nep-eec New Economics Papers
on European Economics
Issue of 2021‒03‒08
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unconventional monetary policy and corporate bond issuance By De Santis, Roberto A.; Zaghini, Andrea
  2. The talkative variables of the hybrid Heston model: Yields’ maturity and economic (in)stability By Francesco Campigli; Gabriele Tedeschi; Maria Cristina Recchioni
  3. What kind of region reaps the benefits of a currency union? By Augusto Cerqua; Roberta Di Stefano; Guido Pellegrini
  4. Euro area house price fluctuations and unconventional monetary policy surprises By Hülsewig, Oliver; Rottmann, Horst
  5. ECB-Global 2.0: a global macroeconomic model with dominant-currency pricing, tariffs and trade diversion By Georgiadis, Georgios; Hildebrand, Sebastian; Ricci, Martino; Schumann, Ben; van Roye, Björn
  6. The common and speci fic components of inflation expectation across European countries By Chen, Shi; Härdle, Wolfgang Karl; Wang, Weining
  7. One Size Does Not Fit All: TFP in the Aftermath of Financial Crises in Three European Countries By Christian Abele; Agnes Benassy-Quere; Lionel Fontagné; Lionel Gérard Fontagné
  8. The COVID-19 insolvency gap: First-round effects of policy responses on SMEs By Dörr, Julian Oliver; Murmann, Simona; Licht, Georg
  9. Talking in a language that everyone can understand? Transparency of speeches by the ECB Executive Board By Glas, Alexander; Müller, Lena
  10. Reporting behavior and transparency in European banks' country-by-country reports By Dutt, Verena K.; Nicolay, Katharina; Spengel, Christoph
  11. Structural Tax Reforms and Public Spending Efficiency By António Afonso; João Tovar Jalles; Ana Venâncio
  12. Is money demand really unstable? Evidence from divisia monetary aggregates By William A. Barnett; Taniya Ghosh; Masudul Hasan Adil
  13. Should the ECB Adjust its Strategy in the Face of a Lower r*? By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  14. The Covid pandemic in the market: Infected, immune and cured bonds By Zaghini, Andrea
  15. Fiscal Rules in Good Times and Bad By Christoph Peatz
  16. The New Monetary Policy Revolution: Advice and Dissent By Philip Turner
  17. How do secured funding markets behave under stress? Evidence from the gilt repo market By Hüser, Anne-Caroline; Lepore, Caterina; Veraart, Luitgard
  18. Age-specific income trends in Europe: The role of employment, wages, and social transfers By Hammer, Bernhard; Spitzer, Sonja; Prskawetz, Alexia
  19. The Effect of Control Measures on COVID-19 Transmission and Work Resumption: International Evidence By Meng, Lina; Zhou, Yinggang; Zhang, Ruige; Ye, Zhen; Xia, Senmao; Cerulli, Giovanni; Casady, Carter; Härdle, Wolfgang Karl

  1. By: De Santis, Roberto A.; Zaghini, Andrea
    Abstract: We assess the effect and the timing of the corporate arm of the ECB quantitative easing (CSPP) on corporate bond issuance. Because of several contemporaneous mea- sures, to isolate the programme effects we rely on one key eligibility feature: the euro denomination of newly issued bonds. We find that the significant increase in bonds issuance by eligible firms is due to the CSPP and that this effect took at least six months to unfold. This result holds even when comparing firms with similar ratings, thus providing evidence that unconventional monetary policy can foster a financing diversification regardless of firms' risk profile. We also highlight the impact of the programme on the real economic activity. The evidence suggests that while all firms increased investment in capital expenditures and intangible assets, the CSPP induced eligible firms to invest in marketable and equity securities, to repurchase their own stocks, to hold cash and to carry out short-term investment.
    Keywords: quantitative easing,CSPP,corporate bond market
    JEL: E52 G15 G32
    Date: 2021
  2. By: Francesco Campigli (Scuola Normale Superiore, Pisa, Italy); Gabriele Tedeschi (Department of Economics, Universitat Jaume I, Castellón, Spain); Maria Cristina Recchioni (Department of Economics and Social Sciences, U. Politecnica Delle Marche, Ancona, Italy)
    Abstract: This paper aims to shed light on the bidirectional relationship between the yield curve and the macroeconomic dynamics. By calibrating the hybrid Heston model proposed by Recchioni and Tedeschi (2017) on the Greek, Portuguese and German government bond yields with different maturities, we show that the values of the estimated parameters contain different information on the economic conditions of the investigated area. Firstly, the estimated parameters reflect the opinion of the financial markets on the credibility of the monetary policies adopted to face crises and, in particular, their effectiveness in the short, medium and long term. Secondly, they are useful in anticipating the phases of instability characterizing the selected countries. Finally, these parameters, although obtained just estimating the model on the yield time series, are directly related to the macroeconomic performances of the zone. Overall, our results reassign a role to the financial variables in macroeconomic models.
    Keywords: Stochastic volatility model, Yield dynamics and macroeconomic performances in the Eurozone, Early warning indicator
    JEL: C52 C63 G15
    Date: 2021
  3. By: Augusto Cerqua (Department of Social Sciences and Economics, Sapienza University of Rome); Roberta Di Stefano (Department of Methods and Models for Economics, Territory and Finance, Sapienza University of Rome); Guido Pellegrini (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: What is the economic impact of joining a currency union? Is this impact heterogeneous across regions? And how does it change in case of a recession? We answer these questions by investigating the economic impact of joining the euro area for the latecomers, i.e., the countries that adopted the euro after 2002. Di erently from previous literature, we use NUTS-2 regions as units of analysis. This novelty allows us to investigate the theoretical predictions of a currency union impact at a more appropriate geographi- cal level. Using a counterfactual approach based on the recently developed kernel balancing estimator, we estimate the overall as well as the disaggre- gated impact of joining the euro area. We find that the adoption of the euro brought about a small positive e ect, which was, however, dampened by the Great Recession. Individual regional estimates suggest heterogeneous returns with benefits accruing mostly to core regions.
    Keywords: euro area, accession countries, regional data, kernel balancing estimator
    JEL: C23 F33 R11
    Date: 2021–02
  4. By: Hülsewig, Oliver; Rottmann, Horst
    Abstract: This paper examines the reaction of house prices in a panel of euro area countries to monetary policy surprises over the period 2010-2019. UsingJordà's (2005) local projection method, we find that house prices rise in response to expansionary monetary policy shocks that can be related to unconventional monetary policy measures. Thus, monetary policy should take into account the risk of house price fluctuations when implementing new large scale policy interventions.
    Keywords: House price fluctuations,unconventional monetary policy,local projection method
    JEL: E52 E58 E32 G21
    Date: 2021
  5. By: Georgiadis, Georgios; Hildebrand, Sebastian; Ricci, Martino; Schumann, Ben; van Roye, Björn
    Abstract: In a highly interlinked global economy a key question is how foreign shocks transmit to the domestic economy, how domestic shocks affect the rest of the world, and how policy actions mitigate or amplify spillovers. For policy analysis in such a context global multi-country macroeconomic models that allow a structural interpretation are needed. In this paper we present a revised version of ECB-Global, the European Central Bank's global macroeconomic model. ECB-Global 2.0 is a semi-structural, global multi-country model with rich channels of international shock propagation through trade, oil prices and global financial markets for the euro area, the US, Japan, the UK, China, oil-exporting economies, Emerging Asia, and a rest-of-the-world block. Relative to the original version of model, ECB-Global 2.0 features dominant-currency pricing, tariffs and trade diversion. We illustrate the usefulness of ECB-Global exploring scenarios motivated by recent trade tensions between China and the US. JEL Classification: C51, E30, E50
    Keywords: macro-modelling, multi-country models, spillovers
    Date: 2021–03
  6. By: Chen, Shi; Härdle, Wolfgang Karl; Wang, Weining
    Abstract: Inflation expectation (IE) is often considered to be an important determinant of actual inflation in modern economic theory, we are interested in investigating the main risk factors that determine its dynamics. We fiirst apply a joint arbitrage-free term structure model across different European countries to obtain estimate for country-specific IE. Then we use the two-component and three-component models to capture the main risk factors. We discover that the extracted common trend for IE is an important driver for each country of interest. Moreover a spatial-temporal copula model is tted to account for the non-Gaussian dependency across countries. This paper aims to extract informative estimates for IE and provide good implications for monetary policies.
    Keywords: in ation expectation,joint yield-curve modeling,factor model,common trend,spatial-temporal copulas
    JEL: C02 C13 C38 E31 E43
    Date: 2020
  7. By: Christian Abele; Agnes Benassy-Quere; Lionel Fontagné; Lionel Gérard Fontagné
    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 show that relying on a single break date in 2008 misses both the Eurozone crisis and countries' institutional specificities. Although leverage and financial constraints affect firm-level productivity negatively, high-leverage firms suffer more from financial constraints only in Italy, when they are relatively small or when their debt is of short maturity. These results call for approaches taking into consideration country-level characteristics of financial institutions and time varying financing 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
    JEL: E22 E23 E44 D24
    Date: 2021
  8. By: Dörr, Julian Oliver; Murmann, Simona; Licht, Georg
    Abstract: COVID-19 placed a special role to fiscal policy in rescuing companies short of liquidity from insolvency. In the first months of the crisis, SMEs as the backbone of Europe's real economy benefited from large and mainly indiscriminate aid measures. Avoiding business failures in a whatever it takes fashion contrasts, however, with the cleansing mechanism of economic crises: a mechanism which forces unviable firms out of the market, thereby reallocating resources efficiently. By focusing on firms' pre-crisis financial standing, we estimate the extent to which the policy response induced an insolvency gap and analyze whether the gap is characterized by firms which had already struggled before the pandemic. With the policy measures being focused on smaller firms, we also examine whether this insolvency gap differs with respect to firm size. Based on credit rating and insolvency data for the near universe of actively rated German firms, our results suggest that the policy reponse to COVID-19 has triggered a backlog of insolvencies in Germany that is particularly pronounced among financially weak, small firms, having potential long term implications on economic recovery.
    Keywords: COVID-19 policy response,Corporate bankruptcy,Cleansing e ect,SMEs
    JEL: C83 G33 H12 O38
    Date: 2021
  9. By: Glas, Alexander; Müller, Lena
    Abstract: Using novel data on speeches held by members of the European Central Bank's Executive Board, we investigate whether monetary policy transparency has increased over time. With respect to the general public as the target audience, our findings suggest that the European Central Bank successfully improved the frequency and clarity of information provision since its inception. The increase in transparency is gradual, rather than being induced by changes in the Executive Board's composition or major economic events such as the Great Recession. However, the clarity of speeches in recent years is still fairly low. Moreover, our findings indicate that clarity decreased under Christine Lagarde's presidency following the outbreak of the Coronavirus pandemic. We conclude that while the European Central Bank was able to increase transparency over time, further improvements in clarity are required to make monetary policy truly accessible to the broad public.
    Keywords: Central Bank Communication,Monetary Policy Transparency,Clarity,Readability
    JEL: E52 E58
    Date: 2021
  10. By: Dutt, Verena K.; Nicolay, Katharina; Spengel, Christoph
    Abstract: The public CbCR requirement for EU financial institutions leaves leeway to the reporting firms as regards the calculating and presentation of the data. Based on a sample of CbCRs published by EU-headquartered multinational bank groups, we analyze the reporting behavior and the degree of transparency across the reports. We observe a large heterogeneity with respect to the place of publication of the CbCR, its content, the readability of the data tables as well as the list of entities that should be published together with the by-country data. We also identify differences between headquarter countries, with CbCRs prepared by bank groups from the United Kingdom and Germany being the most transparent. Inconsistencies in reporting inhibit the interpretability and the comparability of the data. We conclude that the specification of the underlying data source and of the applicable consolidation scope as well the establishment of uniform definitions of the reportable items are essential for an appropriate consideration of the reports by all addressees. Our analyses are particularly important in light of the proposal for a public CbCR for large multinational firms in the EU.
    Keywords: Country-by-Country Reporting,Financial Institutions,Public Disclosure,Reporting Behavior,Tax Transparency
    JEL: H25 H26 G21 G28
    Date: 2021
  11. By: António Afonso; João Tovar Jalles; Ana Venâncio
    Abstract: We evaluate the effects of structural tax reforms on government spending efficiency in a sample of OECD economies over the period 2007-2016. After calculating input spending efficiency scores, we assess the relevance for efficiency of narrative tax changes in a panel setup. We find that: i) input efficiency scores average around 0.6-07; ii) increases in the tax rates are reflected in falling public sector efficiency; iii) such negative effect is significant for PIT and VAT; iv) controlling for endogeneity, increases in tax rates are still associated with lower public sector efficiency, mainly in PIT; v) increasing tax bases for PIT and VAT improve public sector efficiency; vi) in economic expansion periods, increasing CIT base and reducing PIT rates, positively affect public sector efficiency; ix) in recessions, efficiency improves when PIT and VAT bases increase and CIT rate increases.
    Date: 2020
  12. By: William A. Barnett (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research); Masudul Hasan Adil (Flame University)
    Abstract: We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use the same linear modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship between real money balances and real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of the existence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart.
    Keywords: Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach
    JEL: C23 E41 E52
    Date: 2021–02
  13. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We address this question using an estimated New Keynesian DSGE model of the Euro Area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r?, increases the probability of hitting the lower bound constraint, which entails significant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight tenth the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the ECB from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as committing to make-up for recent, below-target inflation realizations.
    Keywords: inflation target, effective lower bound, monetary policy strategy, euro-area
    JEL: E31 E52 E58
    Date: 2021–02
  14. By: Zaghini, Andrea
    Abstract: By focusing on the cost conditions at issuance, I find that not only the Covid-19 pandemic effects were different across bonds and firms at different stages, but also that the market composition was significantly affected, collapsing on investment- grade bonds, a segment in which the share of bonds eligible to the ECB corporate programmes strikingly increased from 15% to 40%. At the same time the high-yield segment shrunk to almost disappear at 4%. In addition to a market segmentation along the bond grade and the eligibility to the ECB programmes, another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 basis points and started to be priced only after the early containment actions taken by the national authorities. On the contrary, I do not find evidence supporting an increased risk for corporations headquartered in countries with a reduced fiscal space, nor the existence of a premium in favour of green bonds, which should be the backbone of a possible "green recovery".
    Keywords: ECB,Corporate quantitative easing,Covid pandemic,Green bonds
    JEL: G15 G32 E52
    Date: 2021
  15. By: Christoph Peatz (Macroeconomic Policy Institute (IMK))
    Abstract: I estimate fiscal reaction functions to analyze the cyclical behavior of discretionary measures in the euro area and the potential impact of changes in the fiscal framework. The core is to analyze whether fiscal rules have an asymmetric impact on discretionary measures over the cycle. First, results confirm the general perception that overall discretionary fiscal policy in the EMU is marginally procyclical. Procyclicality is, however, characterized by strong fiscal tightening in contractions while reactions in upturns are neutral. Second, fiscal rules marginally increase countercyclical policy responses in upturns, but strongly reinforce destabilizing procyclical polices in downturns. Interestingly, expenditure rules perform comparably better with regard to the stabilization objective than budget or debt rules.
    Keywords: Fiscal rules, fiscal reaction, fiscal cyclicality, debt sustainability, EMU
    JEL: E6 H11 H6
    Date: 2020
  16. By: Philip Turner
    Abstract: Central banks have undertaken a revolution in monetary policy. They reluctantly abandoned conventional wisdom designed to keep them out of political trouble. This paper looks at this revolution through the lens of the divergent perspectives of the IMF and the BIS. The Jeremiahs predicted this revolution would fail to reduce unemployment and lead only to financial ruin. The Jeremiahs were proved wrong on both counts. Radical whatever-it-takes monetary expansion rescued a depressed world economy. Regulatory reform kept financial risks in check. Because central banks now have two distinct monetary policy instruments - their balance sheet as well as the policy interest rate - monetary policy may have financial stability as an objective in addition to its traditional macroeconomic one. The questions for 2021 and beyond are two. The first is: if the mix of large balance sheets, a sudden jump in government debt and yet-to-be-determined regulatory failures creates new financial stability or macroeconomic risks, what should central banks do? The second is: will governments let them?
    Keywords: Monetary policy, financial stability, financial crisis, fiscal dominance, QE, lender of last resort, macroprudential policy, central banks, Fed, ECB, Bank of England, Bank of Japan, Basel Committee, BIS, CGFS, FSB, IEO, IMF
    JEL: E52 E58 G18
    Date: 2021–02
  17. By: Hüser, Anne-Caroline (Bank of England); Lepore, Caterina (International Monetary Fund); Veraart, Luitgard (London School of Economics and Political Science)
    Abstract: We examine how the overnight gilt repo market operates during three episodes of liquidity stress, using novel transaction-level data on repurchase agreements on gilts. Using network analysis we document that the structure of the repo market significantly changes during stress relative to normal times, with a focus on how sectors adjust volumes, spreads and haircuts in their repo transactions. We find several common patterns in the two most recent stress episodes (the US repo turmoil in 2019 and the Covid-19 crisis in 2020): a preference for dealers and banks to transact in the cleared rather than the bilateral segment of the market, increased usage of the market by hedge funds and central counterparties increasing their reinvestment of cash margin into reverse repo.
    Keywords: Repo market; liquidity risk; financial networks; market microstructure; Brexit referendum; US repo turmoil; Covid-19 crisis
    JEL: D85 G01 G21 G23
    Date: 2021–02–26
  18. By: Hammer, Bernhard; Spitzer, Sonja; Prskawetz, Alexia
    Abstract: This study analyses age-specific differences in income trends in nine European countries. Based on data from National Accounts and the European Union Statistics on Income and Living Conditions, we quantify age-specific changes in income between 2008 and 2017 and decompose these changes into employment, wages, and public transfer components. Results show that income of the younger age groups stagnated or declined in most countries since 2008, while income of the older population increased. The decomposition analysis indicates that the main drivers of the diverging trends are higher employment among the older population and a strong increase in public pensions, especially for women.
    Keywords: Generational Economy,Income,Intergenerational Equity
    Date: 2021
  19. By: Meng, Lina; Zhou, Yinggang; Zhang, Ruige; Ye, Zhen; Xia, Senmao; Cerulli, Giovanni; Casady, Carter; Härdle, Wolfgang Karl
    Abstract: Many countries have taken non-pharmaceutical interventions (NPIs) to contain the spread of the coronavirus (COVID-19) and push the recovery of national economies. This paper investigates the effect of these control measures by comparing five selected countries, China, Italy, Germany, the United Kingdom, and the United States. There is evidence that the degree of early intervention and efficacy of control measures are essential to contain the pandemic. China stands out because its early and strictly enforced interventions are effective to contain the virus spread. Furthermore, we quantify the causal effect of different control measures on COVID-19 transmission and work resumption in China. Surprisingly, digital contact tracing and delegating clear responsibility to the local community appear to be the two most effective policy measures for disease containment and work resumption. Public information campaigns and social distancing also help to flatten the peak significantly. Moreover, material logistics that prevent medical supply shortages provide an additional conditioning factor for disease containment and work resumption. Fiscal policy, however, is less effective at the early to middle stage of the pandemic.
    Keywords: COVID-19,coronavirus
    JEL: C00
    Date: 2020

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