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on European Economics |
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Issue of 2019‒01‒07
seventeen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Hartmann, Philipp; Smets, Frank |
| Abstract: | On 1 May 2018 the ECB celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB’s monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key critical issues that were the subject of debate. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB’s credibility. Next, we investigate the ECB’s interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB’s framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework. JEL Classification: E52, E31, E32, E42, N14, G01 |
| Keywords: | crisis, euro area economy, European Central Bank, European Economic and Monetary Union, inflation, monetary policy, non-standard measures, zero-lower bound |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182219&r=all |
| By: | Sona Benecka (Ceska Narodni Banka); Ludmila Fadejeva (Bank of Latvia); Martin Feldkircher (Oesterreichische Nationalbank) |
| Abstract: | This paper investigates the international effects of a euro area monetary policy shock, focusing on countries from Central, Eastern, and Southeastern Europe (CESEE). To that end, we use a global vector autoregressive (GVAR) model and employ shadow rates as a proxy for the monetary policy stance during normal and zero-lower-bound periods. We propose a new way of modelling euro area countries in a multi-country framework, accounting for joint monetary policy, and a novel approach to simultaneously identifying shocks. Our results show that in most euro area and CESEE countries prices adjust and output falls in response to a euro area monetary tightening, but with a substantial degree of heterogeneity. |
| Keywords: | euro area monetary policy, global vector autoregression, spillovers |
| JEL: | C32 F44 E32 O54 |
| Date: | 2018–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201804&r=all |
| By: | Leo de Haan; Robert Vermeulen |
| Abstract: | This paper documents how sovereign debt ratings shape euro area cross-border holdings of euro area sovereign debt, using granular sectoral security holdings statistics for the period 2009Q4 until 2016Q1. Credit risk is the main risk for bond investors when investing in bonds that are issued in the same currency as the currency of the investor's home country. Sovereign debt ratings provided by rating agencies give investors key information on the creditworthiness of governments. The results in this paper show that investors respond differently to credit ratings. In particular, we find that investors from core euro area countries respond more to credit ratings than investors from peripheral euro area countries. The results show that banks, insurance companies, pension funds and investment funds in core countries all significantly increase their bond holdings when credit ratings improve. In peripheral countries we document only a positive effect for pension funds and find no relationship between ratings and bond holdings for the other investor sectors. Finally, we find non-linearities in the relationship between bond holdings and credit ratings. |
| Keywords: | euro area; asset allocation; sovereign debt; sovereign debt rating |
| JEL: | F3 G11 G15 G2 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:620&r=all |
| By: | Concha Artola (Banco de España); María Gil (Banco de España); Javier J. Pérez (Banco de España); Alberto Urtasun (Banco de España); Alejandro Fiorito (Johns Hopkins University); Diego Vila (University of Amsterdam) |
| Abstract: | In highly decentralized countries the subnational dimension of economic developments acquires particular relevance, given the existence of potential spillover effects across jurisdictions or the existence of asymmetric impacts of national-wide macroeconomic shocks. At the same time, though, the analysis of sub-national macroeconomic and public finance short-term developments tend to be restricted in many countries due to data limitations. Against this backdrop, the aim of this paper is to provide an overview of the available data for monitoring macroeconomic and public finance developments at the regional level in Spain, and to present some examples of its practical use in real time. After a thoroughly review of the publicly available information, we identify two key informational gaps in this area of conjunctural analysis, namely: (i) the lack of homogeneous and official quarterly measures of aggregate regional economic activity (in particular, real GDP), and (ii) the limited sample size of time series pertaining to government budgetary developments at the regional level. |
| Keywords: | regional economics, regional data, macroeconomic forecasting, subnational public finances |
| JEL: | E01 E32 H72 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1809&r=all |
| By: | Matías Lamas (Banco de España); Javier Mencía (Banco de España) |
| Abstract: | We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks. |
| Keywords: | banks’ sovereign holdings, sovereign crisis, moral hazard, central bank liquidity, EMU financial fragmentation |
| JEL: | G01 G21 H63 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1843&r=all |
| By: | Benjamin Hartung; Philip Jung; Moritz Kuhn |
| Abstract: | A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today. |
| Keywords: | unemployment insurance, labor market flows, endogenous separations |
| JEL: | E24 J63 J64 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7379&r=all |
| By: | Phillipe Aghion; Emmanuel Farhi; Enisse Kharroubi |
| Abstract: | In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industry-level and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector). |
| Keywords: | growth, financial conditions, firm leverage, competition |
| JEL: | E32 E43 E52 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1590&r=all |
| By: | Alejandro Graziano; Kyle Handley; Nuno Limão |
| Abstract: | We estimate the uncertainty effects of preferential trade disagreements. Increases in the probability of Britain’s exit from the European Union (Brexit) reduce bilateral export values and trade participation. These effects are increasing in trade policy risk across products and asymmetric for UK and EU exporters. We estimate that a persistent doubling of the probability of Brexit at the average disagreement tariff of 4.5% lowers EU-UK bilateral export values by 15 log points on average, and more so for EU than UK exporters. Neither believed a trade war was likely. |
| JEL: | E02 F02 F1 F5 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25334&r=all |
| By: | Wolf Heinrich Reuter (German Council of Economic Experts); Olegs Tkacevs (Bank of Latvia); Karlis Vilerts (Bank of Latvia) |
| Abstract: | Utilising data of the EU28 Member States for the period 1996–2015, this paper confirms the findings of previous studies that the stipulation of fiscal rules reduces fiscal volatility and consequently contributes to macroeconomic stability. Yet, we document that this result only holds for rules which are designed to be unaffected by the current state of the business cycle, i.e. which are "a-cyclical". Those can, e.g. be budget balance rules that set ceilings in cyclically adjusted terms or expenditure rules that set a limit relative to potential instead of current output. Furthermore, the stringency of fiscal rules amplifies their stabilising effect. Actual year-to-year compliance with fiscal rules seems to play no systematic role, such that effects of the rules can be observed even if they are not complied with year-to-year. Overall, our paper suggests that strong, properly designed numerical rules act as an anchor for fiscal policy makers and contribute to more stable discretionary fiscal policy. |
| Keywords: | fiscal rules, fiscal policy volatility, panel data, compliance |
| JEL: | C23 E62 E32 H60 |
| Date: | 2018–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201805&r=all |
| By: | María Gil (Banco de España); Javier J. Pérez (Banco de España); A. Jesús Sánchez (Instituto Complutense de Estudios Internacionales (UCM) and GEN); Alberto Urtasun (Banco de España) |
| Abstract: | The focus of this paper is on nowcasting and forecasting quarterly private consumption. The selection of real-time, monthly indicators focuses on standard (“hard” / “soft” indicators) and less-standard variables. Among the latter group we analyze: i) proxy indicators of economic and policy uncertainty; ii) payment cards’ transactions, as measured at “Point-of-sale” (POS) and ATM withdrawals; iii) indicators based on consumption-related search queries retrieved by means of the Google Trends application. We estimate a suite of mixed-frequency, time series models at the monthly frequency, on a real-time database with Spanish data, and conduct out-of-sample forecasting exercises to assess the relevant merits of the different groups of indicators. Some results stand out: i) “hard” and payments cards indicators are the best performers when taken individually, and more so when combined; ii) nonetheless, “soft” indicators are helpful to detect qualitative signals in the nowcasting horizon; iii) Google-based and uncertainty indicators add value when combined with traditional indicators, most notably at estimation horizons beyond the nowcasting one, what would be consistent with capturing information about future consumption decisions; iv) the combinations of models that include the best performing indicators tend to beat broader-based combinations. |
| Keywords: | private consumption, nowcasting, forecasting, uncertainty, Google Trends. |
| JEL: | E27 C32 C53 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1842&r=all |
| By: | Kern, Milena (University of Salzburg); Paetzold, Joerg (University of Salzburg); Winner, Hannes (University of Salzburg) |
| Abstract: | Trade in services is often hampered by domestic administrative barriers, even when countries are members of the same regional trade agreement. We exploit a large reform in the European Union (the EU Service Directive) targeted to reduce such administrative hurdles in cross border service provision to estimate its effects on service trade. We employ a difference-in-difference strategy and a Pseudo Poisson Maximum Likelihood (PPML) panel approach to estimate gravity equations with multiple high-dimensional fixed effects. On average, the reform increased intra-EU trade in targeted services by about 40%. This effect of the reform on trade volume is corroborated by several robustness and placebo checks. Finally, a disaggregated analysis reveals significant differences between countries and service sectors. |
| Keywords: | Service trade; trade liberalisation; gravity equation |
| JEL: | F13 F14 F15 |
| Date: | 2018–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sbgwpe:2018_009&r=all |
| By: | Thorsten Klug; Tobias Schuler; Eric Mayer |
| Abstract: | We investigate for Germany the positive correlation between the corporate savings glut in the non-financial corporate sector and the current account surplus from a capital account perspective. By employing sign restrictions our findings suggest that mostly labor market, world demand and financial friction shocks can account for the joint dynamics of excess corporate savings and the current account surplus. Private savings shocks, in contrast, cannot explain the correlation. We conclude that a corporate savings glut is a main driver of the current account surplus. |
| Keywords: | Current account, corporate savings, macro shocks |
| JEL: | E32 F32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ifowps:_280&r=all |
| By: | Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic); Karen Poghosyan (Central Bank of Armenia, Economic Research Department, Yerevan, Armenia) |
| Abstract: | We use nowcasting methodology to forecast the dynamics of the real GDP growth in real time based on the business tendency surveys data. Nowcasting is important because key macroeconomic variables on the current state of the economy are available only with a certain lag. This is particularly true for those variables that are collected on a quarterly basis. To conduct out‐of‐sample forecast evaluation we use business tendency surveys data for 22 European countries. Based on the different dataset and using outof‐sample recursive regression scheme we conclude that nowcasting model outperforms several alternative short‐term forecasting statistical models, even when the volatility of the real GDP growth is increasing both in time and across different countries. Based on the Diebold‐Mariano test statistics, we conclude that nowcasting strongly outperforms BVAR and BFAVAR models, but comparison with AR, FAAR and FAVAR does not produce sufficient evidence to prefer one over another. |
| Keywords: | Nowcasting, short‐term forecasting, dynamic and static principal components, Bayesian VAR, Factor Augmented VAR, real GDP growth, European OECD countries |
| JEL: | E52 C33 C38 C52 C53 E37 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1002&r=all |
| By: | Caiumi, Antonella; Majewski, Ina; Nicodème, Gaëtan |
| Abstract: | Despite sharp reductions in corporate income tax (CIT) rates worldwide, CIT revenues have not fallen dramatically in the last two decades. This paper investigates the recent developments in CIT in the European Union, by taking a closer look at the potential driving forces behind this puzzle. Using a unique dataset of national sectoral accounts, we decompose the CIT revenue to GDP ratio for the EU and find that while the decrease in the statutory rates has driven down tax collection, the effect was more than offset by a broadening of the taxable base and a slight increase in the size of the corporate sector. However, this result holds for the period 1995-2015 but not for the last decade where base broadening has not been able to match further cuts in rates. |
| Keywords: | corporate tax; European Union; Implicit Tax Rate; Incorporation; Tax Reforms |
| JEL: | E62 H25 O52 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13385&r=all |
| By: | Matteo Maggiori; Brent Neiman; Jesse Schreger |
| Abstract: | The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use. |
| JEL: | E4 E5 F3 G15 G23 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25410&r=all |
| By: | Javier Bianchi; Jorge Mondragon |
| Abstract: | This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence. |
| JEL: | E4 E5 F34 G15 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25340&r=all |
| By: | Minford, Patrick (Cardiff Business School) |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2019/1&r=all |