nep-eec New Economics Papers
on European Economics
Issue of 2019‒02‒25
29 papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Private bank deposits and macro/fiscal risk in the euro-area By Arghyrou, Michael G; Gadea, María Dolores
  2. Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies By Sarah Mouabbi; Jean-Guillaume Sahuc
  3. Potential international employment effects of a hard Brexit By Brautzsch, Hans-Ulrich; Holtemöller, Oliver
  4. Firms’ Expectations and Monetary Policy Shocks in the Eurozone By Snezana Eminidou; Marios Zachariadis
  5. Brexit and uncertainty: insights from the Decision Maker Panel By Bloom , Nicholas; Bunn, Philip; Chen, Scarlet; Mizen, Paul; Smietanka, Pawel; Thwaites, Greg; Young, Garry
  6. The effect of ECB forward guidance on the term structure of interest rates By Paul Hubert; Fabien Labondance
  7. Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises By Lang, Jan Hannes; Izzo, Cosimo; Fahr, Stephan; Ruzicka, Josef
  8. Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports By Crowley, Meredith A; Exton, Oliver; Han, Lu
  9. Breaking the shackles: Zombie firms, weak banks and depressed restructuring in Europe By Andrews, Dan; Petroulakis, Filippos
  10. Union Debt Management By Equiza-Goni, J.; Faraglia, E.; Oikonomou, R.
  11. The magnitude of euro area misalignments By Bruno Ducoudré; Xavier Timbeau; Sébastien Villemot
  12. Quantifying the Economic Effects of the Single Market in a Structural Macromodel By Jan in ‘t Veld
  13. The Fall in UK Potential Output due to the Financial Crisis: a Much Bigger Estimate By Crafts, Nicholas
  14. Inflation Expectations, Consumption and the Lower Bound: Micro Evidence from a Large Euro Area Survey By Ioana A. Duca; Geoff Kenny; Andreas Reuter
  15. The German undervaluation regime under Bretton Woods: How Germany became the nightmare of the world economy By Höpner, Martin
  16. Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area? By Adam Elbourne; Kan Ji
  17. The financial transmission of housing bubbles: evidence from Spain By Martin, Alberto; Moral-Benito, Enrique; Schmitz, Tom
  18. Predicting Recessions in the Euro Area: A Factor Approach By Goodhead, Robert; Parle, Conor
  19. Debt overhang, rollover risk, and corporate investment: evidence from the European crisis By Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
  20. Natural rate estimates differ: By how much? By Bethencourt, Carlos; Stadtmann, Georg
  21. Immigration and Preferences for Redistribution in Europe By Alesina, Alberto; Murard, Elie; Rapoport, Hillel
  22. The fiscal lifetime cost of receiving refugees By Joakim Ruist
  23. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ryan, Ellen; Whelan, Karl
  24. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ryan, Ellen; Whelan, Karl
  25. Monetary policy transmission to mortgages in a negative interest rate environment By Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
  26. The Distributional Effects of Conventional Monetary Policy and Quantitative Easing: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  27. Hartz IV and the decline of German unemployment: A macroeconomic evaluation By Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian; Gartner, Hermann
  28. Company Profits in Italy By Massimo Del Gatto; Fadi Hassan; Gianmarco I.P. Ottaviano; Fabiano Schivardi
  29. From Microeconomic Favoritism to Macroeconomic Populism By Saint-Paul, Gilles

  1. By: Arghyrou, Michael G (Cardiff Business School); Gadea, María Dolores (Department of Applied Economics, University of Zaragoza)
    Abstract: We examine the relationship between private bank deposits and macro/fiscal risk in the euro area. We test three hypotheses: First, private bank deposits relative to Germany are determined by macro/fiscal risk factor. Second, this relationship is time-varying. Third, time-variation is driven by the level of macro/fiscal risk. Our findings validate all three tested hypotheses. They also reveal persistent fragmentation between EMU core and periphery banking systems caused by a deficit of trust in periphery banking systems, unmitigated by the introduction of OMT and European Banking Union. Our findings have implications for the introduction of the European Deposits Insurance Scheme (EDIS), for which they offer tentative support.
    Keywords: Private bank deposits, macro/fiscal risk, eurozone, TVP panel, fragmentation
    JEL: F30 F36 G11 G15
    Date: 2019–02
  2. By: Sarah Mouabbi; Jean-Guillaume Sahuc
    Abstract: We quantify the macroeconomic effects of the European Central Bank’s unconventional monetary policies using a DSGE model which includes a set of shadow interest rates. Extracted from the yield curve, these shadow rates provide unconstrained measures of the overall stance of monetary policy. Counterfactual analyses show that, without unconventional measures, the euro area would have suffered (i) a substantial loss of output since the Great Recession and (ii) a period of deflation from mid-2015 to early 2017. Specifically, year-on-year inflation and GDP growth would have been on average about 0.61% and 1.09% below their actual levels over the period 2014Q1-2017Q2, respectively.
    Keywords: Unconventional monetary policy, shadow policy rate, DSGE model, euro area
    JEL: E32 E44 E52
    Date: 2019
  3. By: Brautzsch, Hans-Ulrich; Holtemöller, Oliver
    Abstract: We use the World Input Output Database (WIOD) to estimate the potential employment effects of a hard Brexit in 43 countries. In line with other studies we assume that imports from the European Union (EU) to the UK will decline by 25% after a hard Brexit. The absolute effects are largest in big EU countries which have close trade relationships with the UK like Germany and France. However, there are also large countries outside the EU which are heavily affected via global value chains like China, for example. The relative effects (in percent of total employment) are largest in Malta and Ireland. UK employment will also be affected via intermediate input production. Within Germany, the motor vehicle industry and in particular the 'Autostadt' Wolfsburg are most affected.
    Keywords: Brexit,employment,European Union,international trade,tariffs
    JEL: C67 D57 F16 R15
    Date: 2019
  4. By: Snezana Eminidou; Marios Zachariadis
    Abstract: The purpose of this paper is to investigate the impact of monetary policy shocks on firms’ selling price and production expectations. We estimate a panel structural vector autoregressive (SVAR) model for 10 euro-area economies using monthly survey data for the period from 1999:1 to 2018:6. To identify the monetary policy shocks, we use narrative and high frequency instruments taking into account the central bank’s announcements regarding its policy decisions. The impulse responses from a panel SVAR analysis indicate that firms typically revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern where following the initial surprise that leads imperfectly informed firms to raise (reduce) their production and selling expectations after an unanticipated interest rate hike (M1 expansion), firms gradually come to expect contractionary (expansionary) monetary policy shocks to eventually decrease (increase) production and then inflation, thus revise their expectations accordingly by decreasing (increasing) first their production expectations and then their selling price expectations in accordance with this learning experience over time.
    Keywords: Rational inattention; imperfect information; survey data; SVAR; narrative shocks; interest rate shock; divisia index
    JEL: E31 E52
    Date: 2019–02
  5. By: Bloom , Nicholas (Stanford University); Bunn, Philip (Bank of England); Chen, Scarlet (Stanford University); Mizen, Paul (University of Nottingham); Smietanka, Pawel (Bank of England); Thwaites, Greg (LSE Centre for Macroeconomics); Young, Garry (National Institute of Economic and Social Research)
    Abstract: The UK’s decision to leave the EU in the 2016 referendum created substantial uncertainty for UK businesses. The nature of this uncertainty is different from that of a typical uncertainty shock because of its length, breadth and political complexity. Consequently, a new firm-level survey, the Decision Maker Panel (DMP), was created to investigate this, finding three key results. First, Brexit was reported to be one of the top three sources of uncertainty for around 40% of UK businesses in the two years after the vote in June 2016 referendum. This proportion increased further in Autumn 2018. Hence, Brexit provided both a major and persistent uncertainty shock. Second, uncertainty has been higher in industries that are more dependent on trade with the EU and on EU migrant labour. Third, the uncertainties around Brexit have been primarily about the impact on businesses over the longer term rather than shorter term, including uncertainty about the timing of any transition arrangements and around the nature of Brexit.
    Keywords: Business surveys; Brexit; companies; uncertainty
    JEL: D80 E66 G18 H32
    Date: 2019–02–15
  6. By: Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of interest rates. We estimate the static and dynamic impacts of forward guidance on overnight indexed swaps (OIS) rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements have lowered the term structure of private short-term interest rates at most maturities, even after controlling for the macroeconomic information published by the ECB. The effect is stronger on longer maturities and persistent
    Keywords: European central bank; Guidance; Interest rates
    JEL: E43 E52 E58
    Date: 2018–12
  7. By: Lang, Jan Hannes; Izzo, Cosimo; Fahr, Stephan; Ruzicka, Josef
    Abstract: This paper presents a tractable, transparent and broad-based domestic cyclical systemic risk indicator (d-SRI) that captures risks stemming from domestic credit, real estate markets, asset prices, and external imbalances. The d-SRI increases on average several years before the onset of systemic financial crises, and its early warning properties for euro area countries are superior to those of the total credit-to-GDP gap. In addition, the level of the d-SRI around the start of financial crises is highly correlated with measures of subsequent crisis severity, such as GDP declines. Model estimates suggest that the d-SRI has significant predictive power for large declines in real GDP growth three to four years down the line, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. The d-SRI therefore provides useful information about both the probability and the likely cost of systemic financial crises many years in advance. Given its timely signals, the d-SRI is a useful analytical tool for macroprudential policymakers. JEL Classification: G01, G17, C22, C54
    Keywords: early warning models, financial crises, GDP at risk, local projections, quantile regressions, systemic risk
    Date: 2019–02
  8. By: Crowley, Meredith A; Exton, Oliver; Han, Lu
    Abstract: The renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016 the British electorate unexpectedly voted to leave the European Union, introducing a new era in which the UK and EU began to renegotiate the terms of the UK-EU trading relationship. We exploit this natural experiment to estimate the impact of uncertainty associated with trade agreement renegotiation on the export participation decision of firms in the UK. Starting from the Handley and Limao (2017) model of exporting under trade policy uncertainty, we derive testable predictions of firm entry into (exit from) a foreign market under an uncertain `renegotiation regime'. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level, and cross-sectional variation in `threat point' tariffs, we estimate that in 2016 over 5300 exporters did not enter into exporting new products to the EU, whilst over 5400 exporters exited from exporting products to the EU. Entry (exit) in 2016 would have been 5.0% higher (6.1% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.
    Keywords: export participation; extensive margin of trade; Trade agreement; Trade policy uncertainty
    JEL: F13 F14
    Date: 2019–01
  9. By: Andrews, Dan; Petroulakis, Filippos
    Abstract: This paper explores the connection between ”zombie” firms (firms that would typically exit in a competitive market) and bank health and the consequences for aggregate productivity in 11 European countries. Controlling for cyclical effects, the results show that zombie firms are more likely to be connected to weak banks, suggesting that the zombie firm problem in Europe may at least partly stem from bank forbearance. The increasing survival of zombie firms congests markets and constrains the growth of more productive firms, to the detriment of aggregate productivity growth. Our results suggest that around one-third of the impact of zombie congestion on capital misallocation can be directly attributed to bank health and additional analysis suggests that this may partly be due to reduced availability of credit to healthy firms. Finally, improvements in bank health are more likely to be associated with a reduction in the prevalence of zombie firms in countries where insolvency regimes do not unduly inhibit corporate restructuring. Thus, leveraging the important complementarities between bank strengthening efforts and insolvency regime reform would contribute to breaking the shackles on potential growth in Europe. JEL Classification: D24, G21, L25, O47
    Keywords: credit constraints, factor reallocation, productivity, zombie firms
    Date: 2019–02
  10. By: Equiza-Goni, J.; Faraglia, E.; Oikonomou, R.
    Abstract: We study the role of government debt maturity in currency unions to identify whether debt management can help governments hedge their budgets against spending shocks. We first use a novel and detailed dataset of debt portfolios of five Euro Area countries to run a battery of VARs, estimating the responses of holding period returns to fiscal shocks. We find that government portfolios, which in our sample comprise mainly of nominal assets, have not been effective in absorbing idiosyncratic fiscal risks, whereas they have been very effective in absorbing aggregate risks. To shed light on this finding, as well as to investigate what types of debt are optimal in a currency area in the presence of both aggregate and idiosyncratic shocks, we setup a formal model of optimal debt management with two countries, benevolent governments and distortionary taxes. Our key finding is that governments should focus on issuing inflation indexed long term debt since this allows them to take full advantage of fiscal hedging. When we look at the data we find a stark increase in the issuance of real long term debt since the beginning of the Euro in many of the countries in our sample, which our model explains as an optimal response of governments to the introduction of the common currency.
    Keywords: Debt Management, Fiscal Policy, Government Debt, Maturity Structure, Tax Smoothing
    JEL: E43 E62 H63
    Date: 2019–02–11
  11. By: Bruno Ducoudré (Observatoire français des conjonctures économiques); Xavier Timbeau (Observatoire français des conjonctures économiques); Sébastien Villemot (Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: Using real equilibrium exchange rate modelling, we quantify adjustments within the euro area compatible with a current account equilibrium and a stabilisation of the net external positions of t he euro area countries. Our estimates indicate that the imbalances have shrunk since 2008, but substantial misalignments remain, and the average (absolute) mismatch relative to the euro price level amounts to 10% in 2017. The imbalances now weigh on the external equilibrium of the euro area and are increasing the risk of a medium -term appreciation in the euro. These results are robust to hypotheses on the horizon of adjustment, potential growth, output gaps and real interest rates.
    Keywords: Equilibrium exchange rate; Trade balance; Price competitiveness
    JEL: E31 F41
    Date: 2018–12
  12. By: Jan in ‘t Veld
    Abstract: This paper examines the macro-economic benefits of the Single Market in goods and services by simulating a counterfactual scenario in which tariffs and non-tariff barriers are reintroduced. Model simulations show how the reintroduction of trade barriers in such a counterfactual would lead to significantly lower trade flows between the Member States. Lower trade openness also means reduced market size and less competition. Using empirical evidence on the effect of the Single Market on firms’ mark-ups over marginal costs, we add these effects to the direct trade effects to come to a total estimate of the economic benefits of the Single Market of between 8% and 9% higher GDP on average for the EU.
    JEL: F13 F14 F15 F17
    Date: 2019–02
  13. By: Crafts, Nicholas
    Abstract: Conventional estimates suggest that the 2007-9 financial crisis reduced UK potential output by 3.8 to 7.5 per cent of GDP. This implied a need for fiscal tightening as the structural budget deficit had increased considerably. The austerity that followed led to the rise of UKIP, the EU referendum and the vote for Brexit. Brexit will reduce potential output by somewhere between 3.9 and 8.7 per cent of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is approximately double the conventional estimate.
    Keywords: austerity; Brexit; financial crisis; Potential Output
    JEL: F15 G01 H12 O47
    Date: 2019–01
  14. By: Ioana A. Duca; Geoff Kenny; Andreas Reuter
    Abstract: This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding.
    JEL: D12 D84 E21 E31 E52
    Date: 2019–02
  15. By: Höpner, Martin
    Abstract: Germany is an undervaluation regime, a regime that steers economic behavior towards deterioration of the real exchange rate and thereby towards export surpluses. This regime has brought the eurozone to the brink of collapse. But it is much older than the euro. It was established during the Bretton Woods years and has survived all subsequent European currency orders. The regime operates in two steps: competitive disinflation against trading partners; and resistance against correcting revaluations. The Bretton Woods order provided perfect conditions for the establishment and perpetuation of the regime: it was flexible enough for sufficient macroeconomic policy autonomy to bring about differential inflation rates, and sticky enough to delay and minimize revaluations.
    Keywords: current account surpluses,exchange rate policy,inflation,political economy,undervaluation,varieties of capitalism,Inflation,Leistungsbilanzüberschüsse,Politische Ökonomie,Spielarten des Kapitalismus,Unterbewertung,Wechselkurspolitik
    Date: 2019
  16. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This research re-examines the findings of the existing literature on the effects of unconventional monetary policy. It concludes that the existing estimates based on vector autoregressions in combination with zero and sign restrictions do not successfully isolate unconventional monetary policy shocks from other shocks impacting the euro area economy. In our research, we show that altering existing published studies by making the incorrect assumption that expansionary monetary shocks shrink the ECB’s balance sheet or even ignoring all information about the stance of monetary policy results in the same shocks and, therefore, the same estimated responses of output and prices. As a consequence, it is implausible that the shocks previously identified in the literature are true unconventional monetary policy shocks. Since correctly isolating unconventional monetary policy shocks is a prerequisite for subsequently estimating the effects of unconventional monetary policy shocks, the conclusions from previous vector autoregression models are unwarranted. We show this lack of identification for different specifications of the vector autoregression models and different sample periods.
    JEL: C32 E52
    Date: 2019–02
  17. By: Martin, Alberto; Moral-Benito, Enrique; Schmitz, Tom
    Abstract: How do housing bubbles affect other economic sectors? We show that in the presence of collateral constraints, a bubble initially raises housing credit demand and crowds out credit to non-housing firms. If the bubble lasts, however, housing credit repayments raise banks’ net worth and expand credit supply, so that crowding-out eventually gives way to crowding-in. This is consistent with evidence from the recent Spanish housing bubble. Initially, credit growth of non-housing firms was lower at banks with higher bubble exposure, and firms relying on these banks exhibited lower credit and output growth. During the bubble’s last years, these effects reversed. JEL Classification: E32, E44, G21
    Keywords: credit, financial frictions, financial transmission, housing bubble, investment, Spain
    Date: 2019–02
  18. By: Goodhead, Robert (Central Bank of Ireland); Parle, Conor (Central Bank of Ireland)
    Abstract: Recent economic data have pointed to the potential for weaker economic growth in the euro area. This Letter presents a model of recession probabilities using the first five principal components of a range of macroeconomic, financial and global variables as predictors. This model outperforms a yield curve based method, and points to slightly elevated recession risk in the near term.
    Date: 2019–02
  19. By: Kalemli-Ozcan, Sebnem; Laeven, Luc; Moreno, David
    Abstract: We quantify the role of financial factors behind the sluggish post-crisis performance of European firms. We use a firm-bank-sovereign matched database to identify separate roles for firm and bank balance sheet weaknesses arising from changes in sovereign risk and aggregate demand conditions. We find that firms with higher debt levels and a higher share of short-term debt reduce their investment more after the crisis. This negative effect is stronger for firms linked to weak banks with exposures to sovereign risk, signifying increased rollover risk. These financial channels explain about 60% of the decline in aggregate corporate investment. JEL Classification: E22, E32, E44, F34, F36, G32
    Keywords: bank-sovereign nexus, debt maturity, firm investment, rollover risk
    Date: 2019–02
  20. By: Bethencourt, Carlos; Stadtmann, Georg
    Abstract: We examine the natural rate of unemployment estimates of two international organizations (OECD and European Commission) and various release dates. Since estimates differ to a large extent, empirical research results which use natural rate estimates will also vary depending on the data source chosen. We highlight the extend of these effects by focusing on Spain, but also present evidence for several other EU-countries.
    Keywords: natural rate,real time data,monetary policy,fiscal policy
    JEL: E52 J60 A23
    Date: 2019
  21. By: Alesina, Alberto (Harvard University); Murard, Elie (IZA); Rapoport, Hillel (Paris School of Economics)
    Abstract: We examine the relationship between immigration and attitudes toward redistribution using a newly assembled data set of immigrant stocks for 140 regions of 16 Western European countries. Exploiting within-country variations in the share of immigrants at the regional level, we find that native respondents display lower support for redistribution when the share of immigrants in their residence region is higher. This negative association is driven by regions of countries with relatively large Welfare States and by respondents at the center or at the right of the political spectrum. The effects are also stronger when immigrants originate from Middle-Eastern countries, are less skilled than natives, and experience more residential segregation. These results are unlikely to be driven by immigrants' endogenous location choices.
    Keywords: income redistribution, population heterogeneity, welfare systems, immigration
    JEL: D31 D64 I3 Z13
    Date: 2019–02
  22. By: Joakim Ruist (University of Gothenburg)
    Abstract: This study estimates the fiscal consequences of receiving refugees, over the refugees’ lifetime. It uses data from Sweden in 2015, and the calculations account for refugees’ age, years since immigration, and country of origin. The estimated average annual fiscal net contribution over the lifetime of the average refugee (58 years) ranges from –12 per cent of GDP per capita for refugees from the countries of origin for which labor market performance has historically been the strongest, to –22 per cent for those for which it has been the weakest. The estimates imply that if the European Union received all refugees currently in Asia and Africa, the implied average annual fiscal cost over the same time span would be at most 0.6 per cent of GDP.
    Keywords: refugees; immigration; public finances
    JEL: F22 H20 H50 J61
    Date: 2019–02
  23. By: Ryan, Ellen (Central Bank of Ireland); Whelan, Karl (Central Bank of Ireland)
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a “hot potato” that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Date: 2019–01
  24. By: Ryan, Ellen; Whelan, Karl
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a "hot potato" that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Keywords: central banks; Quantitative easing; Reserves
    JEL: E4 E5 G21
    Date: 2019–02
  25. By: Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
    Abstract: Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated. JEL Classification: E40, E52, E58, G21
    Keywords: bank lending, monetary policy, mortgages, negative interest rates
    Date: 2019–02
  26. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and can smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live “hand to mouth.” We compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups.
    Keywords: Economic models; Interest rates; Monetary Policy; Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2019
  27. By: Hochmuth, Brigitte; Kohlbrecher, Britta; Merkl, Christian; Gartner, Hermann
    Abstract: This paper proposes a new approach to evaluate the macroeconomic effects of the Hartz IV reform in Germany, which reduced the generosity of long-term unemployment benefits. We use a model with different unemployment durations, where the reform initiates both a partial effect and an equilibrium effect. The relative importance of these two effects and the size of the partial effect are estimated based on the IAB Job Vacancy Survey. Our novel methodology provides a solution for the existing disagreement in the macroeconomic literature on the unemployment effects of Hartz IV. We find that Hartz IV was a major driver for the decline of Germany's unemployment and that partial and equilibrium effect where of equal importance. We thereby contribute to the literature on partial and equilibrium effects of unemployment benefit changes. In addition, we are the first to provide direct empirical evidence on labour selection, which can be interpreted as one dimension of recruiting intensity.
    Keywords: Unemployment benefits reform,search and matching,Hartz reforms
    JEL: E24 E00 E60
    Date: 2019
  28. By: Massimo Del Gatto; Fadi Hassan; Gianmarco I.P. Ottaviano; Fabiano Schivardi
    Abstract: We provide insights into the macro and microeconomic underpinnings of company profitability developments in Italy. We show that the average ROA (returns on assets) of Italian companies declined slightly between 1993 and 2005 and then contracted sharply during the economic crisis before starting a slow recovery in 2013. While the pattern in Italy before 2009 was very similar to the pattern in Germany; during the crisis it became more similar to the pattern in Spain, with both countries performing relatively worse than Germany and France. This decline appears to be attributable to a fall in productivity, rather than a rise in labour costs. Indeed, notwithstanding the substantial deterioration that began in 2000, unit labour costs (labour costs over value added) in Italy are still lower than in Germany, France and Spain. Within Italy, we document large cross-sectional differences. Micro firms and firms located in the South are tend to exhibit the lowest ROA, while the ROA of firms from the North-West dropped dramatically between the mid-1990s and 2010. Interestingly, firms with the highest innovation intensity (measured by intangibles over total assets) tend not to have the highest ROA, particularly if they are small and operating in low-tech and/or low competition sectors. We interpret our results in terms of ‘active’ (based on innovation and higher expenditure on intermediate goods and labour) and ‘passive’ (based on cost control) business models, with the latter exemplified by domestic and usually small-sized and family-owned firms. From this perspective, subsidising innovation could treat the symptom rather than the disease. Instead, medium-tolong term policies should focus on increasing the share of firms with ‘active’ business models. Our econometric analysis suggests possible instruments: increasing the efficiency of the market for corporate control; reducing the government ownership of firms; increasing the degree of competition in sectors where barriers are still present; and improving the effectiveness of the education system to raise the human capital endowment available to businesses.
    JEL: G3 L1 L2 O3
    Date: 2019–02
  29. By: Saint-Paul, Gilles
    Abstract: Why would people support policies that are macroeconomically unsound, in that they are more likely to lead to such events as sovereign crises, balance of payments crises, and the like? This may arise if decisive voters are likely to bear a lower fraction of the costs of the crisis, while benefitting from the short-run gains associated with those policies, such as greater public expenditure or lower taxes. I first discuss an illustrative model based on Saint-Paul et al. (2017), based on the assumption that in a crisis, not everybody can access his or her entitlement to publicly provided goods, a feature labelled "favoritism". If the decisive voter is relatively favored in this rationing process, then people are more likely to finance public expenditure by debt, the greater the degree of favoritism. Furthermore, favoritism and the likelihood of a crisis raises the level of public spending. Next, I consider the choice between electing a "populist" who reneges on anonymity when allocating the public good, even in normal times, and a "technocrat" who sticks to anonymity, and does all it takes to balance the budget. I show that the support for the populist is greater, (i) the greater the likelihood of default, (ii) the more depressed the macroeconomic environment, (iii) the greater the inherited level of public debt and (iv) the lower the state's fiscal capacity. I then argue that the model helps understanding some episodes in French pension reform. Some occupational groups supported unsustainable reductions in the retirement age because they expected that other workers would bear a higher proportion of the burden of future adjustment. Finally, using a panel of countries, I provide evidence in favor of some of the predictions of the model. As predicted, favoritism raises public debt, budget deficits, and public spending. It also raises the likelihood of a fiscal crisis through its effect on public debt. Furthermore, "populists" are more likely to conquer power, the higher the degree of debt and budget deficits, and the higher the level of government spending--the latter finding being consistent with the model's prediction on the effect of fiscal capacity.
    Keywords: Entitlements; favoritism; Fiscal Crises; inequality; political economy; populism; public debt; state capacity
    Date: 2019–01

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