nep-eec New Economics Papers
on European Economics
Issue of 2020‒01‒27
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Heterogeneous effects of unconventional monetary policy on bond yields across the euro area By Demir, Ishak; Eroglu, Burak A.; Yildirim-Karaman, Secil
  2. The impact of the ECB’s targeted long-term refinancing operations on banks’ lending policies: the role of competition By C. Andreeva, Desislava; García-Posada, Miguel
  3. The ECB after the crisis: existing synergies among monetary policy, macroprudential policies and banking supervision By Nuno, Cassola; Christoffer, Kok; Francesco Paolo, Mongelli
  4. Sovereign exposures in the Portuguese banking system: determinants and dynamics By Maria Manuel Campos; Ana Rita Mateus; Álvaro Pina
  5. A Three-Country Macroeconomic Model for Portugal By Alex Pienkowski
  6. Bank performance in Europe and the US: a divergence in market-to-book ratios By Mathieu Simoens; Rudi Vander Vennet
  7. How Did Order-Flow Impact Bond Prices During the European Sovereign Debt Crisis? By Lin, Zhongguo; Hamill, Philip A.; Li, Youwei; Sun, Zhuowei; Waterworth, James
  8. Non-linear exchange rate pass-through to euro area inflation: a local projection approach By Rubene, Ieva; Colavecchio, Roberta
  9. The economic effects of political disintegration: Lessons from Serbia and Montenegro By Vassilis Monastiriotis; Ivan Zilic
  10. A cointegration model of money and wealth By Assenmacher, Katrin; Beyer, Andreas
  11. Macroprudential policy and its impact on the Credit Cycle By Selien De Schryder; Frederic Opitz
  12. Monetary Policy and Shadow Banking: Trapped between a Rock and a Hard Place By Martin Hodula
  13. Debt sustainability and fiscal space in a heterogeneous Monetary Union: normal times vs the zero lower bound By Javier Andrés; Pablo Burriel; Wenyi Shen

  1. By: Demir, Ishak; Eroglu, Burak A.; Yildirim-Karaman, Secil
    Abstract: This paper investigates the impact of European Central Bank's unconventional monetary policies between 2008-2016 on the government bond yields of eight European Monetary Union countries and up to eleven different maturities. In identifying this impact, it adopts a novel econometric approach that combines data-rich dynamic factor analysis and VAR with heteroskadasiticy based identification. This novel approach allows a single model to estimate the impact of a common unconventional monetary policy shock across different countries, maturities, yield components and over time. The results identify a significant and substantial impact for all countries and all maturities in the sample. The evidence also suggests that the impact was stronger and persistent in the periphery countries which have higher financial distress, uncertainty, country risk and lower liquidity. When we decompose the impact into separate yield components, we find that unconventional shocks decreased the common market component of the yields in all countries. As for the risk component, unconventional policies decreased it for the periphery countries permanently at the cost of a small increase in the core countries, as consistent with the international portfolio balance channel. These findings contribute to the literature by providing a comprehensive characterization of the impact of unconventional monetary policies for different economic environments.
    Keywords: Unconventional monetary policy,ECB,QE,international monetary transmission,portfolio balance,cross-country difference,yield curves,risk premia
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  2. By: C. Andreeva, Desislava; García-Posada, Miguel
    Abstract: We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. We first build a theoretical model in which banks compete in the credit and deposit markets. We distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets. We then test these predictions with a sample of 130 banks from 13 countries focusing on the first TLTRO series. Regarding direct effects, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders which operates via an easing of credit standards. JEL Classification: G21, E52, E58
    Keywords: competition, lending policies, TLTROs, unconventional monetary policy
    Date: 2020–01
  3. By: Nuno, Cassola; Christoffer, Kok; Francesco Paolo, Mongelli
    Abstract: The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new†ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them.
    Keywords: European Central Bank, monetary policy, banking union, banking supervision, financial stability, systemic risks, macroprudential policies, decision-making process
    JEL: E42 E58 F36 G21
    Date: 2019–12
  4. By: Maria Manuel Campos; Ana Rita Mateus; Álvaro Pina
    Abstract: This paper studies the dynamics of the exposure of the Portuguese banking system to the domestic public sector over 2008-2016 and assesses possible underlying motivations. The analysis relies on a new dataset built from granular information that provides full coverage of the Portuguese banking sector and the public sector. The results suggest that moral suasion was an important driver of the evolution of sovereign exposures during the euro area crisis: domestic banks provided financing to the sovereign when the Treasury needed to issue debt amidst rising yields and, although to a smaller extent, when State-Owned Enterprises faced funding shortages in international markets. Moreover, increases in central bank funding are also related to increases in holdings of sovereign debt securities. These findings mainly hold for medium-sized and large banks. In contrast, we find no evidence of gambling for resurrection behaviour by banks with lower prudential capital or depressed profitability.
    JEL: C23 G01 G21 H63
    Date: 2019
  5. By: Alex Pienkowski
    Abstract: This paper outlines a simple three-country macroeconomic model designed to focus on the transmission of external shocks to Portugal. Building on the framework developed by Berg et al (2006), this model differentiates between shocks originating from both inside and outside the euro area, as well as domestic shocks, each of which have different implications for Portugal. This framework is also used to consider the dynamics of the Portuguese economy over recent decades. The model, which is designed to guide forecasts and undertake simulations, can easily be modified for use in other small euro area countries.
    Date: 2019–12–20
  6. By: Mathieu Simoens; Rudi Vander Vennet (-)
    Abstract: Post 2008, the market-to-book ratios of European and US banks have diverged markedly. We use panel regressions to investigate the determinants of the M/B ratios of 112 European and US banks. We show that the underperformance of European banks is mainly driven by non-performing loans and by the negative impact of policy rates on bank interest margins. The higher US bank valuations are mainly driven by higher pro tability and better cost eciency. Our results for European banks stress the importance of timely NPL resolution and imply that low-for-long monetary policy may harm bank health.
    Keywords: market-to-book ratio, European banks, US banks, franchise value, bank performance
    JEL: G21 G28 E52
    Date: 2019–12
  7. By: Lin, Zhongguo; Hamill, Philip A.; Li, Youwei; Sun, Zhuowei; Waterworth, James
    Abstract: The impact of trades on price dynamics in the European sovereign debt markets is of significant importance to policy makers and market participants. This paper uses high-frequency quote and transaction data from the MTS European sovereign bond inter-dealer platform to investigate price-order-flow dynamics from July 2005 until December 2011 for Germany, France, Portugal, Italy, Ireland, Spain and Greece. We find that order-flow had a larger impact on quote revision in a relatively low-intensity trading environment than in a relatively high-intensity trading environment implying that informed traders should only execute in low-intensity trading environments when they value immediacy over discretion. This analysis is consistent with the limited prior literature for European debt markets. Our analysis indicates that this relationship persists during turbulent market conditions. Also, we find that the impact of order-flow on subsequent trades was larger during periods of high-trading intensity implying that market participants use order splitting trading strategies.
    Keywords: Order-flow; Price impact; Trading intensity; Sovereign Bonds
    JEL: G01 G23 G24
    Date: 2019–12
  8. By: Rubene, Ieva; Colavecchio, Roberta
    Abstract: How long does it take for exchange rate changes to pass through into inflation? Does it make a difference whether the exchange rate depreciates or appreciates? Do relatively large exchange rate changes entail more exchange rate pass-through? In this paper, we examine possible non-linearities in the transmission of exchange rate movements to import and consumer prices in all 19 euro area countries as well as the euro area as a whole from 1997 to 2019Q1. We extend a standard single-equation linear framework with additional interaction terms to account for possible non-linearities and apply local projections to obtain state-dependent impulse response functions. We find that (i) euro area consumer and import prices respond significantly to exchange rate movements after one year, responding more when the exchange rate change is relatively large; and (ii) euro appreciations and depreciations affect the level of euro area exchange rate pass-through in a symmetric fashion; (iii) for euro area countries results differ for import and consumer prices and across countries. JEL Classification: E31, F41
    Keywords: exchange rate pass-through, inflation, local projections, non-linearities
    Date: 2020–01
  9. By: Vassilis Monastiriotis (The London School of Economics and Political Science); Ivan Zilic (The Institute of Economics, Zagreb)
    Abstract: Is there an economic premium from state independence? We shed light on this question by analysing the unique historical case of the peaceful separation of Serbia and Montenegro in 2006-the last fully recognised internationally state-disintegration on European soil. Using the synthetic control approach, we find that independence for the seceding country (Montenegro) had a sizeable but transitory positive effect, boosting GDP per capita in the period immediately following independence, but with gains slowly evaporating in the longer period-which we attribute to increased vulnerability of the newly independent state to fluctuations in the international economic environment. In contrast, for Serbia, we find no evidence of an independence dividend. While these results are context-specific, the resemblance of Serbia and Montenegro’s case with the contemporaneous independence movements in Europe, namely in the realm of policy autonomy pre-separation, provide insights on possible economic outcomes of secessions on the national and supra-national level in Europe.
    Keywords: secession; independence; political disintegration; synthetic control; Western Balkans
    JEL: F15 O52 N14
    Date: 2019–06
  10. By: Assenmacher, Katrin; Beyer, Andreas
    Abstract: Extending the data set used in Beyer (2009) from 2007 to 2017, we estimate I(1) and I(2) money demand models for euro area M3. We find that the elasticities in the money demand and the real wealth relations identified previously in Beyer (2009) have remained remarkably stable throughout the extended sample period, once only a few additional deterministic variables in the long run relationships for the period after the start of the global financial crisis and the ECB’s non- standard monetary policy measures are included. Testing for price homogeneity in the I(2) model we find that the nominal-to-real transformation is not rejected for the money relation whereas the wealth relation cannot be expressed in real terms. JEL Classification: E41, C32, C22
    Keywords: cointegration, I(2) analysis, money demand, vector error correction model, wealth
    Date: 2020–01
  11. By: Selien De Schryder; Frederic Opitz (-)
    Abstract: We identify a novel set of macroprudential policy shocks and estimate their effects on credit cycle variables in a panel of 13 EU countries during 1999-2018. We find that a typical macroprudential policy tightening shock reduces bank credit-to-GDP by 1.8% points and household credit-to-GDP by 1.6% points over a period of four years. The non-financial corporations and total credit-to-GDP ratios, however, do not react significantly. Using state-dependent local projections, we further find that the effects on the credit-to-GDP ratios are stronger in credit cycle upturns than in downturns. We also detect a sizable leakage of firm credit from the banking to the non-banking sector next to a shift from firm to household credit.
    Keywords: Macroprudential policy, Effectiveness, State dependency
    JEL: C23 E58 G18 G28
    Date: 2019–12
  12. By: Martin Hodula
    Abstract: In this paper, I collect data on the euro area shadow banking system and demonstrate that tightening of monetary policy conditions in the run-up to the global financial crisis successfully reduced the growth of traditional banking but strengthened the growth of shadow banking due to a general escape from high funding costs. After the crisis, when interest rates were depressed to all-time lows, the empirical link between monetary policy and traditional banking was significantly weakened, while the relationship with shadow banking turned from positive to negative, i.e., the post-crisis monetary easing is found to have caused massive inflows into investment funds as a result of search for yield induced by persistently low interest rates.
    Keywords: Interactions, monetary policy, shadow banking, traditional banking
    JEL: E52 G21 G23
    Date: 2019–12
  13. By: Javier Andrés (Universidad de Valencia); Pablo Burriel (Banco de España); Wenyi Shen (Oklahoma State University)
    Abstract: In this paper we study fiscal policy effects and fiscal space for countries in a monetary union with different levels of public debt. We develop a dynamic stochastic general equilibrium (DSGE) model of a two-country monetary union, calibrated to match the characteristics of Spain and Germany, in which debt sustainability is endogenously determined a la Bi (2012) to shape the responses of the risk premium on public debt. Policy shocks change the market’s expectation about future primary surplus, producing a direct effect on the sovereign risk premium and macroeconomic responses of the economy. In normal times the costs of a government spending driven fiscal consolidation in the high-debt country are greatly diminished when this consolidation improves endogenously its debt sustainability prospects. Fiscal consolidations in both members of the monetary union decrease real interest rates and amplify the reduction in risk premium in the highly-indebted country, improving union-wide output in the long run, but at the cost of lower output in the low-debt country in the short term. On the contrary, when monetary policy is constrained at the zero lower bound, the risk premium channel arising from the endogenous determination of debt sustainability becomes muted. In the ZLB, a fiscal consolidation generates deflation expectations which increase the real interest rate and may compensate partially or completely, depending on the calibration, the benefits from a lower risk premium. In this context, a fiscal expansion in the low-debt country and a consolidation in the high-debt country delivers the greater positive impact on union-wide output. Finally, the risk premium channel only affects countries with medium or low levels of public debt indirectly through the negative spillovers from other high-debt members of the monetary union.
    Keywords: fiscal sustainability, sovereign debt default risk, monetary union
    JEL: E31 E62 H30
    Date: 2020–01

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