nep-eec New Economics Papers
on European Economics
Issue of 2020‒07‒13
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Seigniorage and central banks’ financial results in times of unconventional monetary policy By Zbigniew Polański; Mikołaj Szadkowski
  2. The impact of trade policy uncertainty shocks on the Euro Area By Arigoni, Filippo; Lenarčič, Črt
  3. Estimating the effects of the Eurosystem's asset purchase programme at the country level By Mandler, Martin; Scharnagl, Michael
  4. ECB Announcements and Stock Market Volatility By Frederik Neugebauer
  5. Breaking Badly: The Currency Union Effect on Trade By Douglas L. Campbell; Aleksandr Chentsov
  6. Transmitting fiscal Covid-19 counterstrikes effectively: Mind the banks! By Gropp, Reint; Koetter, Michael; McShane, William
  7. The determinants of bank bailouts in Greece: testing the extreme limits of the “Varieties of Financial Capitalism” framework By Kolliopoulos, Athanasios
  8. The (ir)relevance of the nominal lower bound for real yield curve analysis By Schupp, Fabian
  9. Corona shutdown and bankruptcy risk By Holtemöller, Oliver; Muradoglu, Yaz Gulnur
  10. The anchoring of long-term inflation expectations of consumers: insights from a new survey By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  11. Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households By Michelacci, Claudio; Paciello, Luigi
  12. "Crisis, Austerity, and Fiscal Expenditure in Greece: Recent Experience and Future Prospects in the Post-COVID-19 Era" By Michalis Nikiforos
  13. Why we should expect a much stronger recession in Germany in 2020 than widely believed By Michael Frenkel; Haiko Stefan

  1. By: Zbigniew Polański (SGH Warsaw School of Economics and Narodowy Bank Polski (NBP)); Mikołaj Szadkowski (Narodowy Bank Polski (NBP) and SGH Warsaw School of Economics)
    Abstract: In this paper, we estimate seigniorage and compare it with central banks’ financial results and the size of transfers to the government, adopting the view of seigniorage as the monetary authority’s net income from cash (currency) issuance. Based on the accounting data from the 2003-18 period, the paper analyzes seven monetary authorities: four of the larger economies (Bank of England, Bank of Japan, Eurosystem, Federal Reserve System), and three of the smaller ones (Narodowy Bank Polski, Swedish Riksbank, Swiss National Bank). With the exception of the Polish central bank, following the Global Financial Crisis and the euro area sovereign debt crisis, all of them have adopted unconventional monetary policy measures extensively. Since 2008 we have observed growing divergences between estimates of seigniorage (being typically well below 0.5 per cent of GDP) and financial results (reaching in some cases and years well above 0.5 per cent of GDP), and implied transfers to governments, the latter subject also to different rules of central banks’ profit distribution. We attribute these differences primarily to unconventional activities of central banks in the case of larger economies, and to strong volatility of exchange rates in the case of smaller ones (the Riksbank being an intermediate case). We close our analysis by showing that cash and the resulting seigniorage can play the role of a buffer during the monetary policy normalization process.
    Keywords: seigniorage, financial result, central bank finances, central bank profits, global financial crisis, great recession, euro area sovereign debt crisis, unconventional monetary policy, exit policies, normalization
    JEL: E52 E58 E65 G01 N20
    Date: 2020
  2. By: Arigoni, Filippo; Lenarčič, Črt
    Abstract: This paper sets up a Bayesian SVAR model on Euro Area data and identifies trade policy uncertainty shocks using a minimum set of sign restrictions. We find that rising trade policy uncertainty adversely affects the real business cycle in the Euro Area mostly in short term, while it has more persistent effects on the Euro effective exchange rate and, to a lesser extent, on prices. In line with the recent geo-political events, the evidence suggests an increasing contribution to Euro Area fluctuations towards the end of the sample period. The results are robust to alternative measures of trade policy uncertainty. Furthermore, we show that sectors exhibit heterogeneous responses to trade policy uncertainty shocks.
    Keywords: Trade policy uncertainty; Euro Area; uncertainty shocks; Bayesian SVAR; sign restrictions.
    JEL: C32 D80 E30 F13
    Date: 2020–06–01
  3. By: Mandler, Martin; Scharnagl, Michael
    Abstract: We assess the macroeconomic effects of the Eurosystem's asset purchases on the four largest euro area economies using simulation exercises that combine unconventional monetary policy shocks with a fixed policy rate for the duration of the purchase programme. We identify unconventional monetary policy shocks in a large Bayesian vector autoregressive (BVAR) model as shocks to the term structure of interest rates using zero and sign restrictions. We propose a multi-country model in which we impose identification assumptions mainly on euro area aggregate financial variables and on country averages of output and price responses. Furthermore, the multi-country structure allows testing for cross-country differences in the effects of the asset purchase programme in a statistically rigorous way using the posterior of the difference between the country-specific effects. We estimate positive output effects in all countries as well as positive effects on bank lending to firms. Effects on HICP inflation, generally, are much weaker. We find substantial cross-country heterogeneity with the largest price level effects in Spain while output effects were smallest in France and inflation effects were smallest in Italy.
    Keywords: asset purchase programme,unconventional monetary policy,euro area,Bayesian vector autoregression,regional effects of monetary policy
    JEL: C32 E47 E52 E58
    Date: 2020
  4. By: Frederik Neugebauer
    Abstract: This paper documents that ECB announcements on monetary policy increase stock market volatility in the euro area (EA) using several volatility measures from January 1999 to December 2019. Employing event study methods, a more pronounced impact exists following the global financial crisis starting in 2007. All assets react similarly so that no national peculiarities arise. The effects also spill over to 12 non-EA markets analyzed. Stock markets are more sensitive to negative monetary policy news than to positive ones. Further weighting the announcements by financial market reactions, stock markets behave in a more heterogeneous way.
    Keywords: ECB announcements, asset price volatility, event study
    JEL: E52 E58 G12 G14
    Date: 2020–04–01
  5. By: Douglas L. Campbell (New Economic School); Aleksandr Chentsov (New Economic School)
    Abstract: As several European countries debate entering, or exiting, the euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) estimated that CUs increase trade on average by 100%, and that the euro has increased trade by 50%. In this paper, we find that other major geopolitical events correlated with CU switches drive the large estimated impact of CUs on trade. We find that these estimates are sensitive to intuitive controls and to dynamic specifications. Overall, we estimate that the impact of CUs on trade is often indistinct from zero, depending on the specification and controls.
    Keywords: Euro, Currency Union Effect, Gravity Estimation
    JEL: F15 F33 F54
    Date: 2020–06
  6. By: Gropp, Reint; Koetter, Michael; McShane, William
    Abstract: The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
    Date: 2020
  7. By: Kolliopoulos, Athanasios
    Abstract: This article explores the determinants of the three bank bailouts in Greece during the recent financial crisis. Building on literature from comparative studies applying the “Varieties of Financial Capitalism” framework, the paper analyzes the factors contributing to bank rescue package design. Although this analysis verifies the institutionalist hypotheses in the case of the two fist recapitalizations, the article attempts to explain the significant changes in the domestic banking system and the transfer of control of systemic banks to foreign hands, which were caused after the third recapitalization in 2015. Interpreting such an exceptional case, we focus on the ECB’s lender of last resort tools as a catalyst for bank restructuring.
    Keywords: Greek banks; dehellenization; Varieties of Capitalism; bailout; Emergency Liquidity Assistance
    JEL: F3 G3 J1 N0
    Date: 2020–05–01
  8. By: Schupp, Fabian
    Abstract: I propose a new term structure model for euro area real and nominal interest rates which explicitly incorporates a time-varying lower bound for nominal interest rates. Results suggest that the lower bound is of importance in structural analyses implying time-varying impulse responses of yield components. With short-term rate expectations at or close to the lower bound, premium components are less reactive to inflation shocks, while real rate responses change their sign from positive to negative. However, it is further shown that the lower bound is of only little relevance for decomposing yields into their expectations and premium components once survey information is incorporated. Overall, results support the conclusion that reaching the effective lower bound may change the way macroeconomic shocks propagate along the term structure of nominal as well as real interest rates.
    Keywords: Joint real-nominal term structure modelling,lower bound,inflation expectations,inflation risk premium,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E31 E43 E44 E52
    Date: 2020
  9. By: Holtemöller, Oliver; Muradoglu, Yaz Gulnur
    Abstract: This paper investigates the consequences of shutdowns during the Corona crisis on the risk of bankruptcy for firms in Germany and United Kingdom. We use financial statements from the period 2014 to 2018 to predict how pervasive risk of bankruptcy becomes for micro, small, medium, and large firms due to shutdown measures. We estimate distress for firms using their capacity to service their debt. Our results indicate that under three months of shutdown almost all firms in shutdown industries face high risk of bankruptcy. In Germany, about 99% of firms in shutdown industries and in the UK about 98% of firms in shutdown industries are predicted to be under distress. The furlough schemes reduce the risk of bankruptcy only marginally to 97% of firms in shutdown industries in Germany and 95% of firms in shutdown industries in the United Kingdom in case of a three-month shutdown. In sectors that are not shutdown under conservative estimates of contagion of sales losses, our results indicate considerable risk of widespread bankruptcies ranging from 76% of firms in Germany to 69% of firms in the United Kingdom. These early findings suggest that the impact of corona crisis on corporate sector via shutdowns can be severe and subsequent policy should be designed accordingly.
    Date: 2020
  10. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible de-anchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
    Keywords: Inflation expectations
    JEL: E31 E58 F62
    Date: 2020–06
  11. By: Michelacci, Claudio; Paciello, Luigi
    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: 2020–04
  12. By: Michalis Nikiforos
    Abstract: This policy brief provides a discussion of the relationships between austerity, Greece's macroeconomic performance, debt sustainability, and the provision of healthcare and other social services over the last decade. It explains that austerity was imposed in the name of debt sustainability. However, there was a vicious cycle of recession and austerity: each round of austerity measures led to a deeper recession, which increased the debt-to-GDP ratio and therefore undermined the goal of debt sustainability, leading to another round of austerity. One of the effects of these austerity policies was the significant reduction in healthcare expenditure, which made Greece more vulnerable to the recent pandemic. Finally, it shows how recent pre-COVID debt sustainability analyses projected that Greek public debt would become unsustainable even under minor deviations from an optimistic baseline. The pandemic shock will thus lead to an explosion of public debt. This brings the need for a restructuring of the Greek public debt to the fore once again, as well as other policies that will address the eurozone’s structural imbalances.
    Date: 2020–06
  13. By: Michael Frenkel; Haiko Stefan
    Abstract: We examine the effects of the COVID-19 pandemic on the economic decline expected in Germany in 2020. The magnitude of the economic slump that will occur in 2020 depends on the extent of the slump during the shutdown, on the point in time, at which a significant easing of shutdown occurs, and on the length of adjustment process towards the structures that prevailed before the pandemic. We derive several scenarios and find that the shutdown will only remain in the single-digit percentage range if we apply very optimistic assumptions about the extent of the initial decline in GDP during the shutdown and the speed of adjustment after opening up of the economy. However, assuming that the economic crisis cannot end before the medical crisis ends, which medical experts project not to happen before the end of 2020, such optimistic assumptions do not appear realistic. Hence, we find it more likely that the percentage decline of GDP in Germany will be two-digit in 2020. Our findings are in contrast to the growth projections recently issued by the German Council of Economic Experts or by the Federal Ministry of Economic Affairs and Energy of Germany.
    Keywords: COVID-19, Recession, Germany
    JEL: E01 E20 E37 O52
    Date: 2020–05–01

This nep-eec issue is ©2020 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.