nep-eec New Economics Papers
on European Economics
Issue of 2023‒05‒29
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Monetary policy and the joint distribution of income and wealth: The heterogeneous case of the euro area By Anna Stelzer
  2. Data outliers and Bayesian VARs in the Euro Area By Luis J. Álvarez; Florens Odendahl
  4. Determinants of Functional Specialisation in EU Countries By Aleksandra Kordalska; Magdalena Olczyk
  5. Drivers of Private Equity Activity across Europe: An East-West Comparison By Evzen Kocenda; Shivendra Rai
  6. Fiscal Policy and Stock Markets at the Effective Lower Bound By Christophe Andre; Petre Caraiani; Rangan Gupta
  7. The Energy-Price Channel of (European) Monetary Policy By Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
  8. Credit Line Runs and Bank Risk Management: Evidence from the Disclosure of Stress Test Results By José E. Gutiérrez; Luis Fernández Lafuerza
  9. Do buffer requirements for european systemically important banks make them less systemic? By Carmen Broto; Luis Fernández Lafuerza; Mariya Melnychuk
  10. Warming the MATRIX: a Climate Assessment under Uncertainty and Heterogeneity By Bazzana, Davide; Rizzati, Massimiliano; Ciola, Emanuele; Turco, Enrico; Vergalli, Sergio
  11. Sectoral shocks, reallocation, and labor market policies By Joaquín García-Cabo; Joaquín Anna Lipińska; Gastón Navarro
  12. Minimum Income Support Systems as Elements of Crisis Resilience in Europe By Eichhorst Werner; Holger Bonin; Annabelle Krause-Pilatus; Paul Marx; Mathias Dolls; Max Lay
  13. Functional Specialisation and Working Conditions in Europe By Sandra M. Leitner; Roman Stöllinger; Zuzana Zavarská
  14. The Transmission of Negative Nominal Interest Rates in Finland By Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
  15. Services in the India-EU Free Trade Agreement By Kyvik Nordås, Hildegunn
  16. Debt overhang, credit demand and financial conditions By Isabel Argimón; Irene Roibás
  17. Digitalisation and productivity: gamechanger or sideshow? By Robert Anderton; Vasco Botelho; Paul Reimers
  18. Inflation Expectations and Misallocation of Resources: Evidence from Italy By Tiziano Ropele; Yuriy Gorodnichenko; Olivier Coibion

  1. By: Anna Stelzer
    Abstract: This papers aims to establish the empirical relationship between income, net wealth and their joint distribution in a selected group of euro area countries. I estimate measures of dependence between income and net wealth using a semiparametric copula approach and calculate a bivariate Gini coefficient. By combining structural inference from vector autoregressions on the macroeconomic level with a simulation using microeconomic data, I investigate how conventional and unconventional monetary policy measures affect the joint distribution. Results indicate that effects of monetary policy are highly heterogeneous across different countries, both in terms of the dependence of income and net wealth on each other, and in terms of inequality in both income and net wealth.
    Date: 2023–04
  2. By: Luis J. Álvarez (Banco de España); Florens Odendahl (Banco de España)
    Abstract: We propose a method to adjust for data outliers in Bayesian Vector Autoregressions (BVARs), which allows for different outlier magnitudes across variables and rescales the reduced form error terms. We use the method to document several facts about the effect of outliers on estimation and out-of-sample forecasting results using euro area macroeconomic data. First, the COVID-19 pandemic led to large swings in macroeconomic data that distort the BVAR estimation results. Second, these swings can be addressed by rescaling the shocks’ variance. Third, taking into account outliers before 2020 leads to mild improvements in the point forecasts of BVARs for some variables and horizons. However, the density forecast performance considerably deteriorates. Therefore, we recommend taking into account outliers only on pre-specified dates around the onset of the COVID-19 pandemic.
    Keywords: COVID-19 pandemic, outliers, Bayesian VARs, forecasting, euro area
    JEL: C11 C32 C51 E37
    Date: 2022–11
  3. By: João Alcobia
    Abstract: Using a Balance-of-Payments Constrained Growth model and a Convergence Quadrants Diagram this paper finds evidence of economic divergence of most European Union (EU) peripheral member states and the EU average between 1996 and 2019. In only two cases – Spain and Cyprus – do we find a trend of economic convergence, but which was of an unsustainable nature since it was accompanied by growing external imbalances. Further, using a productivity convergence/divergence model this paper again finds evidence of productivity divergence between peripheral member states and the EU average between 1996 and 2019, though it finds evidence of productivity convergence between 1996 and 2008. In the 2009-2019 period, productivity divergence was driven by a more pronounced reduction in the income elasticity of exports than in the income elasticity of imports and by a reduction in the importance of economies of scale.
    Keywords: Balance-of-Payments Constrained Growth, Convergence Quadrants Diagram, productivity convergence/divergence model, peripheral member states, economies of scale.
    JEL: C22 C23 E12 F15 F45
    Date: 2023–05
  4. By: Aleksandra Kordalska; Magdalena Olczyk
    Abstract: This paper aims to identify factors that determine functional specialisation (FS) in global value chains (GVCs) in European Union countries. We focus on fabrication and R&D as two opposite business functions in terms of their character and their potential of creating value-added. To make our results robust two different approaches to measuring functional specialisation are used – an FDI-based approach and a trade-based approach. To assemble a relative functional specialisation index, for each approach we use the same metric – a revealed comparative advantages index. Our results suggest a positive effect of wages on specialisation in an R&D function, and a negative impact on FS in fabrication. Increasing labour productivity boosts both specialisation in fabrication and in R&D. The results are robust to different model specifications and different time intervals. The instrumental variables method allows us to interpret the results as causal relationships. Additionally, human capital and labour skills foster FS in R&D (only in FDI data), and growing employment makes FS in fabrication increase. The growth of GDP per capita positively affects functional specialisation in R&D activities. Among GVC participation measures, we confirm the importance of increasing backward linkages to explain the boost in fabrication activities. Dividing a full sample into a group of EU15 countries and a group of Central Eastern European countries we observe that patterns for the EU15 are similar to those for the full sample, while for CEE countries wages are insignificant and labour productivity affects FS in fabrication only.
    Keywords: functional specialisation, global value chains, smile curve, factory economy, headquarters economy
    JEL: F15 F21 F23 F63 L23
    Date: 2023–05
  5. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague; Institute of Information Theory and Automation of the CAS, Prague; CESifo Munich; IOS Regensburg.); Shivendra Rai (Institute of Economic Studies, Charles University, Prague, Czech Republic)
    Abstract: We investigate the key macroeconomic and institutional determinants of fundraising and investment activities and compare them across Europe, covering 13 Central and Eastern European (CEE) and 16 Western European (WE) countries. Five macroeconomic variables and nineteen institutional variables are selected. These variables are studied using panel data analysis with fixed effects and random effects models over an eleven-year observation period (2010-2020). Bayesian Model Averaging (BMA) is applied to select the key variables. Our results suggest that macroeconomic variables have no significant impact on fundraising and investment activity in either region. Investment activity is a significant driver of fundraising across Europe. Similarly, fundraising and divestment activity are significant drivers of investments across Europe. Institutional variables, however, affect fundraising and investment activity differently. While investment freedom has a significant effect on funds raised in the WE and CEE countries, government integrity and trade freedom are both significant determinants of investments in both European regions. In addition, the results demonstrate that, in contrast to the WE region, fundraising in the CEE region is not country specific.
    Keywords: Private equity (PE), Fundraising, Investment, Central and Eastern Europe (CEE), Western Europe (WE), Bayesian Model Averaging (BMA)
    JEL: C11 C23 C52 E22 G15 G24 G28 O16
    Date: 2023–05
  6. By: Christophe Andre (OECD, 75775 Paris Cedex 16, France); Petre Caraiani (Institute for Economic Forecasting, Romanian Academy, Romania; Bucharest University of Economic Studies, Bucharest, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: We study the impact of fiscal policy at the effective lower bound (ELB) in the stocks markets of the Euro Area, specically looking at a government spending shock. To uncover the impact of this shock, we estimate a factoraugmented interacted panel vector-autoregressive (FAIPVAR) model. We find statistically different impacts of the government spending shock across the ELB and non-ELB periods, with relatively stronger positive impact on stock returns under the former. Conversely, the differences are not statistically signiffcant for the United States using a time series data-based FAIVAR. Our findings have important implications from the perspectives of both policymaking and investors.
    Keywords: Fiscal policy, Effective lower bound, VAR, Stock Market
    JEL: C32 E52 E58 G12
    Date: 2023–05
  7. By: Gökhan Ider; Alexander Kriwoluzky; Frederik Kurcz; Ben Schumann
    Abstract: This study examines whether central banks can combat inflation that is caused by rising energy prices. By using a high-frequency event study and a Structural Vector Autoregression, we find evidence that the European Central Bank (ECB) and the Federal Reserve (Fed) are capable of doing so by affecting domestic and global energy prices. This “energy-price channel” of monetary policy plays an important role in the transmission mechanism of monetary policy. As many major sources of energy, such as oil, are priced in dollars, fluctuations in the domestic exchange rate vis-a-vis the dollar crucially shapes the transmission of monetary policy to energy prices. On the one hand an appreciation of the euro against the dollar lowers local energy prices (in euro) through cheaper imports. On the other hand lower import prices raise energy demand and thereby increase global energy prices (in dollars). Our counterfactual analysis demonstrates that both effects are present, but the latter effect is stronger than the former.
    Keywords: Inflation, energy prices, monetary policy transmission mechanism
    JEL: C22 E31 E52 Q43
    Date: 2023
  8. By: José E. Gutiérrez (Banco de España); Luis Fernández Lafuerza (Banco de España)
    Abstract: As noted in recent literature, firms can run on credit lines due to fear of future credit restrictions. We exploit the 2011 stress test supervised by the European Banking Authority (EBA) and the Spanish Central Credit Register to explore: 1) the occurrence and magnitude of these runs after the release of negative stress test results; and 2) banks’ behaviour before and after the release of this information. We find that, following the release of the results, firms drew down approximately 10 pp more available funds from lines granted by banks that had a worse performance in the stress test. Moreover, before the release date, poorer performing banks were more likely to reduce the size of credit lines, while those with more significant balances of undrawn credit lines were more likely to cut term lending.
    Keywords: credit lines, bank runs, stress tests, bank risk management
    JEL: G01 G14 G21
    Date: 2022–12
  9. By: Carmen Broto (Banco de España); Luis Fernández Lafuerza (Banco de España); Mariya Melnychuk (Banco de España)
    Abstract: Buffers for systemically important institutions (SIIs) were designed to mitigate the risks posed by these large and complex banks. With a panel data model for a sample of listed European banks, we demonstrate that capital requirements for SIIs effectively reduce the perceived systemic risk of these institutions, which we proxy with the SRISK indicator in Brownlees and Engle (2017). We also study the impact of the adjustment mechanisms that banks use to comply with SII buffer requirements and their contribution to systemic risk. The results show that banks mainly respond to higher SII buffers by increasing their equity, as intended by the regulators. Once we control for the options SIIs employ to fulfil these requirements and SII characteristics (e.g. total asset size), we find a residual effect of having SII status. This result suggests that being an SII provides a positive signal to markets by further decreasing its contribution to systemic risk.
    Keywords: capital requirements, systemically important institutions, systemic risk, SRISK, macroprudential policy
    JEL: C54 E58 G21 G32
    Date: 2022–12
  10. By: Bazzana, Davide; Rizzati, Massimiliano; Ciola, Emanuele; Turco, Enrico; Vergalli, Sergio
    Abstract: This paper explores the potential impacts of climate change and mitigation policies on the Euro Area, considering the uncertainty and heterogeneity in both climate and economic systems. Using the MATRIX model, a multi-sector and multi-agent macroeconomic model, we simulate various climate scenarios by employing different carbon cycle models, damage functions, and marginal abatement curves found in the literature. We find that heterogeneous climate damages amplify both the magnitude and the volatility of GDP losses associated with global warming. By the end of the century, we estimate that assuming homogeneous shocks may underestimate the effects of climate change on aggregate output by up to one-third. Moreover, we find that the speed and feasibility of a low-carbon transition crucially depend on (i) the stringency of emission reduction targets, which determine the level of a carbon tax, and (ii) the rate of technological progress, which influences the shape of the abatement cost curve.
    Keywords: Environmental Economics and Policy, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy
    Date: 2023–05–11
  11. By: Joaquín García-Cabo; Joaquín Anna Lipińska; Gastón Navarro
    Abstract: Unemployment insurance and wage subsidies are key tools to support labor markets in recessions. We develop a multi-sector search and matching model with on-the-job human capital accumulation to study labor market policy responses to sector-specific shocks. Our calibration accounts for structural differences in labor markets between the United States and the euro area, including a lower job-finding rate in the latter. We use the model to evaluate unemployment insurance and wage subsidy policies in recessions of different duration. After a temporary sector-specific shock, unemployment insurance improves reallocation toward productive sectors at the cost of initially higher unemployment and, thus, human capital destruction. By contrast, wage subsidies reduce unemployment and preserve human capital at the cost of limiting reallocation. In the United States, unemployment insurance is preferred to wage subsidies when it does not distort job creation for too long. In the euro area, wage subsidies are preferred, given the lower job-finding rate and reallocation.
    Keywords: labor market policies, search and matching frictions, reallocation
    JEL: E24 J64 J68
    Date: 2023–04
  12. By: Eichhorst Werner; Holger Bonin; Annabelle Krause-Pilatus; Paul Marx; Mathias Dolls; Max Lay
    Abstract: The aim of this study is to analyse the role of social policies in different European welfare states regarding minimum income protection and active inclusion. The core focus lies on crisis resilience, i.e. the capacity of social policy arrangements to contain poverty and inequality and avoid exclusion before, during and after periods of economic shocks. To achieve this goal, the study expands its analytical focus to include other tiers of social protection, in particular upstream systems such as unemployment insurance, job retention and employment protection, as they play an additional and potentially prominent role in providing income and job protection in situations of crisis. A mixed-method approach is used that combines quantitative and qualitative research, such as descrip-tive and multivariate quantitative analyses, microsimulation methods and in-depth case studies. The study finds consistent differences in terms of crisis resilience across countries and welfare state types. In general, Nordic and Continental European welfare states with strong upstream systems and minimum income support (MIS) show better outcomes in core socio-economic outcomes such as poverty and exclusion risks. However, labour market integration shows some dualisms in Continental Europe. The study shows that MIS holds particular importance if there are gaps in upstream systems or cases of severe and lasting crises.
    Date: 2023
  13. By: Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw); Zuzana Zavarská (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Specialisation in value-chain functions is one of the new phenomena introduced by global value chains (GVCs). This report investigates the effects of functional specialisation on labour markets in fabrication and R&D activities as the two polar cases of value-chain functions, whereby the former is associated with factory economies, while the latter is characteristic of headquarter economies. More precisely, a metric similar to revealed comparative advantage is used to study the effect of relative functional specialisation on wages and non-wage working conditions. In line with the GVC literature emphasising power relations and organisational aspects of production networks, we are able to identify differentiated effects for functional specialisation patterns on wages in EU member states at the industry level across time. While relative functional specialisation in fabrication tends to hold back wages, functional specialisation in R&D has a positive effect on wage progression, controlling for labour productivity, GVC participation and numerous labour supply- and labour demand-side factors. The use of a constructed ‘sharp’ instrument allows giving these results a causal interpretation. Conversely, both functional specialisation measures are found to improve some non-wage working conditions, namely workers’ physical environment and their work intensity, which is evidence against a potential ‘race to the bottom’ effect of functional specialisation along GVCs. The effect is stronger for relative specialisation in fabrication than for relative specialisation in R&D.
    Keywords: Functional specialisation, wages, non-wage working conditions, global value chains
    JEL: F15 F21 F23 F63 J31
    Date: 2023–05
  14. By: Simon H. Kwan; Mauricio Ulate; Ville Voutilainen
    Abstract: Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.
    Keywords: negative nominal interest rates; Finland; European Central Bank (ECB); negative rates; mortgage rates
    Date: 2023–04–20
  15. By: Kyvik Nordås, Hildegunn (Örebro University School of Business)
    Abstract: This paper analyses the proposed free trade agreement (FTA) between EU and India focusing on services trade. Based on the text published by the European Union, I use the OECD STRI simulator to calculate the preference margin implied by the agreement and next predict the impact on services trade flows using a general equilibrium structural gravity analysis. I find that the preference margin on the STRI for Indian exports to the EU is between four and eight basis points depending on the sector, while for EU exports to India the preference margin is between 10 and 35 basis points. The predicted effect is almost a doubling of EU services exports to India, while India’s services exports to the EU would increase by about 50%. EU’s trade with the rest of the world would not change much, while India’s exports to the rest of the world would decline by about 3%. Real services output would not change much in the EU or India. Lifting trade restrictions in the telecommunications sector is the most important policy area for facilitating services trade.
    Keywords: Services; Trade; FTA; India; EU
    JEL: F13 F15 F17
    Date: 2023–03–15
  16. By: Isabel Argimón (Banco de España); Irene Roibás (Banco de España)
    Abstract: The empirical literature on the debt overhang hypothesis has estimated the relationship between investment and leverage at the firm level, which does not allow to disentangle between a firm’s decision not to invest as it is highly indebted and its ability to obtain the necessary resources. Using annual Spanish credit data from the Central Credit Register and non-financial corporations’ annual accounts from the lntegrated Central Balance Sheet Data Office Survey for the period 2004-2019, we study the impact of corporate debt on non-financial firms’ demand for bank loans, as a proxy for their willingness to invest. We find a negative relationship between firms’ leverage and demand for bank credit, thus supporting the debt overhang hypothesis. We then study whether such relationship is affected by financial conditions and find that a reduction in short-term interest rates mitigates the effect of firms’ leverage on demand for credit.
    Keywords: credit demand, corporate investment, debt overhang, financial conditions, interest rates, leverage
    JEL: E22 E41 E43 E52 G21 G32
    Date: 2023–01
  17. By: Robert Anderton; Vasco Botelho; Paul Reimers
    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 channels 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.
    Keywords: digital technology/transition; productivity growth; technology adoption; technology diffusion
    Date: 2023
  18. By: Tiziano Ropele; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Using Italian data that includes both inflation forecasts of firms and external information on their balance sheets, we study the causal effect of changes in the dispersion of beliefs about future inflation on the misallocation of resources. We find that as disagreement increases, so does misallocation. In times of low inflation, the aggregate TFP loss of the dispersed expectations-induced misallocation is low, but we argue that it likely becomes quite significant in times of high inflation.
    JEL: E3 E5 E7
    Date: 2023–04

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