nep-eec New Economics Papers
on European Economics
Issue of 2019‒04‒08
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Event studies, the random walk hypothesis and risk spreads: What role for central bank sovereign bond purchases in the Euro area? By Ansgar Belke; Daniel Gros
  2. Unemployment Surges in the EU: The Role of Risk Premium Shocks By Bas B. Bakker; Marta Korczak; Krzysztof Krogulski
  3. The Dynamic Effects of Monetary Policy and Government Spending Shocks on Unemployment in the Peripheral Euro Area Countries By Pietro Dallari; Antonio Ribba
  4. Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data By Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
  5. The Response of European Energy Prices to ECB Monetary Policy By Torró, Hipòlit
  6. How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries By Tigran Poghosyan
  7. International effects of a compression of euro area yield curves By Martin, Feldkircher; Thomas, Gruber; Florian, Huber
  8. FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland By VARTHALITIS, PETROS
  9. Exploring trend inFLation dynamics in Euro Area countries By Mónica Correa-López; Matías Pacce; Kathi Schlepper
  10. The role of internal devaluation on the correction of the Spanish external deficit By Paloma Villanueva; Luis Cárdenas del Rey; Jorge Uxó; Ignacio Álvarez
  11. Demographic Challenges for Labour Supply and Growth By Sandra M. Leitner; Robert Stehrer
  12. The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme By Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
  13. The impact of the excess reserves of the banking sector on interest rates and money supply in Poland By Mariusz Kapuściński; Ilona Pietryka
  14. Measuring real and financial cycles in Luxembourg: An unobserved components approach By Paolo Guarda; Alban Moura
  15. The nexus between underlying dynamics of bank capital buffer and performance. By Mamatzakis, Emmanuel; Bagntasarian, Anna
  16. Macroprudential Policies in the EAGLE FLI Model Calibrated for Hungary By Gábor Fukker; Lóránt Kaszab

  1. By: Ansgar Belke; Daniel Gros
    Abstract: The asset purchase program of the Euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB’s (Public Sector Purchase Program) PSPP program involved the purchase of the bonds of peripheral Euro area governments, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases of the bonds of the own sovereign by the national central bank should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when the Euro area’s QE was announced. However, the initial fall in risk premia might have been due to the expectation of the bond being effective in lowering risk free rates. When these expectations were disappointed risk premia went back to their initial level. Formal statistical test confirm that indeed risk premia on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premia. One should thus not expect the impact effect to have been permanent.
    Keywords: European Central Bank, Quantitative Easing, unconventional monetary policies, spreads, structural breaks, time series econometrics
    JEL: E43 E58 G12 G15
    Date: 2019–01
  2. By: Bas B. Bakker; Marta Korczak; Krzysztof Krogulski
    Abstract: In the last decade, over half of the EU countries in the euro area or with currencies pegged to the euro were hit by large risk premium shocks. Previous papers have focused on the impact of these shocks on demand. This paper, by contrast, focuses on the impact on supply. We show that risk premium shocks reduce the output level that maximizes profit. They also lead to unemployment surges, as firms are forced to cut costs when financing becomes expensive or is no longer available. As a result, all countries with risk premium shocks saw unemployment surge, even as euro area core countries managed to contain unemployment as firms hoarded labor during the downturn. Most striking, wage bills in euro area crisis countries and the Baltics declined even faster than GDP, whereas in core euro area countries wage shares actually increased.
    Date: 2019–03–18
  3. By: Pietro Dallari; Antonio Ribba
    Abstract: In this paper we study the response of unemployment to monetary policy and fiscal shocks in the peripheral Euro-area countries. By applying the structural near-VAR methodology, we jointly model Euro area-wide and national variables while preserving the invariance of the set of Euro-area common shocks. Our main finding is that fiscal multipliers vary across countries and the results are consistent with the prediction of the standard New Keynesian model only in Italy and Greece. Instead, the multipliers exhibit a nonKeynesian sign in Ireland, Portugal and Spain. These results seem to be robust to alternative identification strategies. As far as the monetary policy shock is concerned, we find that it plays an important role, jointly with the other Euro-area wide shocks, as a long-term driver of national unemployment.
    Keywords: Business Cycles; Fiscal Shocks; Unemployment; Euro area; Near-Structural VARs
    JEL: E32 E62 C32
    Date: 2019–02
  4. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
    Abstract: We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
    Keywords: Bank credit;Reserve requirements;Interest rates on loans;Central banks;Bank liquidity;Negative interest rates;portfolio rebalancing;bank lending channel;liquidity management;Eurozone crisis;interbank;credit supply;ex-ante;rebalance;negative rate
    Date: 2019–02–28
  5. By: Torró, Hipòlit
    Abstract: To our knowledge, this paper is the first to discuss the response of European energy commodity prices to unexpected monetary policy surprises from the European Central Bank. Using the Rigobon (2003) identification through heteroscedasticity method, we find a significant and positive response during the crisis period for Brent and coal. Similar results are obtained by other authors for European financial assets in this period. This result reinforces the idea that during this period, financial assets and some commodities positively responded to conventional and unconventional expansionary monetary policy measures, increasing confidence about the survival of the European monetary union. The remaining European energy commodities (electricity, EUAs, and natural gas prices) seem to be unaffected by monetary policy actions. We think these results are of interest to those economic agents and institutions involved in European energy markets and are especially important for the European Central Bank in order to predict the consequences of its monetary policy on the inflation objective.
    Keywords: Research Methods/ Statistical Methods
    Date: 2018–03–12
  6. By: Tigran Poghosyan
    Abstract: This paper assesses the effectiveness of lending restriction measures, such as loan-to-value and debt-service-to-income ratios, in affecting developments in house prices and credit. We use data on 99 lending standard restrictions implemented in 28 EU countries over 1990–2018. The results suggest that lending restriction measures are generally effective in curbing house prices and credit. However, the impact is delayed and reaches its peak only after three years. In addition, the impact is asymmetric, with tightening measures having weaker association with target variables compared to loosening measures. The association is stronger in countries outside of euro area and for legally-binding measures and measures involving sanctions. The results have practical implications for macroprudential authorities.
    Keywords: Monetary policy instruments;Exchange rate policy;Central banks;Monetary policy;Monetary expansion;macroprudential regulation;financial stability;credit;house price;Kleibl;target variable;type of measure;real GDP growth;dependent variable
    Date: 2019–03–01
  7. By: Martin, Feldkircher (Oesterreichische Nationalbank (Austrian Central Bank)); Thomas, Gruber (Oesterreichische Nationalbank (Austrian Central Bank)); Florian, Huber (University of Salzburg)
    Abstract: In this paper, we use a Bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves. Our findings indicate positive effects on real activity and prices, both within the euro area as well as in neighboring economies. Spillovers transmit through an exchange rate channel and a broad financial channel. We complement our analysis by conducting a portfolio optimization exercise. Our results show that multi-step-ahead forecasts conditional on the euro area yield curve shock improve Sharpe ratios relative to other investment strategies.
    Keywords: Unconventional monetary policy; spillovers; GVAR; minimum variance portfolio
    JEL: C30 E32 E52 F41
    Date: 2019–03–27
    Abstract: This paper presents FIR-GEM: Fiscal IRish General Equilibrium Model. FIR-GEM is a small open economy DSGE model designed as fiscal toolkit for fiscal policy analysis in Ireland. To illustrate the model's potential for fiscal policy analysis, we conduct three types of experiments. First, we analyse the fiscal transmission mechanism through which Irish fiscal policy affects the Irish economy. Second, we compute fiscal multipliers for the main tax-spending instruments, namely government consumption, public investment, public wage bill, public transfers, consumption, labour and capital tax. We focus on a fiscal policy stimulus that is either implemented through spending increases or tax cuts. Third, we perform robustness analysis on key structural characteristics that can affect quantitatively the size of fiscal multipliers. We find that the size of fiscal multipliers in the Irish economy heavily depends on its degree of openness, the method of fiscal financing employed, the elasticity of the sovereign risk premia to Irish debt dynamics and the flexibility of Irish labour and product markets.
    Keywords: Keywords: Fiscal policy, DSGE, Ireland, Openness.
    JEL: E62 F41 F42
    Date: 2019–04
  9. By: Mónica Correa-López (Banco de España); Matías Pacce (Banco de España); Kathi Schlepper (Deutsche Bundesbank)
    Abstract: This paper analyzes the inflation processes of twelve Euro Area countries over the period 1984:q1-2017:q4. The stylized features of inflation uncover its changing nature and cross-country heterogeneity, in terms of mean, volatility and persistence. After estimation of a wide array of unobserved components models, we isolate trend inflation rates in a framework that allows for time-varying inflation gap persistence and stochastic volatility in both the trend and transitory components. On average, a sizeable share of overall inflation dynamics is accounted for by movements in the trend. In explaining trend dynamics, we consistently find a signficant role for short-term inflation expectations, economic slack, and openness variables. However, the cumulated impacts of these are fairly small, except in certain, sustained episodes. This is of policy relevance since the monetary authority might want to respond to shocks that are prone to affect the inflation trend in order to ensure that long-term inflation expectations remain anchored.
    Keywords: trend inflation, inflation dynamics, UCSV models, monetary policy
    JEL: E31 E52
    Date: 2019–03
  10. By: Paloma Villanueva (Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.); Luis Cárdenas del Rey (Universidad Isabel I e Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.); Jorge Uxó (Departamento de Análisis Económico y Finanzas, Universidad de Castilla – La Mancha.); Ignacio Álvarez (Instituto Complutense de Estudios Internacionales (ICEI). Departamento de Estructura Económica y Economía del Desarrollo, Universidad Autónoma de Madrid.)
    Abstract: The Spanish economy has been one of the EU’s most affected by the Great Recession of 2008, recording a rate of unemployment of 26.2% in 2013. However, since 2014 Spain is growing faster than most Euro Area countries, reaching an annual growth rate over 3% during the period 2015- 2017. Moreover, it has turned its historical current account deficit, which peaked in 2007, into a surplus of 2 % of GDP in 2017. International and Spanish institutions, as well as some scholars, have rooted this readjustment of the current account in the “internal devaluation strategy”. Consisting in the reduction of wages, this strategy is supposed to have boosted exports and therefore Spanish economic activity, through the reversion of the accumulated loss of price-competitiveness since the creation of the European Monetary Union. Nevertheless, empirical evidence shows that changes in demand (and some exceptional factors as the recent evolution of oil prices) are much more important to explain the evolution of Spanish net exports than changes in price competitiveness. Based on an extended version of the Bhaduri-Marglin model, which enables the disentangling of the price effect from the demand effect, this paper sheds light on the true influence of internal devaluation on the deficit correction occurred in the Spanish external sector. It reveals that wage restraint has meant only limited gains in price-competitiveness, having affected external balance mainly through a “demand effect” on imports, although to a limited extent. The estimations carried out show that the internal devaluation strategy readjusted the Spanish external sector by 1.74 p.p. during the period of 2010-2017. Of all this correction, 98% is induced by a change in the demand of the economy, and only 2% is due to the effect on prices. It makes also clear that although exports performance has been remarkable during last years in Spain, it does not differ much from the previous decade, and it cannot be explained by internal devaluation.
    Abstract: La economía española ha sido una de las más afectadas de la UE por la Gran Recesión de 2008, alcanzando la tasa de paro un 26,2% en 2013. Sin embargo, desde 2014 España está creciendo a un ritmo superior al de los países de la zona del Euro, concretamente por encima del 3% en el período 2015-2017, y lleva desde entonces registrando superávits por cuenta corriente (2% del PIB en 2017). Tanto instituciones internacionales como españolas, además de numerosos economistas, sostienen que dicho ajuste exterior es fruto de la devaluación interna. Así, la reducción de los salarios habría contribuido al crecimiento de las exportaciones, y por tanto de la producción, gracias a la recuperación de la competitividad precio, la cual se había deteriorado desde la creación de la Unión Monetaria Europea. No obstante, la evidencia empírica sugiere que la evolución de la demanda interna (y de otros factores como los precios del petróleo) se encuentran detrás de la corrección del histórico déficit por cuenta corriente. Basándonos en una versión extendida del modelo de Bhaduri-Marglin, que distingue el efecto precio del efecto demanda, este trabajo aclara el papel de dicha estrategia en el reajuste exterior. De tal forma, para el período 2010-2017 los efectos de esta estrategia han sido muy limitados; siendo el efecto demanda (1,71 pp) claramente predominante sobre el efecto precios (0,03 pp). Estos resultados apuntan a que el éxito exportador no ha sido consecuencia de la devaluación salarial.
    Keywords: Spanish current account; Wage share; Price-cost competitiveness; Internal devaluation; Bhaduri-Marglin.; Balanza por cuenta corriente; Rentas del trabajo; Competitividad precio; Devaluación interna; Bhaduri-Marglin.
    JEL: E12 E25 E64 F32
    Date: 2018
  11. By: Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Many EU countries are currently undergoing major demographic changes, particularly in terms of shrinking total and working-age populations and population ageing. If this trend is to continue, the functioning of the labour market is at risk as labour shortages are increasingly more likely to emerge which will subsequently imperil further economic growth and catching-up across the EU. This report addresses the likely labour-market consequences of observable demographic trends in the EU. It applies a simple trend-based model which uses observable trends of the past 15 years of the working-age population and the activity rate – which together determine the evolution of the supply of labour – as well as of labour productivity and GDP growth – which together determine the evolution of the demand for labour – to simulate likely scenarios for the future development of labour supply and demand until 2050. Projected future trends in both labour supply and demand are then used to establish whether and – if so – in what year adverse past demographic developments are likely to kick in and begin jeopardising further growth. Different simulation exercises demonstrate that in some EU countries – particularly countries in Central and Eastern Europe – labour supply-side constraints would already materialise in the mid-2020s, which calls for quick policy action to address and ideally avert the imminent demographic collapse.
    Keywords: demographic change, labour supply constraints, labour shortages, growth
    JEL: J11 J21 J23
    Date: 2019–03
  12. By: Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
    Abstract: In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to $10bn of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE's CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE's demand for bonds and auction participants' supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
    Keywords: Quantitative easing, Market liquidity, Market-making, Corporate bonds
    JEL: G12 G23 E52 E58
    Date: 2019–03–29
  13. By: Mariusz Kapuściński (SGH Warsaw School of Economics); Ilona Pietryka (Nicolaus Copernicus University in Torun)
    Abstract: In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.
    Keywords: excess reserves; interest rate pass through; money multiplier; GARCH; VAR; panel data models
    JEL: E52 E43 E51 C32 C33
    Date: 2019
  14. By: Paolo Guarda; Alban Moura
    Abstract: We use unobserved components time series models to extract real and financial cycles for Luxembourg over the period 1980Q1-2018Q2. We find that financial cycles are longer and have larger amplitude compared to standard business cycles. Furthermore, financial cycles are highly correlated with cycles in GDP. We compare our results to other approaches to measure financial cycles and show how unobserved components models can serve to evaluate uncertainty and to monitor cyclical developments in real time. Overall, our estimates indicate that in mid 2018 both real and financial cycles in Luxembourg were close to zero, with financial conditions near their long-run trend.
    Keywords: Financial cycles, unobserved component time series models, Luxembourg.
    JEL: C22 C32 E30 E50 G01
    Date: 2019–03
  15. By: Mamatzakis, Emmanuel; Bagntasarian, Anna
    Abstract: This paper reveals the underlying dynamics between the capital buffer and bank performance in EU-27 countries. A dynamic panel analysis shows that capital buffer is significantly affected by bank performance and risk exposure. Remarkably, a threshold analysis identifies regime changes for the underlying relationships during the financial crisis of 2008. We find a positive relationship between the capital buffer and performance for banks that fall in the low performance regime, while a negative relationship is reported for the banks that belong to the high regime. Threshold results also show that buffer exerts a positive impact on bank performance. Although regulation reforms that aim to raise the capital requirements could improve bank performance and stability, these improvements are not homogeneous across banks.
    Keywords: Capital buffer; Dynamic threshold; Performance; Bank default risk.
    JEL: G0 G1 G2
    Date: 2019–03–14
  16. By: Gábor Fukker (Magyar Nemzeti Bank (Central Bank of Hungary)); Lóránt Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper we develop the Hungarian version of the EAGLE FLI (Euro Area GLobal Economy model with Financial LInkages) model which is the EAGLE model enriched with financial frictions and country-specific banking sector. The EAGLE FLI features the intermediation of loanable funds (ILF) view in banking whereby the creation of new loans requires banks to collect additional deposits. Households and firms borrow in the model using housing as collateral. We find that macroprudential policies such as an increase in capital requirements, decreases in the loan-to-value ratio or loan-to-income ratio of borrower households (and firms) limits banks’ credit creation with negative spillover effects to the real economy due to the financial accelerator mechanism in the model. On the other hand, these policies strengthen banks’ capital and limit the vulnerability of households and firms to negative financial shocks.
    Keywords: macroprudential policy, multi-country DSGE, capital requirements, loan-to-value ratio, loan-to-income ratio
    JEL: E12 E13 E52 E58 F11 F41
    Date: 2019

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