nep-eec New Economics Papers
on European Economics
Issue of 2020‒09‒14
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. After 25 years as faithful members of the EU. Public support for the euro and trust in the ECB in Austria, Finland and Sweden By Roth, Felix; Jonung, Lars
  2. Public debt and economic growth nexus in the euro area: A dynamic panel ARDL approach By Chirwa, Themba G; Odhiambo, Nicholas M
  3. New Evidence on the Anchoring of Inflation Expectations in the Euro Area By Sascha Möhrle
  4. Negative monetary policy rates and systemic banks' risk-taking: Evidence from the euro area securities register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
  5. Fiscal sustainability duringthe COVID-19 pandemic By Hürtgen, Patrick
  6. Finance, Growth and (Macro)Prudential Policy: European Evidence By Martin Hodula; Ngoc Anh Ngo
  7. On the Economic Effects of a Reallocation of EU Cohesion Policy Expenditures By Stefan Jestl; Roman Römisch
  8. Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area By Gareis, Johannes; Mayer, Eric
  9. Why is the Ratio of Debt-to-GDP so Large for Non-Financial Companies in Luxembourg? By Gabriele Di Filippo
  10. The Impact of Pessimistic Expectations on the Effects of COVID-19-Induced Uncertainty in the Euro Area By Giovanni Pellegrino; Federico Ravenna; Gabriel Züllig
  11. The interaction between macroprudential and monetary policies: The cases of Norway and Sweden By Cao, Jin; Dinger, Valeriya; Grodecka, Anna; Juelsrud, Ragnar; Zhang, Xin
  12. What Kind of EU Fiscal Capacity? Evidence from a Randomized Survey Experiment in Five European Countries in Times of Corona By Roel Beetsma; Brian Burgoon; Francesco Nicoli; Anniek de Ruijter; Frank Vandenbroucke
  13. Money, inflation and the financial crisis: the case of Switzerland By Peter Kugler; Samuel Reynard
  14. Central bank funding and credit risk-taking By Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja

  1. By: Roth, Felix; Jonung, Lars
    Abstract: Austria, Finland and Sweden became members of the EU in 1995. This paper examines how support for the euro and trust in the European Central Bank (ECB) have evolved in these three countries since their introduction at the turn of the century. Support for the euro in the two euroarea members Austria and Finland has remained high and relatively stable since the physical introduction of the new currency nearly 20 years ago, while the euro crisis significantly reduced support for the euro in Sweden. Since the start of the crisis, trust in the ECB was strongly influenced by the pronounced increase in unemployment in the euro area, demonstrating that the ECB was held accountable for macroeconomic developments. Our results indicate that citizens in the EU, both within and outside the euro area, judge the euro and the ECB based on the economic performance of the euro area. Thus, the best way to foster support for the euro and trust in the ECB is to pursue policies aimed at achieving low unemployment and high growth.
    Keywords: euro,trust,ECB,EU,monetary union,Austria,Finland,Sweden
    JEL: E42 E52 E58 F33 F45
    Date: 2020
  2. By: Chirwa, Themba G; Odhiambo, Nicholas M
    Abstract: This study investigates the relationship between public debt and economic growth in 10 European Countries in the presence of cross-sectional dependency. Using a panel ARDL approach, the results show that public debt and other covariates such as investment, government consumption, and inflation revealed significant but mixed country-specific results only in the short run. The results also show that the real exchange rate and the real interest rate are negatively and significantly associated with economic growth both in the short and the long run. Furthermore, population growth was found to be positively associated with economic growth only in the short run, while trade was negatively associated with income growth only in Spain. The creation of the EMU was detrimental to Greece as it revealed a significant negative relationship with income growth. These findings have significant policy implications for the Stability and Growth Pact of the Euro area. It is recommended that member states should ensure fiscal sustainability by balancing their fiscal budgets to effectively reduce the accumulation of public debt as well as implementing structural reforms that will improve the efficiency of investment as well as macroeconomic stability.
    Keywords: Euro Area; Panel ARDL Models; Cross-Section Dependence; Public Debt; Economic Growth
    Date: 2020–07
  3. By: Sascha Möhrle
    Abstract: This paper examines the anchoring of inflation expectations in the euro area based on data from the Survey of Professional Forecasters (SPF). The analysis shows that the overall distribution of medium- and long-term inflation forecasts has changed considerably following the global financial crisis. Moreover, micro level expectations of professional forecasters are found to be sensitive to short-term economic developments. These patterns suggest that euro area inflation expectations are significantly less anchored to the ECB’s definition of price stability in recent years compared to the pre-crisis period.
    Keywords: Inflation expectations, anchoring, euro area, ECB, financial crisis
    JEL: E31 E58
    Date: 2020
  4. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: Negative Rates,Non-Standard Monetary Policy,Reach-for-Yield,Securities,Banks
    JEL: E43 E52 E58 G01 G21
    Date: 2020
  5. By: Hürtgen, Patrick
    Abstract: The "Great Lockdown" implemented in response to the COVID-19 pandemic has led to a severe world-wide economic crisis. In euro area countries, sovereign debt-to-GDP ratios are on the rise and reductions in expected fiscal surpluses raise sustainability concerns amongst investors. This paper provides novel estimates of non-linear state-dependent fiscal limits based on Bi (2012) for the five largest euro area countries. Within the DSGE model I build a COVID-19 scenario calibrated to match the decline in real GDP growth forecasts between April and February2020 and the fiscal stimulus packages announced up to the end of March 2020. On average, fiscal space contracts by 58.4 percent of national GDP. In a worst-case scenario fiscal space is 28.6 percent for Italy and 65.9 percent of national GDP for Germany.
    Keywords: state-dependent fiscal limits,fiscal space,sovereign debt,Laffer curve,COVID-19
    JEL: E32 H30 H60
    Date: 2020
  6. By: Martin Hodula; Ngoc Anh Ngo
    Abstract: This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.
    Keywords: Development, finance, growth, macroprudential policy, panel analysis
    JEL: G10 G28 O16 O40
    Date: 2020–09
  7. By: Stefan Jestl (The Vienna Institute for International Economic Studies, wiiw); Roman Römisch (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper analyses the economic effects of a reallocation of Cohesion Policy expenditures across EU countries. We evaluate a shift from stronger (i.e. older) Member States to less-developed EU economies (i.e. CEE countries) and vice versa. On top of that, we also assess the effects of a general reduction in the Cohesion Policy budget. For evaluation, we construct a demand-driven macroeconomic model which spans country models of 21 EU economies and is calibrated based on empirical data for the period 1995-2018. Our results suggest that a shift of Cohesion Policy funds to more (less) developed countries would result in a higher (lower) overall economic performance. However, the reallocation would affect economic outcomes in EU economies unevenly. In addition to direct effects on demand and production, it is pivotal to take into account indirect effects via trade as well. As a result, Cohesion Policy seems to be confronted with a trade-off between long-run convergence and short-run economic performance.
    Keywords: Cohesion Policy, Macroeconomic Models, Reallocation
    JEL: C53 O11 R11
    Date: 2020–08
  8. By: Gareis, Johannes; Mayer, Eric
    Abstract: We develop an extended real business cycle (RBC) model with financially con-strained firms and non-pledgeable intangible capital. Based on a model-consistentseries for firms' borrowing conditions, we find, within a structural vector autoregres-sion (SVAR) framework, that, in response to an adverse financial shock, tangible in-vestment falls more than intangible investment. This positive co-movement betweentangible and intangible investment as well as the relative resilience of intangibleinvestment pose a challenge for the theoretical model. We show that investment-specific adjustment costs help in reconciling the model with the observed empiricalevidence. The estimation of the theoretical model using a Bayesian limited infor-mation approach yields support for the presence of much larger adjustment costsfor intangible investment than for tangible investment.
    Keywords: tangible investment,intangible investment,financial shocks,euro area
    JEL: C32 E32 E44
    Date: 2020
  9. By: Gabriele Di Filippo
    Abstract: The debt-to-GDP ratio for non-financial companies (NFCs) in Luxembourg is large compared to other EU countries. The paper argues that this large ratio stems from a structural characteristic of Luxembourg pertaining to its role as a global financial center. Indeed, the country hosts a large number of NFCs and notably foreign-controlled NFCs (including large multinational enterprises) that benefit from Luxembourg as a financial platform to manage their business activities and structure their corporate investments. In addition, debt issued by foreign-controlled companies predominates over debt issued by national NFCs. On the liability side, the financing channel mainly relies on loans granted by NFCs (notably, intra-group loans) and by captive financial institutions and money lenders. On the asset side, these resources finance the purchase of unlisted shares or the granting of long-term loans to NFCs and to captive financial institutions and money lenders. While the ratio of debt-to-GDP places Luxembourg NFCs as the largest holders of debt across EU countries, alternative indicators suggest the opposite result. This is notably the case of the ratio of debt-to-financial assets, as Luxembourg NFCs hold the largest stock of financial assets across EU countries. These features should be taken into consideration to avoid any misinterpretation of the large ratio of NFC debt-to-GDP.
    Keywords: Non-Financial Companies, Debt, Global financial center, Multinational Enterprises.
    JEL: F21 F23 F34
    Date: 2020–07
  10. By: Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University); Federico Ravenna (Danmarks Nationalbank, University of Copenhagen, HEC Montreal, CEPR); Gabriel Züllig (Danmarks Nationalbank, University of Copenhagen)
    Abstract: We estimate an Interacted-VAR model allowing for the impact of uncertainty shocks to depend on the average outlook of the economy measured by survey data. We find that, in response to the same uncertainty shock, industrial production and inflation’s peak decrease is around three and a half times larger during pessimistic times. We build scenarios for a path of innovations in uncertainty consistent with the COVID-19-induced shock. Industrial production is predicted to experience a year-over-year peak loss of between 15:1% and 19% peaking between September and December 2020, and subsequently to recover with a rebound to pre-crisis levels between May and August 2021. The large impact is the result of an extreme shock to uncertainty occurring at a time of very negative expectations on the economic outlook.
    Keywords: COVID-19, Uncertainty shocks, Non-Linear Structural Vector AutoRegressions, Consumer Confidence
    JEL: C32 E32
    Date: 2020–09–09
  11. By: Cao, Jin (Norges Bank); Dinger, Valeriya (University of Osnarbruck and and Leeds University Business School); Grodecka, Anna (Department of Economics, Lund University and Knut Wicksell Centre for Financial Studies); Juelsrud, Ragnar (Norges Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: To shed light on the interaction between macroprudential and monetary policies, we study the inward transmission of foreign monetary policy in conjunction with domestic macroprudential and monetary policies in Norway and Sweden. Using detailed bank-level data we show how Norwegian and Swedish banks' lending reacts to monetary policy surprises arising abroad, controlling for the domestic macroprudential stance and the interaction between monetary and macroprudential policies. In both countries, the domestic macroprudential policy helps mitigate the effects arising after foreign monetary surprises.
    Keywords: monetary policy; macroprudential policy; policy interactions; bank lending; inward transmission; international bank lending channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2020–07–01
  12. By: Roel Beetsma; Brian Burgoon; Francesco Nicoli; Anniek de Ruijter; Frank Vandenbroucke
    Abstract: Based on a conjoint survey experiment we explore the support among European citizens for a European Union (EU) budgetary assistance instrument to combat adverse temporary or permanent economic shocks hitting Member States. Suitably designed, there is quite substantial support for such an EU instrument generally and across the sample countries. Support is broader when budgetary support is conditional on debt reduction in normal times and spent in specific policy areas, in particular healthcare and education. Support also increases when there is a role for the European Commission in terms of monitoring and providing guidance. However, there is little support for policy packages that terminate a program and impose a fine in the case of non-compliance. Further, there is broad acceptance of long-run redistribution towards poorer countries. Financing the assistance through a progressive tax increase is more popular than through a flat tax increase. In general, there is substantial scope for constructing assistance packages that command a majority support in all sample countries. The survey was fielded in the midst of the COVID-19 crisis, in which the prospect of a severe economic shock became realistic. However, the results of our survey are based on respondent views in a (partially) pre-political environment: respondents had the opportunity to reason and form their own opinion about the assistance package before concrete policy proposals were debated by political parties that seek the edges of polarization.
    Keywords: EU fiscal capacity, conjoint experiment, EU support instruments, temporary or permanent shocks, stabilization, conditionally, taxation, redistribution
    JEL: E63 H23 H50 H60
    Date: 2020
  13. By: Peter Kugler; Samuel Reynard
    Abstract: Unconventional monetary policies have sometimes raised inflation-related fears that have not materialized. Switzerland presents an interesting case, as the central bank reacted to an appreciating currency by injecting Swiss francs through foreign exchange interventions, and bank lending increased considerably throughout the financial crisis. The low inflation that occurred after the crisis can be reconciled with the substantial money growth during the crisis by accounting for the effects of the lower equilibrium velocity and portfolio shifts associated with the Swiss National Bank's foreign exchange interventions.
    Keywords: Monetary policy, monetary aggregates, inflation, equilibrium velocity, foreign exchange interventions
    JEL: E52 E58 E41 E30
    Date: 2020
  14. By: Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja
    Abstract: This paper examines the relationship between central bank funding and credit risk-taking. Employing comprehensive bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that borrowing from the central bank is associated with rebalancing of bank portfolios towards ex-ante riskier firms. We further establish that this relationship is associated with the ECB's maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we highlight that these shifts in bank lending might lead to an ex-post deterioration of bank balance sheets, but increase firm-level investment and employment.
    Keywords: Monetary Policy,LTRO,Bank Lending,Credit Risk-Taking,Real Effects,TFP Growth
    JEL: E44 E52 G21 O40
    Date: 2020

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