nep-eec New Economics Papers
on European Economics
Issue of 2023‒10‒09
thirteen papers chosen by
Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia

  1. System-wide Dividend Restrictions: Evidence and Theory By Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote
  2. Corporate Quantitative Easing in Europe during the COVID-19 Crisis and Debt Overhang By Asli Demirgüç-Kunt; Bálint L. Horváth; Harry Huizinga
  3. How usable are capital buffers? By Zsámboki, Balázs; Leitner, Georg; Dvořák, Michal; Magi, Alessandro
  4. The effect of monetary policy on inflation heterogeneity along the income distribution By Miguel Ampudia; Michael Ehrmann; Georg Strasser
  5. Economic, Environmental, and Energy Equity Convergence: Evidence of a Multi-Speed Europe? By Llorca, Manuel; Rodriguez-Alvarez, Ana
  6. The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions? By Di Serio, Mario; Fragetta, Matteo; Gasteiger, Emanuel; Melina, Giovanni
  7. The economic impact of Russia’s invasion of Ukraine on European countries – a SVAR approach By Jonas M. Bruhin; Rolf Scheufele; Yannic Stucki
  8. Labor Supply Response to Windfall Gains By Dimitris Georgarakos; Tullio Jappelli; Geoff Kenny; Luigi Pistaferri
  9. Declining business dynamism in Europe: The role of shocks, market power, and technology By Biondi, Filippo; Inferrera, Sergio; Mertens, Matthias; Miranda, Javier
  10. Forecasting International Financial Stress: The Role of Climate Risks By Santino Del Fava; Rangan Gupta; Christian Pierdzioch; Lavinia Rognone
  11. Loan Recoveries and the Financing of Zombie Firms over the Business Cycle By Asli Demirgüç-Kunt; Bálint Horváth; Harry Huizinga
  12. International Spillovers from Prostitution Regulation: The "Nordic Model" and Sex Tourism By Perrotta Berlin, Maria; Latour, Chiara; Spagnolo, Giancarlo
  13. Which European firms were hardest hit by COVID-19? By Coad, Alexander; Bauer, Péter; Domnick, Clemens; Harasztosie, Péter; Pál, Rozália; Teruel, Mercedes

  1. By: Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote (-)
    Abstract: We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.
    Keywords: dividend recommendation, dividend prudential target (DPT), COVID-19, usable capital buffers, welfare
    JEL: E44 E58 E61
    Date: 2023–09
  2. By: Asli Demirgüç-Kunt (Center for Global Development); Bálint L. Horváth (University of Arizona); Harry Huizinga (Tilburg University and CEPR)
    Abstract: This paper finds that shareholders of highly leveraged firms benefit relatively less compared to bondholders from the corporate quantitative easing (QE) announcements by the European Central Bank and the Bank of England in March 2020, as evidence of debt overhang. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang. The monetary and fiscal responses to the pandemic are complements in the sense that a stronger pandemic-related fiscal response and higher pre-announcement sovereign credit default swap (CDS) spreads enhance the positive effects of corporate QE on equity and debt valuations.
    Keywords: Quantitative easing, debt overhang, pandemic
    JEL: E52 G14
    Date: 2023–04–26
  3. By: Zsámboki, Balázs; Leitner, Georg; Dvořák, Michal; Magi, Alessandro
    Abstract: This paper analyses banks’ ability to use capital buffers in the euro area, taking into account overlapping capital requirements between the risk-based capital framework and the leverage ratio capital framework from 2016 to 2022. This analysis is the first to quantify buffer usability in multiple jurisdictions and across various bank types, identify key drivers of buffer usability and assess the impact of various policy measures using longer time series. The paper shows that while both risk-based and leverage frameworks play a key role in enhancing the resilience of the banking system and ensuring financial stability, their simultaneous application creates interactions that may affect the functioning of capital buffers. In this regard, we investigate to what extent banks could have drawn down regulatory capital buffers in the risk-based framework without breaching current leverage ratio requirements, which is in line with the approach to buffer usability taken in ESRB (2021b). We show that buffer usability was partially constrained in the period examined and is expected to remain so under the current regulatory framework and if risk weight densities (RWDs) remain low. This finding indicates that the leverage ratio constitutes an effective backstop to the risk-based framework, both as regards minimum requirements and capital buffers. Limited buffer usability was identified especially for global systemically important institutions (G-SIIs) that rely largely on internal modelling approaches to calculate risk-based capital requirements, leading to comparably low risk weights and making the leverage ratio relatively more binding. Adding to previous contributions, we find that banks’ ability to use capital buffers fluctuated over time, generally increasing before 2019 and decreasing after the start of the coronavirus (COVID-19) pandemic, with substantial heterogeneity across countries. Furthermore, we provide new insights into the relationship between the RWD of a bank and its buffer usability and find that there is a critical RWD range between 25% JEL Classification: G21, G28
    Keywords: banking regulation, buffer usability, capital buffers, leverage ratio, macroprudential policy
    Date: 2023–09
  4. By: Miguel Ampudia; Michael Ehrmann; Georg Strasser
    Abstract: This paper studies the effect of monetary policy on inflation along the income distribution in several euro area countries. It shows that monetary policy has differential effects and identifies two channels which point in opposite directions. On the one hand, different consumption shares imply that inflation by high-income households responds less to monetary policy. On the other hand, the paper provides novel evidence that there are substantial differences in shopping behaviour and its reaction to monetary policy, which imply that inflation by high-income households responds more to monetary policy.
    Keywords: inflation, distributional effects, monetary policy, shopping behaviour, substitution
    JEL: E31 E52 D30
    Date: 2023–09
  5. By: Llorca, Manuel (Department of Economics, Copenhagen Business School); Rodriguez-Alvarez, Ana (University of Oviedo)
    Abstract: The European Union has committed to make Europe the first climate-neutral continent by 2050. Reaching this objective implies massive changes in the economies of the region. The biggest challenge of this green transition is to make sure that it happens without sacrificing economic progress and guaranteeing justice and inclusiveness. This pledge requires that every country be capable of addressing the trade-offs between the targets while remaining committed towards the common decarbonisation goal. This paper analyses the success with which European countries are carrying out the energy transition. We propose an enhanced hyperbolic distance function and a stochastic frontier analysis approach to model the joint attainment of economic development, environmental sustainability, and energy equity. We apply our model to an unbalanced panel dataset of 29 European countries for the period 2005-2018. Our estimates show that the average performance of the European economies has improved throughout the studied period. However, the patterns of progress have been different, showing the non-EU-15 countries a steeper evolution than the EU-15 countries. Our results also highlight the pivotal role of a sustainable economic development with clean energies for both slashing CO2 emissions and fostering energy equity. Moreover, we find sigma convergence, being this slightly higher for the EU-15 countries. Additionally, we obtain absolute and conditional beta convergence for both non-EU-15 and EU- 15 countries. Finally, we show that a higher share of renewable energy sources helps countries that are lagging behind to reach their optimal level of performance.
    Keywords: Economic development; Environmental sustainability; Energy equity; Enhanced hyperbolic distance function; Stochastic frontier analysis
    JEL: C50 L50 L90 Q40 Q50
    Date: 2023–09–20
  6. By: Di Serio, Mario; Fragetta, Matteo; Gasteiger, Emanuel; Melina, Giovanni
    Abstract: Road infrastructure has been a key input in the economic growth and poverty reduction strategies of China and India. The two countries have used very different instruments for road financing with China mobilizing substantial resources through directed credit by state-owned banks and India heavily relying on international institutions and fuel taxes. However, current modalities of road financing will be insufficient to meet future investment needs requiring both countries explore new mechanisms to attract private capital and expand the fiscal space of central and subnational governments. Different instruments of resource mobilization and intermediation are assessed and compared extracting lessons that could be valuable to many developing countries. Facilitating the participation of the private sector in road development would require inter alia strengthening regulatory frameworks and deepening and broadening domestic financial markets. But given the strong public good characteristics of large segments of the road networks in China and India most of the funding for road construction and maintenance would need to come from the establishment of efficient and sustainable systems of earmarked road-related charges, including a fuel tax in China.We estimate government spending multipliers in demand- and supply-driven recessions for the Euro Area. Multipliers in a moderately demand-driven recession are 2-3 times larger than in a moderately supply-driven recession, with the difference between multipliers being non-zero with very high probability. More generally, multipliers are inversely correlated with the deviation of inflation from its trend, implying that the more demand-driven a recession, the higher the multiplier. Median multipliers range from -0.5 in supply-driven recessions to about 2 in demand-driven recessions. The econometric approach leverages a factoraugmented interacted vector-autoregression model purified of expectations (FAIPVAR-X). The model captures the time-varying state of the business-cycle including strongly and moderately demand- and supply-driven recessions, by taking the whole distribution of inflation deviations from trend into account.
    Keywords: Fiscal Multiplier, Business Cycle, Interacted Panel VAR, Factor Models, Euro Area
    JEL: C32 C33 C38 E32 E62
    Date: 2023
  7. By: Jonas M. Bruhin; Rolf Scheufele; Yannic Stucki
    Abstract: We quantify the economic impact of Russia’s invasion of Ukraine on Germany, the United Kingdom, France, Italy and Switzerland using data on historical geopolitical events. Applying a structural VAR approach based on sign and narrative sign restrictions, we find that the war has exerted a notable drag on real activity and has pushed inflation up considerably. For example, a counterfactual exercise suggests that in Germany, GDP would have been 0.7 percent higher and the CPI 0.4 percent lower in 2022Q4 if Russia had neither attacked nor threatened Ukraine. The negative consequences of the war are likely to be far greater in the medium-to-long term, especially with regard to the real economy.
    Keywords: Geopolitical risk, structural VAR, narrative sign restriction, war in Ukraine, Russia, Europe
    JEL: C1 E32 H56
    Date: 2023–08–02
  8. By: Dimitris Georgarakos (European Central Bank and University of Glasgow); Tullio Jappelli (Università di Napoli Federico II, CSEF, and CEPR); Geoff Kenny (European Central Bank); Luigi Pistaferri (Stanford University, SIEPR, NBER and CEPR)
    Abstract: Using a large survey of euro area consumers, we design an experiment in which respondents report how they would change the decision to participate in the labor market, the hours worked, and their search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only if they are significant in size. At the extensive margin, we find no effect for gains below €25, 000, and a decline in the probability of working of 3 percentage points for gains between €25, 000 and €100, 000. At the intensive margin, there is no effect for small gains, and a drop of roughly one weekly hour for gains above €50, 000. Women and workers closer to retirement respond more strongly to windfall gains. Finally, the proportion of those who stop searching for a job or search less intensively falls by 1 percentage point for each €10, 000 gain, and the effect is more pronounced for older individuals receiving the largest prize.
    Keywords: Survey Experiment; Labor Supply; Job Search; Wealth Shocks; Consumer Expectations Survey.
    JEL: E24 D10 J22 J68
    Date: 2023–09–18
  9. By: Biondi, Filippo; Inferrera, Sergio; Mertens, Matthias; Miranda, Javier
    Abstract: We study the changing patterns of business dynamism in Europe after 2000 using novel micro-aggregated data that we collect for 19 European countries. In all of them, we document a decline in job reallocation rates that concerns most economic sectors. This is mainly driven by dynamics within sectors, size classes, and age classes rather than by compositional changes. Large and mature firms show the strongest decline in job reallocation rates. Simultaneously, the shares of employment and sales of young firms decline. Consistent with US evidence, firms' employment changes have become less responsive to productivity. However, the dispersion of firms' productivity shocks has decreased too. To enhance our understanding of these patterns, we derive a firm-level framework that relates changes in firms' productivity, market power, and technology to job reallocation and firms' responsiveness.
    Keywords: business dynamism, European cross-country data, market power, productivity, responsiveness of labor demand
    JEL: D24 J21 J23 J42 L11 L25
    Date: 2023
  10. By: Santino Del Fava (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany); Lavinia Rognone (University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS, United Kingdom)
    Abstract: We study the predictive value of climate risks for subsequent financial stress in a sample of daily data running from October 2006 to December 2022 of thirteen countries, which include China, ten European Union (EU) countries, the United Kingdom (UK), and the United States (US). The climate risk indicators are the result of a text-based approach which combines the term frequency-inverse document frequency and the cosine-similarity techniques. Given the persistence of financial stress as well as the importance of spillover effects of financial stress from other countries, we use random forests, a machine-learning technique tailored to handle many predictors, to estimate our forecasting models. Our findings show that climate risks tend to have a moderate impact, albeit in several cases statistically significant, on predictive accuracy, which tends to be stronger, in our cross-section of countries, on a daily than at a weekly or monthly forecast horizon of financial stress. Furthermore, the predictive value of climate risks for financial stress is heterogeneous across the countries in our sample, implying that a univariate forecasting model appears to be better suited than a corresponding multivariate one. Finally, the predictive value of climate risks for financial stress appears to be stronger in several countries at the lower conditional quantiles of financial stress.
    Keywords: Financial stress, Climate risks, Random forests, Forecasting
    JEL: C22 C32 C53 G15 Q54
    Date: 2023–09
  11. By: Asli Demirgüç-Kunt (Center for Global Development); Bálint Horváth (University of Arizona); Harry Huizinga (Tilburg University and CEPR)
    Abstract: Using new data from the European Banking Authority on loan recovery outcomes, we examine how variation in loan recovery efficiency affects the transmission of financial sector and overall economic weakness to firm-level financial and real outcomes. We find that firms linked to under-capitalized banks experience higher debt, employment, and sales growth rates, if they are located in countries with less efficient loan recoveries. Furthermore, during economic downturns zombie firms—insolvent firms that continue to receive credit—achieve higher debt, employment, and sales growth, and fewer defaults if they are resident in such countries. Overall, we find that less efficient loan enforcement mitigates the transmission of financial sector and economic weakness to firm-level outcomes. This stabilizing effect, however, is likely to come at the cost of significant distortions documented in earlier literature.
    Keywords: loan recovery, zombie firm, business cycle
    JEL: E32 G21
    Date: 2023–09–22
  12. By: Perrotta Berlin, Maria (Stockholm Institute of Transition Economics); Latour, Chiara (Stockholm Institute of Transition Economics); Spagnolo, Giancarlo (Stockholm Institute of Transition Economics)
    Abstract: We investigate the causal effect of the asymmetric criminalization of prostitution on sex tourism. We exploit legal reforms in five countries that switched from systems where prostitution was legal (Norway, Sweden, Ireland, Canada), or where only buying sex was legal (France), to the “Nordic model” where only buying is criminalized. Using a difference-in-differences approach on data from Google trends and tourism statistics, we estimate the impact of the reforms on tourism flows to neighboring countries and popular sex tourism destinations. We find significant effects for countries where prostitution was legal, but not for France where selling sex was prohibited.
    Keywords: Prostitution law; Nordic model; Sex tourism; Google Trends; Policy spillovers
    JEL: D04 K14
    Date: 2023–09–21
  13. By: Coad, Alexander; Bauer, Péter; Domnick, Clemens; Harasztosie, Péter; Pál, Rozália; Teruel, Mercedes
    Abstract: The COVID-19 shock hit firms hard, on average, but how did it hit in the distribution of firms, differently between the high-growth superstars and the firms that were already struggling to survive? This paper implements graphical techniques and quantile regression to analyse the effect of the COVID-19 shock across the distribution of firms. It impacted negatively the growth of sales and value added all across the growth rate distribution with an effect that was slightly larger at the lower quantiles. For employment growth, while the effect was null for most firms, it was not at the lower tail. Analysis of subsamples, as well as quantile regressions with interaction terms, emphasize that firms that received policy support and those from the service sector were relatively more strongly affected by the COVID-19 shock, especially those that were fast decreasing ones. The results confirm the view that the COVID-19 policy support reached the intended recipients.
    Keywords: Firm growth, growth rates distribution, COVID-19 shock, quantile regression, hanging rootogram
    Date: 2023

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