nep-eec New Economics Papers
on European Economics
Issue of 2019‒05‒13
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Monetary policy, credit institutions and the bank lending channel in the euro area By Altavilla, Carlo; C. Andreeva, Desislava; Boucinha, Miguel; Holton, Sarah
  2. Pockets of risk in European housing markets: then and now By Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
  3. Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone By Timo Henckel; Gordon D. Menzies; Peter Moffat; Daniel J. Zizzo
  4. The Transmission of Business Cycles: Lessons From the 2004 Enlargement and the Euro Adoption By Hoang Sang Nguyen; Fabien Rondeau
  5. Did the euro change the nature of FDI flows among member states? By Sondermann, David; Vansteenkiste, Isabel
  6. An indicator of macro-financial stress for Italy By Arianna Miglietta; Fabrizio Venditti
  7. The Synchronization of Business Cycles and Financial Cycles in the Euro Area By William Oman
  8. Do High-Quality Local Institutions Shape Labour Productivity in Western European Manufacturing Firms? By Ganau, Roberto; Rodríguez-Pose, Andrés
  9. Institutional presence in secondary bank bond markets: how does it affect liquidity and volatility? By Weistroffer, Christian; Opricǎ, Silviu
  10. The effect of the single currency on exports: comparative firm-level evidence By Tibor Lalinsky; Marian Jaanika Meriküll
  11. Measuring credit-to-gdp gaps. The hodrick-prescott filter revisited By Jorge E. Galán
  12. The impact of global value chains on the euro area economy By Gunnella, Vanessa; Al-Haschimi, Alexander; Benkovskis, Konstantins; Chiacchio, Francesco; de Soyres, François; Di Lupidio, Benedetta; Fidora, Michael; Franco-Bedoya, Sebastian; Frohm, Erik; Gradeva, Katerina; Lopez-Garcia, Paloma; Koester, Gerrit; Nickel, Christiane; Osbat, Chiara; Pavlova, Elena; Schmitz, Martin; Schroth, Joachim; Skudelny, Frauke; Tagliabracci, Alex; Vaccarino, Elena; Wörz, Julia; Dorrucci, Ettore
  13. The Procyclicality of Banking : Evidence from the Euro Area By Huizinga, Harry; Laeven, Luc
  14. Doom Loop or Incomplete Union? Sovereign and Banking Risk By Giorgio Barba Navaretti; Giacomo Calzolari; José Manuel Mansilla-Fernández; Alberto Franco Pozzolo
  15. Monetary policy, firms’ inflation expectations and prices: causal evidence from firm-level data By Marco Bottone; Alfonso Rosolia
  16. The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks By Stefano Neri; Stefano Siviero

  1. By: Altavilla, Carlo; C. Andreeva, Desislava; Boucinha, Miguel; Holton, Sarah
    Abstract: As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account. JEL Classification: G21, G20, E52, E43
    Keywords: banks, credit, interest rates, monetary policy
    Date: 2019–05
  2. By: Kelly, Jane; Le Blanc, Julia; Lydon, Reamonn
    Abstract: Using household survey data, we document evidence of a loosening of credit standards in Euro area countries that experienced a property price boom-and-bust cycle. Borrowers in these countries exhibited significantly higher loan-to-value (LTV) and loan-to-income (LTI) ratios in the run up to the financial crisis, and an increasing tendency towards longer-term loans compared to borrowers in other countries. In recent years, despite the long period of historically low interest rates and substantial house price increases in some countries, we do not find similar credit easing as before the crisis. Instead, we find evidence of a considerable change in borrower characteristics since 2010: new borrowers are older and have higher incomes than before the crisis. JEL Classification: E5, G01, G17, G28, R39
    Keywords: financial crisis, financial regulation, financial stability, macroprudential policy, survey data
    Date: 2019–05
  3. By: Timo Henckel (Australian National University & Centre for Applied Macroeconomic Analysis); Gordon D. Menzies (University of Technology Sydney & Centre for Applied Macroeconomic Analysis); Peter Moffat (University of East Anglia); Daniel J. Zizzo (University of Queensland & Centre for Applied Macroeconomic Analysis)
    Abstract: We use the behavior of inflation among Eurozone countries to provide information about the degree of credibility of the European Central Bank (ECB) since 2008. We define credibility along three dimensions-official target credibility, cohesion credibility and anchoring credibility - and show in a new econometric framework that the latter has deteriorated in recent history; that is, price setters are less likely to rely on the ECB target when forming inflation expectations.
    Keywords: credibility; infl?ation; expectations; anchoring; monetary union; inferential expectations
    JEL: C51 D84 E31 E52
    Date: 2019–02–21
  4. By: Hoang Sang Nguyen (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Fabien Rondeau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper evaluates macroeconomic interdependencies of seven Central and Eastern European Countries (CEECs) with the Euro Area (EA) through trade relationship. We estimate a near-VAR model and we simulate responses of activity in those CEECs to output shocks for twelve former members of the EA before and after the 2004 enlargement of the European Union (EU). During both periods, empirical results show that spillover effects come through the main economies of the EA: Germany, France and Italy. Furthermore, CEECs are more responsive to output shocks in the EA after 2004 than before (3.3 times larger on average). Increases in spillover effects are larger for the three CEECs that adopted the Euro early (Slovenia, Slovakia, and Estonia) than the other CEECs (4.9 versus 2.1) but without higher trade intensity with the EA (1.07 versus 1.12). Our results show that trade effects are positive inside the same currency area but negative for the CEECs without the euro. JEL Classifications: F13, F15, F45
    Keywords: Enlargement,European Union,Trade Spillovers,Euro,Near-VAR,OCA
    Date: 2019–03–27
  5. By: Sondermann, David; Vansteenkiste, Isabel
    Abstract: In this paper we investigate the impact of the euro integration process on the drivers of FDI inflows. We show theoretically and empirically that the single currency alters the drivers of FDI inflows across its Member States. Estimating bilateral gravity models of FDI inflows into euro area countries, we show that the euro facilitates intra-euro area vertical FDI flows but reduces incentives for horizontal or market seeking FDI. Instead, horizontal FDI flows stemming from investor countries located outside the monetary union increase. Such flows are however not more likely be directed towards euro area countries with larger domestic markets but rather to countries that are close to large euro area markets and that have higher quality institutions. Overall, these results suggest that while the euro has been beneficial to FDI inflows into the monetary union, the impact differs significantly across countries. The global financial crisis does not change our main findings. Our results are robust to various economic specifications. JEL Classification: F21, F23, F45, O43
    Keywords: economic structures, euro, euro area countries, Foreign direct investment, institutions
    Date: 2019–04
  6. By: Arianna Miglietta (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: We develop a measure of systemic stress for the Italian financial markets (FCI-IT) that aggregates information from five major segments of the whole financial system, i.e. the money market, the bond market, the equity market, the foreign exchange market and the market for stocks of financial intermediaries. The index builds on the methodology of the Composite Indicator of Systemic Stress (CISS) developed by Hollò, Kremer and Lo Duca (2012) for the euro area. We set up a simple TVAR model to verify whether the proposed measure is able to provide significant and consistent information about the evolution of macroeconomic variables when financial conditions change. The indicator’s performance is evaluated against two alternative metrics publicly available (e.g. the euro-area CISS and the Italian CLIFS). Our results show that FCI-IT behaves quite similarly to the other indexes considered in signalling high-stress periods, but it also identifies episodes of financial distress for the Italian economy which are disregarded by the other two. During periods of high stress, the effects of financial shocks on gross domestic product are significant.
    Keywords: Financial stability, systemic risk, financial condition index
    JEL: G01 G10 G20 E44
    Date: 2019–04
  7. By: William Oman (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, International Monetary Fund (IMF))
    Abstract: Using a frequency-based filter, I document the existence of a euro-area financial cycle and high- and low-amplitude national financial cycles. Applying concordance and similarity analysis to business and financial cycles, I provide evidence of five empirical regularities: (i) the aggregate euro-area creditto- GDP ratio behaved procyclically in the years preceding euro-area recessions; (ii) financial cycles are less synchronized than business cycles; (iii) business cycle synchronization has increased while financial cycle synchronization has decreased; (iv) financial cycle desynchronization was more pronounced between high-amplitude and low-amplitude countries, especially Germany; (v) high-amplitude countries and Germany experienced divergent leverage dynamics after 2002.
    Keywords: Business cycle,Economic integration,Euro area,Financial cycle,Monetary policy
    Date: 2019–03
  8. By: Ganau, Roberto; Rodríguez-Pose, Andrés
    Abstract: We investigate the extent to which regional institutional quality shapes firm labour productivity in western Europe, using a sample of manufacturing firms from Austria, Belgium, France, Germany, Italy, Portugal and Spain, observed over the period 2009-2014. The results indicate that regional institutional quality positively affects firms' labour productivity and that government effectiveness is the most important institutional determinant of productivity levels. However, how institutions shape labour productivity depends on the type of firm considered. Smaller, less capital endowed and high-tech sectors are three of the types of firms whose productivity is most favourably affected by good and effective institutions at the regional level.
    Keywords: Cross-Country Analysis; labour productivity; Manufacturing firms; Regional Institutions; Western Europe
    JEL: C23 D24 H41 R12
    Date: 2019–04
  9. By: Weistroffer, Christian; Opricǎ, Silviu
    Abstract: Using newly available information on euro area sectoral holdings of securities, this paper investigates to what extent the presence of institutional investors affects volatility and liquidity in secondary bank bond markets. We find that non-bank financial intermediaries, in particular money market funds (MMFs), have a positive impact on secondary bank bond markets’ liquidity conditions, at the cost of significantly increasing volatility of daily returns. The effect translates to more than a 19% improvement in liquidity conditions and up to 57% increase in daily-return volatility, assuming MMFs hold about 10% of the notional amount in the secondary market of a representative euro area bank bond. The effect is relative to the impact the non-financial private sector has on markets. Investment funds, insurance corporations and pension funds are found to similarly affect market conditions, though to a lesser magnitude. We find a trade-off between volatility and liquidity, where the stronger presence of institutional investors at the same time improves liquidity and increases volatility. The results suggest that possible structural shifts in investor composition matter for market conditions and should be monitored by financial stability authorities. JEL Classification: G10, G15, G23
    Keywords: Bond Liquidity, Financial Markets, Generalized Method of Moments, Institutional Ownership, Securities Holdings
    Date: 2019–05
  10. By: Tibor Lalinsky (National Bank of Slovakia); Marian Jaanika Meriküll (Eesti Pank)
    Abstract: We investigate how adopting the euro affects exports using firmlevel data from Slovakia and Estonia. In contrast to previous studies, we focus on countries that adopted the euro individually and had different exchange rate regimes prior to doing so. Following the New Trade Theory we consider three types of adjustment: firm selection, changes in product varieties and changes in the average value of the exports that compose the exports of individual firms. The euro effect is identified by a difference in differences analysis comparing exports to the euro area countries with exports to the non-euro area EU countries. The results highlight the importance of the transaction costs channel related to exchange rate volatility. We find the euro has a strong pro-trade effect in Slovakia, which switched to the euro from a floating exchange rate, while it has almost no effect in Estonia, which had a fixed exchange rate to the euro prior to the euro changeover. Our findings indicate that the euro effect manifested itself mainly through the intensive margin and that the gains from trade were heterogeneous across firm characteristics.
    Keywords: international trade, common currency areas, euro adoption, transaction costs, Slovakia, Estonia, firm-level data
    JEL: F14 F15
    Date: 2019–03
  11. By: Jorge E. Galán (Banco de España)
    Abstract: The credit-to-GDP gap computed under the methodology recommended by Basel Committee for Banking Supervision (BCBS) suffers of important limitations mainly regarding the great inertia of the estimated long-run trend, which does not allow capturing properly structural changes or sudden changes in the trend. As a result, the estimated gap currently yields large negative values which do not reflect properly the position in the financial cycle and the cyclical risk environment in many countries. Certainly, most countries that have activated the Countercyclical Capital Buffer (CCyB) in recent years appear not to be following the signals provided by this indicator. The main underlying reason for this might not be only related to the properties of statistical filtering methods, but to the particular adaptation made by the BCBS for the computation of the gap. In particular, the proposed one-sided Hodrick-Prescott filter (HP) only accounts for past observations and the value of the smoothing parameter assumes a much longer length of the credit cycle that those empirically evidenced in most countries, leading the trend to have very long memory. This study assesses whether relaxing this assumption improves the performance of the filter and would still allow this statistical method to be useful in providing accurate signals of cyclical systemic risk and thereby inform macroprudential policy decisions. Findings suggest that adaptations of the filter that assume a lower length of the credit cycle, more consistent with empirical evidence, help improve the early warning performance and correct the downward bias compared to the original gap proposed by the BCBS. This is not only evidenced in the case of Spain but also in several other EU countries. Finally, the results of the proposed adaptations of the HP filter are also found to perform fairly well when compared to other statistical filters and model-based indicators.
    Keywords: credit-to-GDP gap, cyclical systemic risk, early-warning performance, macroprudential policy, statistical filters
    JEL: C18 E32 E58 G01 G28
    Date: 2019–04
  12. By: Gunnella, Vanessa; Al-Haschimi, Alexander; Benkovskis, Konstantins; Chiacchio, Francesco; de Soyres, François; Di Lupidio, Benedetta; Fidora, Michael; Franco-Bedoya, Sebastian; Frohm, Erik; Gradeva, Katerina; Lopez-Garcia, Paloma; Koester, Gerrit; Nickel, Christiane; Osbat, Chiara; Pavlova, Elena; Schmitz, Martin; Schroth, Joachim; Skudelny, Frauke; Tagliabracci, Alex; Vaccarino, Elena; Wörz, Julia; Dorrucci, Ettore
    Abstract: The studies summarised in this paper focus on the economic implications of euro area firms’ participation in global value chains (GVCs). They show how, and to what extent, a large set of economic variables and inter-linkages have been affected by international production sharing. The core conclusion is that GVC participation has major implications for the euro area economy. Consequently, there is a case for making adjustments to standard macroeconomic analysis and forecasting for the euro area, taking due account of data availability and constraints. JEL Classification: F6, F10, F14, F16, E3
    Keywords: euro area, global value chains, international interlinkages, international trade, vertical specialisation
    Date: 2019–04
  13. By: Huizinga, Harry (Tilburg University, Center For Economic Research); Laeven, Luc (Tilburg University, Center For Economic Research)
    Abstract: Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation of bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption, and the divergent growth experiences of euro area countries following the global financial crisis.
    Keywords: procyclicality; loan loss provisions
    JEL: G20
    Date: 2019
  14. By: Giorgio Barba Navaretti (University of Milan and LdA); Giacomo Calzolari (European University Institute, CEPR and LdA); José Manuel Mansilla-Fernández (Universidad Pùblica de Navarra and LdA); Alberto Franco Pozzolo (University of Molise and LdA)
    Abstract: This chapter discusses the foremost regulatory advances and policy proposals for the so-called "doom loop", i.e. the perverse and destabilizing interconnections between sovereigns' and banks liabilities. We discuss how the merits of the proposed regulatory reforms are strictly intertwined with the mechanisms of risk sharing being built up and implemented within the Baking Union, and more broadly within the Eurozone. We argue that it is very unlikely that there might be viable solutions to the regulatory treatment of Sovereign exposures without a strenghtening of risk-sharing mechanisms.
    Date: 2019–04–29
  15. By: Marco Bottone (Bank of Italy); Alfonso Rosolia (Bank of Italy)
    Abstract: We empirically explore the direct and immediate response of firms’ inflation expectations to monetary policy shocks. We use the Bank of Italy’s quarterly Survey of Inflation and Growth Expectations, in operations since 2000, and compare average point inflation expectations of firms interviewed in the days following scheduled ECB Governing Council meetings with those of firms interviewed just before them; we then relate the difference we find to the change in the nominal market interest rates recorded on Governing Council meeting days, a gauge of the unanticipated component of monetary policy communications. We find that unanticipated changes in market rates are negatively correlated in a statistically significant way with the differences in inflation expectations between the two groups of firms and that this effect has become stronger since 2009. We do not find evidence that firms’ pricing plans are affected by these monetary policy shocks nor that firms perceive significant changes in the main determinants of their pricing choices.
    Keywords: inflation expectations, firm surveys, monetary policy, high frequency identification
    JEL: D22 E3 E5
    Date: 2019–04
  16. By: Stefano Neri (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: This paper examines the challenges faced by the European Central Bank since the outbreak of the global financial crisis. From 2008 to 2014, the need to preserve the correct functioning of the monetary policy transmission mechanism and ensure the supply of credit to the private sector stretched the limits of conventional monetary policy. In 2015, the risk of deflation led the ECB to start a large scale asset purchase programme. The analysis is largely based on a review of the many studies that Banca d’Italia staff has produced on the factors that have brought inflation to unprecedented low levels in 2014 and on the effects of the asset purchase programme.
    Keywords: monetary policy, global financial crisis, sovereign debt crisis, deflation, asset purchases
    JEL: I31 I32 D63 D31
    Date: 2019–03

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