nep-eec New Economics Papers
on European Economics
Issue of 2023‒07‒17
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Monetary Policy Effects. Does the Shape of the Yield Curve Matter? By Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
  2. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Pablo Garcia; Pascal Jacquinot; ÄŒrt LenarÄ iÄ; Matija Lozej; Kostas Mavromatis
  3. Comparing different features of a fiscal stimulus in the euro area By Caroline Bozou; Jérôme Creel
  4. The drivers of market-based inflation expectations in the euro area and in the US By Christian Hoynck; Luca Rossi
  5. Time-Varying Parameters in Monetary Policy Rules: A GMM Approach By Christina Anderl; Guglielmo Maria Caporale
  6. Expecting Brexit and UK Migration: Should I Go? By Di Iasio, Valentina; Wahba, Jackline
  7. Firm-bank relationships: a cross-country comparison By Kosekova, Kamelia; Maddaloni, Angela; Papoutsi, Melina; Schivardi, Fabiano
  8. Bank profitability and central bank digital currency By Bellia, Mario; Calès, Ludovic
  9. Sovereign bond and CDS market contagion: A story from the Eurozone crisis By Georgios Bampinas; Theodore Panagiotidis; Panagiotis N. Politsidis
  10. Measuring the Natural Rate of Interest after COVID-19 By Kathryn Holston; Thomas Laubach; John C. Williams
  11. Quantitative easing, accounting and prudential frameworks, and bank lending By Andrea Orame; Rodney Ramcharan; Roberto Robatto
  12. The Impact of Taxation Structure on Growth: Empirical Evidence from EU27 Member States By Giuseppe Piroli; Joerg Peschner
  13. The Extent and Composition of Automatic Stabilization in EU Countries By COADY David; DE POLI Silvia; HERNÁNDEZ Adrián; PAPINI Andrea; TUMINO Alberto
  14. The anatomy of labor cost adjustment to demand shocks: Germany and Italy during the Great Recession By Francesco D'Amuri; Salvatore Lattanzio; Benjamin S. Smith
  15. The determinants and dynamics of regional convergence in the EU By ARVANITOPOULOS Theodoros; LAZAROU Nicholas
  16. New Technologies and Jobs in Europe By Albanesi, Stefania; Dias da Silva, António; Jimeno, Juan F.; Lamo, Ana; Wabitsch, Alena
  17. Discretionary decisions in capital requirements under Solvency II By Grochola, Nicolaus; Schlütter, Sebastian
  18. Monetary Policy and Labor Income Inequality: the Role of Extensive and Intensive Margins By Paul Hubert; Frédérique Savignac
  19. Tax Design, Information, and Elasticities: Evidence From the French Wealth Tax By Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman

  1. By: Florens Odendahl; Maria Sole Pagliari; Adrian Penalver; Barbara Rossi; Giulia Sestieri
    Abstract: This paper investigates the effects of monetary policy in the euro area. We make three main contributions to the literature. First, we use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. Second, we construct a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Third, we show that the way conventional and unconventional monetary policy announcements shape expectations inherent in the term structure influences the response of key macroeconomic variables.
    Keywords: Monetary Policy, Euro Area, Quantitative Easing
    JEL: E50 E20 E37
    Date: 2023
  2. By: Pablo Garcia; Pascal Jacquinot; ÄŒrt LenarÄ iÄ; Matija Lozej; Kostas Mavromatis
    Abstract: We analyse the COVID-19 pandemic shock on small open economies (SOEs) in the euro area in a unified modelling framework: the Euro Area and the Global Economy model. We find strong negative international spillovers affecting each of the modelled SOEs, stemming not only from the rest of the euro area, but also from the United States and the rest of the world. A lower bound on nominal interest rates in the euro area amplifies these spillovers, especially within the euro area. Furthermore, we find some positive spillovers from the fiscal measures implemented in the Euro area to combat the pandemic, including the new Next Generation EU instrument.
    Keywords: DSGE Modelling, International Spillovers; Monetary Union; Euro Area; COVID-19
    JEL: C53 E32 E52 F45
    Date: 2023–06
  3. By: Caroline Bozou (UP1 - Université Paris 1 Panthéon-Sorbonne); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We build a two-country DSGE model where we distinguish the core from the periphery of a monetary union. First, we highlight the spillovers of fiscal shocks across countries. Then, we evaluate and compare the macroeconomic effects of the European recovery plan NGEU with national plans. In all settings, we distinguish public consumption shocks from public investment ones, and funding via loans or grants. We also generate a post-Covid situation where we add a zero-lower bound and demand shocks and compare the outcomes to the former scenarios. We find that the stimulus is more effective when it is financed by grants, interestingly enough especially for public consumption, that public investment spending has a higher multiplier effect in the long run and that a European fiscal stimulus has always more impact per country than a national stimulus plan. A side-result permits to assess the opportunity cost of accepting loans.
    Keywords: fiscal policy, open economy, euro area, spillovers, DSGE, NGEU, RRF
    Date: 2023–02–08
  4. By: Christian Hoynck (Bank of Italy); Luca Rossi (Bank of Italy)
    Abstract: In this paper, we propose a methodology to assess the structural drivers of inflation expectations, as measured by inflation-linked swaps. To this end, we estimate a Bayesian Vector Autoregressive (BVAR) model for the euro area (EA) and the United States (US) on daily asset price movements in the two economies. Shocks are identified using sign and magnitude restrictions, also taking into account international spillovers. The inclusion of inflation expectations helps to clearly distinguish between supply and demand innovations. The findings suggest that over the course of 2021-23 inflation expectations in the US were steadily sustained by domestic demand, while in the EA they mostly reflected supply shocks, and only more recently a growing strength of demand factors. Our evidence also indicates that monetary policy shocks gradually contributed to lowering inflation expectations in both jurisdictions, although with different timing and vigour.
    Keywords: inflation expectations, international transmission, monetary policy, high-frequency identification.
    JEL: C32 C54 E31 E44 E52
    Date: 2023–06
  5. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper assesses time variation in monetary policy rules by applying a Time-Varying Parameter Generalised Methods of Moments (TVP-GMM) framework. Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.
    Keywords: Taylor rules, monetary policy rules, Generalised Methods of Moments, Time-varying parameters
    JEL: C14 C52 E52 E58
    Date: 2023
  6. By: Di Iasio, Valentina (University of Southampton); Wahba, Jackline (University of Southampton)
    Abstract: This paper examines the impact of the 2016 UK referendum and expecting Brexit on migration flows and net migration in the UK. We employ a Difference-in-Differences strategy and compare EU migration to non-EU migration before and immediately after the UK referendum of June 2016. We also investigate the potential secondary effects of the referendum on non-EU migrants by using different methodologies and various robustness checks. Our results show that after the referendum (i) migration inflows from the EU declined, (ii) emigration of EU migrants increased and (iii) net migration flows from EU countries to the UK fell. Our results are not driven by the potential spillover impacts on non-EU migrant workers. Overall, the findings show that migration in the UK declined after the Brexit referendum, even before any policy change.
    Keywords: UK migration, EU migration, Brexit
    JEL: F22 J61 J48
    Date: 2023–05
  7. By: Kosekova, Kamelia; Maddaloni, Angela; Papoutsi, Melina; Schivardi, Fabiano
    Abstract: We document the structure of firm-bank relationships across eleven euro area coun-tries and present new stylised facts using data from the Eurosystem credit registry -AnaCredit. We look at the number of banking relationships, reliance on the main bank, credit instruments, loan maturity, and interest rates. Firms in Southern Europe borrow from more banks and obtain a lower share of credit from the main bank than those in Northern Europe. They also tend to borrow more on short term, more expensive instru-ments and to obtain loans with shorter maturity. This is consistent with the hypothesis that firms in Southern Europe rely less on relationship banking and obtain credit less conducive to firm growth, in line with their smaller average size. Relationship lending does not translate in lower rates, possibly because banks appropriate part of the surplus generated by relationship lending through higher rates. JEL Classification: G21, G3, G32
    Keywords: AnaCredit, bank credit, corporate financing, firm-bank relationship
    Date: 2023–06
  8. By: Bellia, Mario (European Commission); Calès, Ludovic
    Abstract: This paper analyzes the potential effect of a European Central Bank Digital Currency (CBDC) on banks’ profitability. We use a large sample of EU banks that span the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regression, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for small banks, that mostly rely on deposits as a source of funding.
    Keywords: Central Bank Digital Currency, CBDC, ECB, bank deposits
    JEL: G18 G28 G32
    Date: 2023–05
  9. By: Georgios Bampinas (Department of Economics and Regional Development, Panteion University of Social and Political Sciences, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece); Panagiotis N. Politsidis (Finance Department, Audencia Business School, France)
    Abstract: We examine the asymmetric and nonlinear nature of the cross- and intra-market linkages of eleven EMU sovereign bond and CDS markets during 2006-2018. By adopting the excess correlation concept of Bekaert et al. (2005) and the local Gaussian correlation approach of Tjøstheim and Hufthammer (2013), we find that contagion phenomena occurred during two major phases. The first, extends from late 2009 to mid 2011 and concerns the outright contagion transmission from EMU South bond markets towards all European CDS markets. The second, is during the revived fears of a Greek exit in November 2011 and is characterized by contagion from (i) CDS spreads in the EMU South towards bond yields in the same bloc and Belgium, and (ii) from Italian and Spanish CDS spreads towards all European CDS spreads. Consistent with their “too big to bail out” status, Italy and Spain emerge as pivotal for the evolution of sovereign credit risk across the Eurozone. Our examination of the relevant mechanisms, highlights the importance of credit risk over liquidity risk, and the containment effect of the naked CDS ban.
    Keywords: sovereign bond market, sovereign CDS market, nonlinear dependence, contagion, local Gaussian correlation
    JEL: G01 G14 G15 C1 C58
    Date: 2023–06
  10. By: Kathryn Holston; Thomas Laubach; John C. Williams
    Abstract: We modify the Laubach-Williams and Holston-Laubach-Williams models of the natural rate of interest to account for time-varying volatility and a persistent COVID supply shock during the pandemic. Resulting estimates of the natural rate of interest in the United States, Canada, and the Euro Area at the end of 2022 are close to their respective levels estimated directly before the pandemic; that is, we do not find evidence that the era of historically low estimated natural rates of interest has ended. In contrast, estimates of the natural rate of output have declined relative to those projected before the pandemic.
    Keywords: Natural rate of output; time-varying volatility; Kalman filter; trend growth; COVID-19 pandemic
    JEL: C32 E43 E52 O40
    Date: 2023–06–01
  11. By: Andrea Orame (Bank of Italy); Rodney Ramcharan (University of Southern California); Roberto Robatto (University of Wisconsin-Madison)
    Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks' net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks' balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms' credit constraints through the bank lending channel.
    Keywords: unconventional monetary policy, bank lending channel, sovereign default premia, regulatory capital, historical cost accounting
    JEL: G28 E52 M48
    Date: 2023–06
  12. By: Giuseppe Piroli; Joerg Peschner
    Abstract: What is the impact of taxation on growth? Is it supported by specific taxes and harmed by others? We use an error correction model to study the relationship between the tax composition and GDP growth in the EU27 Member States over the period 1995-2019. Under the constraint of revenue-neutrality, we find that, in the long-run, shifting tax away from labour (personal income tax) is growth-enhancing. In addition, growth is positively associated with a higher share of corporate income tax and consumption taxes in the total tax mix. However, evidence for property taxation is contrary to our expectation. We find a negative link between the share of property taxes and growth. Expectedly, increasing the overall tax burden has a negative impact on growth in the long-run. Results are robust to different model specifications. Supplementary evidence based on a computable general equilibrium model confirms that de-taxing wages for employees and lowering labour costs for employers would push output.
    Keywords: EU27, growth, tax mix, personal income tax, corporate income tax, consumption taxes, environmental taxes, property taxes, labour tax shift, Computable General Equilibrium model.
    JEL: H2 C23 C68
    Date: 2023–06–05
  13. By: COADY David; DE POLI Silvia (European Commission - JRC); HERNÁNDEZ Adrián (European Commission - JRC); PAPINI Andrea (European Commission - JRC); TUMINO Alberto
    Abstract: This paper analyses the magnitude of automatic income and demand stabilization in EU Member States between 2011 to 2019. Our analysis finds that automatic income stabilization in 2019 averaged 41.3 percent at the EU level, with considerable variation among Member States. While the extent of stabilization is similar across income groups within countries, the source of stabilization differs, with income taxation (transfers) being more important for high-income (low-income) households. Income stabilization proved stable over time, with a few exceptions driven by major reforms. EU-level demand stabilization averaged 84.7 percent, increasing with household income and reflecting the greater ability of richer households to smooth consumption.
    Keywords: Income stabilization; Demand stabilization; Euromod
    Date: 2023–06
  14. By: Francesco D'Amuri (Bank of Italy); Salvatore Lattanzio (Bank of Italy); Benjamin S. Smith (Federal Trade Commission)
    Abstract: We shed light on the anatomy of labor cost adjustment in German and Italian manufacturing firms with more than 20 employees, leveraging matched employer employee-balance sheet data and an exogenous demand shifter that exploits the collapse in world trade during the Great Recession. Following a 1 per cent exogenous decrease in sales, the average German firm cuts wage growth by 0.19 per cent, twice as much as its Italian counterpart. The employment adjustment is gradual in both countries but more pronounced in Germany, where, however, firms in sectors hardest hit by the world trade collapse had been increasing employment in the run-up to the Great Recession. These results are not driven by differences in the response of hours per worker, in labor supply conditions, or in firms' exposure to the concurrent negative credit shock. Finally, we find that - in both countries - producer prices were reduced to a similar extent in response to the shock.
    Keywords: labor demand, wages, employment, flexibility
    JEL: J21 J23 J31
    Date: 2023–06
  15. By: ARVANITOPOULOS Theodoros; LAZAROU Nicholas (European Commission - JRC)
    Abstract: In this study, we employ the pairwise stochastic convergence approach to identify the pairs of NUTS2 regions for all 28 EU Member States that exhibit co-movement in their growth dynamics, over the period 1980-2018. We then use the observed convergence trajectories to assess the role of first nature geography and second nature geography, in causing economic growth convergence patterns. We find that western and northern parts of Europe have higher pairwise convergence (and lower intra-country convergence) rates than regions in East and Southeast Europe. We find strong evidence that first and second nature geography drive cluster-like convergence dynamics. Regions with common locational characteristics (metropolitan, coastal, islands, and mountainous) tend to converge to each other, while they diverge from dissimilar regions. Regardless of national borders, contiguity and accessibility are significant drivers of convergence. Congruence in sectoral specialisation results in divergence, that could be driven by competing economic interests within the common market. The opposite holds for dissimilarities in specialisation, which could be explained by complementarity in the production process. Overall, we find strong evidence for club convergence at the top of the EU. Bottom regions with low market dynamism and poor economic development, do not converge to each other.
    Keywords: Stochastic convergence, economic geography, pairwise approach, EU Member States, NUTS2 regions, EU Cohesion Fund
    Date: 2023–06
  16. By: Albanesi, Stefania (University of Pittsburgh); Dias da Silva, António (European Central Bank); Jimeno, Juan F. (Bank of Spain); Lamo, Ana (European Central Bank); Wabitsch, Alena (University of Oxford)
    Abstract: We examine the link between labour market developments and new technologies such as artificial intelligence (AI) and software in 16 European countries over the period 2011- 2019. Using data for occupations at the 3-digit level in Europe, we find that on average employment shares have increased in occupations more exposed to AI. This is particularly the case for occupations with a relatively higher proportion of younger and skilled workers. This evidence is in line with the Skill Biased Technological Change theory. While there exists heterogeneity across countries, only very few countries show a decline in employment shares of occupations more exposed to AI-enabled automation. Country heterogeneity for this result seems to be linked to the pace of technology diffusion and education, but also to the level of product market regulation (competition) and employment protection laws. In contrast to the findings for employment, we find little evidence for a relationship between wages and potential exposures to new technologies.
    Keywords: artificial intelligence, employment, skills, occupations
    JEL: J23 O33
    Date: 2023–06
  17. By: Grochola, Nicolaus; Schlütter, Sebastian
    Abstract: The capital requirements of Solvency II allow insurers to make discretionary choices. Besides extensive possibilities regarding the choice of a risk model (ranging between a regulatory prescribed standard formula to a full self-developed internal model), insurers can make use of transitional measures and adjustments, which can have a substantial impact on their reported solvency level. The aim of this article is to study the effect of these long-term guarantee measures and to identify drivers of the discretionary decisions. For this purpose, we first assess the risk profile of 49 European insurers by estimating the sensitivities of their stock returns to movements in market risk drivers, such as interest rates and credit spreads. In a second step, we analyze to what extent insurers' risk profiles influence their discretionary decisions in the capital requirement calculation. We gather information on discretionary decisions based on hand-collected Solvency II data for the years 2016 to 2020. We find that insurers optimize their reported solvency situation by making discretionary decisions in such a way that capital requirements for material risk drivers are clearly reduced. For instance, we find that the usage of the volatility adjustment is positively related to the interest rate risk as perceived by financial markets, even when controlling for the portion of life insurance in technical provisions. Similarly, the matching adjustment is linked to significantly higher credit risk sensitivities. Our results point out that due to discretionary decisions Solvency II figures can substantially deviate from a market-oriented, risk-based view on insurance companies' risk situation.
    Keywords: Solvency II, capital requirements, discretionary decisions
    Date: 2023
  18. By: Paul Hubert; Frédérique Savignac
    Abstract: Using French matched administrative-survey data, we quantify the distributional effects of monetary policy on labor income and decompose the extensive and intensive margins of these effects. We find that the effects of ECB monetary policy shocks on labor income are U-shaped along the labor income distribution. These effects are driven by the extensive margin (transitions out or to unemployment) at the bottom of the distribution and by the intensive margin (labor income changes for individuals continuously employed) at the top. We document that sectoral heterogeneity, especially related to the labor force composition, is crucial in explaining these heterogeneous effects.
    Keywords: Distributional Effects, Household Heterogeneity, Labor Market
    JEL: E52 E58
    Date: 2023
  19. By: Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman
    Abstract: We study a French wealth tax reform that starkly reduced the information some taxpayers must report to the tax authority. Using a new dynamic bunching approach we estimate the average response to the reform, the share of compliers, and the local average treatment effect. The annual wealth growth rate of treated taxpayers falls by 0.5 percentage points after the reform. This decline is likely due to increased evasion, as suggested by the sharp responses in self-reported wealth but not in third-party-reported incomes. The wealth tax base becomes more elastic post reform, illustrating the key role of information policy choices for tax base elasticities.
    JEL: H26 H31
    Date: 2023–06

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