nep-eec New Economics Papers
on European Economics
Issue of 2020‒08‒24
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Liquidity Traps in a Monetary Union By Robert Kollmann
  2. Bank capital and the European recovery from the COVID-19 crisis By Moritz Schularick; Sascha Steffen; Tobias H. Tröger
  3. Who takes the ECB’s targeted funding? By Vergote, Olivier; Sugo, Tomohiro
  4. Demographics and the natural interest rate in the euro area. By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  5. Drivers of European public debt management By Wolswijk, Guido
  6. Reflections on the EU third country regime for capital markets in the shadow of Brexit By Moloney, Niamh
  7. Examining the drivers of business cycle divergence between Euro Area and Romania By Ionut Jianu
  8. Protectionism and the effective lower bound in the euro area By Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  9. Households' income and the cushioning effect of fiscal policy measures during the Great Lockdown By Vanda Almeida; Salvador Barrios; Michael Christl; Silvia De Poli; Alberto Tumino; Wouter van der Wielen
  10. Export performance and capacity pressures in Central and Eastern Europe By Karsten Staehr
  11. Does Disappointing European Productivity Growth Reflect a Slowing Trend? Weighing the Evidence and Assessing the Future By John G. Fernald; Robert Inklaar
  12. Can news help measure economic sentiment? An application in COVID-19 times By Pablo Aguilar; Corinna Ghirelli; Matías Pacce; Alberto Urtasun
  13. Sudden Stop: When Did Firms Anticipate the Potential Consequences of COVID-19? By Lukas Buchheim; Carla Krolage; Sebastian Link

  1. By: Robert Kollmann
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Zero lower bound; liquidity trap; monetary union; terms of trade; international fiscal spillovers; Euro Area
    JEL: E30 E40 F20 F30 F40
    Date: 2020–08
  2. By: Moritz Schularick (Federal Reserve Bank of New York, Macrofinance Lab Bonn and ECONtribute Excellence Cluster); Sascha Steffen (Frankfurt School of Finance & Management, Center for Financial Intermediaries and the Real Economy (FIRE)); Tobias H. Tröger (Goethe University Frankfurt and Leibniz Institute for Financial Research Sustainable Architecture for Finance in Europe (LIF SAFE))
    Abstract: Do current levels of bank capital in Europe suffice to support a swift recovery from the COVID-19 crisis? Recent research shows that a well-capitalized banking sector is a major factor driving the speed and breadth of recoveries from economic downturns. In particular, loan supply is negatively affected by low levels of capital. We estimate a capital shortfall in European banks of up to 600 billion euro in a severe scenario, and around 143 billion euro in a moderate scenario. We propose a precautionary recapitalization on the European level that puts the European Stability Mechanism (ESM) center stage. This proposal would cut through the sovereign-bank nexus, safeguard financial stability, and position the Eurozone for a quick recovery from the pandemic.
    Date: 2020–07
  3. By: Vergote, Olivier; Sugo, Tomohiro
    Abstract: This paper investigates motives of banks to borrow funds from the ECB through its first two series of targeted longer-term refinancing operations (TLTROs) allotted between September 2014 and March 2017. We quantify that the top-three parameters that determine banks’ take-up decisions are the price of the operation, the amount of eligible collateral of the bank, and the composition of that collateral. In particular, the opportunity for banks to transform their less liquid assets partly into liquid central bank reserves by pledging these assets as collateral with the central bank is a strong motive for take-up and suggests that accepting a broad set of collateral was important for the monetary easing provided by TLTROs. In addition, we find that the conditions attached to TLTRO participation and take-up played an important role in creating broad-based participation across banks of different financial strength and size. JEL Classification: C23, C24, E52, E58, G21
    Keywords: dynamic tobit panel, funding for lending, monetary policy operations, take-up behaviour, targeted longer-term refinancing operations
    Date: 2020–07
  4. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw); Michał Brzoza-Brzezina (SGH Warsaw School of Economics and Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics and Narodowy Bank Polski)
    Abstract: We investigate the impact of demographics on the natural rate of interest (NRI) in the euro area, with a particular focus on the role played by economic openness, migrations and pension system design. To this end, we construct a life-cycle model and calibrate it to match the life-cycle profiles from HFCS data. We show that population aging contributes significantly to the decline in the NRI, explaining about two-thirds of its secular decline between 1985 and 2030. Openness to international capital flows has not been important in driving the EA real interest rate so far, but will become a significant factor preventing its further decline in the coming decades, when aging in Europe accelerates relative to the rest of the world. Of two possible pension reforms, only an increase in the retirement age can revert the downward trend on the equilibrium interest rate while a fall in the replacement rate would make its fall even deeper. The demographic pressure on the Eurozone NRI can be alleviated by increased immigration, but only to a small extent and with a substantial lag.
    Keywords: population aging, natural interest rate, life-cycle models, pension systems, migrations
    JEL: E31 E52 J11
    Date: 2020
  5. By: Wolswijk, Guido
    Abstract: This study analyses the choice of government debt managers in the euro area between issuing short‐term or long‐term debt over the period 1992‐2017. Debt managers increased short‐term debt issuance in response to higher interest rate spreads and to rising government debt, notably in vulnerable, high‐debt countries. Thus, lower long-term rates as a result of ECB’s Quantitative Easing (QE) triggered debt managers to focus debt issuance on the long‐term end. Moreover, the usual increase in debt maturity when debt rises ceases to operate when QE is active, possibly because markets perceived it as a backstop to the government bond market. However, limited QE experience calls for caution in interpreting the results. JEL Classification: H63, G12
    Keywords: debt management, debt maturity, Quantitative Easing, reaction function
    Date: 2020–07
  6. By: Moloney, Niamh
    Abstract: This article considers the recent evolution of the EU's third country regime for capital market access in light of Brexit, the important series of legislative reforms adopted in March 2019 as the 2014-2019 European Parliament/Commission term closed, and the emergence of the European Securities and Markets Authority (ESMA) as a material technocratic influence. The article suggests that while the capital market third country regime is changing (with Brexit a key but not exclusive driver of change), it is not being radically recast, although it is tightening. The regime remains broadly based on the more-or-less liberal 'deference' model which has long characterised EU third-country financial services policy. But it is becoming increasingly 'on-shored' by means of the direct application of EU rules and by ESMA's oversight/supervision of certain third country actors. The significantly more restrictive approach being taken to third country central clearing counterparties is a marked development, but here the political and economic context is distinct. The implications of the overall shift towards a more 'on-shore', centralised, and potentially restrictive access regime are considered, and a modest reform prescription is offered.
    JEL: J1
    Date: 2020–03–12
  7. By: Ionut Jianu
    Abstract: This research aims to provide an explanatory analyses of the business cycles divergence between Euro Area and Romania, respectively its drivers, since the synchronisation of output-gaps is one of the most important topic in the context of a potential EMU accession. According to the estimates, output-gaps synchronisation entered on a downward path in the subperiod 2010-2017, compared to 2002-2009. The paper demonstrates there is a negative relationship between business cycles divergence and three factors (economic structure convergence, wage structure convergence and economic openness), but also a positive relationship between it and its autoregressive term, respectively the GDP per capita convergence.
    Date: 2020–07
  8. By: Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic impact on the euro area (EA) of the imposition of tariffs by simulating a multi-country New Keynesian model featuring the effective lower bound (ELB) on the EA monetary policy rate. The main results are as follows. First, the bilateral tariff dispute between the United States (US) and China (CH) has positive spillovers on the EA economy, because of favorable trade diversion effects. Second, simultaneous tariff increases between the US and CH and between the US and EA have negative effects on euro-area GDP and (ex-tariff) inflation. The effects are magnified if the ELB binds in the EA. Third, if the elasticity of substitution among tradables is low, the spillovers on euro-area GDP of US-CH trade tensions are negligible if the ELB is not binding, while they become negative if the ELB binds.
    Keywords: euro area, inflation, tariffs, effective lower bound, DSGE models.
    JEL: C54 E52 F13 F41
    Date: 2020–07
  9. By: Vanda Almeida (European Commission - JRC); Salvador Barrios (European Commission - JRC); Michael Christl (European Commission - JRC); Silvia De Poli (European Commission - JRC); Alberto Tumino (European Commission - JRC); Wouter van der Wielen (European Commission - JRC)
    Abstract: We analyse the impact of the COVID-19 crisis on EU households' income and assess the cushioning effect of discretionary policy measures taken by the EU Member States. Our assessment is based on the European Commission Spring 2020 forecasts and counterfactual scenarios under a no policy change assumption. Our analysis suggests that over the course of 2020, on average, households' disposable income in the EU would fall by -5.9% due to the COVID-19 crisis without discretionary policy measures, and by -3.6% with policy intervention, pointing to a significant cushioning effect of these measures in protecting households against income losses. Furthermore, our results confirm that the impact of the COVID-19 crisis is likely to be highly regressive, with the poorest households being the most severely hit. However, discretionary policy measures are expected to contain the regressive effects of the recession, resulting in a quite homogeneous impact along the income distribution. Poverty, as measured by the at risk of poverty (AROP) rate, would increase significantly, even in presence of policy measures (+1.7pp), although this result depend on whether we anchor the poverty line to its pre-crisis level. When doing so, the impact of the COVID crisis on poverty becomes very close to the one observed in the aftermath of the financial crisis (i.e. +0.1pp) once policy measures are considered. Given the sheer size of the COVID shock, we might consider that the anchored poverty line may provide a more reliable assessment of the impact of the Great lockdown on poverty, however. Policy interventions are therefore seen as instrumental in cushioning against the impact of the crisis on inequality and poverty. Finally, our results suggest that the social impact of the Great Lockdown is likely to be much larger than the one experienced during the 2008/2009 financial crisis, at least for what concerns the immediate impact of the crisis.
    Keywords: COVID-19, Great Lockdown, EUROMOD, household income, inequality, poverty
    JEL: E24 D31 H12 H23 H84
    Date: 2020–08
  10. By: Karsten Staehr
    Abstract: This paper investigates whether various measures of capacity pressure or available production capacity may help predict the dynamics of exports from the EU countries in Central and Eastern Europe. The analysis uses annual panel data for the 11 countries from 2001 to 2019. Reduced form estimations reveal that cost competitiveness measures have little or no predictive power. The measures of capacity pressure comprise capacity utilisation in industry, the unemployment rate and the output gap, and the measures are all robust predictors of future export dynamics. The results are robust to various changes in the time and country sample, control variables and specification, and also hold in panel vector autoregressive models
    Keywords: export, competitiveness, capacity utilisation, output gap, unemployment, Central and Eastern Europe
    JEL: F14 F17 E32
    Date: 2020–08–13
  11. By: John G. Fernald; Robert Inklaar
    Abstract: In the years since the Great Recession, many observers have highlighted the slow pace of labor and total factor productivity (TFP) growth in advanced economies. This paper focuses on the European experience, where we highlight that trend TFP growth was already low in the runup to the Global Financial Crisis (GFC). This suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. After the mid-1990s, European economies stopped converging, or even began diverging, from the U.S. level of TFP. That said, in contrast to the United States, there is some macroeconomic evidence for some northern European countries that the GFC had a further adverse impact on TFP growth. Still, the challenges for economic policy look surprisingly similar to the ones discussed prior to the Great Recession, even if the policy implications seem less clear.
    Keywords: Productivity Growth; Great Recession; Convergence
    JEL: D24 E23 E44 F45 O47
    Date: 2020–06–12
  12. By: Pablo Aguilar (Banco de España); Corinna Ghirelli (Banco de España); Matías Pacce (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: We construct a new newspaper-based sentiment indicator for Spain that allows us to monitor Spanish economic activity in real-time. As opposed to the traditional survey-based confidence indicators that are released at the end of the month, our indicator can be constructed on a daily basis and updated in real-time. We compare our proposed index with the popular Economic Sentiment Indicator of the European Commission, and we show that ours performs significantly better in nowcasting the Spanish GDP. In addition, our indicator proves to be helpful in order to predict the current COVID-19 recession from an earlier date. All in all, our indicator performs similarly to or even outperforms other soft indicators, with the advantage of being updated daily. Thus, it provides a valuable option when measuring the confidence in the economy.
    Keywords: nowcasting, GDP, recession, real-time, textual analysis, sentiment indicators, soft indicators
    JEL: E32 E37 C53 C23
    Date: 2020–08
  13. By: Lukas Buchheim; Carla Krolage; Sebastian Link
    Abstract: COVID-19 hit firms by surprise. In a high frequency, representative panel of German firms, the business outlook declined and business uncertainty increased only when the spread of the COVID-19 pandemic led to domestic policy changes: The announcement of nation-wide school closures on March 13 caused by far the largest change in business perceptions. In contrast, business perceptions hardly reacted to any other potential source of information: Firms did not learn from foreign policy measures, even if they relied on inputs from China or Italy. The local, county-level spread of COVID-19 cases affected expectations and uncertainty, albeit to a much lesser extent than the domestic policy changes.
    Keywords: expectations, uncertainty, policy, COVID-19, firms
    JEL: E66 E32 H32 D22 D84
    Date: 2020

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