nep-eec New Economics Papers
on European Economics
Issue of 2020‒06‒08
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Who’s afraid of euro area monetary tightening? CESEE shouldn’t By Geis, André; Moder, Isabella; Schuler, Tobias
  2. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  3. Negative Monetary Policy Rates and Systemic Banks’ Risk-Taking: Evidence from the Euro Area Securities Register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
  4. ECB Monetary Policy and Commodity Prices By Shahriyar Aliyev; Evzen Kocenda
  5. The North-South Divide, the Euro and the Worlds By Konstantinos Chisiridis; Kostas Mouratidis; Theodore Panagiotidis
  6. Monetary Policy at Work: Security and Credit Application Registers Evidence By Peydró, José-Luis; Polo, Andrea; Sette, Enrico
  7. Macroeconomic reversal rate: evidence from a nonlinear IS-curve By Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
  8. Is there a trade-off between inventories and trade credit? The role of the sovereign debt crisis By da Silva Fernandes, Filipa; Guariglia, Alessandra; Kontonikas, Alexandros; Tsoukas, Serafeim
  9. The importance of studying inter-regional spillover effects of European policies: application of the RHOMOLO model for Poland By Patrizio Lecca; Simone Salotti; Andrea Conte
  10. Elevated survey uncertainty after the Great Recession: a non-linear approach By Natalia Levenko
  11. Real Effects of Uncertainty: Evidence from Brexit By Anna Lipinska; Musa Orak
  12. COVID-19 and Financial Markets: A Panel Analysis for European Countries By Jens Klose; Peter Tillmann
  13. Stressed banks? Evidence from the largest-ever supervisory review By Abbassi, Puriya; Iyer, Rajkamal; Peydró, José-Luis; Soto, Paul E.
  14. The interbank market puzzle By Allen, Franklin; Covi, Giovanni; Gu, Xian; Kowalewski, Oskar; Montagna, Mattia

  1. By: Geis, André; Moder, Isabella; Schuler, Tobias
    Abstract: After a first phasing out of the ECB’s net asset purchases at end-2018, the question of how a future tightening of the ECB’s monetary policy may affect countries located in the vicinity of the euro area has gained prominence, but has been left largely unanswered so far. Our paper aims to close this gap for the CESEE region by employing shock-specific conditional forecasts, a methodology that has been little exploited in this context. Besides demonstrating the usefulness of our framework, we obtain three key findings characterising the spillovers of ECB monetary policy to CESEE economies: first, a euro area monetary tightening does trigger sizeable spillovers to the CESEE region. Second, we show that in the context of a demand shock-induced monetary tightening, which is more realistic than the usual approach taken in the literature, CESEE countries’ output and prices actually respond positively. Third, spillovers on output and prices in CESEE countries are heterogeneous, and depend on the trajectory of euro area tightening. JEL Classification: C11, C32, E52, F42
    Keywords: BVAR, EU integration, international shock transmission, monetary policy
    Date: 2020–05
  2. By: Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    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 from Italy. NIRP affects banks with higher net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRPaffected banks reduce liquid assets, expand credit supply (to ex-ante riskier firms), and cut rates, inducing sizable firm-level real effects. By contrast, there is no evidence of a contractionary retail deposit channel.
    Keywords: negative interest rates,portfolio rebalancing,bank lending channel and of monetary policy,liquidity management,Eurozone crisis
    JEL: E52 E58 G01 G21 G28
    Date: 2020
  3. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: negative rates,non-standard monetary policy,reach-for-yield,securities,banks
    JEL: E43 E52 E58 G01 G21
    Date: 2020
  4. By: Shahriyar Aliyev (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic.); Evzen Kocenda (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic; Institute of Information Theory and Automation of the CAS, Prague; CESifo, Munich; IOS Regensburg; and the Euro Area Business Cycle Network.)
    Abstract: We analyze the impact of the ECB monetary policies on global aggregate and sectoral commodity prices using monthly data from January 2001 till August 2019. We employ a SVAR model and assess separately period of conventional monetary policy before global financial crisis (GFC) and unconventional monetary policy during post-crisis period. Our key results indicate that contractionary monetary policy shocks have positive effects on the aggregate and sectoral commodity prices during both conventional and unconvetional monetary policy periods. The effect is statistically significant for aggregate commodity prices during post-crisis period. In terms of sectoral impact, the effect is statistically significant for food prices in both periods and for fuel prices during post-crisis period; other commodities display positive but statistically insignificant responses. Further, we demonstrate that the impact of the ECB monetary policy on commodity prices increased remarkably after the GFC. Our results also suggest that the effect of the ECB monetary policy on commodity prices does not transmit directly through market demand and supply expectations channel, but rather through the exchange rate channel that influences the European market demand directly.
    Keywords: European Central Bank, commodity prices, short-term interest rates, unconventional monetary policy, Structural Vector Autoregressive model, exchange rates.
    JEL: C54 E43 E58 F31 G15 Q02
    Date: 2020–04
  5. By: Konstantinos Chisiridis; Kostas Mouratidis; Theodore Panagiotidis
    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: global trade imbalances, expansionary policy, competitiveness, internal devaluation, current account deficits
    Date: 2020–04
  6. By: Peydró, José-Luis; Polo, Andrea; Sette, Enrico
    Abstract: Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to e.g. risk-shift or hoard liquidity. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with higher ECB liquidity, less capitalized banks react by increasing securities over credit supply, inducing worse firm-level real effects. However, they buy securities with lower yields and haircuts, thus reaching-for-safety and liquidity. Differently, in pre-crisis time, securities do not crowd-out credit supply. The substitution from lending to securities in crisis times helps less capitalized banks to repair their balance-sheets and then restart credit supply with a one year-lag.
    Keywords: securities,credit supply,bank capital,monetary policy,reach-for-yield,haircuts,held to maturity,available for sale,trading book,Euro Area Sovereign Debt Crisis
    JEL: G01 G21 G28 E52 E58
    Date: 2020
  7. By: Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
    Abstract: This paper examines the link between interest rates and expenditures, known as the IS-curve. Specifically, we analyse whether the reaction of spending behaviour to monetary policy changes is different in a low compared to a normal interest rate environment. We estimate the nonlinear IS-curve for the euro area and the five largest euro area countries over the period 1999q2-2019q1 and study whether the IS-curve relationship is regime-dependent. We employ smooth-transition local projections to estimate the impulse responses of the output gap, the growth of consumption, investment, and savings to a contractionary monetary policy shock under normal and low interest rate regimes. Our results point to a possible flattening of the IS-curve, related to substitution effects becoming weaker relative to income effects in a low interest rate regime.
    Keywords: IS-curve; monetary policy; low interest rate environment
    JEL: E21 E22 E43 E52
    Date: 2020–05
  8. By: da Silva Fernandes, Filipa; Guariglia, Alessandra; Kontonikas, Alexandros; Tsoukas, Serafeim
    Abstract: Using a panel of 72,172 manufacturing firms from 11 euro-area countries over the period 2006- 2015, we investigate how the stock of inventories relates to the extension of trade credit. Consistent with the inventory-management motive for offering trade credit, we find an inverse relationship between the two variables. This association is stronger for firms producing differentiated goods and during the recent sovereign debt crisis. Furthermore, financial intermediation mitigates the inventory-management motive, especially during the crisis period. Our results are robust to using different definitions of trade credit and of the crisis.
    Keywords: Trade credit; Inventories; Euro area; Sovereign debt crisis; Financial development
    Date: 2020–05–14
  9. By: Patrizio Lecca (European Commission - JRC); Simone Salotti (European Commission - JRC); Andrea Conte (European Commission - JRC)
    Abstract: The European cohesion policy is the EU’s main investment policy and targets all regions and cities across the EU to support job creation, business competitiveness, economic growth, and sustainable development. In the 2014–2020 programming period, one third of the EU budget has been allocated to the projects under this policy. This report contains a macroeconomic impact assessment of the European cohesion policy with a focus on Polish regions. The analysis deals in particular with the spillover effects arising from the policy intervention resulting from indirect trade effects and other inter-regional inter-dependencies and interactions. The analysis shows that the policy has a positive long-run impact, lasting years after the end of the programmes. This reflects the fact that cohesion policy supports investments in key engines of growth improving the structure of the Polish economy.
    Keywords: Rhomolo, region, growth, cohesion policy, Poland
    JEL: C68 R13
    Date: 2020–06
  10. By: Natalia Levenko
    Abstract: The European Survey of Professional Forecasters (SPF) is a dataset that is widely used to derive measures of forecast uncertainty. Participants in the SPF provide not only point estimates but also density forecasts for key macroeconomic variables. The mean individual variance, defined as the average of the variances of individual forecasts, shifted up during the Great Recession and has remained elevated since the crisis. This shift is not typical since proxies for uncertainty are usually counter-cyclical. The paper seeks to explain this puzzling lack of countercyclicality by applying a smooth transition analysis on data from the European SPF. The analysis indicates that the mean individual variance has a non-linear relationship with the share of non-rounded responses in the survey and consequently the upward shift in individual variance is likely to be associated with changes in the modelling preferences of forecasters. The results remain robust after potential endogeneity has been accounted for
    Keywords: survey uncertainty; forecast disagreement; density forecasts; surveys of professional forecasters; Great Recession; smooth transition; instrumental variables
    JEL: C25 C32 C83 D81 E32 E37
    Date: 2020–05–18
  11. By: Anna Lipinska; Musa Orak
    Abstract: In the historic Brexit referendum on June 23, 2016, U.K. citizens voted in favor of leaving the European Union (EU), a result that created substantial uncertainty regarding the future economic relationship between the United Kingdom and the EU. As can be seen in Figure 1, uncertainty, measured by the Economic and Policy Uncertainty (EPU) index of Baker et al. (2016), spiked around the Brexit referendum date and has remained elevated relative to its pre-referendum levels since then.
    Date: 2020–05–11
  12. By: Jens Klose (THM Business School Giessen); Peter Tillmann (Justus Liebig University Giessen)
    Abstract: In order to fight the economic consequences of the COVID-19 pandemic, monetary and fiscal policy announced a large variety of support packages which are often unprecedented in size. In this paper, we provide an empirical analysis of the responses of European financial markets to these policy announcements. The key contribution is a very granular set of policy announcements, both at the national and the European level. We also differentiate between the first announcement in a series of policies and the subsequent announcements because the initial steps were often seen as bad news about the state of the economy. In a panel model we find that monetary policy, in particular through asset purchases, is effective in supporting the real economy and easing the pressure on governmental finances. Across all subsets of polices, it seems that monetary policy is more effective in supporting the stock market than national fiscal policy, though markets clearly distinguish between different types of policies.
    Keywords: event study, announcements, fiscal policy, monetary policy, European Monetary Union
    JEL: E44 E52 E62
    Date: 2020
  13. By: Abbassi, Puriya; Iyer, Rajkamal; Peydró, José-Luis; Soto, Paul E.
    Abstract: Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB's asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase).
    Keywords: Asset quality review,stress tests,supervision,risk-masking,costs of safe assets
    JEL: E58 G21 G28 H63 L51
    Date: 2020
  14. By: Allen, Franklin (Imperial College London); Covi, Giovanni (Bank of England); Gu, Xian (Wharton School of University of Pennsylvania.); Kowalewski, Oskar (IESEG School of Management); Montagna, Mattia (European Central Bank)
    Abstract: This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the limited trust and enhance interbank activity.
    Keywords: Interbank market; trust; networks; centrality; community detection
    JEL: G01 G21 G28
    Date: 2020–05–14

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