nep-eec New Economics Papers
on European Economics
Issue of 2020‒07‒27
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Interest rate setting and communication at the ECB By Cour-Thimann, Philippine; Jung, Alexander
  2. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  3. Inflation expectations in euro area Phillips curves By Luis J. Álvarez; Mónica Correa-López
  4. Understanding household wealth: linking macro and micro data to produce distributional financial accounts By macro, Expert Group on Linking; Sector, Micro Data For The Household
  5. The Eurozone in crisis: A Kaleckian macroeconomic regime and policy perspective By Hein, Eckhard; Martschin, Judith
  6. International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme By Katharina Bergant; Michael Fidora; Martin Schmitz
  7. Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union By Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
  8. The effect of Emergency Liquidity Assistance (ELA) on bank lending during the euro area crisis By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; Vassilis Spiliotopoulos; George S. Tavlas
  9. Measuring Macroeconomic Convergence and Divergence within EMU Using Long Memory By Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
  10. The Role of ECB Communication in Guiding Markets By Marc Anderes; Alexander Rathke; Sina Streicher; Jan-Egbert Sturm
  11. Quantitative easing in the euro area and SMEs’ access to finance: Who benefits the most? By Anne Kathrin Funk
  12. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  13. Determinants of Non-Performing Loans: Can National Asset Management Companies Help to Alleviate the Problems? By Brenda Solis Gonzalez
  14. Macro-financial interactions in a changing world By Eddie Gerba; Danilo Leiva-Leon
  15. Productivity Growth and Value Chains in Four European Countries By Izabela Karpowicz; Nujin Suphaphiphat
  16. Inflation in the G7 Countries: Persistence and Structural Breaks By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  17. Firms’ expectations on access to finance at the early stages of the Covid-19 pandemic By Ferrando, Annalisa; Ganoulis, Ioannis

  1. By: Cour-Thimann, Philippine; Jung, Alexander
    Abstract: Based on ordered Probit models and twenty years of euro area data, we estimate empirical reaction functions for the ECB´s monetary policy and augment them with communication indicators. First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the account of post-meeting communications about risks to price stability and to growth significantly enhances the modelling of its reaction function. Second, we detect that the ECB also responded to the evolution of the federal funds rate, thereby confirming the importance of international interest rate linkages or the global cycle that it reflects. Third, while confirming Gerlach’s (2007) finding on the relevance of M3 growth for explaining future interest rate changes, we show that this result only holds for the period before the global financial crisis. JEL Classification: E43, E52, C22, C25
    Keywords: communication indicators, monetary policy reaction function, Probit model, staff projections, Survey of Professional Forecasters
    Date: 2020–07
  2. By: Bottero, Margherita; Minoiu, Camelia; Peydro, Jose-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-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: bank lending channel of monetary policy; eurozone crisis; Liquidity management; Negative Interest Rates; Portfolio rebalancing
    JEL: E52 E58 G01 G21 G28
    Date: 2019–12
  3. By: Luis J. Álvarez (Banco de España); Mónica Correa-López (Banco de España)
    Abstract: We analyze the information content of alternative inflation expectations measures, including those from consumers, firms, experts and financial markets, in the context of open economy Phillips curves. We adopt a thick modeling approach with rolling regressions and we assess the results of an out-of sample conditional forecasting exercise by means of meta regressions. The information content varies substantially across inflation expectations measures. In particular, we find that those from consumers and firms are better at predicting inflation if compared to those from experts and, especially, those from financial markets.
    Keywords: inflation dynamics, inflation expectations, Phillips curve, euro area, thick modeling, meta regressions
    JEL: E31 E37 E52
    Date: 2020–07
  4. By: macro, Expert Group on Linking; Sector, Micro Data For The Household
    Abstract: The Expert Group on Linking Macro and Micro Data for the household sector (EG-LMM) was established in December 2015 within the European System of Central Banks (ESCB) with the aim of comparing and bridging macro data (i.e. National Accounts/Financial Accounts) and micro data (i.e. the Household Finance and Consumption Survey) on wealth. Furthermore, the Expert Group also focused on developing distributional results for household macro balance sheets, starting with national data from the euro area Member States. The Expert Group assessed the extent to which these two sets of statistics could be compared and was able to link most balance sheet items. Since, following adjustments, the estimates yielded from the micro data were still lower than the macro data, an estimation method was developed to gross up the micro data to be in line with the macro data results. The methodology delivers estimates of the distribution of household wealth that are closely aligned with Financial Accounts aggregates, thereby offering valuable new information for the purposes of macroeconomic analyses based on such Financial Accounts. Further research is needed to examine the robustness of these results and to improve the estimation method taking into account country-specific features and information. The Expert Group has therefore recommended further work be undertaken with a view to compiling experimental distributional results by end-2022. JEL Classification: D31, G51
    Keywords: and their distribution, household debt and wealth
    Date: 2020–07
  5. By: Hein, Eckhard; Martschin, Judith
    Abstract: The current Covid-19 Crisis 2020 has hit the Eurozone in a highly fragile situation, with a weak and asymmetric recovery from the Great Financial Crisis, the Great Recession and the following Eurozone Crisis. These crises have also revealed the weaknesses of the macroeconomic policy institutions and strategies of the Eurozone based on New Consensus Macroeconomics (NCM). Applying a Kaleckian/post-Keynesian analysis of the demand and growth regimes to the EA-12 countries, we show that the internal imbalances within the EA-12 before the Eurozone crisis, with the polarization of current account deficit debt-led private demand boom countries, on the one hand, and of current account surplus export-led mercantilist countries, on the other hand, have been externalized since then. Most of the countries and the EA-12 as a whole have now turned export-led mercantilist. For an economic policy alternative favouring a domestic demand-led regime, we turn towards Kalecki's macroeconomic policy proposals for achieving and maintaining full employment in a capitalist economy by government deficit expenditures, in combination with re-distribution policies in favour of labour and low-income households, assisted by central banks targeting low interest rates. This approach is then applied to the Eurozone, in order to derive a policy mix which should contribute to a more rapid recovery from the Covid-19 Crisis and to a medium- to long-run non-inflationary full employment domestic demand-led regime, on the one hand, and to sustainable catching-up of the periphery of the Eurozone with respect to the more mature centre, on the other hand.
    Keywords: Eurozone crisis,Kalecki,demand and growth regime,macroeconomic policies
    JEL: E11 E12 E61 E63 E65
    Date: 2020
  6. By: Katharina Bergant; Michael Fidora; Martin Schmitz
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Our empirical analysis shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Keywords: Financial and Monetary Sector;Financial crises;Debt securities;Mutual funds;Economic policy;International investment patterns,capital flows,sovereign debt,investor heterogeneity,quantitative easing,WP,PSPP,euro area,debt security,rebalance,MFIs
    Date: 2020–02–28
  7. By: Javier Andrés; Óscar Arce; Jesús Fernández-Villaverde; Samuel Hurtado
    Abstract: We study the macroeconomic effects of internal devaluations undertaken by a periphery of countries belonging to a monetary union. We find that internal devaluations have large and positive output effects in the long run. Through an expectations channel, most of these effects carry over to the short run. Internal devaluations focused on goods markets reforms are generally more powerful in stimulating growth than reforms aimed at moderating wages, but the latter are less deflationary. For a monetary union with a periphery the size of the euro area's, the countries at the periphery benefit from internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate. Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that prioritizes labor policies over goods markets reforms.
    JEL: D42 E44 E63
    Date: 2020–06
  8. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (Bank of Greece); Pavlos Petroulas (Bank of Greece); Vassilis Spiliotopoulos (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: We examine the impact of emergency liquidity assistance (ELA) on bank lending in eleven euro area countries during the financial crisis. With the intensification of the crisis, ELA took on a pivotal role in some countries. However, assessments of the quantitative impact of ELA in the literature are non-existent. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on lending. Our model corrects a mis-specification found in the prototype model used in the literature. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks, indicating that ELA generated positive spillovers to other banks.
    Keywords: euro area financial crisis; emergency liquidity assistance (ELA); European banks; spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2020–01
  9. By: Dräger, Lena, Kolaiti, Theoplasti, Sibbertsen, Philipp
    Abstract: This paper measures the convergence or divergence of EMU inflation rates and industrial production by testing for the existence of fractional cointegration relations. The notion of fractional cointegration allows for long-term equilibria with a higher degree of persistence than allowed for in the standard cointegration framework. We investigate both inflation and industrial production of EMU countries beginning with the introduction of the common currency and including the financial crisis and post-crisis period. Core as well as periphery countries are included in the study. By modelling possible breaks in the persistence structure we find evidence of fractional cointegration as well as a lower persistence before the crisis and a higher persistence by less evidence for fractional cointegration during the crisis. A second break which indicates the end of the crisis can be found as well. In addition, higher inflation persistence can be found for periphery than for core countries.
    Keywords: EMU inflation rates, industrial production, fractional cointegration, persistence breaks
    JEL: F15 F45 C32
    Date: 2020–07
  10. By: Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are.
    Keywords: Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth
    JEL: E3 E43 E51 E52 E58
    Date: 2019–10
  11. By: Anne Kathrin Funk (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically bringing the economy close to a credit crunch. It was only after the start of the ECB’s quantitative easing programme in early 2015 that bank lending improved sustainably. The study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small and medium sized enterprises (SME) using firm-level data of the Survey on the Access to Finance of Enterprises (SAFE) and a fixed effects model. The analysis comprises several measures of financial access such as credit availability, financial constraints and interest rates. The micro level nature of the data allows to distinguish between aggregate and heterogeneous effects across firm size, age, sector and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries which need the most stimulus benefit the most from the Public Sector Purchase Programme.
    Keywords: Unconventional monetary policy, credit channel, bank lending, ECB,SME
    JEL: E44 E51 E52 E58
    Date: 2018–12
  12. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  13. By: Brenda Solis Gonzalez (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: Using a novel dataset I examine to what extent the introduction of national Asset Management Companies (AMCs) impacts the effects of bank-specific and macroeconomic determinants of the NPLs ratio for European countries. This study provides evidence on how national AMCs help to alleviate the level of the NPL ratio in countries with high level of non-viable exposures. The results of the dynamic panel data models show that the NPL ratio is lower and less persistent for banks in countries with national AMC since banks are able to clean their balance sheet with lower losses when market prices of NPL are depressed. For countries with national AMC in general the influence of bank-specific factors is lower than during normal conditions. In the case of macroeconomic factors, the results on the size and direction of the impact are mixed. However, these factors remain the key determinants with the unemployment and the lending rate being the leading indicators.
    Keywords: Non-performing loans, Asset Management Companies, credit risk, macroeconomic determinants, bank-specific determinants, dynamic panel data
    JEL: G21 G28 G32 C23
    Date: 2020–06
  14. By: Eddie Gerba (Danmarks Nationalbank); Danilo Leiva-Leon (Banco de España)
    Abstract: We measure the time-varying strength of macro-financial linkages within and across the US and euro area economies by employing a large set of information for each region. In doing so, we rely on factor models with drifting parameters where real and financial cycles are extracted, and shocks are identified via sign and exclusion restrictions. The main results show that the euro area is disproportionately more sensitive to shocks in the US macroeconomy and financial sector, resulting in an asymmetric cross-border spillover pattern between the two economies. Moreover, while macro-financial interactions have steadily increased in the euro area since the late 1980s, they have oscillated in the US, exhibiting very long cycles of macro-financial interdependence.
    Keywords: macro-financial linkages, dynamic factor models, TVP-VAR
    JEL: E44 C32 C55 F44 E32 F41
    Date: 2020–07
  15. By: Izabela Karpowicz; Nujin Suphaphiphat
    Abstract: Advanced economies have been witnessing a pronounced slowdown of productivity growth since the global financial crisis that is accompanied in recent years by a withdrawal from trade integration processes. We study the determinants of productivity slowdown over the past two decades in four closely integrated European countries, Austria, Denmark, Germany and the Netherlands, based on firm-level data. Participation in global value chains appears to have affected productivity positively, including through its effect on TFP when facilitated by higher investment in intangible assets, a proxy for firm innovation. Other contributors to productivity growth in firms are workforce aging, access to finance, and skills mismatches.
    Keywords: Total factor productivity;Real sector;Gross domestic product;Labor productivity;Financial crises;Productivity,firms,GVC,WP,TFP,productivity growth,selected country,advanced economy,intermediate input
    Date: 2020–01–31
  16. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper examines long-range dependence in the inflation rates of the G7 countries by estimating their (fractional) order of integration d over the sample period January 1973 - March 2020. The results indicate that the series are very persistent, the estimated value of d being equal to or higher than 1 in all cases. Possible non-linearities in the form of Chebyshev polynomials in time are ruled out. Endogenous break tests are then carried out, and the degree of integration is estimated for each of the subsamples corresponding to the detected break dates. Significant differences are found between subsamples and countries in terms of the estimated degree of integration of the series.
    Keywords: inflation rates, G7, persistence, long memory, long-range dependence
    JEL: C22 E31
    Date: 2020
  17. By: Ferrando, Annalisa; Ganoulis, Ioannis
    Abstract: This paper provides novel information on the propagation of the pandemic-induced real shock to firms’ financial conditions. It uses firm-level survey data from end February to early April 2020 for a large sample of euro area SMEs and large firms. Firms’ expectations on the availability of credit lines, bank loans and trade credit deteriorated significantly in the first half of March. Firms mostly expected to be affected if they had previously difficulties in securing finance, had higher indebtedness and, hence, less capacity to deal with a liquidity shock. Conditional on these factors, firm size does not seem to matter, except for trade credit, in which case SMEs had more positive conditional expectations. Together with the overall deterioration of expectations, there seems to have also been a reallocation of opportunities to access finance amidst the crisis. Small firms were more likely to have conditional expectations of improvement in their access to finance. JEL Classification: C83, D22, D84, E65, L25
    Keywords: Covid-19, expectation formation, survey data
    Date: 2020–07

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