nep-eec New Economics Papers
on European Economics
Issue of 2016‒10‒02
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Bank interest rate setting in the euro area during the Great Recession By Camba-Méndez, Gonzalo; Durré, Alain; Mongelli, Francesco Paolo
  2. Anchoring of inflation expectations in the euro area: recent evidence based on survey data By Łyziak, Tomasz; Paloviita, Maritta
  3. The euro area bank lending survey By Köhler-Ulbrich, Petra; Hempell, Hannah S.; Scopel, Silvia
  4. Policy spillovers and synergies in a monetary union By Arce, Óscar; Hurtado, Samuel; Thomas, Carlos
  5. Has the exchange rate pass through recently declined in the euro area? By Özyurt, Selin
  6. EAGLE-FLI - A macroeconomic model of banking and financial interdependence in the euro area By N. Bokan; A. Gerali; Sandra Gomes; P. Jacquinot; P. Pisani
  7. Net debt supply shocks in the euro area and the implications for QE By Blattner, Tobias; Joyce, Michael A. S.
  8. Institutions, public debt and growth in Europe By Masuch, Klaus; Moshammer, Edmund; Pierluigi, Beatrice
  9. An inflation-predicting measure of the output gap in the euro area By Jarociński, Marek; Lenza, Michele
  10. Public debt sustainability: Methodologies and debates in European institutions By João Amador; Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj; Lara Wemans
  11. Boosting investment performance in Germany By Andrés Fuentes Hutfilter; Andreas Kappeler; Dorothee Schneider; Giovanni Maria Semeraro
  12. When shadows grow longer: shadow banking with endogenous entry By Ari, Anil; Darracq Pariès, Matthieu; Kok, Christoffer; Żochowski, Dawid
  13. A tale of two sectors: why is misallocation higher in services than in manufacturing? By Daniel Dias; Carlos Robalo Marques; Christine Richmond
  14. Exchange rate floor and central bank balance sheets: Simple spillover tests of the Swiss franc By Adrien Alvero; Andreas M. Fischer
  15. The ECB's asset purchase programme: an early assessment By Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
  16. How large is the output gap in the euro area By Jarociński, Marek; Lenza, Michele

  1. By: Camba-Méndez, Gonzalo; Durré, Alain; Mongelli, Francesco Paolo
    Abstract: This paper sheds light on how recent financial tensions in the euro area were ultimately reflected in bank interest rate setting. We make two new contributions. First, we develop a theoretical model capturing banks financing and the rate setting choices. Banks in the model can finance themselves through deposits, on the money market and/or by issuing bonds. Second, we assemble a novel database and put our model to test. Our model extends that of Gambacorta (2004), as we formalise banks' decision to issue debt endogenously. Gambacorta's analysis was conducted for Italian banks and did not include the recent financial crisis. Instead, we focus our analysis on the Great Recession period (July 2007 to October 2014) and euro area banks. From a monetary policy perspective, both our theoretical model and the empirical results provide useful information on the impact of some of the measures introduced by the ECB during the financial crisis. First, the ECB introduced specific measures to alleviate tensions in money markets. To the extent that these measures fostered stability in money markets, and reduced the volatility of money market rates, this paper shows that they were also channelled to bank rates. Second, the ECB also introduced measures to address tensions in bond markets. Our results also show that having access to debt financing has important implications for bank rate setting. JEL Classification: C32, E43,E52, E58, G01
    Keywords: bank financing, bank interest rate setting, non-standard monetary policy and euro area crisis
    Date: 2016–09
  2. By: Łyziak, Tomasz; Paloviita, Maritta
    Abstract: The paper analyses the anchoring of inflation expectations of professional forecasters and consumers in the euro area. We study anchoring, defined as the central bank’s ability to manage expectations, by paying special attention to the impact of the ECB inflation target and ECB inflation projections on inflation expectations. Our analysis indicates that longer-term inflation forecasts have become somewhat more sensitive to shorter-term forecasts and to actual HICP inflation in the post-crisis period. We also find that the ECB inflation projections have recently become more important for short- and medium-term professional forecasts and at the same time the role of the ECB inflation target for those expectations has diminished. Overall, our analysis suggests that in recent years inflation expectations in the euro area have shown some signs of de-anchoring. JEL Classification: D84, E52, E58
    Keywords: anchoring, euro area, financial crisis, inflation expectations, survey data
    Date: 2016–08
  3. By: Köhler-Ulbrich, Petra; Hempell, Hannah S.; Scopel, Silvia
    Abstract: The euro area bank lending survey (BLS) serves as an important tool in the analysis of bank lending conditions in the euro area and across euro area countries, providing otherwise unobservable qualitative information on bank loan demand and supply from/to euro area enterprises and households. Since its introduction in 2003, the BLS has received growing attention and has become of key importance for the analysis and assessment of bank lending conditions in the euro area and at the national level. In particular in the context of the financial crisis, the BLS was used to gather additional information on the impact of the crisis and of the ECB’s monetary policy measures on banks’ funding situation and bank lending conditions. Following a description of the design and development of the BLS, this paper focuses on the analysis of bank lending supply and demand in the euro area and on their contributing factors. The results of the BLS are put into a wider economic perspective by relating them to other macroeconomic and financial variables. Analyses based on individual bank replies complement the picture further by providing more granular evidence on loan developments. In addition, an overview of the use of the euro area BLS as an analytical tool for investigating bank lending conditions in the euro area is presented. JEL Classification: E44, E5, G21
    Keywords: bank lending conditions, euro area, loan demand, loan supply, monetary policy, monetary policy transmission
    Date: 2016–09
  4. By: Arce, Óscar; Hurtado, Samuel; Thomas, Carlos
    Abstract: We provide a general equilibrium framework for analyzing the effects of supply and demand side policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its ‘periphery‘. We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the core, and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance re-inforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. Our results provide a case for complementing current unconventional monetary stimuli in the euro area with national efforts on the structural reform and fiscal fronts. JEL Classification: E44, E63, D42
    Keywords: deleveraging, monetary union, structural reforms, synergies, zero lower bound
    Date: 2016–08
  5. By: Özyurt, Selin
    Abstract: This study investigates the degree and speed of the exchange rate pass through (ERPT) into extra-euro area import prices for the euro area aggregate and the five largest countries. Based on quarterly frequency data, the analysis covers the period 1996Q1-2015Q2. Two alternative measures of the nominal exchange rate are used: the NEER of the euro against 38 partners and the EUR/USD bilateral exchange rate. The results show that the pass through is only “partial” in the euro area, most probably reflecting slow nominal price adjustments and the pricing-to-market behaviour of firms. We find clear evidence that the degree of pass through has been declining over the past two decades. Interestingly, the period of strong fall of pass through coincides with the increasing share of the emerging countries in world trade and the accession of China to the WTO. Looking at the largest euro area countries, we find striking heterogeneities in the degree but also in the speed of the ERPT. The lowest degree of pass through of a change in NEER is found for Germany while it is the highest for Italy. In addition, unlike the other large euro area countries, we do not find evidence for Italy of a decline in the degree of pass through over time. In a monetary union, such differences may signal large heterogeneities in domestic markets structures. JEL Classification: E31, F3, F41
    Keywords: euro area, Exchange rate pass-through, Import prices, Pricing to market
    Date: 2016–09
  6. By: N. Bokan; A. Gerali; Sandra Gomes; P. Jacquinot; P. Pisani
    Abstract: We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross-country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features - together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks - allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector could amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union.
    JEL: E51 E32 E44 F47
    Date: 2016
  7. By: Blattner, Tobias; Joyce, Michael A. S.
    Abstract: This paper examines how shocks to the net supply of government bonds affect the euro area term structure of interest rates and the wider macroeconomy. To measure net debt supply we construct a new free-float measure, which adjusts total government debt of the four largest euro area economies for foreign official holdings and the maturity of the outstanding stock of debt. Using a small macro-finance BVAR model, we estimate that the ECB’s government bond purchases, as announced on 22 January 2015, reduced euro area 10-year bond yields, on average, by around 30bps in 2015 through the so-called duration channel. The impact on the output gap and inflation in 2016 is of the order of 0.2ppt and 0.3ppt respectively. Our estimates are likely to underestimate the overall impact of the ECB’s purchases on interest rates and inflation, as they exclude effects on credit risk and monetary policy expectations that may have compressed interest rates even further. JEL Classification: C5, E4, E5, G1
    Keywords: ECB, government debt, macroeconomy, Quantitative Easing, term structure
    Date: 2016–09
  8. By: Masuch, Klaus; Moshammer, Edmund; Pierluigi, Beatrice
    Abstract: This paper shows that initial cross-country institutional differences can explain to a substantial extent the relative GDP performance of European countries since 1995, after controlling for the initial level of GDP per capita and government debt. It shows that improving the quality of institutions could lead to significantly higher per capita GDP. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor subsequent real growth performance during this period. Interestingly, the detrimental effect of high debt levels seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The results are confirmed across a large sample of countries, also including OECD countries outside Europe. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular. JEL Classification: O43, C23, E02, H63
    Keywords: panel estimates, public debt, public governance, quality of institutions and real growth, structural reforms
    Date: 2016–09
  9. By: Jarociński, Marek; Lenza, Michele
    Abstract: Using a small Bayesian dynamic factor model of the euro area we estimate the deviations of output from its trend that are consistent with the behavior of inflation. We label these deviations the output gap. In order to pin-down the features of the model, we evaluate the accuracy of real-time inflation forecasts from different model specifications. The version that forecasts inflation best implies that after the 2011 sovereign debt crisis the output gap in the euro area has been much larger than the official estimates. Versions featuring a secular-stagnation-like slowdown in trend growth, and hence a small output gap after 2011, do not adequately capture the inflation developments. JEL Classification: C32, C53, E31, E32, E37
    Keywords: factor model, inflation forecast, output gap, Phillips curve
    Date: 2016–09
  10. By: João Amador; Cláudia Braz; Maria Manuel Campos; Sharmin Sazedj; Lara Wemans
    Abstract: Following the recent economic and financial crisis, public debt ratios increased considerably in most European Union countries, reaching historically high levels. Against this background, issues regarding the outlook for the debt ratio and the analysis of the sustainability of public finances in Member States became central in the economic policy analysis of European authorities. This Occasional Paper aims to address, in an integrated manner, the various aspects of the discussion on public debt sustainability, with a particular focus on the Portuguese case and on the constraints associated with the institutional and economic environment in the euro area. In this respect, the text approaches the concepts and methodologies used to assess sustainability, lists the existing assessment rules for euro area countries, presents its results for Portugal and refers to the main ongoing discussions on high debt levels.
    JEL: H60 H63
    Date: 2016
  11. By: Andrés Fuentes Hutfilter; Andreas Kappeler; Dorothee Schneider; Giovanni Maria Semeraro
    Abstract: Non-residential investment has fallen over the past 20 years as a share of GDP and is now lower than in several other high-income OECD countries. Business investment growth has been weak since the outbreak of the global financial and economic crisis. Government investment has been low, especially at municipal level. Investment in knowledge-based capital (KBC), which is closely related to long-term productivity performance, has been subdued. Weak growth prospects in the Euro Area have weighed on business investment and an increasing share of firms invests in distant, more dynamic markets. Policies that strengthen stability and growth prospects in the Euro Area would raise the attractiveness of Germany as a location to invest, notably steps to strengthen the single market and cross-border infrastructure, and complete the banking union. Steps to liberalise regulation of services, in particular knowledge-intensive professional services, would raise investment and productivity. Policies that encourage the reallocation of resources would also increase investment in KBC. Poor municipalities invest relatively little and there is scope to lower the cost of public investment projects. Better use of e-governance and more performance-oriented budgeting could improve the efficiency and effectiveness of public investment. Renouer avec le dynamisme de l'investissement en Allemagne L’investissement non résidentiel a diminué en proportion du PIB au cours des deux dernières décennies, et son niveau est désormais inférieur à celui de plusieurs autres pays de l’OCDE à revenu élevé. La croissance de l’investissement productif demeure en demi-teinte depuis l’éclatement la crise économique et financière mondiale, cependant que les investissements des administrations publiques sont limités, en particulier à l’échelon municipal. L’investissement en capital intellectuel, important facteur des gains de productivité à long terme, est resté modeste. Les perspectives de croissance faible dans la zone euro ont pesé sur l’investissement productif, et une proportion croissante d’entreprises investit sur des marchés distants plus dynamiques. Des mesures venant affermir les perspectives de croissance et accroître la stabilité au sein de la zone euro, en premier lieu des initiatives visant à consolider le marché unique et les infrastructures transfrontalières, ainsi qu’à parachever l’union bancaire, renforceraient l’attrait de l’Allemagne aux yeux des investisseurs. Un allègement de la réglementation des services, notamment des services professionnels à forte intensité de connaissances, doperait l’investissement et les gains de productivité. Par ailleurs, toutes les mesures facilitant la réaffectation des ressources devraient avoir des retombées positives sur les investissements dans le capital intellectuel. Les communes pauvres investissent relativement peu, or il serait possible de réduire le coût des projets d’investissement public. Enfin, une meilleure utilisation de la gouvernance électronique et l’adoption d’un processus budgétaire plus orienté sur les résultats permettraient d’accroître l’efficience et l’efficacité des investissements publics.
    Keywords: productivity, knowledge-based capital, investment
    JEL: E22 E24
    Date: 2016–09–21
  12. By: Ari, Anil; Darracq Pariès, Matthieu; Kok, Christoffer; Żochowski, Dawid
    Abstract: Why did the shadow banking sectors in the US and the euro area expand in the decade before the financial crisis and what are the implications for systemic risk and macro-prudential policy? This paper examines these issues with a model of the financial sector where the size of the shadow banking sector is endogenous. In the model, shadow banking is an alternative banking strategy which involves greater risk-taking at the expense of being exposed to "fundamental runs" on the funding side. When such runs occur, shadow banks liquidate their assets in a secondary market. Entry into shadow banking is profitable when traditional banks provide sufficient secondary market demand to prevent these liquidations from causing a fire-sale. During periods of stability, the shadow banking sector expands to an excessively large size that ferments systemic risk. Its collapse then triggers a fire-sale that renders traditional banks vulnerable to "liquidity runs". The prospect of liquidity runs undermines market discipline and increases the risk-taking incentives of traditional banks. Policy interventions aimed at alleviating the fire-sale fuel further expansion of the shadow banking sector. Financial stability is achieved with a Pigouvian tax on shadow bank profits. JEL Classification: E44, G01, G11, G21, G28
    Keywords: financial crises, fire-sales, macro-prudential regulation, shadow banking
    Date: 2016–08
  13. By: Daniel Dias; Carlos Robalo Marques; Christine Richmond
    Abstract: Recent empirical studies document that the level of resource misallocation in the service sector is signicantly higher than in the manufacturing sector.We quantify the importance of this difference and study its sources. Conservative estimates for Portugal (2008) show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distribution. We interpret these results as stemming mainly from higher output-price rigidity, higher labor adjustment costs and higher informality in the service sector.
    JEL: D24 O11 O41 O47
    Date: 2016
  14. By: Adrien Alvero (Columbia Business School); Andreas M. Fischer (Swiss National Bank)
    Abstract: This paper examines spillover and spillback effects of unconventional monetary policies conducted by the European Central Bank (ECB) and Swiss National Bank (SNB) on the exchange rate's distribution. The empirical setup examines the price response of EURCHF risk reversal to a change in ECB and SNB balance sheets, with a distinction for the period of the minimum exchange rate (fl oor). The analysis finds only weak evidence of spillover effects from the ECB, while the spillback effect from the SNB balance sheet is robust during the floor period.
    Date: 2016–09
  15. By: Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
    Abstract: This paper analyses the effects of the European Central Bank's expanded asset purchase programme (APP) on yields and on the macroeconomy, and sheds some light on its transmission channels. It shows, first, that the January 2015 announcement of the programme has significantly and persistently reduced sovereign yields on long-term bonds and raised the share prices of banks that held more sovereign bonds in their portfolios. This evidence is consistent with versions of the portfolio rebalancing channel acting through the removal of duration risk and the relaxation of leverage constraints for financial intermediaries. It then presents a stylised macroeconomic model that incorporates the aforementioned transmission channels. The model suggests that the macroeconomic impact of the programme can be expected to be sizable. JEL Classification: E44, E52, G12
    Keywords: reanchoring inflation expectations, transmission of large-scale asset purchases, unconventional monetary policy
    Date: 2016–09
  16. By: Jarociński, Marek; Lenza, Michele
    Abstract: The estimates of the output gap depend on the features of the models used to derive them. We discriminate among different estimates on the basis of their ability to forecast inflation. Our analysis suggests that output in the euro area was 6% lower than potential in 2014 and 2015, which is substantially below institutional estimates.
    Date: 2016–07

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