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on European Economics |
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Issue of 2024‒05‒13
nineteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Lambert, Claudia; Meller, Barbara; Pancaro, Cosimo; Pellicani, Antonella; Radulova, Petya; Soons, Oscar; van der Kraaij, Anton |
| Abstract: | A digital euro would provide the general public with an additional means of payment in the form of risk-free central bank money in digital form that is universally accepted for digital payments across the euro area. A digital euro would offer a wide range of financial stability benefits, including safeguarding the role of public money and strengthening the strategic autonomy and monetary sovereignty of the euro area in the digital era. It would be designed to have no material impact on financial stability or the transmission of monetary policy. This paper shows the usefulness of digital euro safeguards, such as holding limits, that would limit the impact of the introduction of a digital euro on banks’ liquidity and on their reliance on central bank funding. To this end, it assesses how banks might respond to the introduction of a digital euro while seeking to maximise profitability and manage their risks for a range of holding limit scenarios. The results of the simulated impact on key liquidity metrics show that, with safeguards in place and on aggregate, the liquidity metrics of euro area banks would decline but remain well above regulatory minimums. In addition, the central bank funding ratios of euro area banks would not increase materially on aggregate and would remain contained overall. JEL Classification: E42, E58, G21 |
| Keywords: | bank intermediation, CBDC, digital euro, financial stability risks |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2024346&r=eec |
| By: | Alexander Karaivanov; Benoit Mojon; Luiz Awazu Pereira da Silva; Albert Pierres Tejada; Robert M Townsend |
| Abstract: | We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times and there are no redistributionary transfers across countries. We show that, relative to the status quo, such scheme would have provided nearly perfect insurance of the euro area member states' unemployment expenditures risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2 percent of the euro area GDP. Limiting, or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019. |
| Keywords: | unemployment insurance, risk sharing, reinsurance, euro area, fiscal policy, mechanism design, limited commitment |
| JEL: | E62 J65 F32 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1180&r=eec |
| By: | Menz, Jan-Oliver |
| Abstract: | We use a simple macroeconomic model proposed by Bernanke and Blanchard (2023) to investigate the reasons for the recent sharp rise in inflation. Applied to Germany and the euro area, the model suggests that the surge in inflation has mainly been caused by commodity price shocks and supply bottlenecks, rather than shortages in the labour market. Inflation expectations were found to be well-anchored and evidence for a wage-price spiral is scarce. The model predicts a gradual decline in future inflation rates. However, this prediction is based on the assumption that there will be no commodity price shocks and that the labour market will cool down. |
| Keywords: | Inflation, wages, inflation expectations, Phillips curve |
| JEL: | E3 J3 D84 C33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubtps:290409&r=eec |
| By: | Giovanni Carnazza; Emilio Carnevali |
| Abstract: | The European fiscal framework has recently been reformed, yet the concept of structural balance still plays a crucial role within it. This paper proposes a multidimensional approach to scrutinize the pro-cyclical tendencies embedded in European economic policies arising from the European Commission’s calculation methodology of potential output and structural balance. Initially, a theoretical model shows the vicious cycle dynamic that characterises the fiscal adjustment process during a recession when potential output is dependent on actual output. Subsequently, numerical simulations juxtapose this dynamic with a counterfactual scenario where potential output is only influenced by long-term supply factors. Finally, employing dynamic panel data analysis covering 26 EU countries from 1995 to 2023, on an annual basis, empirical evidence is presented to show the pro-cyclical nature of fiscal policies adopted by European governments. Importantly, these estimates facilitate the isolation of the proportion of the pro-cyclical effect attributed solely to the bias stemming from the endogeneity of potential GDP. |
| Keywords: | European fiscal framework, fiscal (pro-)cyclicality, (endogenous) output gap, structural balance, pro-cyclical bias |
| JEL: | C51 E32 E62 H62 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2024/306&r=eec |
| By: | Jens H. E. Christensen; Xin Zhang |
| Abstract: | We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects. |
| Keywords: | term structure modeling; financial market frictions; safety premium; unconventional monetary policy |
| JEL: | C32 E43 E52 E58 F41 F42 G12 |
| Date: | 2024–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:98076&r=eec |
| By: | Christl, Michael; De Poli, Silvia; Köppl-Turyna, Monika |
| Abstract: | This paper analyzes the relationship between economic growth, inequality and redistribution. In a cross-country setting for 25 EU countries over the period 2007-2019, we show that market income inequality is associated with higher growth in the short run. To estimate the impact of redistribution to low-income earners, we introduce a new measure, the so-called net benefit share (NBS). Contrary to other findings, we show that this (targeted) redistribution to lowincome earners (Q1 NBS) boosts growth in the short run, driven by the consumption and private investment channels. On the other hand, untargeted redistribution to higher income earners reduces growth. |
| Keywords: | growth, redistribution, inequality, European Union |
| JEL: | H23 O47 D63 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1414&r=eec |
| By: | Fauvrelle, Thiago; Riedel, Max; Skrutkowski, Mathias |
| Abstract: | This paper studies whether Eurosystem collateral eligibility played a role in the portfolio choices of euro area asset managers during the "dash-for-cash" episode of 2020. We find that asset managers reduced their allocation to ECB-eligible corporate bonds, selling them in order to finance redemptions, while simultaneously increasing their cash holdings. These findings add nuance to previous studies of liquidity strains and price dislocations in the corporate bond market during the onset of the Covid-19 pandemic, indicating a greater willingness of dealers to increase their inventories of corporate bonds pledgeable with the ECB. Analysing the price impact of these portfolio choices, we also find evidence pointing to price pressure for both ECB-eligible and ineligible corporate bonds. Bonds that were held to a larger extent by investment funds in our sample experienced higher price pressure, although the impact was lower for ECB-eligible bonds. We also discuss broader implications for the related policy debate about how central banks could mitigate similar types of liquidity shocks. |
| Keywords: | Investment funds, dash-for-cash, corporate bonds, Eurosystem collateral eligibility |
| JEL: | G11 G23 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:290387&r=eec |
| By: | Luca Fornaro; Christoph Grosse-Steffen |
| Abstract: | We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate. |
| Keywords: | Monetary unions, Euro area, fragmentation, optimal monetary policy in openeconomies, capital flows, fiscal crises, unconventional monetary policies, Inflation, endogenous breaking of symmetry, Optimum |
| JEL: | E31 E52 F32 F41 F42 F45 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1883&r=eec |
| By: | Giang Nghiem; Lena Dräger; Ami Dalloul |
| Abstract: | This paper explores communication strategies for anchoring households’ medium-term inflation expectations in a high inflation environment. We conducted a survey experiment with a representative sample of 4, 000 German households at the height of the recent inflation surge in early 2023, with information treatments including a qualitative statement by the ECB president and quantitative information about the ECB’s inflation target or projected inflation. Inflation projections are most effective, but combining information about the target with a qualitative statement also significantly improves anchoring. The treatment effects are particularly pronounced among respondents with high financial literacy and high trust in the central bank. |
| Keywords: | anchoring of inflation expectations, central bank communication, survey experiment, randomized controlled trial (RCT) |
| JEL: | E52 E31 D84 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11042&r=eec |
| By: | Krause, Thomas; Sfrappini, Eleonora; Tonzer, Lena; Zgherea, Cristina |
| Abstract: | The establishment of the European Banking Union constitutes a major change in the regulatory framework of the banking system. Main parts are implemented via directives that show staggered transposition timing across EU member states. Based on the newly compiled Banking Union Directives Database, we assess how banks' funding costs responded to the Capital Requirements Directive IV (CRD IV). Our findings show an upward trend in funding costs which is driven by an increase in cost of equity and partially offset by a decline in cost of debt. The diverging trends are most present in countries with an ex-ante lower regulatory capital stringency, which is in line with banks' short-run adjustment needs but longer-run benefits from increased financial stability. |
| Keywords: | banking union, CRD IV, funding costs, staggered difference-in-difference estimators |
| JEL: | C52 G01 G18 G21 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:289797&r=eec |
| By: | Giuliano, Romina; Mahy, Benoît; Rycx, François; Vermeylen, Guillaume |
| Abstract: | This paper is the first to examine whether and how overeducation and overskilling, considered separately and in interaction, influence workers' job satisfaction at European level. It also investigates the moderating role of employment contracts. Our results, based on a unique pan-European database covering 28 countries in 2014, show that overeducation and overskilling reduce the probability of workers being satisfied with their jobs, but also that the drop in job satisfaction is almost double for genuinely overeducated workers (i.e. workers that are both overeducated and overskilled). These adverse effects on job satisfaction are found to be more pronounced among mismatched workers (whether overeducated, overskilled or both) on fixed-term rather than indefinite contracts. |
| Keywords: | Job Satisfaction, Overeducation, Overskilling, Labour Contracts, Europe |
| JEL: | C21 J24 J28 J41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:1419&r=eec |
| By: | Hang Do (University of Southampton); Kiet Duong (University of York); Toan Huynh (Queen Mary University of London); Nam T. Vu (Miami University) |
| Abstract: | Using the most comprehensive longitudinal survey on small and medium-sized businesses (SMEs) in the United Kingdom to date, we study the extent to which the implementation of Brexit in 2020 impacts their labor demand in a difference-in-difference framework. Our identification strategy hinges on using firms’ distance to the Irish border as a novel instrument to isolate the effects of Brexit at the firm level. Specifically, after Brexit in effect, while firms located in Great Britain are subjected to higher costs of doing business with the European Union, their Northern Irish counterparts are not, following the provisions arising from the Northern Ireland Protocol. Leveraging the distance to the border as a plausibly exogenous proxy for Brexit exposure among firms that did not change their location before and after the 2016 referendum, we find that the 2020 implementation of Brexit caused exposed firms to cut their workforce by up to 13.59% on average. The exposed firms are also more likely to have lower growth expectations and more likely to increase their research and development (R&D) expenditure in response. These results highlight the expectation channel and support the hypothesis that firms prioritize innovations in response to Brexit. |
| Keywords: | Brexit; firm responses; technology; EU workers |
| JEL: | D25 D84 F16 O32 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cgs:wpaper:117&r=eec |
| By: | Bianca Brétéché; Alastair Swarbrick |
| Abstract: | Supreme audit institutions (SAIs) are a critical part of public accountability systems. They ‘watch’ over governments’ use of public money and report about it publicly, helping to increase transparency. SAIs have an interest in strongly engaging with external stakeholders – including citizens – to make sure that their work is relevant, understood and used to hold governments to account.This paper provides a compilation of European SAIs’ practices on communication, co-operation and collaboration with external partners and is intended to provide inspiration to SAIs of EU candidate countries and potential candidates to further strengthen their engagement with their non-governmental stakeholders. |
| Keywords: | civil society organisations, EU, EU candidate countries, EU potential candidates, external engagement, non-governmental organisations, non-governmental stakeholders, public accountability, public auditing, public funds, supreme audit institutions, transparency |
| Date: | 2024–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:oec:govaac:69-en&r=eec |
| By: | Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Andrea Pescatori |
| Abstract: | Many countries have used energy subsidies to cushion the effects of high energy prices on households and firms. After documenting the transmission of oil supply shocks empirically in the United States and the Euro Area, we use a New Keynesian modeling framework to study the conditions under which these policies can curb inflation. We first consider a closed economy model to show that a consumer subsidy may be counterproductive, especially as an inflation-fighting tool, when applied globally or in a segmented market, at least under empirically plausible conditions about wage-setting. We find more scope for energy subsidies to reduce core inflation and stimulate demand if introduced by a small group of countries which collectively do not have much influence on global energy prices. However, the conditions under which consumer energy subsidies reduce inflation are still quite restrictive, and this type of policy may well be counterproductive if the resulting increase in external debt is high enough to trigger sizeable exchange rate depreciation. Such effects are more likely in emerging markets with shallow foreign exchange markets. If the primary goal of using fiscal measures in response to spikes in energy prices is to shield vulnerable households, then targeted transfers are much more efficient as they achieve their goals at lower fiscal cost and transmit less to core inflation. |
| Keywords: | Energy Prices; Energy Subsidies; Monetary Policy; International Spillovers |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/081&r=eec |
| By: | SOUDER James; KENNEDY Erin; XU Chi; GRUBER Benedikt; PAES Carolina; HU Rebecca; VAZQUEZ BUSTELO Jaime; KAMPS Martijn; SIERRA GARCIA Marta; BJÖRK Cassie; AMADEI Andrea Martino |
| Abstract: | The European Commission is supporting initiatives to increase the use of recycled plastics in Europe to 10 million tonnes (Mt) per year by 2025, but there is still a considerable way to go before achieving this goal. Studies estimate that only an amount between 3.5-5.6 Mt of recyclates is currently directed back into products. The objective of the present study is to improve the quality of data and the modelling of plastics mass flows in Europe. This report describes a second iteration of a Plastic Product Mass Flow Model which is based on public data sources and inputs from the Circular Plastics Alliance (CPA), for the reference year 2019. The modelled results for 2019 are in the range of values found in other studies, while providing a dynamic tool for industry players to take forward, update, and improve over time. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc135901&r=eec |
| By: | Gasparini, Matteo; Ives, Matthew C.; Carr, Ben; Fry, Sophie; Beinhocker, Eric |
| Abstract: | Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments. |
| JEL: | N0 R14 J01 |
| Date: | 2024–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122630&r=eec |
| By: | Altsitsiadis, E.; Kaiser, M.; Tsakas, A.; Kyriakidis, A.; Stamos, A. |
| Abstract: | Clean energy transition underpins the European Energy strategy with ambitious objectives for Renewable Energy Technologies (RET) deployment. Yet, social support remains a significant barrier to accelerating the energy transition. Existing studies have examined wide-ranging social-psychological factors that can affect support for RETs but have failed to address key local barriers. This study aims to illuminate regional characteristics that can influence social support for energy alternatives by assessing public support for two emerging renewables, hydrogen and biomethane, in three different EU countries, the Netherlands, Spain and Greece. We combine our micro-data with EU regional indicators to extend our model beyond known individual-level factors and test the effects of higher-scale antecedents covering regional development, poverty and social exclusion statistics. Our multilevel regression analysis reveals that severe material deprivation plays a key role in social support for RETs. In particular, our results suggest that people living in regions with elevated poverty levels are less likely to support such energy systems. This finding is consistent for both the renewables examined in the three EU countries studied. Our research offers significant and timely insights for accelerating the clean energy transition, while highlighting the need for better strategies to gain and increase social support for RETs. |
| Keywords: | Renewable energy acceptance, just transition, energy poverty, regional factors |
| JEL: | I32 Q42 Q55 R58 |
| Date: | 2024–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2419&r=eec |
| By: | Rim Berahab |
| Abstract: | The Carbon Border Adjustment Mechanism (CBAM) has emerged as an important policy tool in the European Union's (EU) efforts to combat climate change and prevent carbon leakage. By putting a price on carbon emissions embedded in certain goods imported into the EU, the CBAM has the potential to impact economies worldwide, including Morocco. This policy brief examines recent CBAM developments and assesses their implications for Morocco's economy and climate change efforts. It analyzes the challenges that the Moroccan economy may face, including implications for costs, competitiveness, compliance requirements, supply chain adjustments, and increased risk exposure. The brief also highlights the opportunities available to Morocco, and the importance of implementing targeted policies, strengthening the regulatory framework, promoting capacity-building initiatives, and fostering cooperation to navigate the CBAM transition period effectively. By understanding the complexities of CBAM and adopting proactive strategies, Morocco can position itself to capitalize on the opportunities and overcome the challenges presented by this transformative policy. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ocp:ppaper:pb29-23&r=eec |
| By: | Teodora Dobos; Martin Bichler; Johannes Kn\"orr |
| Abstract: | The European day-ahead electricity market is split into multiple bidding zones. Within these zones, a uniform energy price is computed for each hour. Large bidding zones have been under scrutiny. The fact that zonal clearing ignores the transmission capacities within zones and the increase in renewables lead to a growing number of interventions in the generation of energy sources and large redispatch costs. The European Union Agency for the Cooperation of Energy Regulators (ACER) proposed alternative bidding zone configurations that should be analyzed as part of the Bidding Zone Review. For Germany, four alternative configurations were suggested. Bidding zones shall be stable and based on long-term, structural congestion in the grid. We analyzed the proposed configurations considering different clustering algorithms and periods. We found that the configurations do not reduce the price standard deviations within zones considerably, while the average prices across zones are similar. Other configurations identified based on clustering prices lead to lower price standard deviations but are not geographically coherent. Importantly, different configurations emerge depending on clustering features, algorithm, and period considered. Given the substantial changes in energy supply and demand that can be expected in the future, defining stable configurations appears to be a moving target. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.06489&r=eec |