nep-eec New Economics Papers
on European Economics
Issue of 2021‒03‒29
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. On the behavioral antecedents of business cycle coherence in the euro area By Petar Sorić; Ivana Lolić; Marija Logarušić
  2. Risk Shocks and Divergence between the Euro Area and the US in the aftermath of the Great Recession By Thomas Brand; Fabien Tripier
  3. Completing the European Banking Union: Capital cost consequences for credit providers and corporate borrowers By Koetter, Michael; Krause, Thomas; Sfrappini, Eleonora; Tonzer, Lena
  4. The Impact of ECB Corporate Sector Purchases on European Green Bonds By Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
  5. ZLB and Beyond: Real and Financial Effects of Low and Negative Interest Rates in the Euro Area By Andrejs Zlobins
  6. Inflation expectations in the euro area: indicators, analyses and models used at Banca d’Italia By Sara Cecchetti; Davide Fantino; Alessandro Notarpietro; Marianna Riggi; Alex Tagliabracci; Andrea Tiseno; Roberta Zizza
  7. Natural real rates of interest across Euro area countries: Are R-stars getting closer together? By Tomas Reichenbachas; Linas Jurkšas; Rokas Kaminskas
  8. Supranational debt and financing needs in the European Union By Mar Delgado-Téllez; Iván Kataryniuk; Fernando López-Vicente; Javier J. Pérez
  9. Gauging the Effect of Influential Observations on Measures of Relative Forecast Accuracy in a Post-COVID-19 Era: Application to Nowcasting Euro Area GDP Growth By Boriss Siliverstovs
  10. Quantifying bias and inaccuracy of upper-level aggregation in HICPs for Germany and the euro area By Herzberg, Julika; Knetsch, Thomas A.; Schwind, Patrick; Weinand, Sebastian
  11. Forecasting the Stability and Growth Pact compliance using Machine Learning By Kea Baret; Amélie Barbier-Gauchard; Theophilos Papadimitriou
  12. Monetary and Macroprudential Policy Complementarities: Evidence from European Credit Registers By Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
  13. Liquidity in the German corporate bond market: Has the CSPP made a difference? By Boneva, Lena; Islami, Mevlud; Schlepper, Kathi
  14. Euro Area Business Confidence and Covid-19 By Ambrocio, Gene
  15. Exchange Rates and Prices: Evidence from the 2015 Swiss Franc Appreciation By Raphael Auer; Ariel Burstein; Sarah M. Lein
  16. Exploiting payments to track Italian economic activity: the experience at Banca d’Italia By Valentina Aprigliano; Guerino Ardizzi; Alessia Cassetta; Alessandro Cavallero; Simone Emiliozzi; Alessandro Gambini; Nazzareno Renzi; Roberta Zizza
  17. The Transmission Channels of Government Spending Uncertainty By Anna Belianska; Aurélien Eyquem; Céline Poilly
  18. Estimating Policy-Corrected Long-Term and Short-Term Tax Elasticities for the United States, Germany, and the United Kingdom By Bernd Hayo; Sascha Mierzwa; Umut Unal

  1. By: Petar Sorić (Faculty of Economics and Business, University of Zagreb); Ivana Lolić (Faculty of Economics and Business, University of Zagreb); Marija Logarušić (Faculty of Economics and Business, University of Zagreb)
    Abstract: Departing from the mainstream literature on European monetary integration, we acknowledge the interdependence of economic sentiment synchronization and business cycle co-movements for 17 individual European countries and the euro area (EA). Building upon both hard and soft data, we find that sentiment cycles are in fact the driving force behind general economic cycle synchronization. This finding is robust with respect to different synchronization indicators, different Granger causality test specifications, data frequencies (monthly vs. quarterly), and the targeted EA composition (EA11 vs. EA19). The latter is of particular importance, implying that recent EA enlargements have not decreased its homogeneity in this regard. Our results exhibit a certain degree of dependence upon the business cycle phase. The synchronization of 17 examined countries vis-a-vis the EA seems to be even more intensive in recessions than in expansions. In other words, common monetary policy of the ECB should be able to effectively act as a countercyclical tool when an individual national economy is facing a recession.
    Keywords: economic sentiment, business cycle synchronization, Optimum Currency Areas, Euro
    JEL: C32 E32 E58 E71
    Date: 2021–03–11
  2. By: Thomas Brand; Fabien Tripier
    Abstract: Highly synchronized during the Great Recession of 2008-2009, the Euro area and the US have diverged in the period that followed. To explain this divergence, we provide a structural interpretation of these episodes through the estimation for both economies of a business cycle model with ?nancial frictions and risk shocks, measured as the volatility of idiosyncratic uncertainty in the ?nancial sector. Our results show that risk shocks have stimulated US growth in the aftermath of the Great Recession and have been the main driver of the double-dip recession in the Euro area. They play a positive role in the Euro area only after 2015. Risk shocks therefore seem well suited to account for the consequences of the sovereign debt crisis in Europe and the subsequent positive e?ects of unconventional monetary policies, notably the ECB’s Asset Purchase Programme (APP).
    Keywords: Great recession;Business cycles;Uncertainty;Risk Shocks;Divergence
    JEL: E3 E4 G3
    Date: 2021–03
  3. By: Koetter, Michael; Krause, Thomas; Sfrappini, Eleonora; Tonzer, Lena
    Abstract: The bank recovery and resolution directive (BRRD) regulates the bail-in hierarchy to resolve distressed banks without burdening tax payers. We exploit the staggered implementation of the BRRD across 15 European Union (EU) member states to identify banks' capital cost and capital structure responses. In a first stage, we show that average capital costs of banks increased. WACC hikes are lowest in the core countries of the European Monetary Union (EMU) compared to formerly stressed EMU and non-EMU countries. This pattern is driven by changes in the relative WACC weight of equity in response to the BRRD, which indicates enhanced financial system resilience. In a second stage, we document asymmetric transmission patterns of banks' capital cost changes on to corporates' borrowing terms. Only EMU banks located in core countries that exhibit higher WACC are those that also increase firms' borrowing cost and contract credit supply. Hence, the BRRD had unintended consequences for selected segments of the real economy.
    Keywords: bail-in,banking union,funding costs,real effects
    JEL: C41 F34 G21 H63
    Date: 2021
  4. By: Franziska Bremus; Franziska Schütze; Aleksandar Zaklan
    Abstract: This papers analyzes the effect of the ECB’s Corporate Sector Purchase Programme (CSPP) and the recent Pandemic Emergency Purchase Programme (PEPP) on the yields of eligible green bonds, a new but rapidly growing segment of the corporate bond market. We exploit these policy changes using a difference-in-differences strategy, with ineligible corporate green bonds is- sued in euro, U.S. dollars and Swedish crowns as comparison groups. We find that both programs significantly improve financing conditions for eligible green bonds, thereby increasing the attractiveness of these instruments to issuers and of the euro area as a location of issuance. The effects of the CSPP and PEPP are heterogeneous, both in terms of average impact and persistence of the effects. Yield differences between eligible and ineligible green bonds can last for more than six months. Our analysis informs the debate about new financing options for firms as well as about effects of asset purchase programs on the transition towards a less carbon-intensive economy.
    Keywords: green bonds, bond yields, monetary policy, corporate sector purchase programme (CSPP), pandemic emergency purchase programme (PEPP)
    JEL: E52 E58 G12 G18 Q54
    Date: 2021
  5. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the effects of low and negative interest rates in the euro area on a wide range of macroeconomic and financial variables and documents the changes in the monetary transmission mechanism once the policy rate reaches the zero lower bound (ZLB). To that end, we employ a set of non-linear time series frameworks, namely a time-varying parameter structural vector autoregression with stochastic volatility and non-linear local projections and perform identification via both sign restrictions and high frequency information approaches. Our findings suggest that the policy rate has continued to support the aggregate demand in the euro area even in sub-zero territory. Despite that, we find that the reaction of inflation and its expectations has significantly deteriorated in the post-ZLB period. Regarding the transmission mechanism, we show that policy rate cuts below zero have a more persistent impact on the term structure and interest rate expectations. In addition to that, our results suggest that negative interest rates do not cause a contraction in lending despite the disconnect of lending rates from the policy rate. In general, our findings contribute to the growing list of literature which questions the empirical relevance of the ZLB.
    Keywords: NIRP, ZLB, monetary policy, euro area, non-linearities
    JEL: C54 E43 E52 E58
    Date: 2020–12–30
  6. By: Sara Cecchetti (Bank of Italy); Davide Fantino (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Marianna Riggi (Bank of Italy); Alex Tagliabracci (Bank of Italy); Andrea Tiseno (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.
    Keywords: inflation expectations, anchoring, surveys
    JEL: E31 E32
    Date: 2021–03
  7. By: Tomas Reichenbachas (Bank of Lithuania); Linas Jurkšas (Bank of Lithuania); Rokas Kaminskas (Bank of Lithuania)
    Abstract: Using two different methodologies, we estimate time-varying natural real rates of interest for a majority of euro area (EA) countries, including Lithuania. We find that natural real rates have been declining, particularly since 2008, albeit to different extent across EA countries. Lower rates could (at least partly) be explained by lower productivity and population growth. In line with previous literature, we find evidence of a substantial dispersion of the natural interest rate across EA economies. This became especially evident during the financial crisis of 2008-2009 and the sovereign debt crisis of 2010-2012, while estimates of natural rates tend to converge during "calm" periods. Estimates of natural rates for Lithuania were significantly above the estimates of core EA countries over 2002-2008, but this has changed after the crisis. From 2011 the estimates of natural rates for Lithuania tend to be close to the average for EA countries.
    Keywords: LEuro area, natural rate of interest, common monetary policy, fragmentation
    JEL: C32 E32 E43 E52
    Date: 2021–03–10
  8. By: Mar Delgado-Téllez (Banco de España); Iván Kataryniuk (Banco de España); Fernando López-Vicente (Banco de España); Javier J. Pérez (Banco de España)
    Abstract: The COVID-19 pandemic has substantially affected the financial trajectory of governments, which have seen their financing needs increase significantly. Against this background, the European Union has launched a series of programmes to smooth this financing in the short term, through the activation of credit lines to cover direct or indirect health expenses and temporary unemployment scheme-related expenditure. Further, it has approved a recovery fund (dubbed Next Generation EU), which will transfer resources from the European budget to the Member States for investments that enhance competitiveness and social and environmental sustainability. In this connection, this paper firstly estimates the increase in financing needs at the European level. Secondly, it sets out the supranational measures adopted to address the consequences of the pandemic, to be financed with debt issued by the European Commission, on behalf of the Member States. Finally, it characterises the starting point of this situation, i.e. it provides the main figures on euro-denominated supranational debt currently in circulation and reviews the arguments in favour of the importance of increasing this type of debt and pan-European safe assets.
    Keywords: public debt, European Union, public financing needs, European Recovery Fund
    JEL: E62 F36 F45 H63
    Date: 2020–08
  9. By: Boriss Siliverstovs (Latvijas Banka)
    Abstract: The previous research already emphasised the importance of investigating the predictive ability of econometric models separately during expansions and recessions (Chauvet and Potter (2013), Siliverstovs (2020), Siliverstovs and Wochner (2020)). Using the data for the pre-COVID period, it has been shown that ignoring asymmetries in a model's forecasting accuracy across the business cycle phases typically leads to a biased judgement of the model's predictive ability in each phase. In this study, we discuss the implications of data challenges posed by the COVID-19 pandemic on econometric model estimates and forecasts. Given the dramatic swings in GDP growth rates across a wide range of countries during the coronavirus pandemic, one can expect that the asymmetries in the models' predictive ability observed during the pre-COVID period will be further exacerbated in the post-COVID era. In such situations, recursive measures that dissect the models' forecasting ability observation by observation allow to gain detailed insights into the underlying causes of one model's domination over the others. In this paper, we suggest a novel metric referred to as the recursive relative mean squared forecast error (based on rearranged observations) or R2MSFE(+R). We show how this new metric paired with the cumulated sum of squared forecast error difference (CSSFED) of Welch and Goyal (2008) highlights significant differences in the relative forecasting ability of the dynamic factor model and naive univariate benchmark models in expansions and recessions that are typically concealed when only point estimates of relative forecast accuracy are reported.
    Keywords: COVID-19, nowcasting, GDP, euro area
    JEL: C22 C52 C53
    Date: 2021–02–02
  10. By: Herzberg, Julika; Knetsch, Thomas A.; Schwind, Patrick; Weinand, Sebastian
    Abstract: Current HICP measurement practices produce an upward bias of about one-ninth of a percentage point in German inflation due to changing consumption being disregarded and the preliminary data being used in the compilation of expenditure weights. The statistical uncertainty produced by these sources of mismeasurement can be illustrated by an interdecile range of about one-quarter of a percentage point. The annual updating of the quantity component of the weights, which was implemented in 2012, has reduced the substitution component, making the disregard of changing consumption virtually a non-issue for the euro area HICP. The measurement of the German HICP is impaired by the extrapolation of expenditure weights, and the use of preliminary national accounts data since 2012 has not led to an improvement. This source of mismeasurement is likely to be relevant for the euro area HICP as well but cannot be quantified due to data constraints. Compilers might identify weight updating techniques as a potential field of HICP quality improvement. For the time being, users have to consider this source of mismeasurement when assessing the precision of the HICP as a measure of "true" inflation.
    Keywords: Inflation measurement,Substitution bias,Updating of expenditure weights,HICP
    JEL: E31 C43
    Date: 2021
  11. By: Kea Baret (BETA - Bureau d'Économie Théorique et Appliquée - UL - Université de Lorraine - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Amélie Barbier-Gauchard (BETA - Bureau d'Économie Théorique et Appliquée - UL - Université de Lorraine - UNISTRA - Université de Strasbourg - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Theophilos Papadimitriou (DUTH - Democritus University of Thrace)
    Abstract: Since the reinforcement of the Stability and Growth Pact (1996), the European Commission closely monitors public finance in the EU members. A failure to comply with the 3% limit rule on the public deficit by a country triggers an audit. In this paper, we present a Machine Learning based forecasting model for the compliance with the 3% limit rule. To do so, we use data spanning the period from 2006 to 2018 (a turbulent period including the Global Financial Crisis and the Sovereign Debt Crisis) for the 28 EU Member States. A set of eight features are identified as predictors from 141 variables through a feature selection procedure. The forecasting is performed using the Support Vector Machines (SVM). The proposed model reached 91.7% forecasting accuracy and outperformed the Logit model that we used as benchmark.
    Keywords: Fiscal Rules,Fiscal Compliance,Stability and Growth Pact,Machine learning
    Date: 2021–01–26
  12. By: Altavilla, Carlo; Laeven, Luc; Peydró, José-Luis
    Abstract: We show strong complementarities between monetary and macroprudential policies in influencing credit. We exploit credit register data - crucially from multiple (European) countries and for both corporate and household credit - in conjunction with monetary policy surprises and indicators of macroprudential policy actions. Expansive monetary policy boosts lending more in accommodative macroprudential environments. This complementary effect of monetary and macroprudential policy is stronger for: (i) expansionary (as opposed to contractionary) monetary policy; (ii) riskier borrowers; (iii) less capitalized banks (especially when lending to riskier borrowers); (iv) consumer and corporate loans (rather than mortgages); and (v) more (ex-ante) productive firms (especially for less capitalized banks).
    Keywords: credit registers,household loans,corporate loans,monetary policy,macroprudential policy
    JEL: G21 G28 G32 G51 E58
    Date: 2021
  13. By: Boneva, Lena; Islami, Mevlud; Schlepper, Kathi
    Abstract: The Eurosystem purchased €178 billion of corporate bonds between June 2016 and December 2018 under the Corporate Sector Purchase Programme (CSPP). Did these purchases lead to a deterioration of liquidity conditions in the corporate bond market, thus raising concerns about unintended consequences of large-scale asset purchases? To answer this question, we combine the Bundesbank's detailed CSPP purchase records with a range of liquidity indicators for both purchased and nonpurchased bonds. We find that while the flow of purchases supported secondary market liquidity, liquidity conditions deteriorated in the long-run as the Bundesbank reduced the stock of corporate bonds available for trading in the secondary market.
    Keywords: Corporate Bond Market,Central Bank Asset Purchases,Market Liquidity
    JEL: E52 F30 G12
    Date: 2021
  14. By: Ambrocio, Gene
    Abstract: I study the effects of the Covid-19 pandemic on business confidence in 11 Euro area countries and its consequent impact on economic activity. To obtain causal effects, I instrument business confidence with domestic household confidence as well as average household confidence in neighboring countries. I find evidence suggesting that the confidence and expectations channel was an important component to the economic transmission of Covid-19. A one standard deviation drop in business confidence leads to between 5-6 and 9 percent fall in economic activity in the industrial and wholesale and retail trade sectors respectively. These results highlight the importance of managing confidence and expectations in crises episodes.
    JEL: E23 E66 E71 I12
    Date: 2021–03–15
  15. By: Raphael Auer; Ariel Burstein; Sarah M. Lein
    Abstract: We dissect the impact of a large and sudden exchange rate appreciation on Swiss border import prices, retail prices, and consumer expenditures on domestic and imported non-durable goods, following the removal of the EUR/CHF floor in January 2015. Cross-sectional variation in border price changes by currency of invoicing carries over to consumer prices and allocations, impacting retail prices of imports and competing domestic goods, as well as import expenditures. We provide measures of the sensitivity of retail import prices to border prices and the sensitivity of import shares to relative prices, which is higher when using retail prices than border prices.
    JEL: F0
    Date: 2021–01
  16. By: Valentina Aprigliano (Bank of Italy); Guerino Ardizzi (Bank of Italy); Alessia Cassetta (Bank of Italy); Alessandro Cavallero (Bank of Italy); Simone Emiliozzi (Bank of Italy); Alessandro Gambini (Bank of Italy); Nazzareno Renzi (Bank of Italy); Roberta Zizza (Bank of Italy)
    Abstract: This paper provides an overview of how information on payments has been recently exploited by Banca d’Italia staff for the purposes of tracking economic activity and forecasting. In particular, the payment data used for this work are drawn from the payment systems managed by Banca d’Italia (BI-COMP and TARGET2) and from the Anti-Money Laundering Aggregate Reports submitted by banks and by Poste Italiane to the Banca d’Italia’s Financial Intelligence Unit (Unità di Informazione Finanziaria, UIF). We show that indicators drawn from these sources can improve forecasting accuracy; in particular, those available at a higher frequency have proved crucial to properly assessing the state of the economy during the pandemic. Moreover, these indicators make it possible to assess changes in agents’ behaviour, notably with reference to payment habits, and, thanks to their granularity, to delve deeper into the macroeconomic trends, exploring heterogeneity by sector and geography.
    Keywords: short term forecasting, high-frequency data, payment systems, TARGET2, money laundering, COVID-19
    JEL: C53 E17 E27 E32 E37 E42
    Date: 2021–03
  17. By: Anna Belianska (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Céline Poilly (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, DIW Berlin - German Institute for Economic Research)
    Abstract: Higher uncertainty about government spending generates a persistent decline in the economic activity in the Euro Area. This paper emphasizes the transmission channels explaining this empirical fact. First, a Stochastic Volatility model is estimated on European government consumption to build a measure of government spending uncertainty. Plugging this measure into a SVAR model, we stress that government spending uncertainty shocks have recessionary, persistent and humped-shaped effects. Second, we develop a New Keynesian model with financial frictions applying to a portfolio of equity and long-term government bonds. We argue that a portfolio effect-resulting from the imperfect substitutability among both assets-acts as a critical amplifier of the usual transmission channels.
    Keywords: government spending uncertainty,stochastic volatility,portfolio adjustment cost
    Date: 2021–02
  18. By: Bernd Hayo (University of Marburg); Sascha Mierzwa (University of Marburg); Umut Unal (University of Marburg)
    Abstract: We estimate the elasticities of the most important tax categories using a new quarterly database of discretionary tax measures for the United States, Germany, and the United Kingdom over the period 1980Q1 to 2018Q2. Employing Romer and Romer’s (2009) narrative approach, we construct a policy-neutral dataset based on revenue figures from governmental records. Using this quantitative information, we are able to subtract policy-induced changes, which are typically not considered in the extant literature. Furthermore, we estimate state-dependent elasticities. Our conclusions are as follows. (i) In Germany and the UK, long-term tax-to-base elasticities are generally higher than short-term elasticities, whereas results for the US are mixed. (ii) Short-term base-to-output elasticities tend to be smaller than unity, whereas long-term elasticities are close to unity. (iii) German and UK tax-to-output elasticities in the short term are lower than long-term elasticities, with mixed results for the US. (iv) For tax-to-base elasticities, we find business cycle asymmetries across countries but not within countries. (v) For base-to-output elasticities, our results suggest few asymmetries across countries and more asymmetries across tax types. (vi) Typically, the above conclusions do not hold for corporate income tax.
    Keywords: Tax revenue; tax base; tax elasticity; business cycle; Germany; United Kingdom; United States
    JEL: E62 H20 H30 E32
    Date: 2021

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