nep-eec New Economics Papers
on European Economics
Issue of 2023‒09‒18
six papers chosen by
Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia

  1. A single monetary policy for heterogeneous labour markets: the case of the euro area By Gomes, Sandra; Jacquinot, Pascal; Lozej, Matija
  2. Measuring systemic financial stress and its risks for growth By Chavleishvili, Sulkhan; Kremer, Manfred
  3. Can Central Banks Do the Unpleasant Job That Governments Should Do? By Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
  4. CORTAX 2019 Updated calibration and baseline results By BRATTA Barbara; PYCROFT Jonathan; STOEHLKER Daniel
  5. UK Monetary Policy in An Estimated DSGE Model with State-Dependent Price and Wage Contracts By Chen, Haixia; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  6. Were COVID and the Great Recession Well-Being Reducing? By Blanchflower, David G.; Bryson, Alex

  1. By: Gomes, Sandra (Bank of Portugal, UECE/REM); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland)
    Abstract: Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment. Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households.
    Keywords: DSGE Modelling, Business cycles, Search and matching, Monetary Union.
    JEL: E24 E32 E43 E52 F45
    Date: 2023–04
  2. By: Chavleishvili, Sulkhan; Kremer, Manfred
    Abstract: This paper proposes a general statistical framework for systemic financial stress indices which measure the severity of financial crises on a continuous scale. Several index designs from the financial stress and systemic risk literature can be represented as special cases. We introduce an enhanced daily variant of the CISS (composite indicator of systemic stress) for the euro area and the US. The CISS aggregates a representative set of stress indicators using their time-varying cross-correlations as systemic risk weights, computationally similar to how portfolio risk is computed from the risk characteristics of individual assets. A boot-strap algorithm provides test statistics. Single-equation and system quantile growth-at-risk regressions show that the CISS has stronger effects in the lower tails of the growth distribu-tion. Simulations based on a quantile VAR suggest that systemic stress is a major driver of the Great Recession, while its contribution to the COVID-19 crisis appears to be small. JEL Classification: C14, C31, C43, C53, E44, G01
    Keywords: Financial crisis, Financial stress index, Macro-financial linkages, Quantile VAR, Systemic risk
    Date: 2023–08
  3. By: Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos; Vanghelis Vassilatos
    Abstract: We investigate what happens when the fiscal authorities do not react to rising public debt so that the unpleasant task of fiscal sustainability falls upon the Central Bank (CB). In particular, we explore whether the CB’s bond purchases in the secondary market can restore stability and determinacy in an otherwise unstable model. This is investigated in a DSGE model calibrated to the Euro Area (EA) and where monetary policy is conducted subject to the numerical rules of the Eurosystem (ES). We show that given the recent situation in the ES, and to the extent that a relatively big shock hits the economy and fiscal policy remains active, there is no room left for further quasi-fiscal actions by the ECB; there will be room only if the ES’ rules are violated. We then search for policy mixes that can respect the ES’s rules and show that debt-contingent fiscal and quantitative monetary policies can reinforce each other; this confirms the importance of policy complementarities. On the negative side, bond purchases by the CB worsen income inequality and the unavoidable reversal, in the form of QT, will come at a real cost.
    Keywords: central banking, fiscal policy, debt stabilization, Euro Area
    JEL: E50 E60 O50
    Date: 2023
  4. By: BRATTA Barbara; PYCROFT Jonathan; STOEHLKER Daniel (European Commission - JRC)
    Abstract: CORTAX is a macroeconomic model that focuses on corporate taxation and is used extensively for European Commission policy assessments. As a macroeconomic model, it simulates variables such as GDP, investment and employment, while being especially notable for its focus on corporate income taxation (CIT). It models the key aspects of CIT, such as multinational profit shifting, investment decisions, loss compensation, and debt-equity financing. CORTAX is versatile and can be used to examine different aspects of CIT, such as adjusting or harmonizing the CIT rate or base, addressing debt bias in CIT, and consolidation of the multinational CIT base. CORTAX is a multi-country model, covering all EU Member States, selected partner countries, and a tax haven. The general equilibrium framework of the model captures the interactions between different economic actors, including those between multinational headquarters and foreign subsidiaries. This calibration updates the model to 2019. This paper outlines the model structure, and explains the methodology used to arrive at the new baseline, including explaining the choices of data sources and parameters. The paper provides key summary results that serve as both a description and a validation of the model, and also serves as a reference for future work carried out using CORTAX 2019.
    Keywords: Cortax
    Date: 2023–07
  5. By: Chen, Haixia (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: Considerable micro-level evidence suggests that price/wage contract durations fluctuate with the state of the economy, particularly inflation; nonetheless, macro-level evidence for this is scarce. We incorporate state-dependent price/wage setting into an open economy DSGE model to investigate the evidence of state-dependence in the UK economy’s postwar behaviour. The model is estimated and tested using the Indirect Inference method and is found to fit the dynamic behaviour of key variables very well over a long sample period 1955-2021. In the state-dependent scenario, apart from the direct responses to shocks, monetary policy affects the degree to which the economy is close to the NK world, which in turn indirectly affects the response to these shocks; it also potentially pushes interest rates to the Zero Lower Bound, ZLB. Under the interaction of state-dependence and the ZLB, monetary-fiscal coordination is needed to stabilise the economy, as monetary policy alone cannot achieve economic stability during ZLB scenarios, where it must use bond purchases (Quantitative Easing, QE). Our findings suggest that a coordinated monetary-fiscal policy framework, i.e., an interest rate policy that targets nominal GDP complemented by a ZLB-suppressing fiscal policy, decreases the frequency of economic crises and enhances price/output stability and household welfare compared to the baseline Taylor Rule and QE framework.
    Keywords: State-dependence, DSGE, QE, ZLB, Monetary Policy, Nominal GDP Targeting, Fiscal Policy, Indirect Inference.
    Date: 2023–08
  6. By: Blanchflower, David G. (Dartmouth College); Bryson, Alex (University College London)
    Abstract: Using micro-data on six surveys – the Gallup World Poll 2005-2023, the U.S. Behavioral Risk Factor Surveillance System, 1993-2022, Eurobarometer 1991-2022, the UK Covid Social Survey Panel, 2020-2022, the European Social Survey 2002-2020 and the IPSOS Happiness Survey 2018-2023 – we show individuals' reports of subjective wellbeing in Europe did decline in the Great Recession of 2008/9 and during the Covid pandemic of 2020-2021 on most measures and on four bordering countries to Ukraine after the Russian invasion in 2022. However, the movements are not large and are not apparent everywhere. We also used data from the European Commission's Business and Consumer Surveys on people's expectations of life in general, their financial situation and the economic and employment situation in the country, all of which dropped markedly in the Great Recession and during Covid, but bounced back quickly, as did firms' expectations of the economy and the labor market. Neither the annual data from the United Nation's Humasn Development Index (HDI) nor data used in the World Happiness Report from the Gallup World Poll shifted much in response to negative shocks. The HDI has been rising in the last decade or so reflecting overall improvements in economic and social wellbeing, captured in part by real earnings growth, although it fell slightly after 2020 as life expectancy dipped. This secular improvement is mirrored in life satisfaction which has been rising in the last decade. However, so too have negative affect in Europe and despair in the United States.
    Keywords: subjective wellbeing, life satisfaction, expectations, Human Development Index, Great Recession, COVID-19
    JEL: I31
    Date: 2023–07

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