EconPol Working Paper Series

Cover of EconPol Working Paper 18

Investment Incentives and Tax Competition under the Allowance for Growth and Investment (AGI)

Seppo Kari, Jussi Laitila and Olli Ropponen

The European Commission’s Allowance for Growth and Investment (AGI) has proposed investment incentives in its two-step approach towards the Common Consolidated Corporate Tax Base (CCCTB). In this latest EconPol working paper, the authors demonstrate that the AGI strengthens investment incentives in high-tax countries and decreases the CCCTB-induced investment push towards low-tax countries. They also demonstrate that the AGI decreases tax competition and that a sufficiently generous AGI reduces tax competition between countries when introduced with the CCCTB.

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Cover of EconPol Working Paper 17

The EU Budget and Common Agricultural Policy Beyond 2020: Seven More Years of Money for Nothing?

Friedrich Heinemann and Stefani Weiss

The European Commission’s proposals for the post-2020 Common Agricultural Policy (CAP) are under discussion, and these cautious reform ideas have set the parameters for upcoming negotiations. CAP will continue to have a two-pillar structure of direct payments and rural development, with a seven-year budget of €365 billion. As before, almost three-quarters of the budget - €265 billion - is reserved for direct payments to farmers. However, ‘European added value’ must be urgently applied to CAP, say Friedrich Heinemann and Stefani Weiss, who have developed a series of recommendations to justify direct payments in their latest report for EconPol.

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Cover EconPol Working Paper 16

Shadow Banking and the Four Pillars of Traditional Financial Intermediation

Emmanuel Farhi and Jean Tirole

Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This paper unveils the logic of the quadrilogy by putting core services to “special depositors and borrowers” at the heart of the analysis, and makes room for bank and depositor implicit and explicit guarantees. It analyzes how prudential regulation must adjust to the emergence of shadow banking. The model also rationalizes ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms to counter syphoning and financial contagion.

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Cover EconPol Working Paper 15

Fragmentation and Strategic Market-Making

Laurence Daures Lescourret and Sophie Moinas

Information technology, infrastructure enhancement, and arbitrage strategies all contributeto link trading venues in fragmented markets. Our paper highlights a new cross-market linking channel: the interdependence of liquidity providers' inventory costs. We use a two-venue duopoly model involving strategic risk-averse market-makers. Costs to provide immediacy depend on market-makers' inventory aggregated across venues, implying that absorbing a shock in one venue simultaneously changes marginal costs in all other venues. Moreover, market-makers strategically choose which shock(s) to absorb. These two forces may lead to competitive prices and enhanced liquidity. Using Euronext proprietary data, we uncover evidence for these crossmarket inventory cost linkages.

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Cover EconPol Working Paper 14

Macroeconomic Imbalances and the Euro Zone. Alternative Views

Roberto Tamborini

Macroeconomic imbalances (MI) play a prominent role in the "consensus narrative" of the crisis of the Euro Zone (EZ). Accordingly, the package of governance reforms undertaken by the EZ countries amid the crisis includes the Macroeconomic Imbalances Procedure (MIP) to be enacted by the Commission. The whole approach has raised various critical and alternative views. These are examined distinguishing between the "domestic" and "external" dimension of MI, and the controversial issues are identified with reference to the MI relevance, their causes and connections with the crisis, and their policy implications.

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