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on European Economics |
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Issue of 2024‒02‒26
fifteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | James Costain; Galo Nuño Barrau; Carlos Thomas |
| Abstract: | We build an arbitrage-based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a "default risk extraction" channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective. |
| Keywords: | sovereign default, quantitative easing, yield curve, affine model, Covid-19 crisis, ECB, pandemic emergency purchase programme |
| JEL: | E5 G12 F45 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1165&r=eec |
| By: | Bats, Joost Victor; Bua, Giovanna; Kapp, Daniel |
| Abstract: | The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets. JEL Classification: G12, G14, G28, Q51, Q54 |
| Keywords: | climate physical risk, climate transition risk, corporate bonds, intertemporal hedging demand, news index |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242899&r=eec |
| By: | Lo Duca, Marco; Moccero, Diego; Parlapiano, Fabio |
| Abstract: | We analyse the impact of macroeconomic and monetary policy shocks on corporate credit risk as measured by firms’ probabilities of default (PDs) for the four largest euro area countries. We estimate the impact of shocks on one-year PDs using local projections (LP). For the period 2014-19, we find that aggregate shocks significantly affect the dynamics of credit risk. An adverse supply shock leads to a deterioration of firms’ riskiness 10 per cent above the average PD. Contractionary monetary policy shocks exert similar, but delayed effects. Firms’ responses to shocks vary depending on their characteristics and degree of financial constraints. Smaller firms are affected to a larger degree. Firms’ outstanding indebtedness and debt repayment capacity are an important transmission channel for aggregate shocks, but the accumulation of cash reserves helps building resilience. JEL Classification: C23, C55, E43, E52, G33 |
| Keywords: | corporate credit risk, local projections, monetary policy shocks, probabilities of default, structural demand and supply shocks |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242897&r=eec |
| By: | Daniele Colombo; Laurent Ferrara |
| Abstract: | This paper evaluates the dynamic impact of weather shocks on economic activity within the three main European countries. To consolidate meaningful variation in weather patterns, we propose a novel monthly composite weather index (CWI). This index captures relevant information on severe cold and heat conditions, drought, heavy precipitation, and intense wind events. We estimate a series of country-specific Bayesian Structural Vector Autoregressive models to assess the effects of weather shocks on distinct production sectors, namely energy, construction, manufacturing, and services. The findings reveal evidence of a significant impact of weather shocks on economic activity in Europe, with each component of the CWI exerting heterogeneous effects across different countries and production sectors. |
| Keywords: | weather shocks, European production, Bayesian SVAR |
| JEL: | C32 E23 Q54 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-07&r=eec |
| By: | Krenz, Johanna; Verma, Akhilesh K |
| Abstract: | How does macroprudential regulation affect financial stability in the presence of non-bank financial intermediaries? We estimate the contributions of traditional banks vis-'a-vis non-bank financial intermediaries to changes in systemic risk - measured as ∆CoVaR - after macroprudential policy shocks in European countries. We find that while tighter macro-prudential regulation, generally, decreases systemic risk among traditional banks, it has the opposite effect on systemic risk in the non-bank financial intermediation sector. For some types of regulations, the latter effect is even stronger than the former, indicating that macro-prudential tightening increases systemic risk in the entire financial system, through leakages between the traditional and the non-bank financial intermediation sectors. |
| Keywords: | macroprudential policy, systemic risk, ∆, CoVaR, non-bank financial intermediation, regulatory arbitrage, Europe |
| JEL: | G18 G23 G28 G21 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281783&r=eec |
| By: | Nicolas HÉRAULT; Stephen P. JENKINS |
| Abstract: | We decompose the redistributive effect of direct taxes into vertical, horizontal, and reranking components applying the methods of Urban and Lambert (Public Finance Review, 2008). In the first such application to the UK, and using yearly data covering 1977–2020, we find that redistributive effect increased over the period. However, there is no clear trend in horizontal inequity and this component forms a very small fraction of total redistributive effect by comparison with reranking and especially vertical components. It is also the vertical component that best tracks trends in redistributive effect. We give specific attention to the choice of the bandwidth used to define ‘close equals’ in terms of pre-tax income. We also show that implausible estimates of the horizontal inequity component arise for some years regardless of bandwidth used. |
| Keywords: | Redistributive effect; redistribution; horizontal inequity; reranking; Urban-Lambert decomposition; income tax |
| JEL: | D31 H24 H50 I38 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:grt:bdxewp:2023-11&r=eec |
| By: | Pollitt, M. G.; Dolphin, G. G. |
| Abstract: | This paper considers the current proposal to extend the EU ETS to cover CO2 emissions from the combustion of heating and road transport fuels. We argue that increased coverage of the EU ETS, together with a binding cap consistent with a net zero trajectory, would be a powerful dynamic incentive to efficient emissions reduction. In addition, it would complement standards-based policies currently enacted in these sectors in several ways. Distributional implications remain a serious challenge to such an extension but several mechanisms are available to alleviate them. |
| Keywords: | climate policy, emissions trading, EU, net zero |
| JEL: | Q52 Q54 Q58 |
| Date: | 2024–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2152&r=eec |
| By: | Shteryo Nozharov |
| Abstract: | Two fundamental issues are incorporated in the present monograph: the issue related to the quantification of the social costs and the issue, related to the defining of the circular economy concept as a theoretical model. The analysis is based on the methodology of the new institutional economics, which fact distinguishes it from the many other circular economy analysis based on the neo-classical methodological apparatus. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.13675&r=eec |
| By: | Sofia Anyfantaki; Yannis Caloghirou; Konstantinos Dellis; Aikaterini Karadimitropoulou; Filippos Petroulakis |
| Abstract: | We document and analyse key deficiencies of the Greek economy, with the view to providing new insights and articulate policy proposals. We consider issues which are the purview of both horizontal policies, raising productivity across sectors, and vertical policies, which allow for realignment of activity. With respect to the first dimension, we focus on two specific problem-areas of Greek industry, with high importance: skills and management practices. We also use information from a novel survey on entrepreneurship, technological developments, and regulatory change and examine structural characteristics of innovation and technology adoption of Greek firms, with a focus on the role of size, ownership structure, and global value chain participation. With respect to the second dimension, we provide an overview of Greece’s export performance and analyse its sectoral comparative advantage. In an empirical study we also focus on the determinants of export sophistication. Overall, the collection of our empirical findings provides ample fodder for concrete policy proposals to increase productivity in Greek manufacturing. |
| Keywords: | skills; management, innovation, knowledge, export sophistication. |
| JEL: | D22 F10 J24 J50 L22 O32 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:193&r=eec |
| By: | Charlotte Cavaillé (Ford School of Public Policy - University of Michigan [Ann Arbor] - University of Michigan System); Karine Van der Straeten (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Research shows that opposition to policies that redistribute across racial divides has affected the development of the American welfare state. Are similar dynamics at play in Western Europe? For many scholars, the answer is yes. In contrast, we argue that researchers' understanding of the political economy of redistribution in diversifying European countries is too incomplete to reach a conclusion on this issue. First, existing evidence is inconsistent with the assumption—ubiquitous in this line of research—of a universal distaste for sharing resources with people who are culturally, ethnically, and racially different. Second, important historical and institutional differences between the United States and Europe preclude any straightforward transposition of the American experience to the European case. We discuss what we see as the most promising lines of inquiry going forward. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04379228&r=eec |
| By: | Luca Barbaglia; Lorenzo Frattarolo; Niko Hauzenberger; Dominik Hirschbuehl; Florian Huber; Luca Onorante; Michael Pfarrhofer; Luca Tiozzo Pezzoli |
| Abstract: | Timely information about the state of regional economies can be essential for planning, implementing and evaluating locally targeted economic policies. However, European regional accounts for output are published at an annual frequency and with a two-year delay. To obtain robust and more timely measures in a computationally efficient manner, we propose a mixed-frequency dynamic factor model that accounts for national information to produce high-frequency estimates of the regional gross value added (GVA). We show that our model produces reliable nowcasts of GVA in 162 regions across 12 European countries. |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.10054&r=eec |
| By: | Salmai Qari; Tobias Börger; Tim Lohse; Jürgen Meyerhoff |
| Abstract: | Defense spending accounts for a large share of the budget in many countries, but the value of the resulting public good - national defense – has so far escaped assessment. Much of the literature has instead considered indirect benefits of defense spending in terms of greater economic growth or technological spillovers. In this paper, we assess the direct welfare effects of defense policy, namely an increase in the security of citizens, by means of a survey-based discrete choice experiment. Drawing on a representative sample of the German population, results suggest substantial willingness to pay for an increase in troop numbers, the establishment of a European army and an improved air defense system. The reintroduction of compulsory military service does not enjoy public support. Results further indicate substantial preference heterogeneity across respondents and policy options which we explore. As such, these findings demonstrate how methods of survey-based, non-market valuation can help to refine research in this area of public policy. |
| Keywords: | public good, national defense, non-market valuation, discrete choice experiment, willingness to pay |
| JEL: | C90 H41 H56 H60 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10872&r=eec |
| By: | Jost, Thomas |
| Abstract: | Das Eurosystem und auch die Deutsche Bundesbank werden 2023 Verluste erzielen, die einige Jahre anhalten dürften. Aufgrund der massiven Käufe von Wertpapieren in den letzten 10 Jahren, vor allem Staatsanleihen, sind die Überschussreserven der Banken stark angestiegen. Die dadurch bedingten hohen Zinszahlungen an die Banken seit der geldpolitischen Kehrtwende, bei geringen Einnahmen für die hohen Wertpapierbestände, führten zu massiver Kritik. Die Banken würden dadurch 'ungerechte' Gewinne erzielen, während die Fiskalbehörden auf die früher üblichen Überweisungen der Zentralbankgewinne verzichten müssen. Populistische Forderungen nach einer Begrenzung der Bankengewinne durch z.B. eine pauschale, drastische Erhöhung der Mindestreservesätze im Eurosystem zur Reduzierung der Überschussreserven bergen neue Probleme und sind nicht hilfreich. Letztlich haben die Staaten sehr lange von historisch niedrigen Zinsen infolge der expansiven Geldpolitik des Eurosystems profitiert und müssen nun die Folgen der massiven Aufblähung der Zentralbankbilanzen während des Zeitraums der Normalisierung der Geldpolitik tragen. |
| Abstract: | The Eurosystem and also Deutsche Bundesbank will make losses in 2023, which are likely to last for several years. Due to massive purchases of securities over the last 10 years, especially government bonds, banks' excess reserves have risen sharply. The resulting high interest payments to the banks since the change of the monetary policy course due to high inflation, combined with low income for the high securities holdings, led to massive criticism. The banks would thereby receive 'unfair' subsidies, while fiscal authorities would lose transfers of central bank profits. Populist calls for a cap on bank profits through, e.g., a drastic increase in the minimum reserve ratios in the Eurosystem to reduce excess reserves do not appear to be helpful and pose new problems. Ultimately, states have benefited from historically low interest rates for a very long time as a result of the Eurosystem's expansionary monetary policy. Now, they have to bear the consequences of the massive increase of central bank balance sheets during the period of normalization of monetary policy. |
| JEL: | E50 E58 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hawdps:281764&r=eec |
| By: | Rodrigue Dossou-Cadja (Sapienza University of Rome, EHESS, PSE) |
| Abstract: | The CFA franc devaluation on 11 January 1994 stands out as the most significant reform within the Franc Zone system since political independences of former African French colonies in 1960, yet a topic shrouded into profound taboo. So far, the economic literature has failed to draw any connection between this pivotal event in African macroeconomic history and its historical context: the 1992-3 European Monetary System (EMS) crisis. Using the narrative approach coupled with quantitative analysis (DCC-MGARH-X and SVARs) and powered by an unprecedented set of archival data from the Banque de France, the Bank of England, and the Bundesbank (the latter two from Eichengreen and Naef, 2022), as well as the International Monetary Fund (IMF), we document a brand-new route on understanding a certain integrated African-European common history. Evidence unveils the CFA franc devaluation as a fundamental role player in backing up credibility of the French franc amidst the 1992-3 EMS crisis. A ‘new democratic Franc Zone's Transition Committee' at the Banque de France, appears as a key feature for the future of the Zone’s management. |
| Keywords: | CFA franc devaluation, Franc Zone, European Monetary System, Currency crisis, Political Independences, Narrative approach |
| JEL: | E42 E58 F31 F33 F42 F53 F54 F55 N14 N17 N24 N27 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:hes:wpaper:0246&r=eec |
| By: | Massimiliano Ferraresi (University of Ferrara); Benedikt Herrmann, European Commission, JRC-Ispra; Luisa Loiacono (University of Ferrara); Leonzio Rizzo (University of Ferrara & IEB); Riccardo Secomandi (University of Ferrara) |
| Abstract: | Can fiscal autonomy affect per-capita income levels? The existing literature shows mixed results on the impact of fiscal autonomy on GDP growth, it often uses cross-country datasets comparing nations with different socio-economic contexts. Even when it digs into the subnational entities of a nation either financial indexes or institutional dummies are used as proxies for fiscal autonomy: both can imply endogeneity due either to measurement errors or reverse causality. We empirically investigate the impact of fiscal autonomy on per-capita income stimulated by the proper use of local financial resources. We do this by exploiting an Italian natural experiment comparing the impact on per-capita income of the use of own resources in municipalities belonging to the autonomous provinces of Trento and Bolzano, which manage almost all their taxes autonomously, to those belonging to the neighbouring regions of Veneto and Lombardy, which manage only a small fraction of taxes paid by their citizens. We use a spatial fuzzy regression discontinuity design to compare similar municipalities on the border between the provinces of Trento and Bolzano and Lombardy and Veneto. We find that the higher the level of local financial fiscal autonomy, proxied by the ratio of own tax revenue to total revenue, the higher the level of per-capita income. The proxy is instrumented with a dummy indicating municipalities with a real institutional fiscal autonomy : those belonging to the provinces of Trento and Bolzano. This allows us to interpret the proxy as an exogenous variation indicating institutional fiscal autonomy. We find that a 10 percentage points increase in financial fiscal autonomy increases per-capita income by 3%. Hence, our results suggest that local governments that are more accountable and closer to citizens, manage their revenues in a more efficient way than in the case when they receive transfers from the centre. |
| JEL: | H71 H72 R11 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipu:wpaper:112&r=eec |