nep-eec New Economics Papers
on European Economics
Issue of 2020‒04‒06
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The impact of unconventional monetary policies on retail lending and deposit rates in the euro area By Boris Hofmann; Anamaria Illes; Marco Jacopo Lombardi; Paul Mizen
  2. An analysis of sovereign credit risk premia in the euro area: are they explained by local or global factors? By Sara Cecchetti
  3. Expansionary yet different: credit supply and real effects of negative interest rate policy By Margherita Bottero; Enrico Sette
  4. The North-South Divide, the Euro and the World By Konstantinos Chisiridis; Kostas Mouratidis; Theodore Panagiotidis
  5. A sectoral anatomy of the spanish productivity puzzle By Pilar Cuadrado; Enrique Moral-Benito; Irune Solera
  6. Implications of negative interest rates for the net interest margin and lending of euro area banks By Klein, Melanie
  7. The impact of SNB monetary policy on the Swiss franc and longer-term interest rates By Fabian Fink; Lukas Frei; Thomas Maag; Tanja Zehnder
  8. Asymmetry in the conditional distribution of euro-area inflation By Alex Tagliabracci
  9. Residual return reversals: European evidences By Anh Nguyen
  10. Central bank information shocks and exchange rates By Franz, Thorsten
  11. A WTO-compatible Border Tax Adjustment for the ETS to Finance the EU Budget By Alexander Krenek; Mark Sommer; Margit Schratzenstaller
  12. Goods exports and soft export indicators: is a disconnect under way? By Claire Giordano
  13. The Impact of Plastic Money Use on VAT Compliance: Evidence from EU Countries By Amakoe D. Alognon; Antonios M. Koumpias; Jorge Martinez-Vazquez
  14. Tracking and Predicting the German Economy: ifo vs. PMI By Robert Lehmann; Magnus Reif
  15. On-Site Inspecting Zombie Lending By Diana Bonfim; Geraldo Cerqueiro; Hans Degryse; Steven Ongena
  16. Income Composition Inequality By , Stone Center; Ranaldi, Marco
  17. Repo market and leverage ratio in the euro area By Luca Baldo; Filippo Pasqualone; Antonio Scalia
  18. The effect of monetary policy on the Swiss franc: an SVAR approach By Christian Grisse

  1. By: Boris Hofmann; Anamaria Illes; Marco Jacopo Lombardi; Paul Mizen
    Abstract: This paper investigates the overall effect of the European Central Bank's (ECB's) unconventional monetary policies (UMPs) implemented since 2008 on euro area bank retail lending and deposit rates offered to households and non-financial corporations. To do so, we use an analytical approach that combines the estimation of the cumulative effects of UMP on key money and capital market rates via daily event study analysis with monthly retail rate pass-through estimation. In counterfactual simulations, we quantify the full effect of the ECB's UMPs implemented since 2008 on retail lending and deposit rates and systematically explore differences in their effects over time and across euro area countries. Our results show that the ECB's UMPs - particularly the measures launched since 2012 - significantly lowered retail lending and deposit rates in Germany, France, Spain and in particular in Italy. The impact on banks' intermediation margins through retail lending-deposit rate spreads turns out to be not clean-cut, with significant compressions prevailing only in Germany and Italy.
    Keywords: retail rates, pass-through, unconventional monetary policy, European Central Bank
    JEL: E43 E52 G21
    Date: 2020–03
  2. By: Sara Cecchetti (Bank of Italy)
    Abstract: We study the determinants of sovereign credit risk in the euro area in a time period that includes the financial and sovereign debt crisis, as well as the unconventional monetary policy adopted by the European Central Bank. First, we detect the presence of commonality in sovereign credit spreads of different countries, justifying the search for the common factors that drive CDS prices. Building on the work of Longstaff et al. (2011), we employ the econometric model used in Cecchetti (2017) to decompose sovereign credit default swap spreads into expected default losses and risk premia, finding evidence of a significant contribution of the latter component. We use the model to understand to what extent the variations in CDS spreads and in the two embedded components of selected euro-area countries are more linked to local or euro area economic variables. The results point to the importance of both global and local factors, which have a greater impact on the risk premium component. Finally, we estimate the contribution of the objective probability and risk premium components of redenomination risk (as measured by the ISDA basis) to the related CDS spread components, detecting some differences between countries.
    Keywords: bond excess return, credit default swap, distress risk premium, credit losses
    JEL: B26 C02 F30 G12 G15
    Date: 2020–03
  3. By: Margherita Bottero (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply— and the real economy —through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB’s NIRP and matched administrative datasets— including the credit register— from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms—without higher ex-post delinquencies—and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.
    Keywords: negative interest rates, portfolio rebalancing, bank lending channel of monetary policy, liquidity management, Eurozone crisis
    JEL: E52 E58 G01 G21 G28
    Date: 2020–03
  4. By: Konstantinos Chisiridis (Department of Economics, University of Macedonia, Greece); Kostas Mouratidis (Department of Economics, University of Sheffield, UK); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece; Rimini Centre for Economic Analysis)
    Abstract: The European north-south divide has been an issue of a long-standing debate. We employ a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro area framework. The aim is to assess the propagation mechanisms of real shocks, focusing on the interconnections among the north euro area and the south euro area. We incorporate theory-based long-run over-identifying restrictions and examine the effects of (i) non-export real output shocks, (ii) expansionary shocks and (iii) real exchange rate shocks. An expansionary policy of the north euro area and increased competitiveness in the south euro area could alleviate trade imbalances of the debtor euro area economies. From the south euro area perspective, internal devaluation decreases output but at the same time, it also reduces current account deficits. North euro area origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia.
    Keywords: Trade Imbalances, European North-South Divide, Global VAR, International Linkages, Spillover Effects, Generalised Impulse Response Analysis
    JEL: C33 E27 F14
    Date: 2020–03
  5. By: Pilar Cuadrado (Banco de España); Enrique Moral-Benito (Banco de España); Irune Solera (Banco de España)
    Abstract: Income per capita in Spain relative to that of other advanced EU countries held stable at around 90% from 2000 to 2016. Stagnant abour productivity is at the root of this lack of convergence. This paper examines these developments from a sectoral perspective based on recently released EU KLEMS data. Our main findings are as follows: i) Spain has lower productivity levels vis-à-vis other EU countries in most sectors, with only 4 out of 23 sectors exhibiting higher productivity in Spain: accommodation and food services, agriculture, electricity and gas supply, and information and communication services; moreover, the allocation of employment towards low-productivity sectors accounts for half of the aggregate Spain-EU productivity gap in levels; ii) turning to the changes in the 2000-2016 period, the overall lack of convergence is driven by a divergence in productivity relative to EU countries, especially within services sectors; iii) while both ICT (Information and Communication Technology) and non-ICT capital in Spain converged towards European levels, Total Factor Productivity (TFP) divergence in most sectors explains the lack of convergence in labour productivity. Finally, we explore one potential explanation for this pattern: the TFP divergence and ICT capital convergence can be rationalised in the presence of complementarities between ICT-capital and labour force skills. Indeed, our industry-country regression analysis suggests that the dismal performance of Spanish TFP might be related to the significant deficit in the population’s skills as proxied by PIAAC-OECD scores.
    Keywords: labour productivity, Total Factor Productivity, productivity gap, labour force skills.
    JEL: D24 C23
    Date: 2020–03
  6. By: Klein, Melanie
    Abstract: This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.
    Keywords: net interest margin,monetary policy,negative interest rates,bank profitability,lending
    JEL: G21 E43 E52
    Date: 2020
  7. By: Fabian Fink; Lukas Frei; Thomas Maag; Tanja Zehnder
    Abstract: We estimate the impact of monetary policy rate changes made by the Swiss National Bank on the Swiss franc and on the expected path of future short-term interest rates. We employ an identification-through-heteroskedasticity approach to identify the causal effects. The approach accounts for the simultaneous relation of exchange rates and interest rates. We find that from 2000-2011, an unexpected policy rate hike appreciated the nominal Swiss franc on the same day. The null hypothesis that a policy rate change does not affect the Swiss exchange rates is clearly rejected. Importantly, the results indicate that simple methods that do not adequately account for simultaneity yield biased and typically nonsignificant estimates. Our findings further suggest that policy rate changes affect medium- to longer-term expectations about the stance of monetary policy, which in turn influence the Swiss franc.
    Keywords: Monetary policy shocks, interest rates, exchange rates, identification-through-heteroskedasticity
    JEL: E43 E52 E58 F31 C32
    Date: 2020
  8. By: Alex Tagliabracci (Bank of Italy)
    Abstract: Macroeconomic conditions are among the key determinants of the inflation outlook. This paper studies how business cycles affect the conditional distribution of euro-area inflation forecasts. Using a quantile regression approach, I estimate the conditional distribution of inflation to assess the impact of business cycle conditions over time and the possible asymmetries across quantiles of inflation. Interestingly, downside risks to inflation forecasts are related to the business cycle while upside risks are instead relatively stable over time and are not affected by the state of the economy.
    Keywords: inflation, quantile regression, conditional distribution, asymmetry, downside risks
    JEL: C32 E31 E32 E37
    Date: 2020–03
  9. By: Anh Nguyen (CleRMa - Clermont Recherche Management - Clermont Auvergne - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne)
    Abstract: This paper revisits the performance of residual return reversal strategy for European stock markets during the time period 1990-2016. We confirm recent results for US data and find evidences of higher performance of residual return reversal strategy than those of conventional one. The residual return reversal in the EU are robust to market microstructure biases. However, the results are heterogeneous across countries, are robust in France and Germany, but seem to be fragile in smaller countries. We also find a strong significant and positive relation between residual reversal return and market volatility, which supports for the hypothesis that short-term reversal is associated to liquidity provision. Asset pricing models; short-term reversal; residual return reversal; Anomalies. JEL classification: G12.
    Date: 2020
  10. By: Franz, Thorsten
    Abstract: The dynamic effects of ECB announcements, disentangled into pure monetary policy and central bank information shocks, on the euro (EUR) exchange rate are examined using a Bayesian Proxy Vector Autoregressive (VAR) model fed with high-frequency data. Contractionary monetary policy shocks result in a sizable appreciation of the nominal effective and bilateral EUR exchange rates, peaking on impact. By contrast, despite similar effects on interest rate differentials, responses to central bank information shocks exhibit strong heterogeneities across currency pairs. This disparity can be rationalized by an increase in investors' risk appetite, as measured by the VIX, triggering capital flows into speculative currencies when the ECB reveals a surprisingly sanguine economic outlook. In line with this, the EUR depreciates against a high-yielding carry trade investment portfolio, while it appreciates against a low-yielding carry trade funding portfolio.
    Keywords: central bank information,monetary policy,exchange rate,Proxy VAR,high-frequency data,carry trades
    JEL: E52 E58 F31
    Date: 2020
  11. By: Alexander Krenek; Mark Sommer (WIFO); Margit Schratzenstaller
    Abstract: One element of the proposed European Green Deal is a border carbon adjustment mechanism. The introduction of a BCA would allow the EU to phase out current carbon leakage provisions of the ETS and to auction off all emission allowances, thus rendering the ETS a more effective unilateral tool to price and reduce carbon emissions. In theory a BCA would be a perfect instrument to ensure a level playing field for domestic and foreign producers, thus avoiding potential carbon leakage. Until now, however, the legal and administrative issues of implementation have been deemed too huge to overcome. We derive a WTO-compatible (full) border tax adjustment (BTA) design that could be implemented in the near future, and we estimate potential EU BCA and BTA revenues using a dynamic new Keynesian (DYNK) model. The BTA design of our choice would generate substantial and stable revenues that could be used as innovative sustainability-oriented own resource to finance the EU budget. We find that estimated revenues would suffice to finance between 5 and 7 percent of the EU's expenditure in the coming Multiannual Financial Framework period 2021-2027 and up to 16 percent in the year 2050. This new revenue source would allow member states to reduce their current contributions to the EU budget accordingly and would thus create space to cut other more distortionary taxes at the national level, enabling an EU-wide supranational sustainability-enhancing tax shift. Thus, a BTA could contribute to tackle both environmental and fiscal challenges currently facing the EU.
    Keywords: EU budget, sustainability-oriented taxation, border carbon adjustment, border tax adjustment, EU revenue system, EU own resources, emission trading system, carbon pricing
    Date: 2020–03–25
  12. By: Claire Giordano (Banca d’Italia)
    Abstract: We find evidence of a gradual weakening of the correlation between the new export orders component of the manufacturing purchasing managers’ index (PMI) and real goods export dynamics in the four major euro-area countries since 2012. In Italy this disconnect has been particularly strong over the last few quarters and concerns other soft export indicators as well. The decline in the information content of firms’ survey responses has gone hand in hand with several economic factors common to all four countries, such as a significant rise in economic uncertainty and the growing role of infra-group transactions within multinational enterprises.
    Keywords: national accounts, goods exports, soft indicators
    JEL: F00 F19
    Date: 2020–03
  13. By: Amakoe D. Alognon (International Center for Public Policy, Department of Economics, Andrew Young School of Policy Studies, Georgia State University); Antonios M. Koumpias (Department of Social Sciences, University of Michigan-Dearborn & Population Studies Center, Institute for Social Research, University of Michigan); Jorge Martinez-Vazquez (International Center for Public Policy, Department of Economics, Andrew Young School of Policy Studies, Georgia State University)
    Abstract: In the recent decades, several countries around the world have implemented cash restriction policies to incentivize the use of electronic means of payments with the aim to combat money laundering, terrorism financing, and tax evasion. This paper examines the impact of the proliferation in credit and debit card usage on consumption tax compliance using annual national level data for 26 European Union (EU) member states from 2000 to 2016. We measure consumption tax compliance using estimated Value-Added Tax (VAT) gaps, defined as the difference between the theoretical VAT liability according to the law and actual VAT collections. We exploit variation in time and space of credit and debit card usage across 26 EU member states from 2000-16 using panel data and instrumental variable techniques. We find that plastic money use significantly reduces tax evasion while cash withdrawals appear to noticeably widen the compliance gap. This paper contributes to the literature on the effect of modern means of payment on tax compliance by using a more adequate measure of the VAT compliance gap compared to earlier works and by accounting for potential confounders such as tax policy choices and ex ante enforcement capacity of tax administrations to curb the gap.
    Date: 2020–03
  14. By: Robert Lehmann; Magnus Reif
    Abstract: This analysis investigates the predictive power of the most important leading indicators for the German economy, which are provided by the ifo Institute and IHS Markit. We conduct an out-of-sample, real-time forecast experiment for growth of gross domestic product and growth of gross value added in both the manufacturing and the service sector. We find that both survey providers produce valuable leading indicators to predict the current quarter of German GDP growth. Regarding forecasts for the next quarter, the ifo indicators are slightly better than the IHS Markit headline index. For the manufacturing sector, series provided by ifo are clearly superior to those of IHS Markit. For the service sector, the ifo indicators produce better nowcasts, whereas the indicators by IHS are more valuable for one-quarter-ahead predictions.
    Keywords: forecasting nowcasting, survey data, ifo Business Climate, PMI
    JEL: E17 E27 E37
    Date: 2020
  15. By: Diana Bonfim (Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics); Geraldo Cerqueiro (Catolica-Lisbon SBE); Hans Degryse (KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Banks may have incentives to continue lending to “zombie” firms in order to avoid or delay the recognition of credit losses. In spite of growing regulatory pressure, there is evidence that “zombie lending” remains widespread, even in developed countries. We exploit information on a unique series of authoritative on-site inspections of bank credit portfolios in Portugal to investigate how such inspections affect banks’ future lending decisions. We find that following an inspection a bank becomes up to 9 percentage points less likely to refinance a firm with negative equity, implying a halving of the unconditional refinancing probability. Hence, banks structurally change their lending decisions following on-site inspections, suggesting that – even in the age of reg-tech – supervisory “reg-leg” can remain a potent tool to tackle zombie lending.
    Keywords: zombie lending, bank supervision
    JEL: G21 G32
    Date: 2020–02
  16. By: , Stone Center (The Graduate Center/CUNY); Ranaldi, Marco
    Abstract: The purpose of this paper is twofold. First, it introduces a novel inequality concept, named income composition inequality. Second, it constructs an indicator for its measurement. This paper argues that the study of income composition inequality across the income distribution allows for (i) novel political economy analysis of the evolution of economic systems and (ii) the technical assessment of the relationship between the functional and personal distribution of income. Following an empirical application on six European countries, this paper discusses possible avenues for future research on the matter, ranging from development issues to public finance. (Stone Center on Socio-Economic Inequality Working Paper)
    Date: 2020–03–09
  17. By: Luca Baldo (Bank of Italy); Filippo Pasqualone (Bank of Italy); Antonio Scalia (Bank of Italy)
    Abstract: This paper provides new evidence on the effect of the leverage ratio (LR) on repo market activity in the euro area. The share of trades with central counterparties has increased in recent years as a result of greater regulatory efficiency. After controlling for factors that may affect participation in the repo market, banks are found to exert market power towards non-bank financial institutions by applying lower rates and larger bid-ask spreads. While there is a permanent rate differential between transactions conducted via CCPs – which can easily be netted for LR purposes - and those with non-banks, on average this differential and the bid-ask spread do not increase at quarter-end. The widening of the bid-ask spread at year-end is sizeable, but this is not necessarily due to the LR, since other important factors enter into play. This evidence lessens the concern that the additional LR reporting and disclosure requirements based on daily averages, which will take effect on June 2021, might cause a contraction in repo volume and greater rate dispersion.
    Keywords: repo market, leverage ratio, monetary policy transmission
    JEL: E4 E5 G2
    Date: 2020–03
  18. By: Christian Grisse
    Abstract: This paper revisits the effects of monetary policy on the exchange rate, focusing on the Swiss franc. I estimate a structural VAR using Bayesian methods introduced by Baumeister and Hamilton (2015) and identify monetary policy shocks by exploiting the interest rate and stock price comovement they induce. Priors are based on the previous empirical literature, leaving the exchange rate response to monetary policy agnostically open. The results show that increases in Swiss short-term interest rates are associated with a nominal Swiss franc appreciation against the euro and the US dollar within the same week, with the Swiss franc remaining permanently stronger than prior to the interest rate shock.
    Keywords: Monetary policy shocks, exchange rates, stock-bond comovement, delayed overshooting, structural vector autoregression, informative priors, sign restrictions
    JEL: C32 E43 E58 F31
    Date: 2020

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