nep-eec New Economics Papers
on European Economics
Issue of 2019‒09‒23
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Introducing ECB-BASE: The blueprint of the new ECB semi-structural model for the euro area By Angelini, Elena; Bokan, Nikola; Christoffel, Kai; Ciccarelli, Matteo; Zimic, Srečko
  2. Financial stability assessment for EU candidate countries and potential candidates By Comunale, Mariarosaria; Geis, André; Gkrintzalis, Ioannis; Moder, Isabella; Polgár, Éva Katalin; Quaglietti, Lucia; Savelin, Li
  3. Endogenous TFP, business cycle persistence and the productivity slowdown By Schmöller, Michaela; Spitzer, Martin
  4. “Increasing contingent guarantees: The asymmetrical effect on sovereign risk of different government interventions" By Manish K. Singh; Marta Gómez-Puig; Simón Sosvilla-Rivero
  5. What is the fiscal stress in Euro Area? Evidence from a joint monetary-fiscal structural model By Gerba, Eddie
  6. ECB policy consistency – loss of independence and the real estate bubble? By Rybacki, Jakub
  7. Public Debt and Economic Growth nexus: A Dynamic Panel ARDL approach By Attard, Juergen
  8. The Relation between Municipal and Government Bond Yields in an Era of Unconventional Monetary Policy By Kneezevic, David; Nordström, Martin; Österholm, Pär
  9. Assessing reliability of aggregated inflation views in the European Commission Consumer Survey By Ewa Stanisławska; Maritta Paloviita; Tomasz Łyziak
  10. Modelling and forecasting the dollar-pound exchange rate in the presence of structural breaks By Jennifer Castle; Takamitsu Kurita

  1. By: Angelini, Elena; Bokan, Nikola; Christoffel, Kai; Ciccarelli, Matteo; Zimic, Srečko
    Abstract: This paper presents the blueprint of a new ECB multi-country model. The version documented in the following pages is estimated on euro area data. As a prelude to the country models, this version is meant to enhance the understanding of the main model mechanisms, enlarge the suite of area wide tools, and provide a tool for a top down approach between euro area and country modelling. The model converges to a well-defined steady state and its properties are in line with macroeconomic theory and standard empirical benchmarks. The design is aligned to its role as workhorse model in the context of the forecasting and policy simulation exercises at the ECB. JEL Classification: C3, C5, E1, E2, E5
    Keywords: euro area, forecasting, monetary policy, Semi-structural model, simulations
    Date: 2019–09
  2. By: Comunale, Mariarosaria; Geis, André; Gkrintzalis, Ioannis; Moder, Isabella; Polgár, Éva Katalin; Quaglietti, Lucia; Savelin, Li
    Abstract: This paper reviews and assesses financial stability challenges in countries preparing for EU membership, i.e. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia and Turkey. The paper mainly focuses on the period since 2016 (unless the analysis requires a longer time span) and on the banking sectors that dominate financial systems in this group of countries. For the Western Balkans, the paper analyses recent trends in financial intermediation, as well as the two main challenges that have been identified in the past. Asset quality continues to improve, but the share of non-performing loans is still high in some countries, while regulatory, legal and tax impediments are still to be resolved in most cases. High unofficial euroisation is a source of indirect credit risk for countries with their own national legal tender, which calls for continued efforts to promote the use of domestic currencies in the financial system. At the same time, banking systems seem less prone to financial stress from maturity mismatches than certain EU peers. These risks are met with a solid shock-absorbing capacity in the Western Balkans, as exemplified by robust capital and liquidity buffers. Turkey experienced a period of heightened financial stress during 2018 and, while its banking system appears to have sufficient buffers to absorb shocks overall, significant forex borrowing of corporates and high rollover needs of banks in foreign exchange on the wholesale market constitute considerable financial stability risks. JEL Classification: F31, F34, F36, G15, G21, G28
    Keywords: Banking sector, credit growth, EU accession, financial stability, foreign exchange lending, non-performing loans, Turkey., Western Balkans
    Date: 2019–09
  3. By: Schmöller, Michaela; Spitzer, Martin
    Abstract: This paper analyses the procyclicality of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. Total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession an increase in liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response over the business cycle which helps rationalizing both the negligible fall in inflation during the Great Recession and the sluggish increase of inflation in the subsequent recovery.
    JEL: E24 E32 O31
    Date: 2019–09–18
  4. By: Manish K. Singh (Department of Management Studies, Indian Institute of Technology Delhi, India); Marta Gómez-Puig (Department of Economics & Riskcenter, Universitat de Barcelona, Spain); Simón Sosvilla-Rivero (Complutense Institute of Economic Analysis (ICAE), Universidad Complutense de Madrid, Spain)
    Abstract: Government interventions to support the financial institutions fall into two broad categories: direct interventions (which immediately increase the government's financing need) and off-balance sheet contingent guarantees (which have no immediate impact on debt but will add to government debt as and when a loss materializes). If financial sector losses are independent of sovereign's own risk, all else being equal, they must have the same effect on the sovereign's risk profile, even though they impact the government balance sheet differently. In this paper, we study the nature and effectiveness of a government's interventions on its own risk profile. Our findings suggest that direct assistance has a significantly large effect on sovereign risk, while the effect of contingent guarantees is statistically not significant, being significant only for the euro area founders. Controlling for government interventions, we also find that GDP, perceived government effectiveness, economic sentiment, size of the financial sector, and membership of the euro area reduce the sovereign risk, while asset concentration within financial sector, unemployment and ination have an adverse effect. Our findings support Bresciani and Cossaro (2016)'s claim that during the sovereign debt crisis, governments undertook complex financial operations to change the composition of their interventions towards contingent guarantees.
    Keywords: Sovereign risk, Financial assistance, Fiscal capacity, Bailout, Contingent guarantee JEL classification:G01, H63
    Date: 2019–09
  5. By: Gerba, Eddie
    Abstract: I examine the importance of fiscal policy in stabilizing the Euro Area economy and the degree of interaction with monetary policy. The results provide solid evidence of a common fiscal reaction in the monetary union despite the lack of a formal fiscal union. I identify area-wide shocks and find statistically significant (endogenous) responses of fiscal policies to shocks. I also find strong evidence for interactions between fiscal-and monetary policy. Said that, the nature of interactions depends very much on the shocks that hit the economy. At the same time, the way the two fiscal policies interact with monetary policy is also different and independent of each other. Furthermore, the spending multiplier is higher than the tax multiplier. Nonetheless, their relative efficacy has changed over time, with the spending (tax) multiplier falling (rising) since the onset of the Great Recession. To conclude, there are considerable differences in the nature of Euro Area monetary-fiscal interactions compared to the US. Not only are the impulse responses to different shocks significantly different, but also the fiscal multipliers vary a lot. Keynesian (or spending-oriented) fiscal policy is more effective in expanding output in the Euro Area while tax reductions are more effective in the US.
    Keywords: structural BVAR; sign restrictions; fiscal multipliers; fiscal and monetary transmission; debt channel
    JEL: F3 G3
    Date: 2018–11–09
  6. By: Rybacki, Jakub
    Abstract: During the period 2015-2018 European Central Bank (ECB) has implemented a large-scale asset purchases program in order to revive inflation expectations and achieve sustainable annual HICP dynamics close to 2%. Furthermore, bank communicated that policy should remain accommodative for a long time in the foreseeable future. Based on an extended Taylor rule with Wu-Xia shadow rates and variable Holston-Laubach-Williams natural rates we analyzed discretionary deviation in policy of ECB, US Federal Reserve (Fed) and Bank of England. We identified a widening dovish bias in ECB Governing Council policy during the years 2015-2019. Such policy resulted in increase of real estate prices and the risk of market bubble measured by the UBS index. The likely consequence of this problem is a decrease in public trust in central banks and increase of support for populist movements.
    Keywords: forward guidance, large scale asset purchases, quantitative easing, time consistency, real estate bubbles
    JEL: E52 E58
    Date: 2019–09–05
  7. By: Attard, Juergen
    Abstract: The impact of public debt on economic growth has been a pertinent topic over the last decade following the financial and global economic crisis. This empirical study examines the debt and growth nexus for a panel of 25 European Union member states over the 1996-2017 period. A panel autoregressive distributed lag model (ARDL) is used to analyse the impact of debt on growth. This framework helps in determining both the long and short-run impact of debt on growth. This mitigates some limitations of previous empirical literature that explains either the short- or long-run effect. The full panel ARDL estimation illustrates a negative relationship between debt and growth both over the long and short-term. The debt and growth nexus, although of different magnitudes, is also negative across high and low levels of debt and across different time periods. Finally, a Dumitrescu Hurlin panel causality test is carried out to establish the causal direction between debt and growth. Evidence of bidirectional causality is detected for the full panel of countries. However, the direction of causality varies between countries with high and low average debt-to-GDP ratio.
    Keywords: Public Debt, Economic Growth, Panel ARDL, Causality, European Union
    JEL: H63
    Date: 2019–09
  8. By: Kneezevic, David (Kommuninvest of Sweden); Nordström, Martin (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper we investigate how the five-year Swedish municipal bond yield has been related to the corre-sponding yield on government bonds during the period that the Riksbank has conducted unconventional monetary policy in terms of bond purchases. Using daily Swedish data on bond yields from February 2015 to January 2018, we first conduct an event study to assess the short-run effects of the Riksbank’s bond-purchase announcements. We then estimate bivariate vector autoregressive models in order to study the dynamic relationship between the yields. Results from the event study suggest that the accumulated short-run effect of the Riksbank’s announcements was to lower the government bond yield by approximately 40 to 50 basis points and municipal bond yields by 30 to 35 basis points. Our vector autoregressive analysis indicates – in line with the event study – that an unexpected decrease in the government bond yield initially increases the municipal bond-yield spread. However, after approximately four weeks, the effect has been reversed and the municipal bond-yield spread is lower than it was initially. By conducting this analysis, we contribute to the understanding of the transmission of unconventional monetary policy.
    Keywords: Spread; Event study; Vector autoregression; Cointegration
    JEL: C32 E44 G10
    Date: 2019–09–19
  9. By: Ewa Stanisławska (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland); Tomasz Łyziak (Narodowy Bank Polski)
    Abstract: Using a novel approach based on micro-level survey responses, we assess the reliability of aggregated inflation expectations estimates in the European Commission Consumer Survey. We identify the share of consumers, whose qualitative and quantitative views on expected increase of prices do not match each other. Then we consider the impact of inconsistent survey responses on balance statistics and mean values of quantitative inflation expectations. We also analyze expectations’ formation estimating the sticky-information models. The results, based on Finnish and Polish data, suggest that even if the fraction of inconsistent survey responses is non-negligible, it matters neither for the aggregated figures of inflation views, nor for understanding of the formation of inflation expectations by consumers. We conclude that micro-level inconsistencies do not reduce the reliability of the current EC Consumer Survey dataset. Our results also indicate that inconsistent responses are not important drivers of the inflation overestimation bias displayed in the data.
    Keywords: inflation expectations, European Union, consumer survey.
    JEL: D12 D84
    Date: 2019
  10. By: Jennifer Castle; Takamitsu Kurita
    Abstract: We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate in an era of structural change. The paper uncovers a class of local data generation mechanisms underlying long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect the central banks’ monetary policy stances and the influence of a forward exchange market. The impact of the Brexit referendum is evaluated by examining forecasts when the dollar-pound exchange rate fell substantially around the vote.
    Keywords: Exchange rates, Monetary policy, General-to-speciï¬ c approach, Partial cointegrated vector autoregressive models, Structural breaks.
    JEL: C22 C32 C52 F31
    Date: 2019–01–07

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