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on European Economics |
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Issue of 2020‒09‒07
sixteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Ioannou, Demosthenes; Stracca, Livio; Pagliari, Maria Sole |
| Abstract: | This paper quantifies the economic influence that shocks to EMU cohesion, which in turn reflect the incomplete nature of the monetary union, have on the rest of the world. Disentangling euro area stress shocks and global risk aversion shocks based on a combination of sign, magnitude and narrative restrictions in a daily Structural Vector Autoregression (VAR) model with financial variables. We find that the effects of euro area stress shocks are significant not only for the euro area but also for the rest of the world. Notably, an increase in euro area stress entails a slowdown of economic activity in the rest of the world, as well as a fall in imports/exports of both the euro area and the rest of the world. A decrease in euro area stress has somewhat more widespread beneficial effects on both economic performance and global trade activity. JEL Classification: C23, C32, F02, F33 |
| Keywords: | Bayesian SVAR, Economic and Monetary Union, narrative sign restrictions, panel local projections |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202459&r=all |
| By: | José Santos; Nuno Tavares; Gabriel Osório de Barros |
| Abstract: | Productivity growth in southern European countries has been slowing down at least since the early 2000s. In this regard, Portugal has been no exception to this common trend as productivity growth has been sluggish since the beginning of the century, well before the global financial crisis. At the same time, corporate levels of indebtedness of Portuguese firms have built-up quite substantially until recent years. Although with different levels of intensity across sectors, this pattern was particularly prevalent in the construction sector, rendering it to be a compelling case to study the relation between debt and productivity. Using microdata from Portuguese construction firms, in this paper, we investigate the long-term impact of persistent corporate debt accumulation on total factor productivity growth. To do so, we rely on the framework provided by the estimation of heterogeneous dynamic-panel models. This framework allows us to account for dynamics, feedback effects, firm heterogeneity, and cross-sectional dependencies arising from unobserved common factors. After taking into account the effect of unobserved common factors affecting all firms in the sector as well as firm’s specific characteristics, we find a negative and significant effect of corporate debt-build up on total productivity growth in the industry. This result is robust to different measures of total factor productivity, labour productivity and firms’ indebtedness. Our results suggest that timely measures aiming to reduce debt overhangs by firms may be essential tools to boost productivity growth in the construction sector. |
| Keywords: | Portugal; construction sector; corporate debt; productivity; heterogeneous dynamic panel models |
| JEL: | D24 C23 C22 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0141&r=all |
| By: | Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen |
| Abstract: | We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank. |
| JEL: | E44 G21 G28 G32 G34 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27537&r=all |
| By: | François Langot (IZA - Institute for the Study of Labor, Gains - Groupe d’Analyse des Itinéraires et Niveaux Salariaux, PSE - Paris School of Economics) |
| Abstract: | This paper highlights the specics of a monetary union, such as the Euro area, regarding the possible choices of monetary and scal policies. As the dynamics of public debt are specic to the choices made by each government, I show that the dynamic stability of the area requires coordination of scal policies, particularly in the case of a liquidity trap situation. My results suggest that a scal union, taking the form of a common debt, guarantees the dynamic stability of the area, notwithstanding the monetary policy, chosen or constrainedthus improving institutional robustness of the European Union. |
| Keywords: | Euro area,Taylor rule,Fiscal rule,public debt,NK model,Fiscal theory of price level |
| Date: | 2020–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02895635&r=all |
| By: | Eidam, Frederik |
| Abstract: | Do governments strategically choose debt maturity to fill supply gaps across maturities? Building on a new panel data set of more than 9,000 individual Eurozone government debt issues between 1999 and 2015, I find that governments increase long-term debt issues following periods of low aggregate Eurozone long-term debt issuance, and vice versa. This gap-filling behaviour is more pronounced for (1) less financially constrained and (2) higher rated governments. Using the ECB’s three-year LTRO in 2011-2012 as an event study, I find that core governments filled the supply gap of longer maturity debt, which resulted from peripheral governments accommodating banks’ short-term debt demand for “carry trades”. This gap-filling implies that governments act as macro-liquidity providers across maturities, thereby adding significant risk absorption capacity to government bond markets. JEL Classification: E58, E62, G11, H63 |
| Keywords: | financial stability, government bond market, liquidity provision, market segmentation |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2020110&r=all |
| By: | Giancarlo Corsetti; Joao B. Duarte; Samuel Mann |
| Abstract: | We study the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. We develop a methodology to assess the degree of heterogeneity, which we find to be low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets. Building a small open economy model featuring a housing sector and calibrating it to Spain, we show that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the responses of output and private consumption. |
| Date: | 2020–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/108&r=all |
| By: | Tümmler, Mario; Thiemann, Matthias |
| Abstract: | Discussions regarding the planned European Deposit Insurance Scheme (EDIS), the missing third pillar of the European Banking Union, have been ongoing since the Commission published its initial legislative proposal in 2015. A breakthrough in negotiations has yet to be achieved. The gridlock on EDIS is most commonly attributed to moral hazard concerns over insufficient risk reduction harboured on the side of northern member states, particularly Germany, due to the weak state of some other member states' banking sectors. While moral hazard based on uneven risk reduction is helpful for explaining divergent member-state preferences on the scope of necessary risk reduction, this does not explain preferences on the institutional design of EDIS. In this paper, we argue that contrary to persistent differences on necessary risk reduction, preferences regarding the institutional design of EDIS have become more closely aligned. We analyse how preferences on EDIS developed in the key member states of Germany, France, and Italy. In all sampled countries, we find path-dependent benefits connected to the current design of national Deposit Guarantee Schemes (DGS) that shifted preferences of the banking sector or significant subsectors in favour of retaining national DGSs. Overall, given that a compromise on riskreduction can be accomplished, we argue that current preferences in these key member states provide an opportunity to implement EDIS in the form of a reinsurance system that maintains national DGSs in combination with a supranational fund. |
| Keywords: | Banking Union,Deposit Insurance,EDIS |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:72&r=all |
| By: | Diana Bonfim; João A. C. Santos |
| Abstract: | The success of deposit insurance arrangements at eliminating bank runs is likely closely tied to their credibility. We investigate this hypothesis building on two episodes which tested the insurance protection offered by the Portuguese arrangement in the midst of the country’s sovereign debt crisis. Our results show that Portuguese depositors responded to foreign banks’ decision to convert their subsidiaries into branches by relocating their deposits into the latter. We find a similar response following the announcement that insured depositors in Cyprus would lose part of their savings. On both instances responses are concentrated on household deposits. Given that foreign banks’ branches offer the insurance protection of these banks’ home countries, rather than that granted by their host country arrangement, our findings confirm that the credibility of the deposit insurance arrangement is critical for the protection it offers banks against the risk of depositor runs. These results show that sovereign-bank links can be detrimental to financial stability through a novel channel: the credibility of deposit insurance. |
| JEL: | G01 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202011&r=all |
| By: | Costa Cabral, Nazaré |
| Abstract: | The aim of this article is to verify whether the creation of safe assets (sovereign bond-backed securities, SBBS) proposed in 2012 by the so-called group of ‘euro-nomics’ is a way to promote financial safety and risk-sharing in the EMU. In particular, attention is given to the shortcomings associated with the process of securitization. This is important, because securitization was, prior to the subprime crisis, considered an innovative means of increasing safety in private debt markets. The question is whether sovereign debt is a candidate for securitization and, if so, what implications this carries over to the debt structure itself and respective contractual design. My conclusion is that the creation of SBBS really implies a ‘privatization’ of sovereign debt, with advantages to the functioning of financial markets in ‘normal’ times but with possible insufficiencies in moments of financial distress. Moreover, lessons from the subprime crisis should not be forgotten. |
| Keywords: | safe assets, sovereign bond-backed securities, securitization, subprime crisis, sovereign debt |
| JEL: | E6 G01 G1 G2 H63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102248&r=all |
| By: | Figueres, Juan Manuel; Jarociński, Marek |
| Abstract: | This paper examines which measures of financial conditions are informative about the tail risks to output growth in the euro area. The Composite Indicator of Systemic Stress (CISS) is more informative than indicators focusing on narrower segments of financial markets or their simple aggregation in the principal component. Conditionally on the CISS one can reproduce for the euro area the stylized facts known from the US, such as the strong negative correlation between conditional mean and conditional variance that generates stable upper quantiles and volatile lower quantiles of output growth. JEL Classification: C12, E37, E44 |
| Keywords: | downside risk, macro-financial linkages, quantile regression |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202458&r=all |
| By: | Budnik, Katarzyna |
| Abstract: | The paper inspects the credit impact of policy instruments that are commonly applied to contain systemic risk. It employs detailed information on the use of capital-based, borrower-based and liquidity-based instruments in 28 European Union countries in 1995—2017 and a macroeconomic panel setup. The paper finds a significant impact of capital buffers, profit distribution restrictions, specific and general loan-loss provisioning regulations, sectoral risk weights and exposure limits, borrower-based measures, caps on long-term maturity and exchange rate mismatch, and asset-based capital requirements on credit to the non-financial private sector. Furthermore, the business cycle and monetary policy influence the effectiveness of most of the macroprudential instruments. Therein, capital buffers and sectoral risk weights act countercyclically irrespectively of the prevailing monetary policy stance, while a far richer set of policy instruments can act countercyclically in combination with the appropriate monetary policy stance. JEL Classification: E51, E52, G21 |
| Keywords: | borrower-based instruments, capital requirements, liquidity requirements, macroprudential policy, monetary policy |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202462&r=all |
| By: | Sami Diaf (Universität Hamburg (University of Hamburg)); Jörg Döpke (Hochschule Merseburg (University of Applied Sciences Merseburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Ida Rockenbach (Universität Hamburg (University of Hamburg)) |
| Abstract: | Using corpora of business cycle report sections dealing with monetary and fiscal policy issues from 1999 to 2017 we use methods of unsupervised text scaling (Slapin and Proksch, 2008; Lauderdale and Herzog, 2016), namely Wordfish and Wordshoal to scale the institutions’ theoretical/ ideological position over debates. The results are in line with findings from descriptive textual analysis. For monetary policy, we observe a strong but short-living consensus in debate-specific positions during the heat of the financial crisis in 2008 and a larger polarization after 2008 compared to the sample period before. For the fiscal policy textual corpus, the polarization was similarly high before and after the crisis. For both policy areas, the institutions DIW Berlin and IfW Kiel define the outer bounds of the observed spectrum of latent ideological positions. |
| Keywords: | Text Scaling Model, Wordfish, Wordshoal, Computational Content Analysis, Hierarchical Factor Model, Bayesian Estimation, Political Economy, Ideology, Polarization, Public Policy, Monetary Policy, Fiscal Policy |
| JEL: | E32 E52 E62 H3 C55 D7 P16 |
| Date: | 2020–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:202001&r=all |
| By: | Mai Dao |
| Abstract: | This paper explores the interaction between corporate ownership concentration and private savings, and by extension, the current account balance in Germany. As high corporate savings largely reflected capital income accruing to wealthy households and increasingly retained in closely-held firms, the buildup of external imbalances in Germany has been accompanied by widening top income inequality, rising private savings and compressed consumption rates. Rising corporate profits in an environment of high business wealth concentration account for 90 percent of the rise in the private savings rate and a third of the increase in the German current account surplus over 1999–2016. |
| Date: | 2020–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:20/107&r=all |
| By: | Christian Abele (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Lionel Fontagné (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | We analyse the impact of both the Global Financial Crisis of 2008 and the European sovereign and banking crisis of 2011-13 on firm-level productivity in France, Italy and Spain. We firstly show that relying on a single break date in 2008 misses both the euro crisis and countries' institutional speci_cities. Secondly, although leverage and financial constraints affect firm-level productivity negatively, high-leverage firms su_er more from financial constraints only in Italy, when they are relatively small or when their debt is of short maturity. These results, which are robust to a series of alternative explanations, call for approaches taking into consideration country-level characteristics of financial institutions and time varying _nancing constraints of the firms, instead of pooling data and adopting a common break date. One size does not fit all when it comes to identifying the impact of financial crises on firm level productivity. |
| Keywords: | total factor productivity,firm-level data,financial constraints,crises |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02883685&r=all |
| By: | D'Orazio, Paola; Dirks, Maximilian W. |
| Abstract: | COVID-19 has quickly emerged as a novel risk, generating feverish behavior among investors, and posing unprecedented challenges for policymakers. The empirical analysis provides evidence for a significant negative effect on stock markets of COVID-19-related measures announced in the Euro Area from January 1st, 2020 to May 17th, 2020. Further negative effects are detected for movements in bond yields, EU volatility index, Google trends, and infection rates. Health measures have, instead, a significant positive effect, while fiscal policy announcements are not significant. |
| Keywords: | Coronavirus,COVID-19,investor behavior,stock market volatility,containment policies,policy announcements,fiscal policy |
| JEL: | E44 G15 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:859&r=all |
| By: | Nettekoven, Zeynep Mualla |
| Abstract: | After the Great Financial Crisis of 2007-2008, macroprudential policy has increasingly become the mainstream. New institutions and regulations were introduced for macroprudential supervision in the EU Member States as well as at the supranational level. This leads us to the research question: what are the blind spots of this new macroprudential institutional design in the EU? This question gained even more in substance due to the repercussions of Covid-19 pandemic. Based on desk research and talks with experts, we group the blind spots into three categories: shadow banking system, institutional power hierarchies, and monetary and macroprudential policy interactions. In this paper, we discuss these blind spots and some policy recommendations for a functional macroprudential institutional design. |
| Keywords: | macroprudential policy,institutions,Great Financial Crisis,shadow banking system |
| JEL: | E52 E58 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:1472020&r=all |