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on European Economics |
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Issue of 2020‒06‒15
seventeen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Marius Clemens; Stefan Gebauer; Tobias König |
| Abstract: | While the first two pillars of the European Banking Union have been implemented, a European deposit insurance scheme (EDIS) is still not in place. To facilitate its introduction, recent proposals argue in favor of a reinsurance scheme. In this paper, we use a regime-switching open-economy DSGE model with bank default and bank-government linkages to assess the relative efficiency of such a scheme. We find that reinsurance by both a national fiscal backstop and EDIS is efficient in stabilizing the macro economy, even though welfare gains are slightly larger with EDIS and debt-to-GDP ratios rise under the fiscal reinsurance. We demonstrate that risk-weighted contributions to EDIS are welfare-beneficial for depositors and discuss trade-offs policy makers face during the implementation of EDIS. In a counterfactual exercise, we find that EDIS would have stabilized economic activity in Germany and the rest of the euro area just as well as a fiscal backing of insured deposits during the financial crisis. However, the debt-to-GDP ratio would have been lower with EDIS. |
| Keywords: | Banking Union, Deposit Insurance, Risk-Sharing |
| JEL: | E61 F42 F45 G22 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1873&r=all |
| By: | Huljak, Ivan; Martin, Reiner; Moccero, Diego; Pancaro, Cosimo |
| Abstract: | We contribute to the empirical literature on the impact of non-performing loan (NPL) ratios on aggregate banking sector variables and the macroeconomy by estimating a panel Bayesian VAR model for twelve euro area countries. The model is estimated assuming a hierarchical prior that allows for country-specific coefficients. The VAR includes a large set of variables and is identified via Choleski factorisation. We estimate the impact of exogenous shocks to the change in NPL ratios across countries. The main findings of the paper are as follows: i ) An impulse response analysis shows that an exogenous increase in the change in NPL ratios tends to depress bank lending volumes, widens bank lending spreads and leads to a fall in real GDP growth and residential real estate prices; ii ) A forecast error variance decomposition shows that shocks to the change in NPL ratios explain a relatively large share of the variance of the variables in the VAR, particularly for countries that experienced a large increase in NPL ratios during the recent crises; and iii ) A three-year structural out-of-sample scenario analysis provides quantitative evidence that reducing banks' NPL ratios can produce significant benefits in euro area countries in terms of improved macroeconomic and financial conditions. JEL Classification: G21, C32, C11 |
| Keywords: | euro area countries, hierarchical priors, non-performing loans, panel Bayesian VAR |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202411&r=all |
| By: | Catherine Mathieu (Observatoire français des conjonctures économiques) |
| Abstract: | The results of the June 2016 referendum in favour of the UK leaving the EU opened a period of huge economic and political uncertainty in the UK, and in the EU27. A large number of official and academic analyses have been published that address the economic impact of different modalities of Brexit. Section 1 analyses possible models for the future UK-EU relationship, from remaining in the single market and in the customs union, to a Free Trade Agreement (FTA) or world trade organization (WTO) rules. Section 1 also discusses the future of UK trade regulations (tariff and non-tariff barriers, trade agreements) and the various channels through which Brexit could have an impact on the UK economy (trade, foreign direct investment (FDI), migration, productivity, fiscal policy). The UK must make a trade-off between ensuring access to the EU market and increasing its regulatory autonomy. Section 2 surveys studies released on the impacts of Brexit, over short-and long-term horizons, under different scenarios, from a soft Brexit to a hard Brexit and a no deal scenario. These studies provide very different results depending on the methods they use and the assumptions they adopt on the future relationship between the UK and the EU27, mainly on how they view the effects of trade openness and regulations on productivity, in level as in growth rate. Studies usinggravity models and computable general equilibrium models generally find negative but small effects on UK GDP. Some studies increase these effects by adding the negative impact of a less open UK economy on labour productivity growth, even if Brexiteers want to open the UK to non-EU economies. Others believe that a liberalisation shock could boost output growth, but the UK is already a very liberal economy. The impact of Brexit on the GDP of the EU27 countries is on average 4 to 5 times smaller than on UK GDP, although some countries (Ireland in particular) are more affected. In the shorter term, uncertainty about Brexit has a negative effecton investment and exports, which is partly offset by lower interest rates and exchange rates. |
| Keywords: | Brexit; UK economy; EU membership; Trade agreements |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2jt9boop748r0ql0k1lmshm5ou&r=all |
| By: | B De Rezende, Rafael (Bank of England); Ristiniemi, Annukka (Sveriges Riksbank and European Central Bank) |
| Abstract: | We propose a shadow rate that measures the overall stance of monetary policy when the lower bound is not necessarily binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro area and the UK, and document that they fall (rise) as monetary policy becomes more expansionary (contractionary). This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding in a timely fashion, and in line with government bond yields. We show two applications for our shadow rate. First, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and assess the pass-through of each type of policy to exchange rates. We find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, a counterfactual experiment in a DSGE model suggests that inflation in Sweden would have been around half a percentage point lower had unconventional monetary policy not been used since February 2015. |
| Keywords: | Monetary policy stance; unconventional monetary policy; term structure of interest rates; short-rate expectations; term premium; exchange rates |
| JEL: | E43 E44 E52 E58 |
| Date: | 2020–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0864&r=all |
| By: | Maximilian Bock; Martin Feldkircher; Pierre L. Siklos |
| Abstract: | This paper explores the domestic and international effects of an increase in observed interest rates (conventional monetary policy) and expected interest rates (forward guidance). We find significant spillovers to a broad range of countries when both are subject to a tightening shock: Output growth and inflation decelerate and equity returns decline. Currencies of euro area neighboring countries tend to depreciate against the euro. A tightening forward guidance shock triggers more persistent effects on euro area and international interest rates. We find that international effects vary over the sample period when either interest rates are shocked. |
| Keywords: | Spillovers, interest rate expectations, forward guidance, GVAR |
| JEL: | E5 F3 C11 C30 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-54&r=all |
| By: | Ca' Zorzi, Michele; Dedola, Luca; Georgiadis, Georgios; Jarociński, Marek; Stracca, Livio; Strasser, Georg |
| Abstract: | This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world. JEL Classification: E44, E52, F3, E58, F42 |
| Keywords: | international monetary policy coordination, international shock transmission, monetary policy shocks, monetary policy spillovers |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202407&r=all |
| By: | Martin Braml; Gabriel Felbermayr |
| Abstract: | Our paper shows that individual preferences for open-market policies are mainly shaped by trust in institutions and not economic self-interest. On the basis of the Eurobarometer, a comprehensive semiannual survey that monitors public opinion in EU Member States, we exploit data on attitudes towards the Transatlantic Trade and Investment Partnership (TTIP), free trade, protectionism, and globalization. We find that preferences for open-market trade policies cannot be sufficiently explained by variables that, according to classical trade theory, typically determine personal advantages. Nevertheless, rational considerations follow expected patterns, in particular when individuals express strong preferences. A spatial analysis at the European NUTS-2 level shows that measures of regional trade exposure and other macroeconomic determinants serve as well-suited predictors for the substantial cross-regional variation in the support for globalization. Country specific narratives are predominant drivers of individual open-market attitudes. |
| Keywords: | International political economy, globalization, free trade attitudes |
| JEL: | F13 F53 F68 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ifowps:_325&r=all |
| By: | Mariarosaria Comunale |
| Abstract: | In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery. |
| Keywords: | euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy |
| JEL: | E31 F31 F45 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-32&r=all |
| By: | Cristiana Belu Manescu; Elva Bova |
| Abstract: | This study reviews national expenditure rules currently in force in the EU, examining their design, effectiveness and the extent to which they have been complied with. Based on evidence from the Commission’s Fiscal Governance Database and using a novel database on compliance and econometric estimation, this study finds that out of the 14 expenditure rules covering general and central governments, half mirror the EU expenditure benchmark while four rules are multi-annual expenditure ceilings, with varying binding force. Empirical estimates over the 1999-2016 period confirm that while fiscal policy is indeed pro-cyclical in the EU, the magnitude of the pro-cyclical bias is lower in presence of expenditure rules. Moreover, the better the expenditure rule design in terms of legal base, independent monitoring, consequences for non-compliance or coverage, the stronger the mitigating effect. Finally, we find that expenditure rules were complied with in about 78 percent of cases, with compliance being better for multiannual expenditure ceilings than for rules specified as growth rates. |
| JEL: | E62 E63 H5 H6 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:124&r=all |
| By: | Federico Maria Ferrara; Jörg Haas; Andrew Peterson (Georgia Institute of Technology [Atlanta]); Thomas Sattler (Research Unit Ecosystem Boundaries - WSL) |
| Abstract: | The economic imbalances that characterize the world economy have unequally distributed costs and benefits. This raises the question how countries could run long-term external surpluses and deficits without significant opposition against the policies that generate them. We show that economic ideas, and their emphasis in the public discourse , help to secure mass political support for these policies and the resulting economic outcomes. First, a content analysis of 32,000 newspaper articles finds that the dominant interpretations of economic outcomes in Australia and Germany concur with very distinct perspectives: external surpluses are seen as evidence of competitiveness in Germany, while external deficits are interpreted as evidence of attractiveness for investments in Australia. Second, survey experiments in both countries suggest that exposure to these diverging interpretations has a causal effect on citizens' support for their country's economic strategy. Economic ideas, thus, are crucial to provide the societal foundation of national growth strategies. |
| Keywords: | survey experiments,text analysis,trade,capital flows,ideas,public opinion |
| Date: | 2020–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02569351&r=all |
| By: | Kortelainen, Mika |
| Abstract: | We study the yield curve control in Eurozone. We apply Chen, Cúrdia and Ferrero (2012) model that uses a financial friction to break Wallace's neutrality. We calibrate a bond supply shock that corresponds to the observed change in the time premium in euro area when the APP program was introduced. With some model simulations, we show that the effectiveness of both unconventional monetary policy and fiscal policy are enhanced, when the yield curve control is applied. Thus, we find that the yield curve control can be an effective tool, if applied in a credible manner for a long enough time period during an effective lower bound episode. |
| Keywords: | Yield curve control,monetary policy,fiscal policy,efficient lower bound,liquidity trap |
| JEL: | E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:52020&r=all |
| By: | Christopher F. Baum; Caterina Forti Grazzini; Dorothea Schäfer |
| Abstract: | This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector. |
| Keywords: | Institutional diversity, Shannon Index, Gini-Simpson Index, bank stability, financial crisis, bank competition |
| JEL: | G01 G20 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1869&r=all |
| By: | Albi Tola; Miriam Koomen; Amalia Repele |
| Abstract: | We investigate the relationship between deviations from the covered interest rate parity (CIP) and Swiss capital outflows since the great financial crisis. While the CIP held tightly before the crisis, it has been failing for most currencies vis-à-vis the US dollar ever since. We expect CIP deviations to adversely affect outflows, as they generally result in additional costs for Swiss investors. We find empirical support for our hypothesis. Our results show that with increasing CIP deviations, Swiss portfolio investment debt outflows decrease significantly. This decrease could have implications for the demand for domestic currency investments. |
| Keywords: | Covered interest rate parity, cross-currency basis, dollar funding, capital flows, portfolio investments |
| JEL: | F31 F32 G11 G15 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2020-08&r=all |
| By: | Gebauer, Stefan; Mazelis, Falk |
| Abstract: | Macroprudential policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. We develop a DSGE model that differentiates between regulated, monopolistic competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999 – 2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. In a counterfactual analysis, we compare how macroprudential policy implemented before the crisis would have dampened the business and lending cycles. JEL Classification: E32, E58, G23 |
| Keywords: | financial frictions, macroprudential policy, monetary policy, non-bank financial institutions, policy coordination |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202406&r=all |
| By: | Claudio Michelacci (EIEF and CEPR); Luigi Paciello (EIEF and CEPR) |
| Abstract: | Using the Bank of England Inflation Attitudes Survey we find that households with preferences for higher inflation and higher interest rates have lower expected inflation. The wedge is mildly correlated with existing measures of uncertainty and increases after major economic events such as the failure of Lehman Brothers or the Brexit referendum. We interpret the wedge as due to Knightian uncertainty about future monetary policy and the underlying economic environment. If households had treated uncertainty as measurable risk, consumption and output would have been around 1 percent higher both during the Great Recession and in recent years. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:2006&r=all |
| By: | Issing, Otmar |
| Abstract: | This Policy White Paper assesses several main elements of ECB's upcoming review of its monetary policy strategy, announced in January 2020. Four aspects of the review are discussed in detail: i) ECB's definition of price stability and the arguments for and against inflation targeting; ii) the scope of ECB's objectives, considering financial stability, employment and the sustainability of the environment; iii) an update of ECB's economic and monetary analyses to assess the risks to price stability; iv) the ECB's communication practice. Furthermore, an overview of the ECB's monetary policy strategy and its last evaluation in 2003 is given. |
| Keywords: | monetary policy,ECB,price stability,two-pillar system,strategy review |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:68&r=all |
| By: | Galvao, Ana Beatriz (University of Warwick); Garratt, Anthony (University of Warwick); Mitchell, James (University of Warwick) |
| Abstract: | This paper presents empirical evidence on how judgmental adjustments affect the accuracy of macroeconomic density forecasts. We aim to separate the effects of judgments made about the first three moments of a set of professional forecasters’ density forecasts for UK output growth and inflation. Using entropic tilting methods, we evaluate whether judgmental adjustments about the mean, variance and skewness improve the accuracy of density forecasts from statistical models. We find that not all judgmental adjustments improve density forecasts: overall, density forecasts from statistical models prove hard to beat. Judgments about point forecasts tend to improve density forecast accuracy at short horizons and at times of heightened macroeconomic uncertainty. Judgments about the variance clearly hinder at short horizons, but can help deliver better tail risk forecasts at longer horizons. Finally, judgments about skew in general take value away, with gains seen only for longer horizon output growth forecasts when statistical models took longer to learn that downside risks had reduced with the end of the Great Recession. |
| Keywords: | density forecasting ; judgment forecasting ; skewness ; exponential tilting ; forecasting uncertainty ; |
| JEL: | C32 C53 E37 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wrkemf:33&r=all |