatility, it increased in the short term, and tended to decrease in the long term.
    Keywords: Spanish Financial Transaction Tax, equity markets, data analysis.
    JEL: G18 E52 E62 E63
    Date: 2023
  15. By: Christian Merkl; Timo Sauerbier
    Abstract: Our paper analyzes the role of public employment agencies in job matching, in particular the effects of the restructuring of the Federal Employment Agency in Germany (Hartz III labor market reform) for aggregate matching and unemployment. Based on two microeconomic datasets, we show that the market share of the Federal Employment Agency as job intermediary declined after the Hartz reforms. We propose a macroeconomic model of the labor market with a private and a public search channel and fit the model to various dimensions of the data. We show that direct intermediation activities of the Federal Employment Agency did not contribute to the decline in unemployment in Germany. By contrast, improved activation of unemployed workers reduced unemployed by 0.8 percentage points. Through the lens of an aggregate matching function, more activation is associated with a larger matching efficiency.
    Keywords: Hartz reforms, search and matching, reform of employment agency
    JEL: E24 E00 E60
    Date: 2023
  16. By: Kris Boudt; Koen Schoors; Milan van den Heuvel; Johannes Weytjens (-)
    Abstract: We develop an income shock classification taxonomy that classifies income changes into 9 categories based on the magnitude, direction and permamency of the income change. Using 01/2017 – 06/2022 bank transaction data of Belgian employees and workers, we apply this classification on labour income changes to find that the elasticity to a positive recurrent labour income shocks is almost double that of a regular labour income change and a transient positive labour income shock. The effect significantly varies among different consumption durability types and is amplified in case of low levels of liquid wealth. Accounting for the heterogeneity in types of income changes is therefore important to understanding the multiplier effect of fiscal policy aimed at increasing available income.
    Keywords: Income changes; consumption; liquid wealth; marginal propensity to consume
    Date: 2023–04
  17. By: Juan de Lucio (Universidad de Alcalá. Pza. San Diego, s/n, 28801, Alcalá de Henares (Spain)); Carmen Díaz-Mora (Universidad de Castilla-La Mancha, Cobertizo de San Pedro Mártir, s/n, 45071 Toledo (Spain)); Raúl Mínguez (Universidad Antonio de Nebrija. Calle de Santa Cruz de Marcenado, 27, 28015, Madrid (Spain)); Asier Minondo (Deusto Business School, University of Deusto, Camino de Mundaiz 50, 20012 Donostia - San Sebastián (Spain)); Francisco Requena (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain))
    Abstract: Since the outbreak of the Covid-19 pandemic, the disruption of supply chains has become a major concern for global firms. This paper uses a representative sample of Spanish manufacturers that participate in global value chains to analyze whether firms are implementing strategies to respond to this concern. Using data for the period 2017-2022, we find that, on average, manufacturers have not increased the number of countries they source their inputs from since the Covid-19 pandemic. Firms have not either shifted their imports to countries that are geographically and geopolitically close to Spain, and have not reshored imports. However, firms have significantly increased the stock of intermediates. Firms only diversify when they have one supplier, export to many destinations, and the imported input has a high risk of experiencing a supply-chain disruption. Firms nearshore and friendshore when their main supplier is geographically distant.
    Keywords: supply-chain disruptions, diversification, nearshoring, friendshoring, reshoring, stocks, Spain
    JEL: F10 F14
    Date: 2023–04
  18. By: Gerard Domènech-Arumí; Silvia Vannutelli
    Abstract: We exploit an unanticipated labor market reform to estimate the effects of procyclical changes in long-term unemployment assistance (UA). In July 2012, Spain raised the minimum age to receive unlimited-duration UA from 52 to 55. Using a difference-in-differences design, we document that shorter benefits caused (i) shorter non-employment duration, especially among younger workers; (ii) higher labor force exit and other programs' take-up, especially among older workers; (iii) lower wages upon re-employment. The reform induced moderate government savings. Our resultshighlight the importance of considering the interplay with labor market conditions when designing long-term beneffit schedules that affect workers close to retirement.
    Date: 2023–04
  19. By: Alberto Martin; Sergio Mayordomo; Victoria Vanasco
    Abstract: Many countries implemented large-scale programs to guarantee private credit in response to the outbreak of COVID-19. Yet the role of banks in allocating guarantees - and thus in shaping their effects - is not well understood. We study this role in an economy where entrepreneurial effort is crucial for efficiency but it is not contractible, giving rise to a debt overhang problem. In such an environment, credit guarantees increase efficiency to the extent that they allow firms to reduce their repayment obligations. We show that banks follow a pecking order when allocating guarantees, prioritizing riskier, highly indebted, firms, from whom they can extract more surplus. The competitive equilibrium is constrained inefficient: all else equal, the planner would tilt the allocation of guarantees towards more productive, safer firms, and would fully pass-through the benefits of guarantees to firms in the form of lower repayments. We confirm the model's main predictions on the universe of all credit guarantees granted in Spain following the outbreak of COVID.
    Keywords: credit guarantees, Debt Overhang, liquidations
    Date: 2023–04

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