nep-eec New Economics Papers
on European Economics
Issue of 2021‒05‒03
eight papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area House Prices and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  2. Business cycle accounting for the German fiscal stimulus program during the Great Recession By Daniel Fehrle; Johannes Huber
  3. The anchoring of long-term inflation expectations of consumers: insights from a new survey By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  4. Determinants of Foreign Direct Investment in Europe: Bayesian Model Averaging in the Presence of Weak Exogeneity By Chupryhin, Radzivon
  5. Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations By Christina Anderl; Guglielmo Maria Caporale
  6. Firm characteristics and potential output: a growth accounting approach By Davide Fantino; Sara Formai; Alessandro Mistretta
  7. Central Bank Digital Currencies and Monetary Policy Effectiveness in the Euro Area By Alexandra Mitschke
  8. The bias and efficiency of the ECB inflation projections: a State dependent analysis By Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta

  1. By: Oliver Hülsewig; Horst Rottmann
    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. Using Jordà’s (2005) local projection method, we find that real house prices rise in response to expansionary monetary policy shocks that can be related to unconventional policy measures. In the core countries including Ireland, we also find that lending for house purchases increases relative to nominal output. Thus, household debt rises.
    Keywords: Euro area house prices, unconventional monetary policy, local projection method
    JEL: E52 E58 E32 G21
    Date: 2021
  2. By: Daniel Fehrle; Johannes Huber
    Abstract: We take the neoclassical perspective and apply the business cycle accounting method as proposed by Chari, Kehoe, and McGrattan (2007, Econometrica) for the Great Recession and the associated stimulus program in Germany 2008-2009. We include wedges to the variables government consumption, durables, investment, labor, net exports, and efficiency. The results suggest: The crisis was mainly driven by the efficiency wedge, followed by the net exports and the investment wedge. The government consumption wedge and in particular the durables wedge acted counter-cyclical. We attribute the latter to an internationally incomparably large cash for clunkers program and conclude that this subsidy on durable goods was more effective than pure government consumption. We introduce a strategy for likelihood maximization, which reliably and quickly locates the maximum; enables a detailed evaluation of the likelihood function and allows large robustness checks.
    Keywords: Fiscal stimulus, Great Recession, Business cycle accounting, Maximum-Likelihood
    JEL: C32 E20 E32 H12 H31
    Date: 2020–06
  3. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible deanchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
    Keywords: inflation expectations
    JEL: E31 E58 F62
    Date: 2021–04
  4. By: Chupryhin, Radzivon
    Abstract: This paper derives the robust determinants of Foreign Direct Investment (FDI) in Europe under model uncertainty and weak exogeneity issues. For this reason, Bayesian Averaging of Limited Information Maximum Likelihood Estimates (BALIMLE) approach was utilized. The chosen methodology allows for the estimation of a dynamic panel model with fixed effects. Also, the jointness measures were computed. The considered sample includes bilateral FDI flows between 36 European countries over the 2004 – 2017 period. The empirical evidence shows the importance of the endowment theory and the significance of output per worker and labor force variables in explaining the FDI flows. A market size theory was proposed to be augmented with a relative growth hypothesis. The calculated jointness measures indicated the complementary nature of considered regressors and theories.
    Keywords: Bayesian Model Averaging, FDI, Europe, model uncertainty, weakly exogenous regressors
    JEL: F2 F21 F23 F41 F62 F66 I26 O3 O33
    Date: 2021–04–15
  5. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper re-examines the UIP relation by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Cointegrated Smooth Transition VAR (CVSTAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. We find that the nonlinear framework is more appropriate to capture the adjustment towards the UIP equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages are stronger. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, UIP holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility.
    Keywords: UIP, exchange rate, nonlinearities, asymmetric adjustment, CVAR (Cointegrated VAR), CVSTAR (Cointegrated Smooth Transition VAR), interest rate expectations, interest rate announcements
    JEL: C32 F31 G15
    Date: 2021
  6. By: Davide Fantino (Bank of Italy); Sara Formai (Bank of Italy); Alessandro Mistretta (Bank of Italy)
    Abstract: We apply a growth accounting approach to estimate the contribution to potential output growth in Italy by firms with different characteristics. We do so by exploiting time series obtained by aggregating individual firm data. Results show that during the double-dip recession smaller firms provided the strongest negative contribution to potential output growth, while the recovery was driven by big ones. Young firms always give a positive contribution. Growth within sectors is the main driver of the dynamic of both aggregate trend total factor productivity and the capital labor ratio. Looking at sectoral composition effects, between 2014 and 2018 sectors with lower capital deepening have increased their share in the economy, holding back the aggregate figures.
    Keywords: potential output, heterogeneity
    JEL: D24 E23
    Date: 2021–04
  7. By: Alexandra Mitschke (University of Paderborn)
    Abstract: In consequence of the progressive digitalization and declining trend of cash- usage in payments, the majority of central banks is currently researching the topic of Central Bank Digital Currencies (CBDCs). Since 2020, the ECB is preparing a review into whether to issue a digital complement to physical cash and central bank deposits, the so-called digital euro. This study investigates its potential impact on the transmission of monetary policy. We fiÂ…rst survey and interpret key properties of money and money-like assets in the current monetary framework, which motivates a discussion of the proposed forms of CBDCs and the digital euro. Against this background, we extend and close the arbitrage model of Meaning et al. (2018) to investigate the effect of CBDCs on the effectiveness of monetary policy transmission and the ability of the banking sector to fulÂ…fil regulatory liquidity requirements. We conclude that monetary policy would be effective following the introduction of interest-bearing CBDCs, potentially reinforcing the mechanism. Further, we confiÂ…rm that an increase in non-pecuniary benefiÂ…ts of holding bank deposits in relation to CBDCs can mitigate the risk of a potential disintermediation of the banking sector.
    Keywords: Central Bank Digital Currencies, Monetary System, Monetary Policy
    JEL: E41 E42 E52 E58
    Date: 2021–04
  8. By: Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    JEL: C12 C22 C53 E31 E52
    Date: 2021–04–29

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