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Working Paper Series in Economics
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No. wp2022-7
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- Merike Kukk and Natalia Levenko
- Interest rate spreads in Estonia:
different stories for different types of loan
The paper studies the determinants of the interest rate spreads in Estonia,
a country that stands out among European countries for its wide spreads. Four
distinct credit markets are considered for housing loans, consumer loans, long-term
corporate loans and short-term corporate loans. The paper uses quarterly panel data
from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed
spread into a component determined by the bank-specific factors and a component
determined by the market-specific factors, which is labelled in the literature as the
pure spread. For each of the two components, the paper finds substantial differences
in the determinants of the spreads across different types of loan. While credit risk
is important for long-term corporate and housing loans, operating costs are
significant in the segment of short-term loans. Similarities found between the loan
markets were that the pure spreads are found to be related to the business cycle and
market concentration, while the relationship with interest rate risk is found to be
insignificant.
- JEL-Codes: G21, G28, D40, E43
- Keywords: interest rate spreads, interest rate margins, banking sector, housing loans, consumer loans, corporate loans, market concentration
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No. wp2022-6
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- Gerda Kirpson, Martti Randveer, Nicolas Reigl, Karsten Staehr and Lenno Uuskula
- Macroeconomic news and sovereign interest rate spreads
before and during Quantitative Easing
This paper studies how macroeconomic news affected the spreads of Italian
sovereign bonds before and during the quantitative easing by the European Central
Bank. Daily changes in the bond spreads are regressed on macroeconomic news
shocks, where the news shocks are computed as the difference between the
published data and the preceding private-sector forecasts. The analysis shows that
macroeconomic news shocks had economically and statistically significant effects
in 2012–2014 before quantitative easing, but the effects were negligible afterwards
with a possible exception of a period in 2019 when the net asset purchases were
paused
- JEL-Codes: E44, E58
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No. wp2022-5
(Download at EconPapers)
- Jaanika Merikyll and Alari Paulus
- Were jobs saved at the cost of productivity
in the Covid-19 crisis ?
Economic recessions can boost the productivity-enhancing reallocation of jobs,
yet the Covid-19 crisis has provided limited and mixed evidence of that. The paper
studies the link between productivity and reallocation and investigates the role of
job retention schemes in it, using a rich administrative dataset for Estonia that
covers the whole population of firms from 2004 to 2020. We find persistent
evidence for the reallocation of jobs towards more productive sectors and firms.
However, the within-sector reallocation was surprisingly unresponsive to
productivity in the Covid-19 crisis, in sharp contrast to the experience in the
previous major crisis, the Great Recession. We show that a generous job retention
scheme supressed the acceleration of within-industry reallocation towards more
productive firms, which had negative consequences for aggregate productivity
during Covid-19. These estimates appear sufficiently large to imply that there are
negative overall welfare effects that offset the positive employment effect.
- JEL-Codes: J62, D24, J68, D61
- Keywords: job reallocation, productivity, Covid-19, cleansing effect, firm exit and entry, job retention scheme
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No. wp2022-4
(Download at EconPapers)
- Merike Kukk, Alari Paulus and Nicolas Reigl
- Credit market concentration and
systemic risk in Europe
We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed
at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated
with higher systemic risk. Cumulative estimates with dynamic models show
that systemic risk has a persistent negative response to an increase in market
concentration from low and median levels of concentration. Local projection
estimates for the period preceding the global financial crisis also suggest that
an increase in market concentration may have further added to systemic risk
at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk
and market concentration
- JEL-Codes: G10, G21, E58, C22, C54
- Keywords: systemic risk, financial stability, credit institutions, credit growth, market concentration
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No. wp2022-3
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- Karsten Staehr and Katri Urke
- The European Structural and Investment Funds
and Public Investment in the EU Countries
Public investment is low and has declined in many EU countries since the global
financial crisis. This paper estimates the effects of the various European Structural
and Investment Funds (ESIF) on public investment in the EU countries. The
analysis is run on annual data from 2000 to 2018 using dynamic panel data specifications. Funding from the Cohesion Fund, the EU’s facility for its less developed
members, has an almost one-to-one effect on public investment in the short term
and more in the longer term. Funding from the European Regional Development
Fund may have some effect, but it cannot be estimated precisely. Other ESIF funds
do not have predictive effects on public investment in the EU countries.
- JEL-Codes: H54, H61, H77
- Keywords: public investment, structural and investment funds, EU
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No. wp2022-2
(Download at EconPapers)
- Alari Paulus
- Business investment, the user cost of
capital and firm heterogeneity
The sensitivity of business fixed investment to one of its key determinants,
the user cost of capital, has been little investigated with firm-level data that
captures firm heterogeneity to the full extent. I study the determinants of
business fixed investment in Estonia, using the universe of business statements for non-financial firms in 1994-2020 from administrative records. The
results with various panel data models provide strong support for a theoretical long-term relationship between the gross investment rate, and changes in
production output and the user cost of capital. I find that the capital stock
is modestly responsive to changes in output and the user cost of capital, with
elasticities less than 0.5 in absolute size, and that different estimation strategies yield broadly similar results. Elasticities differ by firm size, but sectoral
variation is relatively limited. User cost elasticities also exhibit notable variation over time, while output elasticities are much more stable. I also find that
investments in machinery and equipment are more elastic than investments
in buildings and structures.
- JEL-Codes: D22, E22, H32
- Keywords: business investment, user cost of capital, corporate taxation, firm panel data
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No. wp2022-1
(Download at EconPapers)
- Olivier Damette, Karolina Sobczak and Thierry Betti
- Financial Transaction Tax, macroeconomic effects and tax
competition issues: a two-country financial DSGE model
We document how introducing a financial transaction tax affects real and financial activity in a general
equilibrium framework. Our model replicates some interesting stylised facts about financial markets.
Informed, or rational, traders follow the standard rational expectations, while exogenous disturbances, such
as optimism or pessimism shocks, affect the expectations of noise traders. An entry cost is introduced to
endogenise the entry of noise traders in the financial markets. In contrast to the previous literature,
financial contagion and international spillovers are considered in a two-country financial DSGE model. A
welfare analysis is performed and we show that the effects of the financial transaction tax on welfare are
non-linear and mainly depend on the composition of the financial market. In addition, introducing a
financial transaction tax allows volatility to be reduced in both the real and financial sectors, and this result
is robust to several model specifications. In a context where only one country implements the tax, we
identify some externalities, as the country with the tax is likely to export stability or instability through the
flows of traders. Like in the Heckscher-Ohlin-Samuelson (HOS) model in which capital and labor move
internationally when countries trade, we assume that there are trader flows when traders invest abroad. As
a consequence, noise traders can implicitly move to the foreign country to escape the tax, and this means
that countries have conflicting interests. When markets are liquid with a large proportion of noise traders,
countries do not internalise that they export noise traders and then some instability to the other market
and so they set a tax rate that is higher than the optimal. At the opposite end of the scale, when markets are
less liquid and the proportion of noise traders is small, some positive externalities (like financial stability)
are overlooked, and so the tax rate is set too low and is sub-optimal. A cooperative situation where countries
set a common tax rate is the best solution ans is welfare-enhancing. These results have important policy
implications, since the existence of the tax competition issues revealed by our two-country framework
might explain why the European Commission proposal initially discussed in 2011 is so contested and has
been rejected by several countries.
- JEL-Codes: E22, E44, E62
- Keywords: Financial Transaction Tax, DSGE, Welfare, Noise Traders, Tax coordination, EU tax project.
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