nep-eec New Economics Papers
on European Economics
Issue of 2021‒01‒04
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Monetary Communications: Excess Sensitivity and Perception Shocks By Valentin Jouvanceau; Ieva Mikaliunaite
  2. The Gender Unemployment Gap Across the Euro Area: The Role of Macroeconomic Shocks and Labour Market Institutions By Alexander Mihailov; Giovanni Razzu; Zhe Wang
  3. Demand and growth regimes in finance-dominated capitalism and the role of the macroeconomic policy regime: a post-Keynesian comparative study on France, Germany, Italy and Spain before and after the Great Financial Crisis and the Great Recession By Eckhard Hein; Judith Martschin
  4. European Monetary Union and Inequality: A Synthetic Control Approach By Florentin Kerschbaumer; Andreas Maschke
  5. The Expenditure Benchmark: complex and unsuitable for Independent Fiscal Institutions By Carlos Fonseca Marinheiro
  6. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Matthias Neuenkirch
  7. Lower Bank Capital Requirements as a Policy Tool to Support Credit to SMEs: Evidence From a Policy Experiment? By Dietsch Michel; Fraisse Henri; Lé Mathias; Lecarpentier Sandrine
  8. The COVID-19 shock and a fiscal-monetary policy mix in a monetary union By Anna Bartocci; Alessandro Notarpietro; Massimiliano Pisani
  9. Weigh(t)ing the basket: aggregate and component-based inflation forecasts for the euro area By Chalmovianský, Jakub; Porqueddu, Mario; Sokol, Andrej
  10. How will the COVID-19-crisis affect the trend in corporate saving? By Demary, Markus; Hasenclever, Stefan; Hüther, Michael
  11. Monetary policy strategies in the New Normal: a model-based analysis for the euro area By Fabio Busetti; Stefano Neri; Alessandro Notarpietro; Massimiliano Pisani
  12. The market stabilization role of central bank asset purchases: high-frequency evidence from the COVID-19 crisis By Marco Bernardini; Annalisa De Nicola
  13. Designing a Permanent EU-Wide Stabilization Facility By Roel Beetsma; George Kopits
  14. A Model of the Euro Area, China and the United States: Trade Links and Trade Wars By Volha Audzei; Jan Bruha
  15. Impact of COVID-19 on the trade of goods and services in Spain By Asier Minondo
  16. Fiscal Policy Uncertainty and its Effects on the Real Economy: German Evidence By Robert L. Czudaj; Joscha Beckmann
  17. Firm undercapitalization in Italy: business crisis and survival before and after COVID-19 By Tommaso Orlando; Giacomo Rodano
  18. Firms‘ participation in the COVID-19 loan programme By Lucas Marc Fuhrer; Marc-Antoine Ramelet; Jörn Tenhofen
  19. To What Extent does Convergence Explain the Slowdown in Potential Growth of the CEE Countries Following the Global Financial Crisis? By Maciej Stefański
  20. Targeting a sustainable recovery with Green TLTROs By van 't Klooster, Jens; van Tilburg, Rens

  1. By: Valentin Jouvanceau (Bank of Lithuania); Ieva Mikaliunaite (Bank of Lithuania)
    Abstract: We explore new dimensions of the ECB’s monetary communications using the Euro Area Monetary Policy Event-Study Database (EA-MPD) built by Altavilla et al. (2019). We find that three new factors are needed to capture an excess sensitivity of long-term sovereign yields around monetary announcements. "Duration" surprises cause variations in real long-term rates and are mainly transmitted by term premiums. The "Sovereign spread" and "Save the Euro" surprises greatly influence the long-term yields of the periphery countries. These effects are difficult to reconcile with classic monetary policy shocks. We therefore study their underlying nature and discover that they have the characteristics of "Information", or what we label "Perception" shocks.
    Keywords: Monetary surprises, Event-study, Excess sensitivity, Perception shocks, High-frequency Identification
    JEL: E43 E44 E52 E58 G12
    Date: 2020–10–08
  2. By: Alexander Mihailov (Department of Economics, University of Reading); Giovanni Razzu (Department of Economics, University of Reading); Zhe Wang (Department of Economics, University of Reading)
    Abstract: We examine the gender unemployment impact from four types of macroeconomic shocks under single monetary policy in the Euro Area. We also explore the role in shock absorption and transmission played by different labour market institutions. We apply panel data estimation to 11 Euro Area countries over the 2000-2013 period, disaggregated by age, marital status and education. We find that adverse macro-shocks, such as reductions in labour demand, similar to those experienced during the current COVID-19 pandemic, or a contractionary monetary policy, as in the build-up to the global financial crisis of 2007-2009, are associated with a larger increase in unemployment rates for women than for men, specifically for the young and less-educated. However, labour market institutions, in particular unionisation or labour tax wedge abatement, mitigate the widening of the gender unemployment gap.
    Keywords: gender unemployment gap, demographic composition of unemployment, macroeconomic shocks, labour market institutions, monetary policy, Euro Area
    JEL: E24 E32 E52 F45 J16 J24
    Date: 2020–12–18
  3. By: Eckhard Hein (Berlin School of Economics and Law (DE)); Judith Martschin
    Abstract: We contribute to the recent debates on demand and growth regimes in modern finance-dominated capitalism linking them to the post-Keynesian research on macroeconomic policy regimes. We examine the demand and growth regimes, as well as the macroeconomic policy regimes for the big four Eurozone countries, France, Germany, Italy and Spain, for the periods 2001-09 and 2010-19. First, our approach supports the usefulness of the identification of demand and growth regimes according to growth contributions of the main demand components and financial balances of the macroeconomic sectors. This allows for an understanding of the demand sources of growth, or stagnation, if there is a lack of demand, of how these sources are financed and of potential financial instabilities and fragilities. Second, when it comes to the macroeconomic policy drivers of demand and growth regimes, as well as their respective changes, we show that the exclusive focus on fiscal policies, as in the previous literature, is too limited, and that it is the macroeconomic policy regime which matters here, i.e. the combination of monetary, fiscal and wage policies, as well as the open economy conditions.
    Keywords: Demand and growth regimes, macroeconomic policy regimes, post-Keynesian macroeconomics
    JEL: E11 E12 E61 E63 E65 O57
    Date: 2020–12
  4. By: Florentin Kerschbaumer; Andreas Maschke (University of Leeds)
    Abstract: The promise of greater material prosperity and economic convergence has underpinned the process of European economic integration. Its consequences for income inequalities within countries, however, have so far been little discussed. This paper seeks to contribute to the literature by investigating the effects of European economic integration on intra-country income inequality using the synthetic control method. We find that EMU, out of our sample of eight euro countries, has significant effects on inequality in Germany and Spain. From the several theories outlined in the literature, our results lend most support to the growth regime mechanism.
    Keywords: Income Inequality, European Monetary Union, Synthetic Control Method
    JEL: D63 N10 N14 P16
    Date: 2020–12
  5. By: Carlos Fonseca Marinheiro
    Abstract: The Expenditure Benchmark (EB) is an indicator for the evolution of public expenditure, introduced in 2011 in the already complex European fiscal rules framework. Its application has been increasingly promoted by the European Commission, and most existing proposals to reform the EU fiscal rules aim to keep it. However, the EB is not a substitute for the structural balance, not only because it requires the later as an input, but also because the EB calculation demands some of the unobservable variables heavily criticised in the structural balance. The EB indicator is quite complex and not suitable for the use at national level by the Independent Fiscal Institutions – that monitor compliance with national fiscal rules – as it relies on the European Commission’s data inputs and judgement not available in real-time. This paper argues for more transparency and for a simplification of this indicator to reduce the reliance on non-observable variables.
    Keywords: Expenditure benchmark; Independent Fiscal Institutions; EU fiscal rules; Stability and Growth Pact
    JEL: E61 E02 E62 H50 H61
    Date: 2020–12
  6. 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
  7. By: Dietsch Michel; Fraisse Henri; Lé Mathias; Lecarpentier Sandrine
    Abstract: Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our difference-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply.
    Keywords: SME finance, Credit supply, Basel III, Credit risk modelling, Capital requirement.
    JEL: C13 G21 G33
    Date: 2020
  8. By: Anna Bartocci (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of a monetary and fiscal policy mix implemented in a two-region monetary union in response to the COVID-19 shock. The pandemic is modelled as a mix of recessionary demand and supply shocks affecting both regions simultaneously and symmetrically, under two assumptions: the effective lower bound (ELB) constrains the monetary policy rate; and a fraction of households, labelled ‘hand-to-mouth’ (HTM), consume all their available income in every period. The main results are the following: first, higher lump-sum targeted fiscal transfers to HTM households and public consumption spending in one region, financed by issuing public debt, reduce the recessionary effects both domestically and abroad (via the trade channel). Second, the monetary union-wide recession is mitigated more effectively if both regions implement a fiscal expansion and the central bank limits the increase in long-term rates by purchasing sovereign bonds. Third, fiscal measures are less effective if sovereign bond yields increase relatively more in one region because investors perceive its bonds as risky. Effectiveness can be regained if a supranational fiscal authority issues a safe bond.
    Keywords: monetary policy, fiscal policy, effective lower bound
    JEL: E31 E32 E58
    Date: 2020–12
  9. By: Chalmovianský, Jakub; Porqueddu, Mario; Sokol, Andrej
    Abstract: We compare direct forecasts of HICP and HICP excluding energy and food in the euro area and five member countries to aggregated forecasts of their main components from large Bayesian VARs with a shared set of predictors. We focus on conditional point and density forecasts, in line with forecasting practices at many policy institutions. Our main findings are that point forecasts perform similarly using both approaches, whereas directly forecasting aggregate indices tends to yield better density forecasts. In the aftermath of the Great Financial Crisis, relative forecasting performance was typically only affected temporarily. Inflation forecasts made by Eurosystem/ECB staff perform similarly or slightly better than those from our models for the euro area. JEL Classification: C11, C32, C53, E37
    Keywords: aggregation, Bayesian VAR model, inflation forecasting
    Date: 2020–12
  10. By: Demary, Markus; Hasenclever, Stefan; Hüther, Michael
    Abstract: In this paper we aim to shed light on the global trend in rising corporate saving over the last three decades and to discuss the effects that the Covid-19 crisis might have on companies' saving behaviour. To do so, we analyse the transition of the corporate sector from traditionally being a net borrower to becoming a net lender to the rest of the economy from a flow-of-funds perspective. In accordance with the literature, this analysis reveals that the trend in rising corporate saving is mostly pronounced in advanced economies that have been accumulating high and persistent current account surpluses, such as Germany, South Korea and Japan. In addition, we aim to analyse the various factors behind this trend by reviewing the literature. These range from the rise of uncertainty after the global financial crisis to the increased reliance on internal funding for research and development expenditures. To identify the potentially relevant factors for the German corporate sector we, subsequently, study the composition and development of Germany's aggregated corporate sector's balance sheet. We show that the rise in corporate saving is accompanied by an increase in equity capital and a reduction in the corporate sector's reliance on banking loans. Finally, we discuss the possible impact of the current Covid-19 crisis on the trend of rising global saving. We argue that the Covid-19 crisis is most likely to interrupt the trend in corporate saving in the short run due to the decline in revenues. Nonetheless, similar to the pattern observed in the aftermath of the financial crisis we conjecture that the Covid-19 shock will probably strengthen corporate saving in the long run, as corporates may well aim to restore their liquidity and equity capital buffers to be better prepared for future shocks. This will further unfold downward pressures on real interest rates and complicate the conduct of monetary policy.
    JEL: E32 F32 G32
    Date: 2020
  11. By: Fabio Busetti; Stefano Neri (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: A New Keynesian model calibrated to the euro area is used to evaluate the stabilization properties of alternative monetary policy strategies when the natural interest rate is low (‘new normal’) and the probability of reaching the effective lower bound (ELB) is non-negligible. Price level targeting is the most effective strategy in terms of stabilizing inflation and output and of reducing the duration and frequency of ELB episodes. Temporary price level targeting is also effective in mitigating the ELB constraint, although its stabilization properties are inferior to those of price level targeting. Backward-looking average inflation targeting performs well and is preferable to inflation targeting. The effectiveness of these alternative strategies hinges upon the commitment of a central bank to keeping the policy rate ‘lower for longer’ and is influenced by the agents’ expectation formation mechanism.
    Keywords: monetary policy, natural interest rate, effective lower bound.
    JEL: E31 E32 E58
    Date: 2020–12
  12. By: Marco Bernardini (Bank of Italy); Annalisa De Nicola (Bank of Italy)
    Abstract: This paper uses confidential high-frequency data to investigate the dynamic effects on the government bond market of the central bank asset purchases carried out in Italy during the COVID-19 pandemic crisis. We find that in response to an outright purchase of long-term bonds: (i) long-term yields drop by 4 to 5 basis points per billion euros on impact and tend to remain subdued over the trading day; (ii) short- and medium-term bond yields are also strongly affected; (iii) the yield curve shifts downwards and flattens owing to a reduction in the credit and liquidity risk premia embedded in sovereign spreads; (iv) market liquidity improves steadily. We also show that: (v) the yield impact of a purchase is substantially larger in times of heightened market stress; (vi) asset purchases operate similarly and effectively in quieter times as well. These results suggest that actual purchases affect market prices over and above purchase announcements, and that adjusting their pace and composition according to market conditions can boost the overall effectiveness of a programme.
    Keywords: monetary policy, asset purchases, high-frequency data, local projections
    JEL: C22 E43 E44 E52 E58
    Date: 2020–12
  13. By: Roel Beetsma; George Kopits
    Abstract: While the EU recovery plan provides a useful step in alleviating the economic effects of the coronavirus crisis and achieving further European integration, a permanent fiscal stabilization capacity dealing with major crises is still missing. Such a EU-wide stabilization function would be in accordance with the subsidiarity principle, enshrined in the Treaty of Maastricht, as the risk-sharing that it provides can only be conducted at the supranational level. We envisage a mechanism to semi-automatically respond to region- and country-specific shocks via a central fiscal stabilization fund (CFSF). A simple model incorporating hysteresis, cross-border externalities and moral hazard, is deployed to illustrate the optimal responses of the CFSF to these shocks. A well-designed CFSF has the potential to improving welfare not only in crisis-hit member countries, but also in the union as a whole.
    Keywords: subsidiarity principle, shocks, fiscal stabilization, transfers, European Union, corona
    JEL: E32 E62 E63
    Date: 2020
  14. By: Volha Audzei; Jan Bruha
    Abstract: In this paper we develop a dynamic stochastic general equilibrium model featuring the euro area, the United States and China, with an exogenous rest of the world. The countries in the model are linked through trade and international bond purchases. Having estimated the model, we study several scenarios of trade wars between the countries. Our findings suggest that no country benefits from imposing tariffs in the long run. The degree to which a particular country is hurt depends on the strength of its import and export links.
    Keywords: Bayesian estimation, China, multi-country DSGE, trade wars
    JEL: C11 E37 F13 F41
    Date: 2020–12
  15. By: Asier Minondo
    Abstract: The COVID-19 crisis has led to the sharpest collapse in the Spanish trade of goods and services in recent decades. The containment measures adopted to arrest the spread of the virus have caused an especially intense fall of trade in services. Spain's export specialization in transport equipment, capital and outdoor goods, and services that rely on the movement of people has made the COVID-19 trade crisis more intense in Spain than in the rest of the European Union. However, the nature of the collapse suggests that trade in goods can recover swiftly when the health crisis ends. On the other hand, COVID-19 may have a long-term negative impact on the trade of services that rely on the movement of people.
    Date: 2020–12
  16. By: Robert L. Czudaj (Department of Economics, Chemnitz University of Technology); Joscha Beckmann (University of Greifswald, Department o Economics)
    Abstract: This paper introduces a new measure of fiscal policy uncertainty based on the disagreement among professional forecasters. We analyze different patterns of this measure for the German economy for a sample period from November 1995 to April 2018 and also use Italian data for comparison. Especially, we examine the impact of the introduction of the German ‘debt brake’ on fiscal policy uncertainty. Finally, we conduct an impulse response analysis to investigate the effectof fiscal policy uncertainty on the real economy and we provide robust evidence that fiscal policy uncertainty significantly decreases the growth rate of industrial production. The corresponding effect is robust to various sensitivity checks and exceeds the impact of a general measure of economic policy uncertainty. In general, the negative effect on the real economy might be explained by lower hiring and investment by firms, higher costs of financing due to risk premia and lower consumption spending as a result of precautionary savings.
    Keywords: Disagreement, Expectations, Fiscal policy, Survey data, Uncertainty, VAR
    JEL: E62
    Date: 2020–10
  17. By: Tommaso Orlando (Bank of Italy); Giacomo Rodano (Bank of Italy)
    Abstract: In a context characterized by upcoming regulatory changes and deeply affected by the COVID-19 epidemic, this paper examines the diffusion of firm undercapitalization (i.e., the firm displaying a level of equity below the legal limit) among Italian corporations. In a proposal by the National Board of Accountants, business crisis is substantially identified with undercapitalization. Indeed, our analyses show that the onset of undercapitalization often anticipates business termination: around 60 percent of involved firms go out of business within 3 years. In 2010-18, on average around 8.5 percent of Italian companies were undercapitalized. The impact of the COVID-19 epidemic may be substantial: our predictions indicate that the share of undercapitalized firms at the end of 2020 may exceed 12 percent. This estimate incorporates the powerful mitigating effects of several interventions enacted by the Italian government between March and August 2020 to support firms damaged by the pandemic. The increase in undercapitalization may reverberate onto the functioning of the new ‘early warning’ system, which will become operational in September 2021: our predictions suggest that the number of firms that could be involved in early warning procedures may be almost twice as large as that foreseeable on the basis of accounting data from 2018.
    Keywords: firm undercapitalization, equity deficit, early warning, impact of COVID-19 on Italian corporations
    JEL: G32 G33 K29
    Date: 2020–12
  18. By: Lucas Marc Fuhrer; Marc-Antoine Ramelet; Jörn Tenhofen
    Abstract: This paper analyses the determinants of firm participation in the Swiss COVID-19 loan programme, which aims to bridge firms’ liquidity shortfalls that have resulted from the pandemic. State guaranteed COVID-19 loans are widely used by Swiss firms, with 20% of all firms participating, resulting in a sizeable programme of 2.4% of GDP. We use a complete firm-level dataset to study the determinants of firm participation. Our results can be summarised as follows. First, participation was largely driven by the exposure of a firm to lockdown restrictions and to the intensity of the virus in the specific region. Second, we show that less liquid firms had a significantly higher probability of participating in the programme. Third, we find no clear evidence that firm indebtedness affected participation in the programme and no evidence that pre-existing potential zombie firms participated more strongly in the loan programme. Fourth, we show that the programme reached younger and smaller firms, which could be financially more vulnerable as they are less likely to obtain outside finance during a crisis. Overall, we conclude that given its objective, the programme appears to be successful.
    Keywords: COVID-19, loan programme, guarantees, firm behaviour
    JEL: D22 H81
    Date: 2020
  19. By: Maciej Stefański
    Abstract: The paper estimates a simple growth model with time-varying cross-country fixed effects on a panel of high-income countries and decomposes changes in potential growth into convergence, movements in the steady state determinants, global TFP growth and labor force growth in order to investigate the sources of potential growth slowdown in CEE following the global financial crisis. Convergence is found to explain about 40% of the slowdown, the other main drivers being falling investment to GDP ratio and the TFP component. Further decomposition of investment and TFP demonstrates that domestic and external factors each account for 25-30% of the slowdown.
    Keywords: convergence, potential growth, decomposition, TFP, investment, CEE.
    JEL: O43 O47
    Date: 2020–12
  20. By: van 't Klooster, Jens; van Tilburg, Rens
    Abstract: Since their introduction in 2014, the European Central Bank’s Targeted Longer-Term Refinancing Operations (TLTROs) have become ever larger and ever more attractive for banks. As they increasingly drive bank lending, TLTROs often enable unsustainable investments. This report proposes Green TLTROs, which are refinancing operations that provide banks with cheap funding if they lend in accordance with the EU’s taxonomy of green activities. We discuss the legality of such a market-based programme and show that it is compatible with a level playing field between banks and the singleness of monetary policy. We outline several possible technical designs of the Green TLTROs and suggest a pilot programme for energy efficient housing that can quickly be implemented.
    Date: 2020–12–18

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