nep-eec New Economics Papers
on European Economics
Issue of 2017‒03‒05
27 papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sovereign Stress, Banking Stress, and Corporate Financing Costs in the Euro Area By Holtemöller, Oliver
  2. Low inflation and monetary policy in the euro area By Conti, Antonio M.; Neri, Stefano; Nobili, Andrea
  3. Exchange rate pass-through in the euro area By Comunale, Mariarosaria; Kunovac, Davor
  4. Output gap similarities in Europe: Detecting country groups By Ahlborn, Markus; Wortmann, Marcus
  5. Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area By Gross, Marco; Semmler, Willi
  6. Interactions between fiscal multipliers and sovereign risk premium during fiscal consolidation: model based assessment for the euro area By Lalik, Magdalena
  7. Optimal Unemployment Insurance and International Risk Sharing By Stähler, Nikolai; Moyen, Stephane; Winkler, Fabian
  8. Below the zero lower bound: a shadow-rate term structure model for the euro area By Lemke, Wolfgang; Vladu, Andreea Liliana
  9. The impact of constrained monetary policy on fiscal multipliers on output and inflation By Bletzinger, Tilman; Lalik, Magdalena
  10. Inflation Anchoring in the Euro Area By Speck, Christian
  11. Revenue elasticities in euro area countries By Koester, Gerrit; Priesmeier, Christoph
  12. Determinants of Eurosystems Central Banks Provisions By Klose, Jens
  13. An indicator of inflation expectations anchoring By Filippo Natoli; Laura Sigalotti
  14. Modeling euro area bond yields using a time-varying factor model By Adam, Tomáš; Lo Duca, Marco
  15. A tale of fragmentation: corporate funding in the euro-area bond market By Andrea Zaghini
  16. Changing prices... changing times: evidence for Italy By Porqueddu, Mario; Fabiani, Silvia
  17. Unconventional Monetary Policy, Fiscal Side Effects and Euro Area (Im)balances By Hachula, Michael; Rieth, Malte; Piffer, Michele
  18. Determinants of the Portuguese GDP stagnation during the 2001-2014 period: an empirical investigation By Carlos Figueira
  19. Designing the ESM—Who Profits, Who Pays? By Herz, Bernhard; Bauer, Christian; Hild, Alexandra
  20. Value Added in Motion: Determinants of Value Added Location within the EU By Lionel Fontagné; Gianluca Santoni
  21. Inflation anchoring in the euro area By Speck, Christian
  22. Demographics and inflation By Bobeica, Elena; Nickel, Christiane; Lis, Eliza; Sun, Yiqiao
  23. Monetary policy surprises over time By Marcello Pericoli; Giovanni Veronese
  24. Forecasting euro area inflation using targeted predictors: is money coming back? By Falagiarda, Matteo; Sousa, João
  25. Using the payment system data to forecast the Italian GDP By Valentina Aprigliano; Guerino Ardizzi; Libero Monteforte
  26. The long-term distribution of expected inflation in the euro area: what has changed since the great recession? By Dovern, Jonas; Kenny, Geoff
  27. Trust, but verify. De-anchoring of inflation expectations under learning and heterogeneity By Busetti, Fabio; Delle Monache, Davide; Gerali, Andrea; Locarno, Alberto

  1. By: Holtemöller, Oliver
    Abstract: In this paper, we employ firm-level data to analyze to what extent financing conditions of non-financial corporations in the Euro Area depend on country-specific factors, in particular the respective country's government bond yield and the share of non-performing loans to the corporate sector. Moreover, we assess whether this relationship has changed during the European debt crisis. It turns out that the increase in corporate financing costs during the year 2011 can partially be explained by increasing government bond yields. However, the further increase of corporate financing costs in stressed Euro area countries during the year 2012 can not be explained by these yields, but by the share of non-performing loans. This finding suggests that the ECB's policy of reducing corporate financing costs in stressed countries via government bond purchases may not be effective.
    JEL: E43 E44 E52
    Date: 2016
  2. By: Conti, Antonio M.; Neri, Stefano; Nobili, Andrea
    Abstract: Inflation in the euro area has been falling since mid-2013, turned negative at the end of 2014 and remained below target thereafter. This paper employs a Bayesian VAR to quantify the contribution of a set of structural shocks, identified by means of sign restrictions, to inflation and economic activity. Shocks to oil supply do not tell the full story about the disinflation that started in 2013, as both aggregate demand and monetary policy shocks also played an important role. The lower bound to policy rates turned the European Central Bank (ECB) conventional monetary policy de facto contractionary. A country analysis confirms that the negative effects of oil supply and monetary policy shocks on inflation was widespread, albeit with different intensity across countries. The ECB unconventional measures since 2014 contributed to raising inflation and economic activity in all the countries. All in all, our analysis confirms the appropriateness of the ECB asset purchase programme. JEL Classification: C32, E31, E32, E52
    Keywords: Bayesian methods, inflation, monetary policy, oil supply, VAR models
    Date: 2017–01
  3. By: Comunale, Mariarosaria; Kunovac, Davor
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identi?cation based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer in?ation in the euro area. JEL Classification: E31, F3, F41
    Keywords: Bayesian vector autoregression, consumer prices, exchange rate pass-through, import prices, inflation
    Date: 2017–01
  4. By: Ahlborn, Markus; Wortmann, Marcus
    Abstract: The literature on business cycle synchronization in Europe frequently presumes an alleged 'core-periphery' pattern without providing empirical verification of the underlying cyclical (dis)similarities or the supposed but unobservable 'European business cycle(s)'. To provide a data-based country group analysis, we apply a fuzzy clustering approach to quarterly output gap series of 27 European countries over the period 1996-2015. Our results confirm the existence of a persistent core cluster as opposed to clusters on the Eastern and Southern European peripheries, highlighting the inadequate composition of the euro area (EA). Moreover, we find that Germany's business cycle is not a suitable substitute for the core. By analyzing the relation between the identified 'European core business cycle' and the peripheral cycles over time, we show diverging patterns for the southern periphery after the financial crisis, casting doubt on the endogeneity properties of the EA.
    Keywords: business cycles,core-periphery,euro area,fuzzy cluster analysis
    JEL: C38 E32 F15 F45
    Date: 2017
  5. By: Gross, Marco; Semmler, Willi
    Abstract: We develop a theoretical model that features a business cycle-dependent relation between out- put, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem (1997)). The theoretical model motivates our empirical assessment for the euro area, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a pronounced convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. The regime switching VAR reveals the business cycle dependence of macroeconomic responses to monetary policy shocks: Expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy such as the Expanded Asset Purchase Programme (EAPP) of the ECB, during times of deep recession. JEL Classification: E31, E42, E52, E58
    Keywords: euro area, inflation targeting, monetary policy, monetary VAR, nonlinearity, Phillips curve
    Date: 2017–01
  6. By: Lalik, Magdalena
    Abstract: The paper presents a model-based assessment of fiscal multipliers operating in the euro area during the period 2011-2014. The assessment is conditional on two distinct reactions of the sovereign risk premium (either responding endogenously to fiscal shocks or being an exogenous process) and two types of monetary policy (accommodative and non-accommodative). Applying those multipliers to the amount of austerity measures implemented in years 2011-14, the paper evaluates their possible fallouts and shows that the output effects of the recent fiscal consolidations were largely determined by two key factors: financial markets’ sentiments and the composition of adopted measures. Finally, the paper also highlights the importance of modelling of government’s interest payments for predicting the evolution of debt-to-GDP ratios. JEL Classification: E42, E32, F42, F45
    Keywords: debt dynamics, euro area, Fiscal multiplier, macroeconomic models, sovereign risk premium
    Date: 2017–02
  7. By: Stähler, Nikolai; Moyen, Stephane; Winkler, Fabian
    Abstract: In this paper, we discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model ugmented by a search labour market and incomplete financial markets and let the unemployment insurance scheme operate across both countries. We find that cross-country insurance through the unemployment insurance system can in principle be achieved without distorting national labour markets, and that international risk-sharing introduces a countercyclical element to the unemployment insurance tradeoff. When we calibrate our model to the Euro area, the optimal supranational policy makes replacement rates countercyclical, while they would be procyclical in the absence of cross-country transfers. Recent Eurozone policy proposals, by contrast, seem to have only limited effects.
    JEL: H20 J64 E62
    Date: 2016
  8. By: Lemke, Wolfgang; Vladu, Andreea Liliana
    Abstract: We propose a shadow-rate term structure model for the euro area yield curve from 1999 to mid-2015, when bond yields had turned negative at various maturities. Yields in the model are constrained by a lower bound, but - as a special feature of our specification - the bound is allowed to change over time. We estimate that it has first ranged marginally above zero, but has decreased to -11 bps in September 2014. We derive the impact of a changing lower bound on the yield curve and interpret the impact of the September 2014 ECB rate cut from this perspective. Our model matches survey forecasts of short rates and the decline in yield volatility during the low-rate period better than a benchmark affine model. We estimate that since mid-2012 the horizon when short rates are expected to exceed 25 bps again has ranged between 18 and 62 months. JEL Classification: C32, E43, E52
    Keywords: lower bound, monetary policy expectations, nonlinear state space model, term structure of interest rates
    Date: 2017–01
  9. By: Bletzinger, Tilman; Lalik, Magdalena
    Abstract: This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary policy, taking into account alternative agents’ expectations about future monetary policy. We illustrate that those expectations are even more important for the size of the fiscal multipliers than the difference between exogenously versus endogenously modelled constraints. We confirm the well-known finding that fiscal multipliers exhibit an over-proportional reaction when monetary policy is constrained. The novelty of our results is that this over-proportionality is stronger for the fiscal multiplier on inflation than on output. We relate this finding to the structural parameters of the models by means of a Global Sensitivity Analysis. JEL Classification: E31, E43, E52, E62, E63
    Keywords: constrained monetary policy, fiscal multipliers, zero lower bound
    Date: 2017–02
  10. By: Speck, Christian
    Abstract: Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates - a market-based measure of inflation expectations - to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides no evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem's policy target.
    JEL: E44 E31 G14
    Date: 2016
  11. By: Koester, Gerrit; Priesmeier, Christoph
    Abstract: Revenue elasticities play a key role in forecasting, monitoring and analysing public finances under the European fiscal framework, which largely builds on cyclically adjusted indicators. This paper investigates whether there is evidence for dynamic – instead of the currently used static – elasticities in euro area countries. Applying country-specific error correction models we reveal important differences across countries. For a majority of euro area Member States we find evidence for dynamic revenue elasticities. We show that the application of such dynamic elasticities could substantially reduce forecast errors in several countries – with the evidence being stronger based on ex-post than based on real-time data. JEL Classification: E62, H68
    Keywords: error correction models, EU fiscal surveillance, real-time data, revenue elasticities, tax forecasts
    Date: 2017–01
  12. By: Klose, Jens
    Abstract: Central bank provisions may be used as a measure of the perceived risk of the balance sheet composition by a central bank. We identify three possible sources that may change the size of the provisions. These are: The length of the balance sheet, the central bank revenues and measures of fiscal stress. Using data of the eleven founding members of the Eurosystem for the years 1999-2014 we are able to test each of the three determinants. We find that provisions are increased with the size of the balance sheet especially in the recent financial crisis. Moreover, provisions are increased at the cost of lower central bank revenues. While this holds for the pre-crisis period this relationship seems to collapse in the crisis period probably because of the more active collateral policy. Finally, central banks do not tend to lower provisions because of fiscal tensions. This is even more true in the crisis period.
    JEL: E52 E58 C23
    Date: 2016
  13. By: Filippo Natoli (Bank of Italy); Laura Sigalotti (Bank of Italy)
    Abstract: We compare the degree of anchoring of inflation expectations in the euro area, the United States and the United Kingdom, focusing on the post-crisis period. First of all, we estimate a set of measures of average and tail correlation using inflation swaps and options, as proposed by Natoli and Sigalotti (2016). To quantify the degree of anchoring, we also propose a new indicator based on the results of a logistic regression, obtained by measuring the odds that strong negative shocks to short-term expectations are connected to large declines in long-term expectations. The results reveal an increase in the risk of de-anchoring during the last quarter of 2014 for the euro area. While showing a significant reduction after the peak, our de-anchoring indicator remains high and volatile for 2015 and 2016. Inflation expectations in the US and the UK are instead found to be firmly anchored.
    Keywords: inflation expectations, anchoring, inflation swaps, inflation options, tail comovement, odds ratio
    JEL: C14 C58 E31 E44 G13
    Date: 2017–02
  14. By: Adam, Tomáš; Lo Duca, Marco
    Abstract: In this paper, we study the dynamics and drivers of sovereign bond yields in euro area countries using a factor model with time-varying loading coefficients and stochastic volatility, which allows for capturing changes in the pricing mechanism of bond yields. Our key contribution is exploring both the global and the local dimensions of bond yield determinants in individual euro area countries using a time-varying model. Using the reduced form results, we show decoupling of periphery euro area bond yields from the core countries yields following the financial crisis and the scope of their subsequent re-integration. In addition, by means of the structural analysis based on identification via sign restrictions, we present time varying impulse responses of bond yields to EA and US monetary policy shocks and to confidence shocks. JEL Classification: C11, G01, E58
    Keywords: bayesian estimation, bond yield, factor model, sovereign debt crisis, stochastic volatility
    Date: 2017–02
  15. By: Andrea Zaghini (Bank of Italy)
    Abstract: Corporations of different euro-area countries faced noticeably different costs of funding in the bond market during the prolonged period of financial instability that started in 2007. We identify the determinants of corporate bond yield spreads in order to isolate country-specific effects as indicators of market fragmentation. Our evidence hints at a disorderly process of reassessment of corporate credit risk since 2007, with country-specific spreads vis-à-vis Germany becoming strongly positive for issuers located in other euro-area countries (Ireland, Italy, Portugal and Spain, in particular). After the introduction of the non-conventional monetary policy tool named OMT, the spreads declined considerably, but fragmentation disappeared only in the most recent period characterized by expectations and the actual deployment of ECB quantitative easing.
    Keywords: credit risk, corporate bonds, market fragmentation, sovereign debt crisis
    JEL: G32 G38
    Date: 2017–02
  16. By: Porqueddu, Mario; Fabiani, Silvia
    Abstract: This paper examines the process of adjustment of prices in Italy to determine whether nominal flexibility, measured by the frequency of price changes, has increased in the recent years of protracted stagnation and double-dip recession. The analysis is based on a large micro-level dataset of individual prices collected monthly by Istat from 2006 to 2013 for the Consumer Price Index. We find that both the percentage of prices adjusted monthly and the average size of the adjustment have risen significantly since the 1996-2001 period, in particular for downward changes. This greater flexibility is related in part to the spread of modern distribution structures. Our estimates further indicate that the recession has affected the price adjustment mechanism: for manufactures, price cuts have become larger and more frequent, while increases are more moderate; for services, both the frequency and the size of price increases have diminished. JEL Classification: E31, D21, D40, L11
    Keywords: consumer prices, frequency of price adjustment, nominal flexibility
    Date: 2017–01
  17. By: Hachula, Michael; Rieth, Malte; Piffer, Michele
    Abstract: We study the effects and transmission channels of non-standard monetary policy in the euro area using structural vector autoregressions, identified with an external instrument. The instrument is the common component of unexpected variations in euro area sovereign yields vis-à-vis Germany for different maturities on policy announcement days. We find that expansionary monetary surprises are effective in stimulating economic activity, prices and inflation expectations. Shock transmission functions through public and private interest rates, asset prices and credit conditions. The policy innovations, however, also lead to a rise in primary public expenditures, a divergence of relative prices within the union and a widening of internal trade balances.
    JEL: E52 E58 E63
    Date: 2016
  18. By: Carlos Figueira (Nova School of Business and Economics)
    Abstract: The current paper aims at analysing the long Portuguese output stagnation during the period 2001-2014. Using a VEC model, the effect of exports, investment, public external liabilities and the country’s risk premium on growth is analysed. Our study reveals that, in the long run, Portuguese GDP is determined by exports, the country’s risk-premium and capital formation while in the short-run, growth is negatively affected by the country’s risk premium and external public liabilities. Our findings also support the vulnerability of the Portuguese economy to external developments, in particular, we identified a negative effect of China’s higher trade integration and the relevance of world market conditions.
    Keywords: Portuguese Economy; Economic Stagnation; Growth Determinants; VEC model
    JEL: C32 H63 O47
    Date: 2017–03
  19. By: Herz, Bernhard; Bauer, Christian; Hild, Alexandra
    Abstract: The European Stability Mechanism (ESM) is the permanent crisis prevention mechanism of the euro area. It was established in 2012 under considerable time pressure in an environment dominated by the financial crisis in the euro area. We analyze the costs of the current (suboptimal) design of the EMS and evaluate an alternative asset-backed securities (ABS) structure under different scenarios. Our simulation results indicate that switching to an ABS structure could lower EMS refunding costs by up to 2% with respect to our benchmark scenario. Moreover, the advantages of an ABS structure are found to be strongest in the mostly likely type of future crisis, namely, medium-sized requests for financial support from EMS members under economic stress accompanied by the unwillingness or inability of other EMS countries to provide new capital to the EMS.
    JEL: F34 F55 G15
    Date: 2016
  20. By: Lionel Fontagné (PSE (Paris 1) and CEPII); Gianluca Santoni (CEPII)
    Abstract: In this paper we approach the determinants of value added location across European countries, from the recent developments to the 2035 horizon. In the first part of the paper, using detailed trade data, we show how competitiveness, demand and export composition have shaped the market shares of European countries, hence the location of production in Europe. Variance and covariance analysis point to the specificity of two countries: the overall market share development seems to be significantly affected by aggregate demand conditions in Germany and Italy. We then turn to trade in value added and observe that bigger countries tend to report a higher share of domestic value added because they can count on more efficient national value chains or a higher diversity of goods upstream. Interestingly, such evidence does not apply to Germany, or Poland, which exhibit a more dynamic insertion in international value chains. In the second part of the paper, we present the main prospects for the allocation of labour (i.e. migration), value added and the macro-economic effects of energy prices across European countries up to year 2035. The projections presented in the paper aim to summarize the main results obtained by other researchers within the "Value Added in Motion (VAM)" project.
    Keywords: Export competitiveness, trade performance, trade patterns after the global crisis
    JEL: F10 F14 F40 C43
    Date: 2017–02–24
  21. By: Speck, Christian
    Abstract: Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates – a market-based measure of inflation expectations – to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides no evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem’s policy target. JEL Classification: E31, E44, G12, G14
    Keywords: central banking, event study, inflation anchoring, inflation expectations, inflation-linked swaps
    Date: 2017–01
  22. By: Bobeica, Elena; Nickel, Christiane; Lis, Eliza; Sun, Yiqiao
    Abstract: Most euro area countries have entered an unprecedented ageing process: life expectancy continues to rise and fertility rates have declined, while retirement age in the last twenty to thirty years hardly increased. This implies an ever smaller fraction of the working age population in total population, leading to changes in consumption and saving behaviours and having an important impact on the macroeconomy. In this paper we focus on the relationship between demographic change and inflation. We find that based on a cointegrated VAR model there is a positive long-run relationship between inflation and the growth rate of working-age population as a share in total population in the euro area countries as a whole, but also in the US and Germany. We also find that this relation is mitigated by the effect of monetary policy, which we account for by including the short-term interest rate in our analysis. One caveat of the analysis could be that the empirical relationship as found does not sufficiently take into account changes in policy settings following the high inflation experiences in the 1970s. Our findings support the view that demographic trends are among the forces that shape the economic environment in which monetary policy operates. This is particularly relevant for countries, like many in Europe, that face an ageing process. JEL Classification: E31, J11, C22
    Keywords: cointegration, demographic change, inflation
    Date: 2017–01
  23. By: Marcello Pericoli (Bank of Italy); Giovanni Veronese (Bank of Italy)
    Abstract: We document how the impact of monetary surprises in the euro area and the US on financial markets has changed since 1999. We use a definition of monetary policy surprises that singles out movements in the long end of the yield curve, rather than those that change nearby futures on the central bank reference rates. By focusing only on this component of monetary policy our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect shifts in sovereign spreads and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.
    Keywords: monetary policy surprises, unconventional monetary policy
    JEL: E44 E52 F31 G14
    Date: 2017–02
  24. By: Falagiarda, Matteo; Sousa, João
    Abstract: This paper sheds new light on the information content of monetary and credit aggregates for future price developments in the euro area. Overall, we find strong variation in the information content of these variables over time. We show that monetary and credit aggregates are very often selected among the top predictors of inflation, with their predictive power relative to other predictors generally improving in the post-2012 period. An out-of-sample forecasting exercise indicates that, when monetary and credit aggregates are loaded directly in the forecasting equation, the additional gains over the benchmark model are generally high and significant across horizons and HICP components only in the most recent period. When the forecasts are computed using factor-augmented regressions based on the best predictors, we confirm the importance of monetary and credit variables in forecasting inflation, even if their information content is diluted in a much broader pool of variables. JEL Classification: C53, E37, E41, E51, E58
    Keywords: diffusion index, forecasting, inflation, money, targeted predictors
    Date: 2017–02
  25. By: Valentina Aprigliano (Bank of Italy); Guerino Ardizzi (Bank of Italy); Libero Monteforte (Bank of Italy)
    Abstract: Payment systems track economic transactions and therefore could be considered important indicators of economic activity. This paper describes the available monthly data on the retail settlement system for Italy and selects some of them for short-term forecasting. Using a mixed frequency factor model to predict Italian GDP, we find that payment system flows stand out when compared to other standard business cycle indicators.
    Keywords: short term forecasting, LASSO, mixed frequency models, Kalman smoothing, payment systems, TARGET2
    JEL: C53 E17 E27 E32 E37 E42
    Date: 2017–02
  26. By: Dovern, Jonas; Kenny, Geoff
    Abstract: This paper analyses the distribution of long-term inflation expectations in the euro area using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. We document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank. JEL Classification: E31, E58
    Keywords: density forecasts, ECB, euro area, inflation expectations
    Date: 2017–01
  27. By: Busetti, Fabio; Delle Monache, Davide; Gerali, Andrea; Locarno, Alberto
    Abstract: The paper studies how a prolonged period of subdued price developments may induce a de-anchoring of inflation expectations from the central bank's objective. This is shown within a framework where agents form expectations using adaptive learning, choosing among a set of alternative forecasting models. The analysis is accompanied by empirical evidence on the properties of inflation expectations in the euro area. Our results also suggest that monetary policy may lose effectiveness if delayed too much, as expectations are allowed to drift away from target for too long. JEL Classification: E31, E37, E58, D83
    Keywords: DSGE, expectations de-anchoring, inflation, learning
    Date: 2017–01

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