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on European Economics |
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Issue of 2023‒10‒23
eleven papers chosen by Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia |
| By: | Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer |
| Abstract: | Despite a formal ‘no-bailout clause, ’ we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of 2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road.’ Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest. |
| Keywords: | Euro area; Monetary Union; Sovereign debt; bailouts |
| Date: | 2023–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/177&r=eec |
| By: | Chiara Colesanti Senni; Maria Sole Pagliari; Jens van ‘t Klooster |
| Abstract: | This paper investigates the climate impact of central bank refinancing operations, with a focus the ECB’s TLTRO III program. Notably, we construct a novel database that combines i) confidential data on loans granted by EU banks to non-financial corporations; ii) confidential data on TLTRO III participation and iii) data on sectoral emissions. We find that the emissions content of bank loans granted over the TLTRO III reference period amount to 8% of overall Euro Area 2019 emissions and that more than 80% of total cumulated loans issued in the reference period was directed towards polluting companies. We then investigate the effectiveness of a green credit easing scheme via a general equilibrium model. Our findings are twofold: first, the central bank policy can increase the costs for lending to polluting companies, thus re-directing loans to less-polluting firms; second, the financial stability implications of such a policy should be carefully considered. Finally, we address legal and operational challenges to such a policy by outlining three alternative ways of implementing a “green†TLTRO programme. |
| Keywords: | TLTRO, CO2 emissions; transition risk; monetary policy; financial stability |
| JEL: | E40 E50 Q50 Q54 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:792&r=eec |
| By: | Christina Anderl; Guglielmo Maria Caporale |
| Abstract: | This paper applies a recently developed method (Inoue and Rossi, 2021) to estimate functional inflation expectations and ex-ante real interest rate shocks, and then examines their macroeconomic effects in the context of a Functional Vector Autoregressive model with exogenous variables (Functional VARX). Monthly data from January 1998 to May 2023 for the US, the UK and the euro area are used for the analysis. The estimated impulse responses show significant effects of the functional shocks on both inflation and output. In addition, threshold functional local projections indicate that the effects are nonlinear and depend on central bank credibility. Further, inflation expectations shocks have similar effects to supply (demand) ones when they are driven by long-term (short-term) changes. In the presence of an inverted (steepening) real interest rate term structure, the effects are inflationary (deflationary) and expansionary (recessionary). Finally, the responses of inflation, output and the policy rate are driven primarily by the slope and curvature factors of the term structure shocks, which contain important information not captured by traditional scalar shocks. |
| Keywords: | inflation expectations, term structure, real interest rates, functional shocks |
| JEL: | E31 E43 C32 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10656&r=eec |
| By: | Mai Dao; Allan Dizioli; Chris Jackson; Pierre-Olivier Gourinchas; Mr. Daniel Leigh |
| Abstract: | The surge in energy prices in 2022 has been a defining factor behind the increase in euro area inflation. We assess the impact of “unconventional fiscal policy, ” defined as the set of fiscal measures, possibly expansionary, motivated by a desire to mute the effects of the increase in energy prices and to lower inflation. Overall, we find that these unconventional measures reduced euro area inflation by 1 to 2 percentage points in 2022 and may avoid an undershoot later on. When nonlinearities in the Phillips curve are taken into account, the net effect is to reduce inflation by about 0.5 percentage points in 2021-24, and keep it nearer to its target. About one-third to one-half of the reduction in 2022 reflects the direct effects of the measures on headline inflation, with much of the remainder reflecting the lower pass-through to core inflation. The fiscal measures were deficit-financed but had limited effects on raising inflation by stimulating demand and instead modestly helped to stabilize longer-term inflation expectations. Looking ahead, the prospective decline in inflation in the euro area is partly due to fortunate circumstances, with energy prices falling from their 2022 peaks and their pass-through effects fading, and with less economic overheating than in economies such as the United States. Implementing similar measures in the face of a more persistent increase in energy prices, or in a more overheated economy, would have caused a more persistent rise in core inflation. |
| Keywords: | Inflation; fiscal policy; monetary policy. |
| Date: | 2023–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/178&r=eec |
| By: | Alicia Gómez-Tello (University of Valencia); María-José Murgui-García; María-Teresa Sanchis-Llopis |
| Abstract: | Over the last two decades a handful of very rich European regions have increased the gap separating them from the European average in terms of labour productivity. In this paper we extend a spatial version of the Mankiw, Romer and Weil model (MRW, 1992) as developed by Fischer (2011) to accommodate human capital spillovers linked to agglomeration. After modelling this specific spillover, we go on to test empirically whether its effect has been to stimulate labour productivity growth in those European regions with the greatest potential to benefit from agglomeration economies. The theoretical model leads to a cross-sectional spatial Durbin model specification. The empirical analysis is carried out for 121 European regions for the period 1995-2014. We find significant conditional b-convergence, positive impacts of investment in physical and human capital, and a negative impact of population growth. Our most notable result involves the specific spillover effect that enhances the impact of investment in human capital in the most highly agglomerated regions. We find this externality significant in explaining labour productivity growth and therefore also in increasing labour productivity disparities across European regions. |
| Keywords: | Human capital, labour productivity, spatial externalities, European region |
| JEL: | R |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2023.11&r=eec |
| By: | Anthony Edo; Cem Özgüzel |
| Abstract: | This paper provides the first evidence on the regional impact of immigration on native employment in a cross-country framework. We show that the rise in the share of immigrants across European regions over the 2010-2019 period had a modest impact on the employment-to-population rate of natives. However, the effects are highly uneven across regions and workers, and over time. First, the short-run estimates show adverse employment effects in response to immigration, while these effects disappear in the longer run. Second, low-educated native workers experience employment losses due to immigration, whereas high-educated ones are more likely to experience employment gains. Third, the presence of institutions that provide employment protection and high coverage of collective wage agreements exert a protective effect on native employment. Finally, economically dynamic regions can better absorb immigrant workers, resulting in little or no effect on the native workforce. |
| Keywords: | Immigration;Employment;Labour Supply;Employment Dynamics |
| JEL: | F22 J21 J61 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2023-20&r=eec |
| By: | Jorge Abad; Galo Nuño Barrau; Carlos Thomas |
| Abstract: | We analyze the impact of introducing a central bank-issued digital currency (CBDC) on the operational framework of monetary policy and the macroeconomy as a whole. To this end, we develop a New Keynesian model with heterogeneous banks, a frictional interbank market, a central bank with deposit and lending facillities, and household preferences for different liquid assets. The model is calibrated to replicate the main monetary and financial aggregates in the euro area. Our analysis predicts that CBDC adoption implies a roughly equivalent reduction in banks' deposit funding. However, this 'deposit crunch' has a rather small effect on bank lending to the real economy, and hence on aggregate investment and GDP. This result reflects the parallel impact of CBDC on the central bank's operational framework. For relatively moderate CBDC adoption levels, the reduction in deposits is absorbed by an almost one-to-one fall in reserves at the central bank, implying a transition from a 'floor' system –with ample reserves– to a 'corridor' one. For larger CBCD adoption, the loss of bank deposits is compensated by increased recourse to central bank credit, as the corridor system gives way to a 'ceiling' one with scarce reserves. |
| Keywords: | central bank digital currency, interbank market, search and matching frictions, reserves |
| JEL: | E42 E44 E52 G21 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1126&r=eec |
| By: | Hung Xuan Do; Rabindra Nepal; Son Duy Pham; Tooraj Jamasb |
| Abstract: | Despite the massive impacts of the COVID-19 pandemic and the Russia-Ukraine war on the European energy market, little is known about their effects on the transmission of risks between member states’ electricity markets and key electricity sources. In this paper, we first employ the quantile connectedness approach to quantify the return connectedness between eleven European electricity markets, natural gas, and carbon market, then examine the impacts of the two crises on the interconnectedness. We find a significant return interconnectedness of the system, mainly driven by the spillover effects among European electricity markets. An investigation of the connectedness across quantiles shows that the spillover effects are much stronger at the tails of conditional distribution and the natural gas and carbon markets are net recipients of return shocks across quantiles. More importantly, our results reveal opposite effects of the two crises on interconnectedness. While the COVID-19 pandemic reduces the interconnectedness, the Russia-Ukraine war intensifies the return shock transmission. |
| Keywords: | Natural gas, European Emission Allowance, Electricity markets, COVID-19, Russia-Ukraine war, Quantile connectedness |
| JEL: | D4 L94 Q43 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-46&r=eec |
| By: | Eleonora Cavallaro (University of Rome, Sapienza); Ilaria Villani (European Central Bank) |
| Abstract: | We focus on the structural and stability dimensions of financial development and build an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. We have the following results. (i) Based on the transitional dynamics of the index over 2000-2019, EU financial systems are converging towards a clustered pattern; (ii) our measure of financial development is highly significant in growth regressions, suggesting that greater openness, market-based financing, and equity positions, longer debt maturities, and enhanced stability are key to stable growth; (iii) financial asymmetries have implications for the heterogeneous vulnerability to domestic output shocks: the risk sharing mechanism is more effective in financially resilient economies that benefit by the contribution of the capital market channel, while a larger fraction of the GDP shocks remains unsmoothed in less resilient economies that feature a considerable down-seizing of the saving channel in the post-global financial crisis. |
| Keywords: | Financial resilience, financial asymmetries, growth, volatility, risk sharing |
| JEL: | F |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2023.12&r=eec |
| By: | Mr. Serhan Cevik; Kelly Gao |
| Abstract: | The world is not decarbonizing fast enough, with global warming on track to reach as much as 4°C over the next century absent a global green transition. Policymakers in Europe—and beyond—still have an opportunity both to achieve net zero emissions by 2050 and to strengthen economic prospects by increasing energy efficiency, along with changing the energy mix from fossil fuels to renewables. In this paper, we assess energy efficiency (or intensity) in a panel of 38 European countries over the period 1980–2021 by using the stochastic frontier analysis and obtain statistically significant and intuitive results. We have two key findings. First, price signals, including through the introduction of a carbon tax and the removal of fossil fuel subsidies, are critical for energy efficiency, as consumers respond to changes in energy prices. Second, stronger environmental policies and institutions generate unambiguous improvements in energy efficiency by inducing investment in energy efficient equipment and buildings and nudging consumers for energy conservation. These results—robust to alternative specifications and methods—have important policy implications for green growth with higher energy efficiency. |
| Keywords: | Energy consumption; energy efficiency; stochastis frontier analysis; Europe |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/198&r=eec |
| By: | Schnattinger, Philip (Bank of England) |
| Abstract: | This paper studies whether beliefs about future labour productivity independent of fundamentals at any horizon are important drivers of job creation. It develops a model with search frictions in the labour market that accounts for imperfectly observed permanent labour productivity changes. The estimation of the model shows that beliefs are important drivers of job creation in economies with larger search frictions. Beliefs explain 2%, 35%, and 55% of employment fluctuations for the US, the UK and France respectively. Furthermore, exogenous belief changes exert a more powerful influence on job creation during times when unemployment is low. |
| Keywords: | Labour productivity; information frictions; fundamentals and beliefs; equilibrium unemployment growth model; search and matching; business cycles |
| JEL: | E24 E32 E37 |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1040&r=eec |