nep-eec New Economics Papers
on European Economics
Issue of 2020‒01‒13
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic Effects of the ECB's Forward Guidance By Andrejs Zlobins
  2. A tale of two decades: the ECB’s monetary policy at 20 By Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
  3. SME access to finance in Europe: structural change and the legacy of the crisis By McQuinn, John
  4. Labour productivity and the wageless recovery By Antonio M. Conti; Elisa Guglielminetti; Marianna Riggi
  5. The effectiveness of the ECB’s asset purchases at the lower bound By Giuseppe Grande; Adriana Grasso; Gabriele Zinna
  6. Two tales of foreign investor outflows: Italy in 2011-2012 and 2018 By Valerio Della Corte; Stefano Federico
  7. Firms' or banks' weakness? Access to finance since the European sovereign debt crisis By Corbisiero, Giuseppe; Faccia, Donata
  8. On the Stability and Growth Pact compliance: what is predictable with machine learning? By Kea BARET; Theophilos PAPADIMITRIOU
  9. Interdependencies in the euro area derivatives clearing network: a multi-layer network approach By Rosati, Simonetta; Vacirca, Francesco
  10. A new approach to Early Warning Systems for small European banks By Bräuning, Michael; Malikkidou, Despo; Scricco, Giorgio; Scalone, Stefano
  11. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
  12. Bayesian VAR forecasts, survey information and structural change in the euro area By Gergely Ganics; Florens Odendahl
  13. An assessment of recent trends in market-based expected iflation in the euro area By Marcello Pericoli
  14. Increasing and Decreasing Labor Shares: Cross-Country Differences in the XXI Century By Sangmin Aum; Dongya Koh; Raül Santaeulàlia-Llopis
  15. Disaggregate income and wealth effects in the largest euro area countries By de Bondt, Gabe; Gieseck, Arne; Zekaite, Zivile; Herrero, Pablo
  16. An evaluation of alternative fiscal adjustment plans By Acocella, Nicola; Beqiraj, Elton; Di Bartolomeo, Giovanni; Di Pietro, Marco; Felici, Francesco
  17. Monetary Union and Financial Integration By Luca Fornaro
  18. A two-tier system for remunerating banks’ excess liquidity in the euro area: aims and possible side effects By Alessandro Secchi
  19. Corporate Leverage and Monetary Policy Effectiveness in the Euro Area By Simone Auer; Marco Bernardini; Martina Cecioni

  1. By: Andrejs Zlobins (Bank of Latvia)
    Abstract: This paper empirically evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) on the euro area economy and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (SVARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG (Odyssean since July 2013, Delphic prior to that). The FG shock is identified via both traditional sign and zero restrictions of Arias et al. (2014) and narrative sign restrictions of Antolin-Diaz and Rubio-Ram?rez (2018) which allow us to incorporate additional information about the timing of the shock to sharpen the inference. We find that the ECB's FG on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09%–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the expanded asset purchase programme (APP) in 2015 considerably enhanced the FG credibility. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.
    Keywords: forward guidance, central bank communication, unconventional monetary policy, euro area, structural VAR
    JEL: C54 E32 E52 E58
    Date: 2019–11–25
  2. By: Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
    Abstract: The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the ECB’s record and learn lessons that can improve the conduct of policy in the future. This paper charts the way the ECB has defined, interpreted and applied its monetary policy framework – its strategy – over the years from its inception, in search of evidence and lessons that can inform those reflections. Our “Tale of Two Decades” is largely a tale of “two regimes”: one – stretching slightly beyond the ECB’s mid-point – marked by decent growth in real incomes and a distribution of shocks to inflation almost universally to the upside; and the second – starting well into the post-Lehman period – characterised by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining element of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2% ceiling, functioned as a key shock-absorber in the relatively high-inflation years prior to the crisis, but offered a softer defence in the face of the disinflationary forces that hit the euro area in its aftermath. The imperative to halt persistent disinflation in the post-crisis era therefore called for a radical, unprecedented policy response, comprising negative policy rates, enhanced forms of forward guidance, a large asset purchase programme and targeted long-term loans to banks. We study the multidimensional interactions among these four instruments and quantify their impact on inflation and economic activity. JEL Classification: E50, E51, E52
    Keywords: financial crises, monetary policy, non-standard measures ECB, policy strategy
    Date: 2019–12
  3. By: McQuinn, John (Central Bank of Ireland)
    Abstract: Small and Medium Enterprise (SME) access to credit deteriorated during the financial crisis and credit constraints remain high for some euro area countries. This paper investigates the factors linked to the variation in SME credit access across euro area countries. After controlling for the fundamental performance and characteristics of firms and bank funding costs, I investigate the financial and macroeconomic channels that explain variation in credit constraints across countries and time. The paper combines approaches taken in the literature, extends the analysis to the post-crisis period, distinguishes between alternative measures of credit constraints and incorporates the role of soft information. The most economically important channels associated with SME access to finance are found to be the soft information channel and firm indebtedness. Bank competition and the condition of bank balance sheets are also found to have economically important relationships with SME access to finance.
    Keywords: access to finance, SMEs, financial crises, soft information, firm indebtedness, bank competition, bank balance sheets, capital markets union.
    JEL: G01 G21 D22 D82 E66
    Date: 2019–08
  4. By: Antonio M. Conti (Bank of Italy); Elisa Guglielminetti (Bank of Italy); Marianna Riggi (Bank of Italy)
    Abstract: We document that the feeble relation between wage growth and unemployment experienced by the euro area since the Global Financial Crisis has been coupled with a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2009 (acyclical) to negative since then (countercyclical). We argue that both facts can be explained by the strong persistence of the last recession and of the subsequent recovery. The relevance of the duration of the cyclical phase can be rationalized in a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent firms adjust relatively more the extensive margin, leading to a countercyclical response of labour productivity and only to a small reaction of wages. We take the model to the data using a Bayesian VAR, where persistent demand shocks are identified exploiting the theoretical prediction which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks (i) induce a lower reaction of wages to employment and (ii) have been a non negligible driver of employment and wage dynamics in the aftermath of the Global Financial Crisis.
    Keywords: missing wage growth, productivity, demand shocks, Bayesian VAR models, DSGE models.
    JEL: C32 E32 F34
    Date: 2019–12
  5. By: Giuseppe Grande (Bank of Italy); Adriana Grasso (Bank of Italy); Gabriele Zinna (Bank of Italy)
    Abstract: In this research note, we assess – both theoretically and empirically – whether net asset purchases by the ECB can further reduce term premiums and bond yields in the euro area. Theory says that, at the effective lower bound, the duration extracted by the central bank is no longer sufficient to assess the price impact of the purchases. In fact, we show empirically that their impact is state-contingent, and is smaller the more the shadow rate is below the short-rate lower bound, and the lower the volatility of bond yields. Nevertheless, central bank asset purchases are still effective in reducing long-term term premiums and bond yields. Moreover, in the euro area, there is room to reduce the duration held by the market. Overall, asset purchases remain a viable tool at the disposal of the ECB for exerting downward pressure on yields.
    Keywords: preferred-habitat theory, term premiums, effective lower bound, quantitative easing, large-scale asset purchases, forward guidance
    JEL: E43 E52 G12
    Date: 2019–12
  6. By: Valerio Della Corte (Bank of Italy); Stefano Federico (Bank of Italy)
    Abstract: This paper focuses on the Italian bond market tensions in 2018, one of the most severe episodes of financial turbulence in the euro area since the peak of the sovereign debt crisis in 2011-12. It provides a detailed description of foreign investor outflows during that episode, and it also looks more systematically at the behaviour of euro-area investors in foreign and domestic securities throughout all the episodes of (acute or mild) financial turmoil in the euro area from 2009 to 2018, using data disaggregated by holder sector and country and issuer country. We show that the outflows in the 2018 episode differed in several respects from those recorded in 2011-12, and cannot be considered as a `sudden stop'. Our broader analysis of investor behaviour during episodes of financial turmoil suggests that there is limited heterogeneity across investor categories. All foreign holders tend to pull out of a country during episodes of sovereign market stress, while domestic investors tend to repatriate their funds, although to a lesser extent since 2014.
    Keywords: Capital outflows, Sudden stops, Sovereign debt crisis, Italian bond market tensions, Investment behaviour.
    JEL: F32 F34 G01 G11 G15 H63
    Date: 2019–12
  7. By: Corbisiero, Giuseppe (Central Bank of Ireland); Faccia, Donata (European Central Bank)
    Abstract: This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank weakness and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers’ and lenders’ characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area.
    Keywords: Credit supply, Bank lending, Credit crunch, European sovereign debt crisis.
    JEL: E44 F36 G01 G21
    Date: 2019–10
  8. By: Kea BARET; Theophilos PAPADIMITRIOU
    Abstract: The aim of the paper is to propose simplest advanced indicators to prevent internal imbalances in European Union. The paper also highlights that new methods coming from Machine Learning field could be appropriate to forecast fiscal policy outcomes, instead of traditionnal econometrics approaches. The Stability and Growth Pact (SGP) and especially the 3% limit sets on the fiscal balance purpose to coordinate fiscal policies of the European Union member states and ensure debt sustainability. The Macroeconomic Imbalance Procedure (MIP) scoreboard introduced by the European Commission aims to verify the good conduct of public finances. We propose an analysis of the determinants of the SGP compliance by the 28 European Union members between 2006 ans 2018, through a Support Vector Machine model. More than testing if the MIP scoreboard variables really matter to forecast the risk of unsustainability, we also test a set of macroeconomic, monetary, and financial variables and apply a prior feature selection model which highlights the best predictors. We give some proofs that main primary indicators of the MIP scoreboard are not useful for SGP compliance forecast and we propose new variables to forecast the European Union supranational fiscal rule compliance.
    Keywords: Fiscal Rules; Stability and Growth Pact, Forecasting, Machine learning.
    JEL: E61 H11 H61 H62
    Date: 2019
  9. By: Rosati, Simonetta; Vacirca, Francesco
    Abstract: The global nature of derivatives markets, and the presence of large key financial institutions trading in several markets across the globe, call for taking a “macro” view on the interconnections arising in the clearing network. Based on the analysis of derivatives transactions data reported under the EMIR Regulation we reconstruct the network of relationships in the centrally-cleared derivatives market and analyse its topology providing insight into its structural features. The centrally-cleared derivatives network is modelled in the form of a multiplex network where each layer is represented by a derivatives asset class market. In turn, each node represents a single counterparty in that market. On the basis of different centrality measures applied to the collapsed aggregate and to the multiplex network, the critical participants of the euro area centrally-cleared derivatives market are identified and their level of interconnectedness analysed. This paper provides insight on how the collected data pursuant to the EMIR regulation can be used to shed light on the complex network of interrelations underlying the financial markets. It provides indications on structural features of the euro area centrally-cleared derivatives market and discusses policy relevant implications and future applications. JEL Classification: G01, G15, G23
    Keywords: CCP, derivatives markets, EMIR data, interconnectedness, multiplex network
    Date: 2019–12
  10. By: Bräuning, Michael; Malikkidou, Despo; Scricco, Giorgio; Scalone, Stefano
    Abstract: This paper describes a machine learning technique to timely identify cases of individual bank financial distress. Our work represents the first attempt in the literature to develop an early warning system specifically for small European banks. We employ a machine learning technique, and build a decision tree model using a dataset of official supervisory reporting, complemented with qualitative banking sector and macroeconomic variables. We propose a new and wider definition of financial distress, in order to capture bank distress cases at an earlier stage with respect to the existing literature on bank failures; by doing so, given the rarity of bank defaults in Europe we significantly increase the number of events on which to estimate the model, thus increasing the model precision; in this way we identify bank crises at an earlier stage with respect to the usual default definition, therefore leaving a time window for supervisory intervention. The Quinlan C5.0 algorithm we use to estimate the model also allows us to adopt a conservative approach to misclassification: as we deal with bank distress cases, we consider missing a distress event twice as costly as raising a false flag. Our final model comprises 12 variables in 19 nodes, and outperforms a logit model estimation, which we use to benchmark our analysis; validation and back testing also suggest that the good performance of our model is relatively stable and robust. JEL Classification: E58, C01, C50
    Keywords: bank distress, decision tree, machine learning, Quinlan
    Date: 2019–12
  11. By: Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
    Keywords: supervision, banking, AnaCredit, monetary policy, euro area crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2019–12
  12. By: Gergely Ganics (Banco de España); Florens Odendahl (Banque de France)
    Abstract: We incorporate external information extracted from the European Central Bank’s Survey of Professional Forecasters into the predictions of a Bayesian VAR, using entropic tilting and soft conditioning. The resulting conditional forecasts significantly improve the plain BVAR point and density forecasts. Importantly, we do not restrict the forecasts at a specific quarterly horizon, but their possible paths over several horizons jointly, as the survey information comes in the form of one- and two-year-ahead expectations. Besides improving the accuracy of the variable that we target, the spillover effects on “other-than-targeted” variables are relevant in size and statistically significant. We document that the baseline BVAR exhibits an upward bias for GDP growth after the financial crisis, and our results provide evidence that survey forecasts can help mitigate the effects of structural breaks on the forecasting performance of a popular macroeconometric model. Furthermore, we provide evidence of unstable VAR dynamics, especially during and after the recent Great Recession.
    Keywords: Survey of Professional Forecasters, density forecasts, entropic tilting, soft conditioning
    JEL: C32 C53 E37
    Date: 2019–12
  13. By: Marcello Pericoli (Bank of Italy)
    Abstract: This paper presents estimates of expected inflation and the inflation risk premium in the euro area inferred from asset prices. A model is developed that exploits both nominal and real bond yields, corrects for market liquidity and anchors expected inflation using survey-based expectation, The resulting estimate of long-term expected inflation fluctuates over time and declines sensibly starting in late 2018. By contrast, expected inflation estimated using inflation swap yields remains roughly unchanged throughout the whole sample period.
    Keywords: affine term structure model, expected inflation, inflation risk premium
    JEL: C32 E43 G12
    Date: 2019–12
  14. By: Sangmin Aum; Dongya Koh; Raül Santaeulàlia-Llopis
    Abstract: We describe the behavior of the labor share in the corporate sector for twenty OECD countries over the first 15 years of the XXI century. Our first finding is that the OECD labor share -a cross-country average- is trendless over this medium-run horizon after adjusting for the labor income generated from IPP rents as in Koh et al. (2017). Second, we find that the behavior of the labor share is largely heterogeneous across countries over this period. Indeed, the corporate labor share significantly increases for equally as many countries (e.g., France, Italy and the United Kingdom) as it decreases (e.g., Germany, Israel and the United States) over this period. Third, a decomposition of the corporate labor share behavior into that of its components shows that the cross-country differences in labor share trends are mainly driven by the differences in labor productivity growth and not wages.
    Keywords: labor share, intellectual property products, SNA revisions, cross-country, wages, Labor Productivity
    JEL: E01 E22 E25
    Date: 2019–12
  15. By: de Bondt, Gabe; Gieseck, Arne; Zekaite, Zivile; Herrero, Pablo
    Abstract: This study extends a thick modelling tool for aggregated euro area real private consumption of de Bondt et al. (2019) to the four largest euro area countries. The suite of error correction models performs well in and out of sample. The ranges and averages of estimated elasticities are, however, sensitive to the exact model specification. We also show that decomposing disposable income into labour, property and transfer income is essential for understanding and forecasting consumption. Finally, substantial crosscountry heterogeneity in marginal propensities to consume out of income and wealth components calls for caution when interpreting aggregate euro area developments. JEL Classification: C53, D12, E21, E27
    Keywords: income, private consumption, thick modelling, wealth
    Date: 2019–12
  16. By: Acocella, Nicola; Beqiraj, Elton; Di Bartolomeo, Giovanni; Di Pietro, Marco; Felici, Francesco
    Abstract: What advice can be given to the policymaker to reduce the burden of public debt after a crisis? In this situation, the debt consolidation calls for fiscal surplus based on increases in taxes and/or reductions in public spending. This paper aims at answering to the above question. Specifically, it evaluates different policy options on the table using the estimated model of the Italian dynamic General Equilibrium Model (IGEM). Our main message is that plans aimed at reducing the public debt based on tax increases rather than expenditure reductions are more effective. Therefore, consolidation should be designed on the former.
    Keywords: Austerity,Public debt,Output,Fiscal adjustment plans
    JEL: E60 E62
    Date: 2019
  17. By: Luca Fornaro
    Abstract: Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
    Keywords: monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area
    JEL: E44 E52 F33 F34 F36 F41 F45
    Date: 2019–12
  18. By: Alessandro Secchi (Bank of Italy)
    Abstract: This note focuses on a two-tier excess reserve remuneration system, a measure recently introduced by the ECB Governing Council that aims at supporting the bank-based transmission of monetary policy by exempting part of banks’ excess reserves from the negative remuneration resulting from the current application of the deposit facility rate. The analysis shows how this tool helps to preserve the positive contribution of negative rates to the accommodative stance of monetary policy, although a careful calibration is necessary to avoid unwarranted effects on euro short-term rates. The initial experience with the two-tier excess reserve remuneration system has been positive so far: its introduction has taken place without any major tensions in money market rates.
    Keywords: interest rates, monetary policy implementation, unconventional monetary measures, liquidity management
    JEL: E42 E43 E52 E58
    Date: 2019–12
  19. By: Simone Auer (Bank of Italy); Marco Bernardini (Bank of Italy); Martina Cecioni (Bank of Italy)
    Abstract: We study the differences in the response of industrial production to monetary policy shocks within the euro area manufacturing sector conditional on leverage. Using polynomial state-dependent local projections, we document a non-linear relationship between corporate leverage and the effectiveness of monetary policy. When leverage is low, more indebted industries adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At higher leverage ratios, this positive relation weakens until it reaches a point where additional leverage is associated with a decrease in the sensitivity to monetary policy. We show that this weakening effect is particularly intense within the short-term horizon and in recessions. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.
    Keywords: financial heterogeneity, monetary policy, polynomial state-dependent local projections, high-frequency shocks, panel data
    JEL: C23 E32 E52 G32
    Date: 2019–12

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