nep-eec New Economics Papers
on European Economics
Issue of 2019‒08‒26
seven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The effects of the eurosystem's APP on euro area bank lending: Letting different data speak By Blaes, Barno A.; Kraaz, Björn; Offermanns, Christian J.
  2. Did Austerity Cause Brexit? By Fetzer, Thiemo
  3. Effects of QE on sovereign bond spreads through the safe asset channel By Jan Willem van den End
  4. Interest Rate Bands of Inaction and Play-Hysteresis in Domestic Investment - Evidence for the Euro Area By Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
  5. Do conventional monetary policy instruments matter in unconventional times? By Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
  6. An investigation of the exchange rate pass-through in the Baltic states By Mariarosaria Comunale
  7. Inflation expectations and consumer spending: the role of household balance sheets By Lieb, Lenard; Schuffels, Johannes

  1. By: Blaes, Barno A.; Kraaz, Björn; Offermanns, Christian J.
    Abstract: We study the implications of the Eurosystem's expanded Asset Purchase Programme (APP) for the bank lending business of euro area banks with euro area non-financial corporations (NFCs) using microeconometric matching techniques. Based on confidential bank-level data on quantitative balance sheet items and interest rates as well as on qualitative survey responses to the Eurosystem's Bank Lending Survey, we identify the exposure of banks to the APP and corresponding effects on loan growth. We find that the APP was effective in stimulating the lending activity with NFCs for a subset of relatively sound banks. At the same time, our results show that there is a non-negligible number of banks with less healthy balance sheets which could not transfer the APP stimulus into more lending. Instead, such banks appear to have used the APP stimulus for consolidating their balance sheets, thereby also reducing their lending business with NFCs. This confirms the importance of accounting for the large degree of heterogeneity in the euro area banking sector in analyses of the effectiveness of monetary policy measures.
    Keywords: lending to non-financial corporations,bank-level data,bank heterogeneity,unconventional monetary policy,treatment effects,regression-adjusted matching
    JEL: E52 G21 C21
    Date: 2019
  2. By: Fetzer, Thiemo
    Abstract: This paper documents a significant association between the exposure of an individual or area to the UK government's austerity-induced welfare reforms begun in 2010, and the following: the subsequent rise in support for the UK Independence Party, an important correlate of Leave support in the 2016 UK referendum on European Union membership; broader individual-level measures of political dissatisfaction; and direct measures of support for Leave. Leveraging data from all UK electoral contests since 2000, along with detailed, individual-level panel data, the findings suggest that the EU referendum could have resulted in a Remain victory had it not been for austerity.
    Keywords: austerity; EU; Globalization; political economy; voting
    JEL: D72 H2 H3 H5 P16
    Date: 2019–07
  3. By: Jan Willem van den End
    Abstract: We show that through the safe asset channel the excess liquidity created by QE can lead to higher sovereign bond spreads in the euro area. This unintended effect is most likely in stressed markets when excess liquidity spurs demand for tradeable safe assets, pushing down the interest rate of these assets, which widens risk spreads. Outcomes of a panel regression model estimated for individual euro area countries confirm that the excess liquidity created by QE had an upward effect on sovereign bond spreads. It indicates that the safe asset channel dominates the usual portfolio rebalancing channel. For monetary policy the results imply that QE is not an appropriate instrument to address country specific shocks.
    Keywords: interest rates, central banks and their policies, monetary policy
    JEL: E43 E58 E52
    Date: 2019–08
  4. By: Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
    Abstract: The interest rate represents an important monetary policy tool to steer investment in order to reach price stability. Therefore, implications of the exact form and magnitude of the interest rate-investment nexus for the European Central Bank's effectiveness in a low interest rate environment gain center stage. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call 'play' area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia.
    Keywords: European Central Bank,interest rate,investment,monetary policy,non-ideal relay,path-dependence,play-hysteresis,uncertainty
    JEL: C32 E44 E49 E52 F21
    Date: 2019
  5. By: Buchholz, Manuel; Schmidt, Kirsten; Tonzer, Lena
    Abstract: This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks' incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by wellcapitalized banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.
    Keywords: bank portfolio,central bank reserves,monetary policy
    JEL: E52 G11 G21
    Date: 2019
  6. By: Mariarosaria Comunale
    Abstract: In this paper, we investigate the Exchange Rate Pass-Through (ERPT) to import and consumer prices in the three Baltic states. We apply reduced form equations first. Then, to look at measures of shock-dependent ERPT, we use Bayesian VARs with zero and sign restrictions and a local projection exercise, using common euro area shocks. We find that results from reduced form equations are in line with the ERPT literature. As for shock-dependent ERPTs, the magnitudes are overall bigger than in the literature in the case of import prices. They get smaller for consumer prices and even smaller if we remove energy and food prices.
    Keywords: Exchange Rate Pass-Through, Baltic states, Shock dependence
    JEL: E31 F3 F41
    Date: 2019–08
  7. By: Lieb, Lenard (General Economics 2 (Macro)); Schuffels, Johannes (General Economics 2 (Macro))
    Abstract: Research interest in the reaction of consumption to expected inflation has increased sharply in recent years due to efforts by central banks to kick-start demand through higher inflation expectations. We contribute to this literature by analyzing whether various components of households’ balance sheets determine how consumption reacts to expected inflation. Many channels are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget constrained or sufficiently liquid to shift funds between consumption and savings. We use household-level information on balance sheets, vehicle expenditures and inflation expectations from the Dutch Central Bank’s Household Survey. We find evidence for a relation between a household’s expected inflation and the probability to have positive expenditures on durables. This effect is stronger for households with low net worth. We find no evidence of such effects on the amount of durable expenditures.
    JEL: D84 E31 E21
    Date: 2019–08–20

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