nep-eec New Economics Papers
on European Economics
Issue of 2020‒05‒18
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Drivers of Bank Default Risk: Bank Business Models, the Sovereign and Monetary Policy By Nicolas Soenen; Rudi Vander Vennet
  2. The Taylor Curve: International Evidence By Semih Emre Cekin; Rangan Gupta; Eric Olson
  3. Quantitative easing and the price-liquidity trade-off By Ferdinandusse, Marien; Freier, Maximilian; Ristiniemi, Annukka
  4. Structural current account benchmarks for the European Union countries: cross-section exploration By Kamila Kuziemska-Pawlak; Jakub Mućk
  5. International confidence spillovers and business cycles in small open economies By Michał Brzoza-Brzezina; Jacek Kotłowski
  6. The Effects of Public Expenditures on Labour Productivity in Europe By Igor Fedotenkov; Rangan Gupta
  7. Heterogeneity in corporate debt structures and the transmission of monetary policy By Holm-Hadulla, Fédéric; Thürwächter, Claire
  8. Do ECB introductory statements help to predict monetary policy: evidence from tone analysis By Paweł Baranowski; Hamza Bennani; Wirginia Doryń
  9. Endogenous TFP, business cycle persistence and the productivity slowdown in the euro area By Spitzer, Martin; Schmöller, Michaela
  10. The impact of low interest rates on banks’ non-performing loans By Matěj Maivald; Petr Teplý
  11. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility in the United Kingdom By Afees A. Salisu; Rangan Gupta
  12. Winners and Losers from Sovereign Debt Inflows By Fernando Broner; Alberto Martin; Lorenzo Pandolfi; Tomas Williams
  13. Distributional consequences of conventional and unconventional monetary policy By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa

  1. By: Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: In this paper we empirically analyze the determinants of bank default risk (measured by the banks’ CDS spreads) for European banks during the period 2008-2018. We examine the effect of (1) bank business model characteristics, (2) sovereign default risk and (3) ECB monetary policy. We disentangle the effect of monetary policy in a direct channel and an indirect effect operating through a sovereign risk channel. In terms of business model variables, we find that the capital ratio and the reliance on stable deposits lowers the perceived default risk of banks, while non-performing loans significantly increase the CDS spreads. Hence, the CDS market distinguishes resilient banks from risky banks. In terms of monetary policy, we document that accommodative ECB actions in general lower bank default risk. We also show that the downward effect of monetary policy on bank risk is mainly transmitted through the sovereign risk channel. Our findings confirm the importance of the Basel 3 capital and stable funding rules and they suggest policy implications in terms of bank business model choices as well as approaches to tackle the bank-sovereign loop in Europe.
    Keywords: banks, credit risk, bank business model, monetary policy, sovereign risk
    JEL: G01 G1 G12 G21 E52
    Date: 2020–05
  2. By: Semih Emre Cekin (Department of Economics, Turkish-German University, Istanbul, Turkey); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Eric Olson (College of Business, University of Tulsa, Tulsa, Oklahoma, United States)
    Abstract: We use the Taylor curve to gauge deviations of monetary policy from an efficiency locus for the United Kingdom (UK) and the four largest economies of the eurozone (Germany, France, Italy, Spain) for the period 2000-2018. For this purpose, we use shadow interest rates, which is a common metric for both conventional and unconventional monetary policies, and the newly proposed Hamilton-filter to measure output gap, which improves upon the drawbacks of the traditionally used Hodrick-Prescott filter. Our findings suggest that deviations in the UK mostly occurred amid the global financial crisis and the post-Brexit period, whereas eurozone members experienced more volatile deviations around 2001, during the global financial crisis and the eurozone sovereign debt crisis.
    Keywords: Taylor curve, Monetary policy, eurozone
    JEL: E31 E58 C32
    Date: 2020–05
  3. By: Ferdinandusse, Marien; Freier, Maximilian; Ristiniemi, Annukka
    Abstract: We consider the effects of quantitative easing on liquidity and prices of bonds in a search-and matching model. The model explicitly distinguishes between demand and supply effects of central bank asset purchases. Both are shown to lead to a decline in yields, while they have opposite effects on market liquidity. This results in a price-liquidity trade-off. Initially, liquidity improves in reaction to central bank demand. As the central bank buys and holds bonds, supply becomes scarcer and other buyers are crowded out. As a result, liquidity can fall below initial levels. The magnitude of the effects depend on the presence of preferred habitat investors. In markets with a higher share of these investors, bonds are scarcer and central bank asset purchases lower yields more. With a lower share of preferred habitat investors and a relatively illiquid market, central bank demand has a stronger positive effect on liquidity. We are the first to construct an index from bond holding data to measure the prevalence of preferred habitat investors in each euro area country. Subsequently, we calibrate the model to the euro area and show how yields and liquidity are affected by the European Central Banks asset purchase programme. JEL Classification: E52, E58, G12
    Keywords: asset purchases, liquidity, search and matching
    Date: 2020–05
  4. By: Kamila Kuziemska-Pawlak (Narodowy Bank Polski); Jakub Mućk (Narodowy Bank Polski)
    Abstract: This paper provides an empirical investigation of the medium- to long- term (structural) determinants of current account to GDP ratio. Cross-section regressions are run on the data for a large group of countries (94 economies) averaged over the period 2008-2016. The traditional set of factors explaining the current account is extended with the level of price-cost competitiveness proxied by national price level. The link between the national price level and the current account proves to be of a non-linear nature and depend on the level of economic development. Based on a battery of estimates, structural current accounts are calculated and compared with actual current accounts for 28 EU countries. In the aftermath of the crisis that escalated in 2008, narrowing gaps between actual and structural current accounts were observed in many EU deficit countries. On the other hand, large positive current account gaps persisted in surplus countries. Decomposition of changes in structural current account since 1995, conducted for the subset of the EU Member States for which the data were available, indicates that the changes in structural current account were mainly driven by the changes in income and the changes in general government balance.
    Keywords: determinants of current account, current account thresholds, crosssection estimation, panel data estimation
    JEL: F32 F41
    Date: 2019
  5. By: Michał Brzoza-Brzezina; Jacek Kotłowski
    Abstract: The economic literature has for a long time been looking for explanations of a very strong international correlation of business cycles. This paper shows empirically that common fluctuations can to some degree be the effect of confidence shocks beeing transmitted internationally. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that euro area confidence fluctuations account for approximately 40-70% of business cycle fluctuations both in the euro area and in Poland. More importantly, their transmission happens not only via traditional channels (e.g. by confidence affecting euro area GDP and then Polish GDP via trade), but to a large extent occurs directly (e.g. by news spreading via media).
    Keywords: International spillovers, animal spirits, sentiments, business cycle
    JEL: C32 E32 F44
    Date: 2020–05
  6. By: Igor Fedotenkov (Joint Research Center, European Commission, Rue du Champ de Mars, 21, 1050 Brussels, Belgium); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: In this paper, we analyse the effects of public expenditures and their structure on productivity growth in industry and services in the European Union (EU) countries. We also control for the share of expenditures made by central governments. We find that productivity growth in industry decreases with government expenditures on environmental protection and increases with the decentralisation of government expenditures on recreation, culture and religion. As for services, productivity growth declines with military expenditures and increases with the centralisation of expenditures on public order and safety, and with the decentralisation of expenditures on economic affairs. The former two effects are mainly noted in Eastern European countries, while the latter is stronger in Western Europe. Lower corruption increases productivity growth. Furthermore, our estimates suggest that there is a convergence in productivities across EU member states, with convergence faster in the service sector than in the industrial sector. These findings carry important policy implications.
    Keywords: Labour productivity, government expenditures, decentralisation, services
    JEL: E24 E62 H50 H76 O14
    Date: 2020–05
  7. By: Holm-Hadulla, Fédéric; Thürwächter, Claire
    Abstract: We study how differences in the aggregate structure of corporate debt financing affect the transmission of monetary policy. Using high-frequency financial market data to identify monetary policy shocks in a panel of euro area countries, we find that: bond finance dampens the overall response of firm credit to monetary policy shocks in economies with a high initial share of bond- relative to bank-based finance; this effect weakens, and may even reverse, in economies with a low share of bond financing; and the dampening effect of a larger bond financing share also attenuates the ultimate impact of monetary policy on economic activity. These findings point to corporate bond markets acting as a “spare tire” in situations when bank lending contracts. JEL Classification: E44, E52, G21, G23
    Keywords: bank lending, corporate bonds, firm financing structure, high-frequency identification, local projections
    Date: 2020–05
  8. By: Paweł Baranowski (Institute of Econometrics, University of Lodz); Hamza Bennani (EconomiX-CNRS, Universite Paris Nanterre); Wirginia Doryń (Institute of Economics, University of Lodz)
    Abstract: In this paper, we examine whether a tone shock derived from ECB communication helps to predict ECB monetary policy decisions. For that purpose, we first use a bag-of-words approach and several dictionaries on the ECB’s Introductory Statements to derive a measure of tone. Next, we orthogonalize the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of economic conditions and monetary policy and the ECB’s Governing Council inter-meeting communication. Further extensions show that the predictive power of the tone shock regarding future monetary policy decisions is robust to (i) the normalization of the tone measure, (ii) alternative market expectations about monetary policy and (iii) the macroeconomic variables used in the Taylortype monetary policy. These findings thus highlight an additional channel by which ECB communication improves monetary policy predictability, and suggest that the ECB may have private information that it communicates through its Introductory Statements.
    Keywords: Central Bank Communication; European Central Bank; Tone; Forecasts; Taylor Rule
    JEL: E43 E52 E58
    Date: 2020
  9. By: Spitzer, Martin; Schmöller, Michaela
    Abstract: This paper analyses the endogeneity of euro area total factor productivity and its role in business cycle amplification by estimating a medium-scale DSGE model with endogenous productivity mechanism on euro area data. In this framework, total factor productivity evolves endogenously as a consequence of costly investment in R&D and adoption of new technologies. We find that the endogeneity of TFP induces a high degree of persistence in the euro area business cycle via a feedback mechanism between overall economic conditions and investment in productivity-enhancing technologies. As to the sources of the euro area productivity slowdown, we conclude that a decrease in the efficiency of R&D investment is among the key factors generating the pre-crisis productivity slowdown, while starting from the Great Recession a shock to liquidity demand is identified as the most important driving force. The endogenous technology mechanism further exerts a dampening effect on the inflation response following a recessionary shock and hence has important implications for both the negligible fall in inflation during the Great Recession, as well as the sluggish increase of inflation in the subsequent recovery. JEL Classification: E24, E32, O31
    Keywords: endogenous productivity, euro area business cycles, low inflation, weak growth
    Date: 2020–05
  10. By: Matěj Maivald; Petr Teplý
    Abstract: The paper examines the impact of a low interest rate environment on banks’ credit risk measured by the non-performing loan (NPL)/total loans ratio. We analyse a unique sample of annual data on 823 banks from the Eurozone, Denmark, Japan, Sweden, and Switzerland for the 2011-2017 period, which also covers the period of zero and negative rates. We conclude that after 1 year of low interest rates, the NPL ratio increases. Our results are mostly consistent with the findings of previous research, and the majority of differences can be explained by the changes in the economic environment during the period with low interest rates.
    Keywords: banks, credit risk, low interest rates, non-performing loans
    JEL: C33 E43 G21
    Date: 2020–02–17
  11. By: Afees A. Salisu (Department for Management of Science and Technology Development, Ton Duc Thang University, Ho Chi Minh City, Vietnam; Faculty of Business Administration, Ton Duc Thang University, Ho Chi Minh City, Vietnam); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: We use constant and time-varying parameters vector autoregressive models that allow the estimation of the impact of monetary policy shocks on volatility of macroeconomic variables in the United Kingdom. Estimates suggest that an increase in the policy rate by 1% is associated with a rise in unemployment and inflation volatility of about 10% on average, with peaks observed during episodes of local and global crises.
    Keywords: Non-Linear SVAR, Stochastic Volatility, Monetary Policy Shock
    JEL: C32 E30 E40 E52
    Date: 2020–05
  12. By: Fernando Broner (CREi and Barcelona GSE); Alberto Martin (European Central Bank, CREi, Barcelona GSE); Lorenzo Pandolfi (Università di Napoli Federico II and CSEF); Tomas Williams (George Washington University)
    Abstract: We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries’ inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.
    Keywords: Sovereign debt; capital inflows; exchange rate; government bond yields; stock prices; emerging markets.
    JEL: F31 F32 F36 G15 G23
    Date: 2020–05–15
  13. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (Marcin Kolasa)
    Abstract: This paper uses a life-cycle model with a rich asset structure, and standard nominal and real rigidities, to investigate the distributional consequences of traditional monetary policy and communication about its future course (forward guidance). The model is calibrated to the euro area using both macroeconomic aggregates and microeconomic evidence from the Household Finance and Consumption Survey. We show that the lifecycle profiles of income and asset accumulation decisions are important determinants of redistributive effects of both anticipated and unanticipated monetary shocks. Even though house prices respond strongly to monetary policy easing, hurting young households, their distributional effects are dwarfed by changes in returns on nominal assets and labor market revival that work in the opposite direction. Both anticipated and unanticipated policy easing hence redistribute welfare from older to younger generations. The scale of this redistribution is larger for forward guidance if nominal interest rates are constrained by the effective lower bound.
    Keywords: monetary policy, forward guidance, life-cycle models, redistribution
    JEL: E31 E52 J11
    Date: 2020

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