nep-eec New Economics Papers
on European Economics
Issue of 2021‒05‒17
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. What drives the German TARGET balances? Evidence from a BVAR approach By Bettendorf, Timo; Jochem, Axel
  2. Can central bank communication help to stabilise inflation expectations? By Jung, Alexander; Kühl, Patrick
  3. Banks and negative interest rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  4. Uncertainty shocks in currency unions By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
  5. Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises By Peydró, José Luis; Polo, Andrea; Sette, Enrico
  6. Debt sustainability when r - g By de Vette, Nander; Olijslager, Stan; van Wijnbergen, Sweder
  7. On the Construction of a Leading Indicator Based on News Headlines for Predicting Greek Deposit Outflows By Anastasiou, Dimitrios; Petralias, Athanassios
  9. Germany's Labour Market in Coronavirus Distress - New Challenges to Safeguarding Employment By Herzog-Stein, Alexander; Nüß, Patrick; Peede, Lennert; Stein, Ulrike
  10. The aggregate-demand doom loop: Precautionary motives and the welfare costs of sovereign risk By Francisco Roldán
  11. Macroeconomic effects of EU value chain participation By Antonia Lopez Villavicencio; Mariam Camarero; Cecilio Tamarit
  12. Being on the Frontline? Immigrant Workers in Europe and the COVID-19 Pandemic By Fasani, Francesco; Mazza, Jacopo

  1. By: Bettendorf, Timo; Jochem, Axel
    Abstract: Applying a BVAR model, the present paper first identifies the possible drivers of Germany's TARGET claims. In this context, in terms of potential causes, a distinction is made between a rise in the global risk assessment, tensions within the euro area, and European monetary policy. It becomes evident that the TARGET flows between 2015 and 2017 can be ascribed in large part to monetary policy and to a minor extent to the risk assessment within the euro area. At the peak of the European debt crisis between 2010 and mid-2012, the TARGET flows were affected by uncertainty in the euro area as a dominant factor, although global factors also played a key role according to the model. The BVAR model we use opens up the possibility of studying the causes of current fluctuations in Germany's TARGET claims.
    Keywords: target balances,risk,monetary policy,bayesian vector autoregression,sign restrictions
    JEL: C32 E52 F32
    Date: 2021
  2. By: Jung, Alexander; Kühl, Patrick
    Abstract: This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors’ attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel. JEL Classification: C20, D80, E52, E58, G14
    Keywords: forward guidance, high-frequency identification, information and news channel, information demand, website attention
    Date: 2021–05
  3. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks’ lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different “initial” conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. JEL Classification: E44, E52, E58, G20, G21
    Keywords: bank lending, bank risk taking, deposits, euro-area heterogeneity, negative interest rates, zero lower bound
    Date: 2021–05
  4. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes
    Abstract: Uncertainty shocks cause economic activity to contract and more so, if monetary policy is constrained by an effective lower bound on interest rates. In this paper, we investigate whether countries within currency unions are also particularly prone to suffer from the adverse effects of heightened uncertainty because they lack monetary independence. First, we estimate a Bayesian VAR on quarterly time series for Spain. We find that country-specific uncertainty shocks impact economic activity adversely. Second, we calibrate a DSGE model of a small open economy and show that it is able to account for the evidence. Finally, we show that currency-union membership strongly reduces the effects of uncertainty shocks because it anchors long-run expectations of the price level and thus alleviates precautionary price setting in the face of increased uncertainty.
    Keywords: Euro Area; Euro crisis; Exchange Rate Regime; monetary policy; Uncertainty shocks
    JEL: E44 F41
    Date: 2020–12
  5. By: Peydró, José Luis; Polo, Andrea; Sette, Enrico
    Abstract: We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests â?? based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value â?? suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.
    Keywords: bank capital; concentration risk; COVID-19; held to maturity; interbank funding; risk shifting; risk weights; trading book; uncertainty
    JEL: G01 G21 G28
    Date: 2020–11
  6. By: de Vette, Nander; Olijslager, Stan; van Wijnbergen, Sweder
    Abstract: Interest rates on public debt have for several years now fallen short of GDP growth rates in much of the Western world. In his presidential address to the AEA Blanchard argued that this implies that there are no fiscal costs to high debt (Blanchard, 2019).He did outline other reasons not to run large deficits in his address.} In this paper we argue that the safe rate is not the right interest rate to use for that comparison. We develop a General Equilibrium Asset Pricing model and econometrically estimate the relevant characteristics of the stochastic processes driving the primary surplus in relation to the growth rate of aggregate consumption and derive the proper risk premium. The resulting interest rate exceeds the growth rate. We then calculate the discounted value of future primary surpluses using the same stochastic process for the primary surplus and compare that to the market value of the (Dutch) public sector debt. We test various explanations for the gap between these two and derive the fiscal adjustment necessary to eliminate it (the ``fiscal sustainability gap").
    Keywords: Debt Valuation; fiscal adjustment gap; sustainable deficits
    JEL: G12 H62 H63
    Date: 2020–12
  7. By: Anastasiou, Dimitrios; Petralias, Athanassios
    Abstract: The purpose of this study is twofold. First, construct a leading indicator based on news headlines, and second, examine whether this novel indicator affects Greek bank deposit flows’ trajectory. Employing alternative econometric methodologies, we find that this index proxies for depositors’ crisis sentiment, and the higher this index becomes, the higher the depositors’ negative sentiment becomes, leading them to withdraw their bank deposits. Monetary poly authorities or macroprudential regulators could adapt our model to assess the resilience of a bank or the whole banking sector.
    Keywords: Bank deposit flows, news headlines; sentiment; uncertainty; Greece.
    JEL: C22 C5 C51 G0 G02 G2 G20 G21
    Date: 2021–05
  8. By: Sascha Keil (Technische Universitaet Chemnitz, Fakultaet für Wirtschaftswissenschaften, Professur für Wirtschaftspolitik, Sascha Keil, 09107 Chemnitz (Germany))
    Abstract: This paper sheds light on serious methodological difficulties of employing the empiric export equation in order to derive long-run trade elasticities. The unreliable estimated price coefficient (Kaldor Paradox) and the potential presence of cointegrationare identified as the most relevant points. It can be shown that difficulties are in part due to methodological issues. New empirical evidence, encompassing eleven Euro area countries and the timespan 1995–2019, has been obtained from different cointegration techniques. In seven out of eleven cases a robust long-run relationship can be detected and price elasticity was consistently found being significant and negative.
    Keywords: International trade, Competitiveness, Kaldor Paradox, Export equation, ARDL
    JEL: F14 C13
    Date: 2021–05
  9. By: Herzog-Stein, Alexander; Nüß, Patrick; Peede, Lennert; Stein, Ulrike
    Abstract: We analyse measures of internal flexibility taken to safeguard employment during the Coronavirus Crisis in comparison to the Great Recession. Cyclical working-time reductions are again a major factor in safeguarding employment. Whereas during the Great Recession all working-time instruments contributed to the reduction in working time, short-time work (STW) now accounts for almost all of the working-time reduction. STW was more rapidly extended, more generous, and for the first time a stronger focus was put on securing household income on a broad basis. Still, the current crisis is more severe and affects additional sectors of the economy where low-wage earners are affected more frequently by STW and suffered on average relatively greater earnings losses. A hypothetical average short-time worker had a relative income loss in April 2020 that was more than twice as large as that in May 2009. Furthermore, marginal employment is affected strongly but not protected by STW.
    Keywords: Internal Flexibility Short-Time Work,Business Cycles,Great Recession,Coronavirus Crisis
    JEL: E24 E32 J08 J20
    Date: 2021
  10. By: Francisco Roldán (International Monetary Fund)
    Abstract: I examine the role of households' precautionary savings motive in amplifying and propagating changes in sovereign spreads. I study this mechanism in a model where the government of a small open economy borrows from foreigners but the debt is then partially held by heterogeneous domestic savers. In a calibration to Spain in the 2000s, default risk accounts for about half of the output contraction. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.
    Keywords: Sovereign risk default aggregate demand precautionary motives heterogeneous agents
    JEL: E21 F34 H63
    Date: 2021–04
  11. By: Antonia Lopez Villavicencio; Mariam Camarero; Cecilio Tamarit
    Abstract: In this paper we analyze some macroeconomic effects derived from the participation of EU countries in global and regional value chains over the period 1990-2019. By employing local projections, we show that the impact of value chain participation on economic performance depends crucially on the country's position in the production chain. While backward participation is linked to better economic performance, forward participation leads to declining domestic output and a rise in unemployment. Moreover, we find evidence of important heterogeneity among EU countries, with peripheral and CEE countries being more sensitive to shocks in the participation indicators. Our results are robust to different controls.
    Keywords: Global Value Chains, EU; local projections, VAR
    JEL: F14 F15 F62 C32
    Date: 2021
  12. By: Fasani, Francesco; Mazza, Jacopo
    Abstract: We provide a first timely assessment of the pandemic crisis impact on the labour market prospects of immigrant workers in Europe by proposing a novel measure of their exposure to employment risk. We characterize migrants' occupations along four dimensions related to the role of workers' occupations in the response to the pandemic, the contractual protection they enjoy, the possibility of performing their job from home and the resilience of the industry in which they are employed. We show that our measure of employment risk closely predicts actual employment losses observed in European countries after the first wave of the COVID-19 pandemic. We estimate that, within industries and occupations, Extra-EU migrants and women are exposed to higher risk of unemployment than native men and that women are losing jobs at higher rates than equally exposed men. According to our estimates, more than 9 million immigrants in the EU14+UK area are exposed to a high risk of becoming unemployed due to the pandemic crisis, 1.3 million of which are facing a very high risk.
    Keywords: COVID-19; Employment risk; key occupations
    JEL: F22 J20 J61
    Date: 2020–12

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