nep-eec New Economics Papers
on European Economics
Issue of 2021‒06‒14
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro area sovereign bond risk premia during the Covid-19 pandemic By Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
  2. Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB’s unconventional policies By Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
  3. What drives euro area financial market developments? The role of US spillovers and global risk By Brandt, Lennart; Saint Guilhem, Arthur; Schröder, Maximilian; Van Robays, Ine
  4. The Covid pandemic in the market: infected, immune and cured bonds By Zaghini, Andrea
  5. The COVID-19 shock and challenges for time series models By Bobeica, Elena; Hartwig, Benny
  7. Misalignments in house prices and economic growth in Europe By Juan Carlos Cuestas; Merike Kukk; Natalia Levenko
  8. The Asymmetric Effect of Foreign Direct Investment on the Net Average Wages of Southeastern European Countries By Kurtović, Safet; Maxhuni, Nehat; Halili, Blerim; Krasniqi, Bujar
  9. Inequality revisited: An international comparison with a special focus on the case of Germany By Niehues, Judith; Stockhausen, Maximilian
  10. Sectoral Fiscal Multipliers and Technology in Open Economy By Olivier Cardi; Romain Restout
  11. Income Inequality as Long-term Conditioning Factor of Monetary Transmission to Bank Interest Rates in EA Countries By Tomas Domonkos; Boris Fisera; Maria Siranova

  1. By: Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
    Abstract: We decompose euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.’s fiscal policy announcements lowered yields more uniformly. JEL Classification: C22, G11
    Keywords: ECB, event study, Kalman filter, sovereign bond yields
    Date: 2021–05
  2. By: Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
    Abstract: This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of the impacts of these unconventional instruments of monetary policy is challenging. We propose a novel identification approach that seeks to overcome this challenge by combining a dense, controlled event study with forward curve counterfactuals that we construct using predictive rate densities derived from rate options. We find that NIRP has exerted a sizeable influence on the term structure of interest rates throughout maturities while, on net, the impact of rate FG has been more muted. QE explains the lion’s share of yield effects, particularly over the back end of the yield curve. We then feed these rate counterfactuals into a large-scale Bayesian VAR and generate alternative histories for the euro area macro-economy that one would likely have observed between 2013 and 2020 in no-NIRP (with or without FG) and in no-QE regimes. According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so. JEL Classification: C32, C54, C58, E50, E51, E52
    Keywords: forward curve, forward guidance, large-scale asset purchases, monetary policy, negative interest rates, rate options, yield curve
    Date: 2021–06
  3. By: Brandt, Lennart; Saint Guilhem, Arthur; Schröder, Maximilian; Van Robays, Ine
    Abstract: Financial asset prices contain a rich set of real-time information on the economy. To extract this information, it is crucial to understand the driving factors behind financial market developments. In this paper, we exploit daily cross-asset price movements in a sign-restricted BVAR model to analyse the extent to which euro area and US yields, equity prices, and the euro-US dollar exchange rate are jointly driven by monetary policy, macro and global risk factors. A novelty is that we allow for cross-Atlantic spillovers while also accounting for the unique role of the US in the global financial system. Our results underline the importance of US spillovers and shifts in global risk sentiment for understanding the dynamics of euro area financial variables. Euro area shocks transmit much less to US financial markets in comparison, with global risk shocks being more important instead. Using the daily shocks as instruments in a Proxy-SVAR, we demonstrate that the transmission of financial market movements to the macroeconomy depends on the underlying driver, thereby illustrating why it matters to look into the driving factors in the first place. JEL Classification: C32, C54, E44, E52
    Keywords: financial conditions, high-frequency identification, international transmission, large-scale asset purchases, monetary policy
    Date: 2021–05
  4. 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%. Contemporaneously, the high-yield segment shrunk to almost disappear at 4%. Another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 bp 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”. JEL Classification: G15, G32, E52
    Keywords: corporate quantitative easing, Covid pandemic, ECB, green bonds
    Date: 2021–06
  5. By: Bobeica, Elena; Hartwig, Benny
    Abstract: We document the impact of COVID-19 on frequently employed time series models, with a focus on euro area inflation. We show that for both single equation models (Phillips curves) and Vector Autoregressions (VARs) estimated parameters change notably with the pandemic. In a VAR, allowing the errors to have a distribution with fatter tails than the Gaussian one equips the model to better deal with the COVID-19 shock. A standard Gaussian VAR can still be used for producing conditional forecasts when relevant off-model information is used. We illustrate this by conditioning on official projections for a set of variables, but also by tilting to expectations from the Survey of Professional Forecasters. For Phillips curves, averaging across many conditional forecasts in a thick modelling framework offers some hedge against parameter instability. JEL Classification: C53, E31, E37
    Keywords: COVID-19, forecasting, inflation, student's t errors, tilting, VAR
    Date: 2021–05
  6. By: Marco Onofri; Gert Peersman; Frank R. Smets (-)
    Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a nancial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.
    Date: 2021–05
  7. By: Juan Carlos Cuestas (Department of Economics and Finance, Tallinn University of Technology, Estonia; IEI and Department of Economics, Universitat Jaume I, Castellón, Spain); Merike Kukk (Department of Economics and Finance, Tallinn University of Technology, Estonia); Natalia Levenko (Department of Economics and Finance, Tallinn University of Technology, Estonia)
    Abstract: In this paper we investigate house price misalignments and how they affect the real economy. We estimate the long-term relationship between house prices and the fundamentals that determine long-term house prices for a panel of European countries with dynamic OLS, using data from 2005-2018. We find that income has been the main driver of fundamental house prices in all countries, while the supply of dwellings has calmed the rise in house prices in some of them. We calculate house price misalignments, which are deviations of house prices from the fundamental value, and we employ them in the growth model. The results of the growth regression indicate that house price imbalances amplify business cycles in the short term, but in the long term house price overvaluations slow economic growth down. The findings imply that it is crucial to take measures to stabilise housing cycles.
    Keywords: housing markets, fundamental house price, misalignments, imbalances, overvaluation, economic growth
    JEL: E21 E44 R21 R31 G01
    Date: 2021
  8. By: Kurtović, Safet; Maxhuni, Nehat; Halili, Blerim; Krasniqi, Bujar
    Abstract: There is a widespread belief in transition and growing economies that the relationship between FDI and wages is symmetrical. On the other hand, the problem of the nonlinear impact of FDI on wages has remained insufficiently explored. Therefore, this paper aims to determine whether there is an asymmetric effect of FDI stock on the net average wages within the eight SEE (Southeastern European countries) economies. We used the nonlinear autoregressive distributed lag (NARDL) and as well on the annual data for the period from 2000 to 2018. We found that there is an asymmetric impact of FDI stock on the net average wages of Bulgaria and Slovenia. In addition, we found that the symmetric effect is stronger compared to the asymmetric effect that the FDI stock has on the net average wages of Bulgaria, N. Macedonia, Montenegro, Serbia and Slovenia. Finally, we found that productivity, employment and education significantly affect solely Slovenia's net average wages.
    Keywords: symmetry, asymmetry, wages, productivity, employment
    JEL: F21 F23 J3
    Date: 2021–03–12
  9. By: Niehues, Judith; Stockhausen, Maximilian
    Abstract: While global extreme poverty and global income inequality have decreased over the last decades before the Corona pandemic, inequality within many industrialized countries has increased. In Germany, net income inequality has increased after the German reunification, but since 2005 there has merely been no change in the distribution of net incomes. A similar picture can be drawn for the development of net wealth, which is generally more unequally distributed than net income. Since the end of the financial crisis, the level of net wealth inequality hast remained almost unchanged. In the last decade, both income and wealth have remarkably increased on average across all income and wealth groups. This development was accompanied by a rising share of labour income reaching levels of the 1990s again. Unfortunately, the Corona pandemic has put a temporary end to the positive income development, and it is not clear so far, what the long-run consequences of the Corona pandemic will be. In the short-run, it is especially a threat to the very poor in developing countries and it is a large challenge in the fight against global extreme poverty.
    Date: 2021
  10. By: Olivier Cardi; Romain Restout
    Abstract: Motivated by recent evidence pointing at an increase in the TFP following higher government spending, we explore how technology affects sectoral fiscal multipliers in open economy. Our estimates for eighteen OECD countries over 1970-2015 reveal that a government spending shock increases significantly the non-traded-goods-sector share of total hours worked while the response of the value added share of non-tradables (at constant prices) is muted at all horizon. The latter finding is puzzling as government spending shocks are strongly biased toward non-tradables. Our empirical findings show that the solution to this puzzle lies in technology which responds endogenously to the government spending shock. By offsetting the effect of the biasedness of the demand shock toward non-tradables, the rise in traded relative to non-traded TFP ensures that real GDP growth is uniformly distributed across sectors (i.e., in accordance with their value added share). Because a government spending shock also leads non-traded firms to bias technological change toward labor and traded firms to bias technological change toward capital, factor-augmenting technological change rationalizes the concentration of the rise in labor in the non-traded sector. Our quantitative analysis shows that a semi-small open economy model with tradables and non-tradables can reproduce the sectoral fiscal multipliers we document empirically once we let the decision on technology improvement vary across sectors and allow firms to change the mix of labor- and capital-augmenting efficiency over time.
    Keywords: Sector-biased government spending shocks, Endogenous technological change, Factor-augmenting efficiency, Open economy, Labor reallocation, CES production function, Labor income share
    JEL: E25 E62 F11 F41 O33
    Date: 2021
  11. By: Tomas Domonkos (Slovak Academy of Sciences & Comenius University in Bratislava, Slovakia); Boris Fisera (Slovak Academy of Sciences; Charles University, Prague); Maria Siranova (Slovak Academy of Sciences)
    Abstract: In this paper we investigate the effect of income inequality on the transmission of standard and unconventional monetary policy shocks to bank loan rates. We hypothesize that income inequality might encapsulate important characteristics of credit market demand. We use an interacted panel error correction model to examine a set of EA countries over the years 2008-2016. Our findings suggest that higher income inequality hinders the transmission of standard monetary policy to consumer loans and limits the use of unconventional monetary policy in the housing loans segment. Conversely, more unequal societies are characterized by stronger monetary transmission in the small firm loans segment.
    Keywords: interest-rate pass-through, interacted PMG, income inequality, standard monetary policy, unconventional monetary policy
    JEL: D31 E21 E52 E58
    Date: 2021–05

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