nep-eec New Economics Papers
on European Economics
Issue of 2019‒07‒22
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. EMU-Risk Synchronisation and Financial Fragility Through the Prism of Dynamic Connectedness By Ioannis Chatziantoniou; David Gabauer
  2. Effects of the ECB’s Unconventional Monetary Policy on Real and Financial Wealth By Clara De Luigi; Martin Feldkircher; Philipp Poyntner; Helene Schuberth
  3. Money Market Funds and Unconventional Monetary Policy By Bua, Giovanna; Dunne, Peter G.; Sorbo, Jacopo
  4. On the Credit and Exchange Rate Channels of Central Bank Asset Purchases in a Monetary Union By Matthieu Darracq Paries; Niki Papadopoulou
  5. Tracing the impact of the ECB’s asset purchase programme on the yield curve By Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
  6. The Third Round of the Euro Area Enlargement: Are the Candidates Ready? By Milan Deskar-Škrbić; Karlo Kotarac; Davor Kunovac
  8. The Euro-Area Government Spending Multiplier at the Effective Lower Bound By Adalgiso Amendola; Mario di Serio; Matteo Fragetta; Giovanni Melina
  9. Euro Area Accession and its Effect on Manufacturing By Magdalena Vlahova-Veleva
  10. The demand for Swiss banknotes: some new evidence By Katrin Assenmacher; Franz Seitz; Jörn Tenhofen

  1. By: Ioannis Chatziantoniou (Portsmouth Business School); David Gabauer (Webster Vienna Private University, Johannes Kepler University)
    Abstract: This study employs dynamic connectedness as a measure of financial risk synchronisation considering government bond yields in 11 EMU member states. In particular, large values of the relevant index can be an indication of comparable levels of risk further implying that the common currency area consists of a financially sensible set of countries. By contrast, small connectedness values can be an indication of fragmentation whereupon certain countries are considered to be safer than others. The latter would be detrimental for the EMU as it fuels financial fragility, which practically stipulates that crises occur as a result of self-fulfilling market fears. The results are based on a daily dataset which spans between 1st September 2003 and 31st August 2018. Findings show that fragmentation was present at the height of the European sovereign debt crisis and that the interconnectedness has not yet reverted to its pre-2009 levels. In addition, core countries appear to transmit shocks to periphery countries although, occasionally, there are noteworthy disparities. Further investigating these disparities on a pairwise connectedness level – which helps to identify sensible pairs of countries in terms of financial risk – shows that core countries dominate this exercise, with the exception of the bilateral relation between Italy and Spain. The fact that most periphery countries of our sample are not included in these pairs raises concerns and calls for a more substantial integration.
    Keywords: OCA, ERM II, EMU, Fragmentation, Fragility Hypothesis
    JEL: C32 C50 F15 F33 F36
    Date: 2019–07–16
  2. By: Clara De Luigi (Foreign Research Division, Oesterreichische Nationalbank); Martin Feldkircher (Foreign Research Division, Oesterreichische Nationalbank); Philipp Poyntner (Department of Economics, Vienna University of Economics and Business); Helene Schuberth (Foreign Research Division, Oesterreichische Nationalbank)
    Abstract: We assess the impact of the ECB’s unconventional monetary policy (UMP) on the wealth distribution of households in ten euro area countries. For this purpose, we estimate the effects of an ECB balance sheet expansion on financial asset and housing prices by means of vector autoregressions. We then use the estimates to carry out micro simulations based on data from the Household Finance and Consumption Survey (HFCS). We find that the overall effect of UMP on the net wealth distribution of households differs depending on which wealth inequality indicators we use. There is an inequality-increasing effect for the majority of the countries under review when we use wealth inequality indicators that are sensitive to changes at the tails of the wealth distribution. The effect is more equalizing when we base our assessment on the Gini coefficient. It is also important to note that one-third of the households in our sample does not hold financial or housing wealth and is thus not directly affected by UMP measures via the asset price channel.
    Keywords: Monetary Policy, Inequality, Wealth, Quantitative Easing
    JEL: D14 D31 E44 E52 E58
    Date: 2019–07
  3. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland); Sorbo, Jacopo (Unipol Gruppo S.p.A.)
    Abstract: Using a unique dataset, covering more than 40 percent of euro area money market funds by asset value, we assess monetary policy effects on fund behaviour and performance.We find a strong but heterogeneous association between fund performance and the policy rate of the currency in which funds report and from this we ascertain how different combinations of conventional and unconventional monetary policies affect fund behaviour. Evidence from the speed of response to policy changes indicates a shortening of investment term when policy is easing and vice versa. This has supply-offunding implications across the first two years of the term structure. When euro area monetary policy is at its limit and when policy is expanded to include the use of unconventional measures, the gap between the rate earned at the ECB’s deposit facility and the yield on short term debt securities widens. In these conditions euro-reporting funds make indirect recourse to the deposit facility and raise their investments in euro-denominated tradable certificates of deposits. This behaviour progressively reduces the impact of unconventional measures on MMF performance. Otherwise, heterogeneity in fund responses to the monetary policy mix can be attributed to differential mandates and involves some combination of increased risktaking and diversification into assets issued by foreign entities.
    Keywords: Money Market Funds; Monetary Policy; Negative Interest Rates.
    JEL: E52 G15 G23 G28
    Date: 2019–06
  4. By: Matthieu Darracq Paries (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Paries et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogeneous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact.
    Keywords: DSGE models; banking; financial regulation; cross-country spillovers; bank lending rates; non-standard measures
    JEL: E4 E5 F4
    Date: 2019–03
  5. By: Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
    Abstract: We trace the impact of the ECB’s asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the “free-float of duration risk” borne by price-sensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia. JEL Classification: C5, E43, E52, E58, G12
    Keywords: central bank asset purchases, European Central Bank, non-standard monetary policy measures, term premia, term structure of interest rates
    Date: 2019–07
  6. By: Milan Deskar-Škrbić (The Croatian National Bank, Croatia); Karlo Kotarac (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia)
    Abstract: In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the later stages of the optimal currency area (OCA) theory we focus on the coherence of economic shocks between candidate countries and the euro area and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in monetary and exchange rate regimes.
    Keywords: euro area enlargement, economic shocks, BVAR, common monetary policy, Mundellian trilemma
    JEL: E32 E52
    Date: 2019–07
  7. By: Aleksandra Kordalska (Gdansk University of Technology, Gdansk, Poland); Magdalena Olczyk (Gdansk University of Technology, Gdansk, Poland)
    Abstract: The goal of the paper is to decompose gross exports/imports to/from Germany for seven selected economies in Central and Eastern Europe (CEE): the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, and Slovakia for 2000 and 2014, to identify the role of German in absorbing, reflecting, and redirecting CEE trade. We use a gross trade decomposition proposed by Borin and Mancini (2017), which is the extended version of the methodology of Koopman, Wang, and Wei (KWW; 2014). Our analysis shows the deep integration of CEE into ‘Factory Germany’ as well as also the overestimated role of Germany as a market of final destination. Germany plays the increasing role in CEE export redirection (and vice versa) to extra-European destinations, especially to the US, China, and Russia. Additionally, we state that the Baltic countries and Poland export domestic value added mostly included in services, while the Visegrád countries do so in manufacturing.
    Keywords: value-added exports, CEE economies, trade linkages, GVC decomposition
    JEL: F1 F14 F1
    Date: 2019–07
  8. By: Adalgiso Amendola; Mario di Serio; Matteo Fragetta; Giovanni Melina
    Abstract: We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
    Date: 2019–06–28
  9. By: Magdalena Vlahova-Veleva (Sofia University “St. Kliment Ohridski”, Faculty of Economics and Business Administration)
    Abstract: A single currency could bring both benefits and challenges, hence, this paper examines one of the various dimensions of euro adoption. Moreover, although previous studies have illuminated the euro effect on inflation and trade, the research on manufacturing remains limited. The paper aims to make an assessment of whether euro area accession has an impact on industrial output in the context of the manufacturing sector, as this sector is considered to have a crucial role for sustainable economic growth. The research fits a panel regression model for seven-euro area member states from Central and Eastern Europe and covers a 16-year period from 2003 to 2018. The findings suggest that the participation in the monetary union might increase manufacturing turnover for its members.
    Keywords: Economic and Monetary Union, euro, panel regression, manufacturing.
    JEL: E50 L60 O52
    Date: 2019–07
  10. By: Katrin Assenmacher; Franz Seitz; Jörn Tenhofen
    Abstract: Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for large-denomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded. Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.
    Keywords: Currency in Circulation, Cash, Demand for Banknotes, Hoarding of Banknotes, Banknotes Held by Non-residents
    JEL: E41 E52
    Date: 2019

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