nep-eec New Economics Papers
on European Economics
Issue of 2018‒01‒08
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank? By van Riet, Ad
  2. Liquidity provision as a monetary policy tool: The ECB's non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  3. Public investment and monetary policy stance in the euro area By Lorenzo Burlon; Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  4. Do Fiscal Multipliers Vary with Different Character of Monetary-Fiscal Interactions? By Michal Bencik
  5. The Impact of Forward Guidance on Inflation Expectations: Evidence from the ECB By Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
  6. Clearing of euro OTC derivatives post Brexit: An analysis of the present cost estimates By Brühl, Volker
  7. Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma By Andreas Steiner; Sven Steinkamp; Frank Westermann
  8. Secular stagnation, R&D, public investment and monetary policy: a global-model perspective By Pietro Cova; Patrizio Pagano; Alessandro Notarpietro; Massimiliano Pisani
  9. Fiscal Spillovers in the Euro Area: Letting the Data Speak By Era Dabla-Norris; Pietro Dallari; Tigran Poghosyan
  10. Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations By Dany-Knedlik, Geraldine; Holtemöller, Oliver
  11. Are external accounts sustainable in Portugal? By Jorge Silva
  12. SMEs’ financing: Divergence across Euro area countries? By S. Roux; F. Savignac
  13. The CSPP at work: yield heterogeneity and the portfolio rebalancing channel By Andrea Zaghini
  14. Financial Spillovers and Macroprudential Policies By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  15. The Productivity Puzzle and Misallocation: An Italian Perspective By Sara Calligaris; Massimo Del Gatto; Fadi Hassan; Gianmarco I. P. Ottaviano; Fabiano Schivardi
  16. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  17. Basel III and Bank-Lending: Evidence from the United States and Europe By Sami Ben Naceur; Caroline Roulet

  1. By: van Riet, Ad
    Abstract: New-style central banking in many advanced economies, involving the use of unconventional monetary policy instruments and forward guidance at the effective lower bound for interest rates, has raised questions about the appropriate role of fiscal policy – also in the euro area, where a fiscal counterpart to the European Central Bank (ECB) and the Eurosystem is missing. This paper considers three areas where euro area governments could act as the ‘joint sovereign’ behind the euro and support the ECB in its task of maintaining price stability, staying within the boundaries of the Maastricht Treaty. First, member countries could coordinate a growth-friendly aggregate economic policy mix that is supportive of the single monetary policy, with the help of a central fiscal capacity subject to common decision-making. Second, they could introduce a safe sovereign asset for the eurozone without assuming common liability in order to anchor financial integration and facilitate monetary policy implementation. Third, the significant benefits for the Eurosystem from a lower burden on monetary policy and a reduced exposure to sovereign risk could make it acceptable for euro area governments to indemnify it against potential large losses on its much expanded balance sheet. The fundamental solution, however, lies in advancing with fiscal integration to address the ‘institutional loneliness’ of the Eurosystem with full respect for its independent status.
    Keywords: Maastricht Treaty; new-style central banking; supportive fiscal policies; capital loss insurance; safe sovereign asset
    JEL: E5 E63 H63
    Date: 2017–10
  2. By: Quint, Dominic; Tristani, Oreste
    Abstract: We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008-09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe.
    Keywords: ECB,euro area,financial crisis,financial frictions,interbank market,non-standard monetary policy
    JEL: E44 E58
    Date: 2017
  3. By: Lorenzo Burlon; Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.
    Keywords: public investment, fiscal policy, monetary policy, euro area
    JEL: E52 E62 F41 F42
    Date: 2017–12
  4. By: Michal Bencik (National Bank of Slovakia)
    Abstract: We investigate the fiscal multiplier in normal times and in the presence of a binding zero lower bound on interest rates with SVARs. We construct special shocks to interest rates that compensate their reactions to fiscal expansion and hold them constant and apply it to the Euro area and the United States. We find that for the former, the multiplier increases sharply in the ZLB, but it decreases in the ZLB for the latter. The sign of its change is determined by the coordination of fiscal and monetary policy i.e. whether the interest rates rise or drop in response to fiscal expansion. We applied this method to Slovak Republic as well and found that the change of the multiplier in ZLB in Slovak Republic is analogous to that in the Euro area.
    Keywords: monetary-fiscal interactions, fiscal multipliers, zero lower bound, VAR models, compensating shocks
    JEL: E62 E63 C32
    Date: 2017–12
  5. By: Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
    Abstract: This paper empirically investigates the impact of forward guidance announcements on inflation expectations in the Eurozone. We identify forward guidance shocks as changes in the 2-year nominal ECB yield on specific announcement days to measure changes in daily inflation swaps of different maturities. In the process, we also separately identify the effect of quantitative easing and interest rate change announcement shocks. We find that forward guidance was successful in reviving inflation expectations across maturities. Analyzing the transmission channels of forward guidance, we find evidence that both a reanchoring channel and a portfolio effect might have been at play.
    JEL: E31 E52 E65
    Date: 2017–12
  6. By: Brühl, Volker
    Abstract: In the context of the upcoming Brexit, a relocation of the clearing of euro-OTC derivatives for EU-based firms is the subject of controversial discussion. The opponents of a relocation argue that a relocation would cause additional costs for market participants of up to USD 100 bn over a period of 5 years. This paper shows that this cost estimate is fairly unrealistic and that relocation costs would amount to approximately USD 0.6 bn p.a., which translates to cumulative costs of around USD 3.2 bn for a transition period of 5 years. In light of the strategic importance of systemically relevant CCPs for the financial stability of the eurozone, the potential relocation costs should not be a decision criterion.
    JEL: G20 G21
    Date: 2017
  7. By: Andreas Steiner; Sven Steinkamp; Frank Westermann
    Abstract: In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks’ balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks.
    Keywords: currency union, exchange market pressure, policy trilemma, speculative attack, TARGET2
    JEL: E42 F36 F41
    Date: 2017
  8. By: Pietro Cova (Bank of Italy); Patrizio Pagano (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the global macroeconomic effects of fiscal and monetary policy measures to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area (EA), Japan (JP), China (CH), and the rest of the world (RW). The model includes investment in research and development (R&D) as a factor that affects global growth. Our main findings are as follows. First, a negative efficiency shock to R&D in the main advanced economies partially replicates the observed slowdown in long-term global growth and the decrease in interest rates. Second, in the medium- and long-term, the increase in US public investment favours global growth; in the short-term, it stimulates US economic activity but reduces foreign activity. Third, in the US an accommodative monetary stance, which provokes the crowding-in effect, amplifies the short-term macroeconomic effectiveness of public investment, without inducing additional negative spillovers. Fourth, EA, JP, and CH, by simultaneously increasing public investment and adopting an accommodative monetary policy, counterbalance US short-run negative spillovers and further enhance long-term world growth.
    Keywords: DSGE models, secular stagnation, open-economy macroeconomics, public investment, monetary policy
    JEL: E43 E44 E52 E58
    Date: 2017–12
  9. By: Era Dabla-Norris; Pietro Dallari; Tigran Poghosyan
    Abstract: We estimate a panel VAR model that captures cross-country, dynamic interlinkages for 10 euro area countries using quarterly data for the period 1999-2016. Our analysis suggests that fiscal spillovers are significant and tend to be larger for countries with close trade and financial links as well, as for fiscal shocks originating from larger countries. The current account appears to be the main channel of transmission, although strong trade integration among countries in the euro area and spillback effects tend to zero-out the net trade impact in some cases. A subsample analysis shows that the effects of fiscal policy have changed over time, with larger estimated domestic multipliers and spillovers between 2011 and 2014.
    Date: 2017–11–15
  10. By: Dany-Knedlik, Geraldine; Holtemöller, Oliver
    Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
    Keywords: inflation dynamics,inflation expectations,trend inflation,nonlinear state space model,panel UCSV model,Euro area
    JEL: C32 E5 E31
    Date: 2017
  11. By: Jorge Silva
    Abstract: This study assesses the sustainability of the Portuguese external accounts during the period 1999-2014 and the role of the public sector.There was evidence of higher import content of the non-construction investment and private investment. Therefore, the high import content of the non-construction investment was an additional challenge because its increase did not create a strong positive multiplier effect on the Portuguese economy. Exports in volume were determined by the economic growth rate of the euro area, the share of the Portuguese nominal exports in the total exports of the euro area, unit labour costs of the private sector due to the compensation of employees and real productivity, the exchange rate and the terms of trade. There was no evidence of twin deficits. Additionally, there was a negative correlation between the internal and the external balance. Furthermore, we analysed the determinants of the liabilities related to the international investment position, decomposing the external funding and identifying their determinants.
    Keywords: Current account, financial markets, Portugal, international investment position, economic and financial adjustment programme
    JEL: C22 F32 F34 G01
    Date: 2017–12
  12. By: S. Roux; F. Savignac
    Abstract: This paper studies the divergence/convergence process of European countries as regard the financing behavior of small and medium sized enterprises. Using a firm level and country representative survey, we construct country-time indicators of SMEs’ use of three external financing sources: bank loans, credit line/overdraft and trade credit. These indicators account for composition effects and demand effects. We find substantial differences between countries in the SMEs’ use of the three financing sources. In particular, the cross-country differences related to SMEs’ use of bank loans have significantly increased over the period 2010-2014. This divergence is not related to a global increase in the volatility of this use between countries. Instead, it has been driven by a sharper increase (resp decrease) in the countries where SMEs’ use was initially higher (resp. lower). Finally, we investigate whether SMEs’ uses of financing sources are correlated at the country level with various macroeconomic and banking structure indicators. The results suggest that indicators about banking concentration are good candidates to explain the cross-country divergence of SMEs’ use of bank loans.
    Keywords: credit constraints, bank financing, trade credit, institutional factors.
    JEL: G31 G01 D22 C35
    Date: 2017
  13. By: Andrea Zaghini (Bank of Italy)
    Abstract: We assess the impact of the corporate sector purchase programme (CSPP), the corporate arm of the ECB’s quantitative easing policy, in its first year of activity (June 2016 – May 2017). Focusing on the primary bond market, we find evidence of a significant impact of the CSPP on yield spreads, both directly on targeted bonds and indirectly via the portfolio rebalancing channel. While spreads on eligible bonds have declined since the start of the programme (by 60 basis points in 2016), non-eligible bonds remained unaffected until 2017, when the entire corporate market recorded a further decline in spreads of 56 basis points.
    Keywords: Quantitative easing, CSPP, corporate bond market, portfolio rebalancing channel
    JEL: G15 G32 G38
    Date: 2017–12
  14. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate whether and to what extent macroprudential policies affect the financial link between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We first estimate the correlation of the policy interest rates between the CEs and the PHs and use that as a measure of financial sensitivity. We then estimate the determinants of the estimated measure of financial sensitivity as a function of country-specific macroeconomic conditions and policies. The potential determinant of our focus is the extensity of macroprudential policies. From the estimation exercise, we find that a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves (IR); when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.
    JEL: F4 F41 F42
    Date: 2017–12
  15. By: Sara Calligaris; Massimo Del Gatto; Fadi Hassan; Gianmarco I. P. Ottaviano; Fabiano Schivardi
    Abstract: Productivity has recently slowed down in many economies around the world. A crucial challenge in understanding what lies behind this \productivity puzzle" is the still short time span for which data can be analysed. An exception is Italy where productivity growth started to stagnate 25 years ago. Italy therefore offers an interesting case to investigate in search of broader lessons that may hold beyond local specific cities. We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy's aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within sectors than between them, increasing more in sectors where the world technological frontier has expanded faster. Relative specialization in those sectors explains the patterns of misallocation across geographical areas and firm size classes. The broader message is that an important part of the explanation of the productivity puzzle may lie in the rising difficulty of reallocating resources between firms in sectors where technology is changing faster rather than between sectors with different speeds of technological change.
    Keywords: misallocation, TFP, productivity puzzle, Italy
    JEL: D22 D24 O11 O47
    Date: 2017–12
  16. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: macroeconomia, economia internacional
    JEL: E31 E52 E58
    Date: 2017–12
  17. By: Sami Ben Naceur; Caroline Roulet
    Abstract: Using data on commercial banks in the United States and Europe, this paper analyses the impact of the new Basel III capital and liquidity regulation on bank-lending following the 2008 financial crisis. We find that U.S. banks reinforce their risk absorption capacities when expanding their credit activities. Capital ratios have significant, negative impacts on bank-retail-and-other-lending-growth for large European banks in the context of deleveraging and the “credit crunch” in Europe over the post-2008 financial crisis period. Additionally, liquidity indicators have positive but perverse effects on bank-lending-growth, which supports the need to consider heterogeneous banks’ characteristics and behaviors when implementing new regulatory policies.
    Date: 2017–11–15

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