nep-eec New Economics Papers
on European Economics
Issue of 2020‒02‒03
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Who did it? A European detective story was it real, financial, monetary and/or institutional: Tracking growth in the Euro area with an atheoretical tool By Mariarosaria Comunale; Francesco Paolo Mongelli
  2. Economic policy uncertainty in the euro area: an unsupervised machine learning approach By Azqueta-Gavaldon, Andres; Hirschbühl, Dominik; Onorante, Luca; Saiz, Lorena
  3. Unconventional monetary policy and inflation expectations in the euro area By Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
  4. Firm or bank weakness? Access to finance since the European sovereign debt crisis By Corbisiero, Giuseppe; Faccia, Donata
  5. Wealth effect on consumption during the sovereign debt crisis: households heterogeneity in the euro area By Garbinti, Bertrand; Lamarche, Pierre; Savignac, Frédérique; Lecanu, Charlélie
  6. Impact of IFRS 9 on the cost of funding of banks in Europe By Fatouh, Mahmoud; Bock, Robert; Ouenniche, Jamal
  7. The effect of the PSI in the relationship between sovereign and bank credit risk: Evidence from the Euro Area By Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
  8. A multi-country dynamic factor model with stochastic volatility for euro area business cycle analysis By Florian Huber; Michael Pfarrhofer; Philipp Piribauer
  9. "Economic determinants of employment sentiment: A socio-demographic analysis for the euro area" By Oscar Claveria; Ivana Lolic; Enric Monte; Petar Soric
  10. Effects of state-dependent forward guidance, large-scale asset purchases and fiscal stimulus in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Smets, Frank
  11. Bank funding costs and solvency By Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
  12. Bad bank resolutions and bank lending By Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
  13. Rising protectionism and global value chains: quantifying the general equilibrium effects By Cappariello, Rita; Gunnella, Vanessa; Franco-Bedoya, Sebastian; Ottaviano, Gianmarco
  14. Tax Cuts Starve the Beast! Evidence from Germany By Clemens Fuest; Florian Neumeier; Daniel Stöhlker
  15. Changes in the trade patterns of the UK in a global perspective By Erdey, László; Gáll, József; Márkus, Ádám; Tőkés, Tibor
  16. Exchange Rates and Consumer Prices: Evidence from Brexit By Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
  17. An unobserved components model for Finland – Estimates of potential output and NAWRU By Sariola, Mikko

  1. By: Mariarosaria Comunale; Francesco Paolo Mongelli
    Abstract: During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.
    Keywords: Euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, and synchronization
    JEL: C23 E40 F33 F43
    Date: 2020–01
  2. By: Azqueta-Gavaldon, Andres; Hirschbühl, Dominik; Onorante, Luca; Saiz, Lorena
    Abstract: We model economic policy uncertainty (EPU) in the four largest euro area countries by applying machine learning techniques to news articles. The unsupervised machine learning algorithm used makes it possible to retrieve the individual components of overall EPU endogenously for a wide range of languages. The uncertainty indices computed from January 2000 to May 2019 capture episodes of regulatory change, trade tensions and financial stress. In an evaluation exercise, we use a structural vector autoregression model to study the relationship between different sources of uncertainty and investment in machinery and equipment as a proxy for business investment. We document strong heterogeneity and asymmetries in the relationship between investment and uncertainty across and within countries. For example, while investment in France, Italy and Spain reacts strongly to political uncertainty shocks, in Germany investment is more sensitive to trade uncertainty shocks. JEL Classification: C80, D80, E22, E66, G18, G31
    Keywords: economic policy uncertainty, Europe, machine learning, textual-data
    Date: 2020–01
  3. By: Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
    Abstract: With the ECB's policy rate having reached the zero lower bound, traditional monetary policy tools became ineffective and the ECB was forced to adopt a set of unconventional monetary policy (UMP) measures. This paper examines the effects of the ECB's UMP on inflation expectations in the Euro area as inflation expectations play a key role for achieving the inflation target of below, but close to 2%. Quantifying the impact of UMP is not straightforward, as standard empirical tools such as VAR cannot be applied. Hence, we use the Qual VAR approach pioneered by Dueker (2005) to overcome this problem. We indeed find that UMP leads to a rise in inflation expectations in the short run but that this effect appears to evaporate in the medium term. Our results put some doubt on the common claim that UMP has consistently contributed to a re-anchoring and a stabilisation of inflation expectations at the zero lower bound. Nevertheless, they indicate a rise in medium-term real GDP growth triggered by UMP.
    Keywords: Bayesian VAR,Qual VAR,inflation expectations,euro area,quantitative easing,unconventional monetary policy
    JEL: C22 E31 E44 E52
    Date: 2020
  4. By: Corbisiero, Giuseppe; Faccia, Donata
    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 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. JEL Classification: E44, F36, G01, G21
    Keywords: bank lending, credit crunch, credit supply, European sovereign debt crisis
    Date: 2020–01
  5. By: Garbinti, Bertrand; Lamarche, Pierre; Savignac, Frédérique; Lecanu, Charlélie
    Abstract: This paper studies the heterogeneity of the marginal propensity to consume out of wealth (MPC) both across and within countries. We estimate the MPC based on a cross-country harmonized household level dataset which combines surveys on wealth, income and consumption. We use panel regressions and an instrumental variable approach. First, our panel-based MPC estimates are very similar to those obtained on aggregate data and show substantial heterogeneity across countries. The wealth effect is coming both from housing and financial assets, while the main asset channel varies between countries. Second, the MPC is higher for low-wealth households, whatever the country. Third, we find some asymmetries across countries regarding the reaction to losses versus gains. Fourth, higher MPC is obtained for the two main consumption expenditure categories. Fifth, we find evidences that housing prices shock decreases consumption inequality while financial wealth shocks have a limited effect on consumption inequality. JEL Classification: D12, E21, C21
    Keywords: consumption, household surveys, marginal propensity to consume out of wealth, policy distributive effects
    Date: 2020–01
  6. By: Fatouh, Mahmoud (Bank of England and University of Essex); Bock, Robert (University of Edinburgh); Ouenniche, Jamal (University of Edinburgh)
    Abstract: On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.
    Keywords: IFRS 9; low-risk anomaly; cost of funding; cost of equity; leverage; expected loss model; asset beta
    JEL: D92 G21 G28 G31 L51
    Date: 2020–01–16
  7. By: Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
    Abstract: This study examines the nexus between sovereigns and banks during a crisis with a focus on the effects of PSI, the voluntary exchange program of Greek sovereign bonds with private sector involvement. The effectiveness of the program is evaluated through its impact on credit default swaps of 8 Eurozone countries and 21 banks, using daily data from 2009 to 2014. Using linear and nonlinear causality analyses, it is found that the link between sovereign and bank risk weakened after PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. The findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. The empirical evidence suggests that sovereign debt restructuring initiatives, such as PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their sovereigns.
    Keywords: CDS spreads; PSI; sovereign/bank credit risk; contagion; nonlinear causality
    JEL: F34 F42 G28 H12 H63
    Date: 2020–01
  8. By: Florian Huber; Michael Pfarrhofer; Philipp Piribauer
    Abstract: This paper develops a dynamic factor model that uses euro area (EA) country-specific information on output and inflation to estimate an area-wide measure of the output gap. Our model assumes that output and inflation can be decomposed into country-specific stochastic trends and a common cyclical component. Comovement in the trends is introduced by imposing a factor structure on the shocks to the latent states. We moreover introduce flexible stochastic volatility specifications to control for heteroscedasticity in the measurement errors and innovations to the latent states. Carefully specified shrinkage priors allow for pushing the model towards a homoscedastic specification, if supported by the data. Our measure of the output gap closely tracks other commonly adopted measures, with small differences in magnitudes and timing. To assess whether the model-based output gap helps in forecasting inflation, we perform an out-of-sample forecasting exercise. The findings indicate that our approach yields superior inflation forecasts, both in terms of point and density predictions.
    Date: 2020–01
  9. By: Oscar Claveria (AQR-IREA, University of Barcelona, 08034 Barcelona, Spain.); Ivana Lolic (University of Zagreb, Faculty of Economics and Business); Enric Monte (Department of Signal Theory and Communications, Polytechnic University of Catalunya.); Petar Soric (University of Zagreb, Faculty of Economics and Business)
    Abstract: In this study we construct quarterly consumer confidence indicators of unemployment for the euro area using as input the consumer expectations for sixteen socio-demographic groups elicited from the Joint Harmonised EU Consumer Survey. First, we use symbolic regressions to link unemployment rates to qualitative expectations about a wide range of economic variables. By means of genetic programming we obtain the combination of expectations that best tracks the evolution of unemployment for each group of consumers. Second, we test the out-of-sample forecasting performance of the evolved expressions. Third, we use a state-space model with time-varying parameters to identify the main macroeconomic drivers of unemployment confidence and to evaluate whether the strength of the interplay between variables varies across the economic cycle. We analyse the differences across groups, obtaining better forecasts for respondents comprised in the first quartile with regards to the income of the household and respondents with at least secondary education. We also find that the questions regarding expected major purchases over the next 12 months and savings at present are by far, the variables that most frequently appear in the evolved expressions, hinting at their predictive potential to track the evolution of unemployment. For the economically deprived consumers, the confidence indicator seems to evolve independently of the macroeconomy. This finding is rather consistent throughout the economic cycle, with the exception of stock market returns, which governed unemployment confidence in the pre-crisis period.
    Keywords: Unemployment, Expectations, Consumer behaviour, Forecasting, Genetic programming, State-space models yield. JEL classification: C51, C53, C55, D12, E24, E27, J10
    Date: 2020–01
  10. By: Coenen, Günter; Montes-Galdón, Carlos; Smets, Frank
    Abstract: We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area-Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect. JEL Classification: E31, E32, E37, E52, E62
    Keywords: asset purchases, effective lower bound, euro area, fiscal policy, forward guidance, monetary policy
    Date: 2020–01
  11. By: Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
    Abstract: This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers. JEL Classification: G15, G21
    Keywords: banks, funding costs, solvency
    Date: 2020–01
  12. By: Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
    Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
    Keywords: bad banks, resolutions, lending, non-performing loans, rescue packages, recapitalisations
    JEL: E44 G01 G21
    Date: 2020–01
  13. By: Cappariello, Rita; Gunnella, Vanessa; Franco-Bedoya, Sebastian; Ottaviano, Gianmarco
    Abstract: Quantifying the effects of trade policy in the age of ’global value chains’ (GVCs) requires an enhanced analytical framework that takes the observed international input-output relations in due account. However, existing quantitative general equilibrium models generally assume that industry-level bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This amounts to applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in available input-output data sets. To overcome this limitation of existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in input-output tables. This allows us to investigate the relation between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies. JEL Classification: F13, F15, F40, F60
    Keywords: Brexit, supply chains, trade model, trade policy shocks
    Date: 2020–01
  14. By: Clemens Fuest; Florian Neumeier; Daniel Stöhlker
    Abstract: The ‘starving the beast’ hypothesis claims that tax cuts lead to lower public spending, rather than higher debt levels and higher taxes in the future. This paper uses the institutional setting of German fiscal federalism to its advantage in order to explore how fiscal policy reacts to exogenous tax revenue shocks. We use panel data from the German states covering the period from 1992 to 2011, and assess to what extent exogenous changes in tax revenues affect aggregate public expenditure as well as specific sub-categories of government spending. Applying the narrative approach pioneered by Romer and Romer (2009), we construct a measure of exogenous tax shocks. This allows us to identify the causal effect of tax changes on fiscal policy. Our results suggest that an exogenous decrease in tax revenues triggers a reduction in public spending of roughly the same amount, with a delay of two to three years. We find that a revenue decline of one Euro reduces public spending on administration and, with a larger delay, social security, by 30 to 45 cents in each case. Spending on infrastructure declines by ten cents. We find no significant effects on spending on education, legal protection and public safety, or culture.
    Keywords: taxation, fiscal policy, tax-spend, public expenditure, narrative approach
    JEL: E62 H11 H20 H62 H72
    Date: 2019
  15. By: Erdey, László; Gáll, József; Márkus, Ádám; Tőkés, Tibor
    Abstract: The aim of our paper is threefold. Based on the contemporary theories of international trade we analyze the integration of the United Kingdom to the European Union from the aspect of merchandise trade. We use disaggregated data (6-digit, HS, CEPII BACI) on bilateral trade flows of the UK with the EU14(13) in the timeframe of 1996-2016 to show the changes on the extensive and intensive margins (à la Kehoe and Ruhl, 2013) and also that of vertical and horizontal intra-industry trade. The analyses of the changes allow us to make conclusions about the possible effect of Brexit on the intra-European trade, while we also extend our calculations to the dynamics of global patterns in intra-industry trade. The latter topic to our knowledge has not been thoroughly examined since the seminal paper of Brülhart (2009).
    Keywords: Brexit, Intra-Industry Trade, Extensive and Intensive Margins of International Trade
    JEL: F14 F15
    Date: 2020–01–13
  16. By: Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit, exchange rate pass-through, import costs, inflation
    JEL: E31 F15 F31
    Date: 2019
  17. By: Sariola, Mikko
    Abstract: In this paper, we estimate a potential output model for Finland using an unobserved component model. The model builds on a production function approach, and features price and wage Phillips curves, Okun’s law and several resource-utilization indicators. We show that incorporating resource-utilization indicators, i.e. capacity utilization and long-term unemployment, improves real-time reliability of the output gap and NAWRU estimates. Our real-time estimate of the output gap is robust even in an event of a sudden turning point in the economy such as the global financial crisis. It also outperforms the HP filter estimate. Results suggest that Finland’s potential output growth slowed significantly in the aftermath of the financial crisis and that the output gap was negative for most of the subsequent decade. The slowdown in potential growth was due mainly to lackluster total factor productivity growth. The real-time results are broadly in line with the ex-post estimates of the IMF and the European Commission.
    Keywords: Suomi,potentiaalinen tuotanto,mallit,tuotantokuilu
    JEL: C51 E23 E32
    Date: 2019

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