nep-eec New Economics Papers
on European Economics
Issue of 2020‒12‒14
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal transfers and economic convergence By Capella-Ramos, João; Checherita-Westphal, Cristina; Leiner-Killinger, Nadine
  2. Institutions, Liquidity Preference, and Reserve Asset Holding in the Eurozone Core and Periphery Before and After Crises: Some Stylized Facts By Eichacker, Nina
  3. Liquidity in resolution: comparing frameworks for liquidity provision across jurisdictions By Grund, Sebastian; Nomm, Nele; Walch, Florian
  4. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Matthias Neuenkirch
  5. Fixed Rate versus Adjustable Rate Mortgages: Evidence from Euro Area Banks By Ugo Albertazzi; Fulvia Fringuellotti; Steven Ongena
  6. The Stabilizing Effects of Economic Policies in Spain in Times of COVID-19 By José E. Boscá; Rafael Doménech; Javier Ferri; José R. García; Camilo Ulloa
  7. On Classifying the Effects of Policy Announcements on Volatility By G.M. Gallo; D. Lacava; E. Otranto
  8. The Impact of Policy Interventions on Systemic Risk across Banks By Simona Nistor; Steven Ongena
  9. Short-term determinants of bilateral exchange rates: A decomposition model for the Swiss franc By Fabian Fink; Lukas Frei; Oliver Gloede
  10. Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of Central Bank Reserves By Christoph Basten; Mike Mariathasan
  11. Impact of fiscal measures in response to the COVID-19 pandemic on small-open economies: lessons from Slovenia By Arigoni, Filippo; Breznikar, Miha; Lenarčič, Črt; Maletič, Matjaž
  12. The Covid-19 Crisis and Consumption: Survey Evidence from Six EU Countries. By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Geoff Kenny
  13. How do banking groups react to macroprudential policies? Cross-border spillover effects of higher capital buffers on lending, risk-taking and internal markets By Cappelletti, Giuseppe; Ponte Marques, Aurea; Salleo, Carmelo; Martín, Diego Vila

  1. By: Capella-Ramos, João; Checherita-Westphal, Cristina; Leiner-Killinger, Nadine
    Abstract: Before the outbreak of the coronavirus (COVID-19) pandemic, discussions were already taking place on how to complete Economic and Monetary Union (EMU) and increase its resilience, inter alia, by speeding up economic convergence. The impact of the current unprecedented crisis on the euro area economy has given the debate new impetus. As a contribution to this topic – and without going into details of new mechanisms for crisis resolution – this paper analyses the role of fiscal transfers in real and business cycle convergence at a regional level. The paper distinguishes between net fiscal transfers – a broad measure defined as the ratio between disposable and primary incomes – and EU structural and investment funds. It provides evidence that net fiscal transfers have contributed to income redistribution across regions and to faster convergence in disposable incomes, although not to higher economic growth and real convergence. More positive evidence has been found for the role of the EU structural and investment funds over the medium term, based on the newly available – and richest so far – European Commission database. Going forward, in addition to efficiency considerations, which are important for real convergence, recommendations on the size and allocation of fiscal transfers should account for their impact on the business cycle. At the same time, in the longer run, it should be borne in mind that fiscal transfers are no substitute for genuine structural reforms and sound macroeconomic and fiscal policies when it comes to promoting sustainable economic growth and convergence. JEL Classification: H54, H77, O47
    Keywords: business cycle, business cycle convergence, economic growth, European structural and investment funds, fiscal transfers, real convergence
    Date: 2020–12
  2. By: Eichacker, Nina
    Abstract: The monetary integration of the Eurozone initially accommodated endogenous money creation across its members; however, liquidity crises that followed the Global Financial Crisis (GFC) revealed structural disparities in liquidity provision in response to funding crises. By refusing to act as a lender of last resort, the European Central Bank pushed governments across the Eurozone to guarantee domestic financial liabilities. The importance of repurchase agreements to fund Eurozone banking and the predominance of European government bonds in general collateral left peripheral governments vulnerable to decreased private demand for their debt, and financially constrained by private intermediaries’ refusal of peripheral sovereign bonds in general collateral. This constraint created accelerated the sovereign debt crises driving the Eurozone crisis. This paper analyzes Eurozone banks’, National Central Banks’, and governments’ balance sheets to show how they have internalized the lessons from the GFC. We find that these entities have returned to holding larger concentrations of reserve assets, a practice that some architects of the Eurozone had hoped monetary integration at the supranational level would end. As Eurozone governments consider how to respond to the Covid-19 pandemic, liquidity crunches that hurt financial and fiscal activity across the Eurozone remain a risk.
    Date: 2020–11–24
  3. By: Grund, Sebastian; Nomm, Nele; Walch, Florian
    Abstract: As a response to the global financial crisis that started in 2008, many countries established dedicated resolution regimes that seek to limit the use of taxpayer money while maintaining the functions of failing banks that are critical for financial stability. This paper extends the existing research by zooming in on the specific topic of liquidity provision to banks in resolution. It examines the provision of liquidity in the United States, the United Kingdom, Japan, Canada and the banking union of the European Union (thereafter: the “banking union”). The paper observes the differences and commonalities of policy choices across jurisdictions with regard to both the relationship between private prefunding and temporary public liquidity provision and the roles of the public budget and the central bank. The comparison also reveals that the role of fiscal authorities is strong and that guarantees from a public budget are a common feature. The framework for the provision of liquidity in the banking union is not yet complete as the construction of a public sector backstop of sufficient size and speed is comparatively more complex in the banking union than in other jurisdictions. Therefore, the idea of establishing a European-level guarantee framework – which would allow access to Eurosystem liquidity for banks coming out of resolution with limited collateral – is being further investigated. JEL Classification: G01, G21, G28, G33, E58
    Keywords: banking union, European Central Bank, liquidity, resolution
    Date: 2020–12
  4. By: Hamza Bennani; Matthias Neuenkirch
    Abstract: We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 2003Q1-2019Q4 with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states (e.g., a normal state and a crisis state), using an underlying logit model determining the relative weight of these states over time. We show that shocks to the credit spread and shocks to credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. Credit standards and the credit spread are also the key determinants of the underlying state of the economy in the logit submodel. Together with a more pronounced transmission of monetary policy shocks in the crisis state, this provides further evidence for a financial accelerator in the euro area. Finally, the detrimental effect of credit conditions is also reflected in the labor market.
    Keywords: Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission
    JEL: E44 E52 E58 G21
    Date: 2020
  5. By: Ugo Albertazzi (ECB -DG Monetary Policy); Fulvia Fringuellotti (Federal Reserve Banks - Federal Reserve Bank of New York); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: Why do residential mortgages carry a fixed or an adjustable interest rate? To answer this question we study unique data from 103 banks belonging to 73 different banking groups across twelve countries in the euro area. To explain the large cross-country and time variations observed, we distinguish between household conditions that determine the local demand for credit and the characteristics of banks that supply credit. As bank funding mostly occurs at the group level, we disentangle these two sets of factors by comparing the outcomes observed for the same banking group across the different countries. Local household conditions dominate. In particular we find that the share of new loans with a fixed rate is larger when: (1) the historical volatility of inflation is lower, (2) the correlation between unemployment and the short-term interest rate is higher, (3) households' financial literacy is lower, and (4) the use of local mortgages to back covered bonds and of mortgage-backed securities is more widespread.
    Date: 2020–11
  6. By: José E. Boscá; Rafael Doménech; Javier Ferri; José R. García; Camilo Ulloa
    Abstract: In this article we analyse the stabilizing role of economic policies during the COVID-19 crisis in Spain. First, we estimate the contribution of the structural shocks that explain the behaviour of the main macroeconomic aggregates during 2020, using a DSGE model estimated for the Spanish economy. Our results highlight the importance of supply and demand shocks in explaining the COVID-19 crisis. Second, we have simulated a counterfactual scenario for GDP in absence of the COVID-19 economic policy measures. According to our results, the annual fall in GDP moderates at least by 7.6 points in the most intense period of the crisis, thanks to these stabilizing policies. Finally, we have estimated the potential effects of Next Generation EU in the Spanish economy. Assuming that Spain may receive from the EU between 1.5 and 2.25 percentage points of GDP in grants and loans from 2021 to 2024, to finance mainly public investment, GDP could increase between 2 and 3 pp in 2024. All these results show the usefulness of a DSGE model like EREMS, as a practical tool for the applied economic analysis and understanding of the Spanish economy.
    Date: 2020–12
  7. By: G.M. Gallo; D. Lacava; E. Otranto
    Abstract: The financial turmoil surrounding the Great Recession called for unprecedented intervention by Central Banks - unconventional policies affected various areas in the economy, including stock market volatility. In order to evaluate such effects, by including Markov Switching dynamics within a recent Multiplicative Error Model, we propose a model–based classification of the dates of a Central Bank's announcements to distinguish the cases where the announcement implies an in- crease or a decrease in volatility, or no effect. In detail, we propose two naïve classification methods, obtained as a by– product of the model estimation, which provide very similar results to those coming from a classical k–means clustering procedure. The application on four Eurozone market volatility series shows a successful classification of 144 European Central Bank announcements.
    Keywords: Markov switching model;Unconventional monetary policies;Stock market volatility;Multiplicative Error Model;Smoothed Probabilities;Model–based clustering.
    Date: 2020
  8. By: Simona Nistor (Babes-Bolyai University - Department of Finance); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: What is the impact of policy interventions on the systemic risk of banks? To answer this question, we analyze a comprehensive sample that combines bank-specific bailout events with balance sheets of key affected and non-affected European banks between 2008 and 2014. We find that guarantees reduce the systemic risk contribution made by small banks in the short run and by small or less liquid banks in the long run. Recapitalizations immediately decrease banks’ systemic importance, but the effect is also short-lived. Liquidity injections may even significantly increase systemic risk especially when administered to the less capitalized or highly profitable banks.
    Keywords: systemic risk, policy interventions, risk profile, Conditional Value at Risk, G-SIBs
    JEL: E58 G01 G21 G28 H81
    Date: 2020–12
  9. By: Fabian Fink; Lukas Frei; Oliver Gloede
    Abstract: This paper develops an FX factor model to decompose short-term bilateral exchange rate dynamics into different global factors and local uniqueness. We apply the model to the Swiss franc exchange rates against the US dollar (USDCHF) and the euro (EURCHF) between 2006 and 2018 and decompose daily dynamics into three global factors: risk, US dollar, and euro. The model captures daily dynamics well, explaining approximately 73% of the variation in USDCHF and 37% of the variation in EURCHF. The risk factor contributes the most to Swiss franc dynamics, especially in times of a worsening risk environment, highlighting the role of the Swiss franc as a safe-haven currency. Global FX factors had been almost completely reflected in USDCHF dynamics before the euro area debt crisis, but once that crisis began, they also became important for EURCHF. Furthermore, momentum is present in daily Swiss franc returns, especially before the introduction of the EURCHF minimum exchange rate.
    Keywords: Factor model, variance decomposition, safe haven, carry trade, momentum
    JEL: F31 G15 C38
    Date: 2020
  10. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo); Mike Mariathasan (KU Leuven- Faculty of Economics & Business)
    Abstract: We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.
    Keywords: negative interest rate policy, tiered remuneration, interest rate pass-through, credit risk, interest rate risk
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2020–11
  11. By: Arigoni, Filippo; Breznikar, Miha; Lenarčič, Črt; Maletič, Matjaž
    Abstract: We estimate the impact of the fiscal expansion due to the COVID-19 outbreak on the Slovene economy using two models. First, we simulate fiscal shocks in 3-scenarios in a calibrated large-scale DSGE model. Second, we employ a small-scale VAR model to check the robustness of the theoretical results. The findings suggest a significant response of GDP, private consumption, and imports to fiscal shocks. In particular, the outcomes highlight that compared to other unanticipated fiscal developments a government consumption shock explains the lion's share of domestic fluctuations. The main transmission channel is high complementarity between private and government consumption.
    Keywords: Fiscal shocks, Fiscal multipliers, DSGE model, VAR model.
    JEL: C32 E32 E62
    Date: 2020–12–02
  12. By: Dimitris Christelis (University of Glasgow, CSEF, CFS, CEPAR and Netspar); Dimitris Georgarakos (European Central Bank and CFS); Tullio Jappelli (Università di Napoli Federico II, CSEF, CFS, CEPAR and Netspar); Geoff Kenny (European Central Bank)
    Abstract: Using new panel data from a representative survey of households in the six largest euro area economies, the paper estimates the impact of the Covid-19 crisis on consumption. The panel provides, each month, household-specific indicators of the concern about finances due to Covid-19 from the first peak of the pandemic until October 2020. The results show that this concern causes a significant reduction in non-durable consumption. The paper also explores the potential impact on consumption of government interventions and of another wave of Covid-19, using household-level consumption adjustments to scenarios that involve positive and negative income shocks. Fears of the financial consequences of the pandemic induce a significant reduction in the marginal propensity to consume, an effect consistent with models of precautionary saving and liquidity constraints. The results are robust to endogeneity concerns through use of panel fixed effects and partial identification methods, which account also for time varying unobservable variables, and provide informative identification regions of the average treatment effect of the concern for Covid-19 under weak assumptions.
    Keywords: Covid-19, Consumption, Income Shocks, Marginal Propensity to Consume, Financial concerns, Fiscal policies.
    JEL: D12 D81 E21 G51 H31
    Date: 2020–12–04
  13. By: Cappelletti, Giuseppe; Ponte Marques, Aurea; Salleo, Carmelo; Martín, Diego Vila
    Abstract: We study the impact of macroprudential capital buffers on banking groups' lending and risk-taking decisions, also investigating implications for internal capital markets. For identification, we exploit heterogeneity in buffers applied to other systemically important institutions, using information from three unique confidential datasets, including information on the EBA scoring process. This policy design induces a randomized experiment in the neighborhood of the threshold, which we use to identify the effect of higher capital requirements by comparing the change in the outcome for banks just above and below the cut-off, before and after the introduction of the buffer. The analysis is implemented relying on a fuzzy regression discontinuity and on a difference-in-differences matching design. We find that, when parent banks are constrained with higher buffers, subsidiaries deleverage lending and risk-taking towards non-financial corporations and marginally expanded lending towards households, with negative effects on protability. Also, we find that parents cut down on holdings of debt and equity issued by their subsidiaries. Our findings support the hypothesis that higher capital buffers have a positive disciplinary effect by reducing banks' risk-taking while having a (temporary) adverse impact on the real economy through a decrease in affiliated banks' lending activity. Therefore, to ensure the effectiveness of macroprudential policy, it is essential that policymakers assess their potential cross-border effects. JEL Classification: E44, E51, E58, G21, G28
    Keywords: capital buffers, Internal capital markets, lending, macroprudential policy, risk-taking
    Date: 2020–11

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