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on European Economics |
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Issue of 2023‒11‒13
eighteen papers chosen by Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia |
| By: | Natalia Martín Fuentes (University of Málaga); Elena Bárcena Martín (University of Málaga); Salvador Pérez Moreno (University of Málaga) |
| Abstract: | This work provides evidence on the heterogeneous effects of ECB’s monetary policy across income classes in the euro area. In particular, this investigation focuses on the macroeconomic channel and analyses how expansionary monetary policy affects income inequality through the labour market, that is, by stimulating economic activity which ultimately affects income classes differently. Based on European Union Statistics on Income and Living Conditions (EU-SILC) data, we compute specific labour market metrics for each income class (lower, lower-middle, upper-middle, and upper) for the countries that originated the Economic and Monetary Union (EMU-11). Covering the period between 2006Q1 and 2019Q4, we estimate a series of country-specific structural Vector Autoregressive (SVAR) models to analyse the impact of an unexpected decline in the euro area shadow rate. As a robustness check, we estimate local projections models using exogenous monetary policy surprises. The results suggest that past monetary easing shocks helped decrease unemployment rates for lower- and middle-income class households, to a larger extent for the former. This differential impact across income classes is accounted for a substantially stronger improvement in job finding rates for those located at the bottom of the income distribution. In contrast, job separation rates have been homogeneously affected across the distribution. Conversely, the employment status of those located at the rightmost side of the income distribution seems to have been less elastic to monetary policy shocks. The analysis identifies a positive impact of expansionary monetary policy on real labour income. Overall, our results suggest that expansionary monetary policy has helped decrease labour income inequality. |
| Keywords: | Monetary policy, income inequality, income class, structural vector autoregressions (SVARs), local projections, euro area. |
| JEL: | C11 D31 E52 |
| URL: | http://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2023-657&r=eec |
| By: | Martin Feldkircher; Karin Klieber |
| Abstract: | This paper examines the degree of integration at euro area financial markets. To that end, we estimate overall and country-specific integration indices based on a panel vector-autoregression with factor stochastic volatility. Our results indicate a more heterogeneous bond market compared to the market for lending rates. At both markets, the global financial crisis and the sovereign debt crisis led to a severe decline in financial integration, which fully recovered since then. We furthermore identify countries that deviate from their peers either by responding differently to crisis events or by taking on different roles in the spillover network. The latter analysis reveals two set of countries, namely a main body of countries that receives and transmits spillovers and a second, smaller group of spillover absorbing economies. Finally, we demonstrate by estimating an augmented Taylor rule that euro area short-term interest rates are positively linked to the level of integration on the bond market. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.07790&r=eec |
| By: | Dusan Stojanovic |
| Abstract: | This study examines how and to what extent quantitative easing of the ECB affects household income and wealth inequality in the euro area. Previous theoretical models have investigated the dynamics of inequality measures through differential access of households to financial/capital market (the portfolio rebalancing channel), neglecting the labor market differential (the earnings heterogeneity channel). Although the portfolio rebalancing channel may provide insight into wealth inequality and non-labor income inequality, this is not the case with labor (and thus total) income inequality. To be in line with the empirical evidence on labor income inequality, this study also considers segmented labor market on the basis of capital-skill complementarity in production and asymmetric real wage rigidities. When only financial market segmentation is considered, the quantitative results indicate a drop in total income inequality that is diminished over time, while wealth inequality experiences a rise that gradually becomes weaker. The introduction of the segmented labor market significantly mitigates the observed drop in total income inequality, while a rise in wealth inequality is largely amplified. Given the possible broadening of the ECB’s mandate towards distributional issues in the future, the analysis of segmented labor and financial markets can be more beneficial to the ECB as it provides a clearer picture of the inequality effects. |
| Keywords: | quantitative easing, capital-skill complementarity, asymmetric real wage rigidity, skill premium, portfolio rebalancing channel, earnings heterogeneity channel |
| JEL: | E21 E22 E44 E52 E58 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp760&r=eec |
| By: | Esther Cáceres (Banco de España); Matías Lamas (Banco de España) |
| Abstract: | We measure the reaction of search for income in mutual funds to supervisory-induced dividend restrictions on euro area banks during the COVID-19 pandemic, which operated as an exogenous shock to payouts in this sector. Using granular data on euro area-based mutual funds’ holdings, we show that demand for dividends motivated portfolio decisions in this period and that these decisions had implications for stock returns. Specifically, we document that there were more sales of bank stocks by income-oriented funds after payout restrictions were set in place. These funds were however less inclined to dispose of bank CoCos, an alternative high income-generating asset issued by credit institutions and not subject to supervisory distribution limits. Lastly, we analyze the price impact of these portfolio adjustments, documenting negative abnormal returns in bank stocks more exposed to income-oriented funds after the policy announcement. Our research evidences that search for income is relevant in asset allocation decisions and price formation, and quantifies some of the side effects of dividend restriction policies. |
| Keywords: | search for income, dividends, asset allocation, abnormal returns, mutual funds |
| JEL: | G12 G14 G21 G35 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2332&r=eec |
| By: | Nam, Hoseung (King's College London); Portes, Jonathan (King's College London) |
| Abstract: | We investigate the impact of immigration on productivity in the UK, using newly published ONS data on employees of non-UK origin by region and sector. Consistent with earlier research, we find some evidence of a positive association between non-EU migration and productivity, and some weaker evidence of a negative association between EU migration and productivity, although results are sensitive to the specifications used. |
| Keywords: | migration, productivity, labour markets, Brexit |
| JEL: | F22 J48 J61 J68 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16472&r=eec |
| By: | Selva Bahar Baziki (Bloomberg); María J. Nieto (Banco de España); Rima Turk-Ariss (Fondo Monetario Internacional) |
| Abstract: | We extend the literature on the sovereign-bank nexus by examining the composition effects of sovereign portfolios on banks’ risk profile, unlike previous studies which generally analyzed the determinants of banks’ sovereign portfolios or the size effects of these portfolios. We also differ from previous studies with respect to the measures of risk considered and by covering a sample period that goes well beyond the global financial crisis (2009-2018). Drawing on granular data from the European Banking Authority, we find that banks are riskier when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns or when they are themselves domiciled in a country with high sovereign credit risk. Nevertheless, we do not find conclusive evidence that larger holdings of government securities of the country where the bank is incorporated increase bank risk ex-post. However, the risk profile is higher for banks that received government capital injections than for banks that did not receive capital support in the aftermath of the global financial crisis. Banks that received government capital injections are less risky when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns. These results may indicate that regulatory arbitrage motives at these banks are particularly important. |
| Keywords: | banks, sovereign crisis, EU |
| JEL: | G01 G21 G28 G38 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2325&r=eec |
| By: | Krause, Willi; Costa, Luís; Costa Filho, João Ricardo |
| Abstract: | What are the drivers of output fluctuations in Germany during the COVID-19 pandemic? We develop a macro-epidemiological model based on the evidence that efficiency and labor wedges are the key distortions in the neoclassical growth model that account for the GDP dynamics during the period. We find that the consumption and laborsupply effects of containment policies and the endogenous responses of households to pandemic-associated health risks can account for almost all weekly dynamics of output in Germany between the first quarter of 2020 and the second quarter of 2021. The containment policies are found to be responsible for especially large output losses during the pandemic, but the endogenous household responses appear to play an important complementary role. We simulate a counterfactual, laissezfaire type of response to the pandemic and find that not only would it not have avoided a sizeable recession either, but it would also lead to substantially higher losses in human life and stress on the German health service. |
| Keywords: | Covid-19, Germany, SIR-Macro, Dynamic General Equilibrium Model, Business Cycle Accounting. |
| JEL: | C63 E27 E32 I1 H0 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02902023&r=eec |
| By: | Jeanjean, François; Liang, Julienne |
| Abstract: | In this paper, we address the issue of the appropriate market structure in European mobile markets by presenting empirical evidence on the effect of the number of MNO on investment. Using a structural entry model based on a country-level dataset of 28 European countries, we find that, in average three player markets invest more at country level and offer more data traffic per subscriber than four or more player markets. |
| Keywords: | Mobile telecommunications, competition, investment, market structure, consumer welfare |
| JEL: | D43 L11 L96 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itse23:277979&r=eec |
| By: | Carlo Altavilla (European Central Bank, CSEF and CEPR.); Marco Pagano (University of Naples Federico II, CSEF, EIEF, and CEPR.); Miguel Boucinha (European Central Bank); Andrea Polo (Luiss University, EIEF, CEPR and ECGI.) |
| Abstract: | Combining euro-area credit register and carbon emission data, we provide evidence of a climate risk-taking channel in banks’ lending policies. Banks charge higher interest rates to firms featuring greater carbon emissions, and lower rates to firms committing to lower emissions, controlling for their probability of default. Both effects are larger for banks committed to decarbonization. Consistently with the risk-taking channel of monetary policy, tighter policy induces banks to increase both credit risk premia and carbon emission premia, and reduce lending to high emission firms more than to low emission ones. While restrictive monetary policy increases the cost of credit and reduces lending to all firms, its contractionary effect is milder for firms with low emissions and those that commit to decarbonization. |
| Keywords: | climate risk, carbon emissions, interest rate, lending, monetary policy. |
| JEL: | E52 G21 Q52 Q53 Q54 Q58 |
| Date: | 2023–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:687&r=eec |
| By: | Carranza, Rafael; Nolan, Brian; Bavaro, Michele |
| Abstract: | While the influence of poverty in childhood on adulthood outcomes has been extensively studied, little is known about how the strength of intergenerational persistence in poverty itself varies across countries. Here we examine the intergenerational persistence of poverty in a comparative analysis of 30 European countries using data from the 2019 ad hoc module of the EU-SILC dataset. We construct proxy measures of poverty in the parental household employing information on the inability to meet basic needs, financial hardship, parental education and occupational social class. The strength of the association between current poverty based on the indicators at the core of the EU's social inclusion process and these measures of parental poverty is assessed by estimating odds ratios and marginal effects. The cross-country variation in poverty persistence is probed in terms of its relationship with country characteristics. Mediation analysis highlights the role of own education as well as occupation in underpinning the observed relationship between current and parental poverty. Finally, differences across age cohorts in the strength of poverty persistence are examined. |
| Keywords: | Intergenerational transmission , poverty, multidimensional poverty, cross-country comparison, disadvantage |
| JEL: | D63 I32 J62 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:amz:wpaper:2023-22&r=eec |
| By: | Schnepf, Sylke V. (European Commission, DG Joint Research Centre); Granato, Silvia (European Commission, Joint Research Centre) |
| Abstract: | This study uses the Progress in International Reading Literacy Study (PIRLS) data, the only cross-national data having measured educational achievement during the COVID-19 pandemic, to investigate educational achievement decline of fourth graders across 21 European countries between 2016 and 2021. Learning decline estimated with PIRLS data is not only composed of learning loss due to COVID-19 but also European performance trends and national policy changes. The study illustrates the education performance decline in Europe by providing information on 20 year reading achievement trends, average performance declines and increasing number of the share of low performing students across European countries. Results of previous national counterfactual impact evaluation studies measuring learning decline in languages due to COVID-19 are compared to PIRLS reading achievement declines between 2016 and 2021. Furthermore, the study examines recent developments of educational inequalities within Europe by first comparing countries' education distributions between 2016 and 2021 and second by investigating changes in the share of children lacking important reading skills by socio-economic background. |
| Keywords: | COVID-19, pandemic, educational inequalities, school, PIRLS, Europe |
| JEL: | I21 I24 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16531&r=eec |
| By: | Joachim Wagner (Leuphana Universität Lüneburg, Institut für Volkswirtschaftslehre and Kiel Centre for Globalization) |
| Abstract: | This paper uses firm level data from the World Bank Enterprise surveys conducted in 2019 and from the COVID-19 follow-up surveys conducted in 2020 in eight European countries to investigate the link between exporting before the pandemic and firm survival until 2020. The estimated effect of exports is positive and statistically significant ceteris paribus after controlling for various firm characteristics that are known to be related to firm survival. Furthermore, the size of this estimated effect can be considered to be large on average. Exporting helped firms to survive. |
| Keywords: | Exports, firm survival, COVID-19, World Bank Enterprise Surveys, Robit regression |
| JEL: | D22 F14 L20 L25 L29 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:422&r=eec |
| By: | Makrevska Disoska, Elena; Tonovska, Jasna; Toshevska-Trpcevska, Katerina; Tevdovski, Dragan; Stojkoski, Viktor |
| Abstract: | We investigate the interplay between innovation and productivity, emphasizing the role of environmental regulations on the innovation behaviours of European firms. Anchored in the Porter hypothesis, which proposes that environmental regulations can drive technological innovation and bolster commercial competitiveness, we utilize the CDM model (Crépon, Duguet, and Mairesse, 1998) for in-depth analysis. Our approach begins by pinpointing the factors that shape firms' decisions to innovate and the associated investments, employing the Heckman correction model. Subsequently, we adopt the three-stage least squares (3SLS) methodology to analyse both innovation outputs and firm productivity in tandem. Drawing data from the Community Innovation Survey (CIS) 2018, our structured examination unveils how diverse innovation drivers can elevate labor productivity in varied institutional landscapes. By contrasting the performance of South Europe (comprising Greece, Spain, Portugal) and Central Eastern Europe (countries like Bulgaria, Estonia, Hungary) against a German benchmark, our research offers a nuanced understanding of environmental regulations' influence on innovation and productivity across European contexts. |
| Keywords: | innovation, productivity, CDM model, CIS, Porter`s hypothesis |
| JEL: | C33 C36 O31 O33 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118724&r=eec |
| By: | Cetin, Sefane (Université catholique de Louvain, LIDAM/CORE, Belgium); Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | Many countries have adopted various pension reforms to deal with aging population. Those reforms involve some balance between ”refinancing” (contribution increase) and ”retrenchment” (benefit cut). The question we address is whether policymakers have the future capacity to sustain the legislated pension reforms in the EU given the growing influence of the elderly in the democratic process. To answer this question, we draw on the 2021 Economic Policy Committee (EPC) projections of pension benefit rates that we compare with the policy adjustments over the amount of refinancing and benefit cut arising from continuously negotiated reforms over time between the successive cohorts of workers and retirees. We compute the optimal bargaining trajectory of benefit and contribution rates that match the aging population. We then use the ”democratic gap” as a political stress test. This democratic gap measures how the implicit bargaining power that rationalizes the projected pension benefits deviates from the population shares. We complement the analysis with the ”benefit gap” that measures how the projected pension benefits deviate from the bargaining outcome when bargaining power evolves according to population aging. |
| Keywords: | Pension reform ; Aging ; Bargaining ; Sustainability ; Stress test |
| JEL: | D63 H55 J18 |
| Date: | 2023–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2023016&r=eec |
| By: | Stephen Machin; Jonathan Wadsworth |
| Abstract: | Elevated concerns over the consequences of recent rises in the UK economic inactivity rate for growth, wages and prices have prominently featured in recent public debate about the labour market and the economy. This paper documents the path of economic inactivity over time, disaggregated along several dimensions in an attempt to evaluate whether or not rising inactivity does indeed have consequences for growth and wages. First of all it is important to highlight that, over the longer run, inactivity is still quite a lot lower now than it has been for some time. This makes the recent rise in inactivity looks more like a cyclical blip, rather than a long-term trend. Second, spatial disparities in inactivity growth are not positively correlated with wage growth. If anything, rising inactivity is associated with lower wage growth. Thirdly, the inactivity rise has been partially offset by growth in employment of workers above statutory retirement age. Consequently, the elevated concern of sizable negative consequences of the recent rise in inactivity looks to be somewhat misplaced. Moreover, the inactivity shifts effects are unequally distributed, an important aspect which appears overlooked in the discussion, especially with regard to policy. Inactivity is strongly concentrated on certain groups of the population and is linked to both aggregate and local economic performance, falling in good times, and rising in bad. As such, policy going forward needs to try to avoid spending time on issues that may resolve themselves as the economy recovers. This means the prime focus should be on what has been an issue for quite some time now, namely the persistently low labour force participation among older, less skilled workers with illness in economically disadvantaged areas. |
| Keywords: | UK economic inactivity rate, growth, wages, retirement age |
| Date: | 2023–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepops:59&r=eec |
| By: | Ravazzolo, Francesco; Rossini, Luca |
| Abstract: | Since Russia’s invasion of Ukraine, many countries have pledged to end or restrict their oil and gas imports to curtail Moscow’s revenues and hinder its war effort. Thus, the European ministers agreed to trigger a cap on the gas price. To detect the importance of the price cap for gas, we provide a mixture representation for the gas price to detect the presence of outliers made by a truncated normal distribution and a uniform one. We focus our analysis on Germany and Italy, which are major Russian gas importers by exploiting the response of the different commodities to a gas shock through a Bayesian vector autoregressive (VAR) model. As a result, including a lower gas price cap smooths the impact of a gas shock on electricity prices, while not considering a price cap will increase exponentially this impact. |
| Keywords: | Public Economics, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy |
| Date: | 2023–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ags:feemwp:338790&r=eec |
| By: | Mahmoud Fatouh (Bank of England and University of Essex); Simone Giansante (University of Palermo); Steven Ongena (University of Zurich; Swiss Finance Institute; KU Leuven; NTNU Business School; CEPR) |
| Abstract: | We assess the impact of the leverage ratio capital requirements on the risk-taking behaviour of banks both theoretically and empirically. We use a difference-in-differences (DiD) setup to compare the behaviour of UK banks subject to the leverage ratio requirements (LR banks) to otherwise similar banks (non-LR banks). Conceptually, introducing binding leverage ratio requirements into a regulatory framework with risk-based capital requirements induces banks to re-optimise, shifting from safer to riskier assets (higher asset risk). Yet, this shift would not be one-for-one due to risk weight differences, meaning the shift would be associated with a lower level of leverage (lower insolvency-risk). The interaction of these two changes determines the impact on the aggregate level of risk. Empirically, we show that LR banks did not increase asset risk, and slightly reduced leverage levels, compared to the control group after the introduction of leverage ratio in the UK. As expected, these two changes lead to a lower aggregate level of risk. Our results show that credit default swap spreads on the 5-year subordinated debt of LR banks fell relative to non-LR banks post leverage ratio introduction. |
| Keywords: | Capital regulation; Risk-taking; Leverage ratio; risk-based requirements |
| JEL: | G01 G21 G28 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2391&r=eec |
| By: | Hilde C. Bjørnland; Jamie L. Cross; Felix Kapfhammer |
| Abstract: | This paper studies the drivers of emission reductions in the carbon market of the European Union Emission Trading System (EU ETS) since its inception in 2005. We introduce a novel empirical framework that facilitates the joint identification of simultaneous demand and supply shocks underlying the European carbon market. We find that emission supply restrictions of the EU ETS were the dominant driver of emissions reductions, reducing emissions by 46%. However we also find that two opposing emission demand factors also played an important role. Demand from industrial economic activity increased emissions by 15%, while other demand-side factors, primarily reflecting the transition to low-carbon economies, reduced emissions by 21%. |
| Keywords: | climate policy, carbon pricing, emission trading system, cap and trade, demand and supply |
| JEL: | Q41 Q54 Q58 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2023-53&r=eec |