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on European Economics |
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Issue of 2021‒07‒12
sixteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Havlik, Annika; Heinemann, Friedrich; Helbig, Samuel; Nover, Justus |
| Abstract: | We use event study regressions to compare the impact of EU monetary versus fiscal policy announcements on government bond spreads of ten euro member countries. Our motivation is to evaluate which of the two players - the ECB or the EU fiscal level - has been more crucial for the stabilization of euro sovereign bond markets in the crisis environment of the pandemic. This question is of substantial relevance to assess potential risks for the effective independence of the ECB in the future. Our key result is that the pandemic monetary emergency measures through the PEPP have been highly effective, whereas fiscal rescue announcements had much less impact. We document a smaller and statistically significant spread-reducing effect only for the announcement of the 'Next Generation EU' program. In contrast, a temporary relaxation of European fiscal rules through the activation of the emergency-escape clause under the Stability and Growth Pact is associated with rising spreads. Our results have an unpleasant implication for the debate on a looming fiscal dominance of the ECB in the presence of rising public debt levels as so far, the stabilization of sovereign bond markets appears to hinge largely on the Eurosystem's role as a massive buyer of high-debt countries' sovereign bonds. |
| Keywords: | Sovereign spreads,monetary policy,fiscal policy,fiscal dominance,event analysis |
| JEL: | E63 H12 H63 H81 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21050&r= |
| By: | Léonore Raguideau-Hannotin |
| Abstract: | This paper investigates the monetary autonomy of Central Eastern and South Eastern European countries with the Euro area. These countries are European Union Member States that have not adopted yet the Euro single currency. Despite high degree of convergence as measured by Maastricht criteria, four of them do no plan to enter the Euro area soon. We therefore assess monetary autonomy of these countries over the long run through the use of a multivariate cointegration methodology with structural breaks (Johansen et al., 2000). This methodology allows us to capture the multidimensional aspects of monetary autonomy in the context of nominal convergence in the Economic and Monetary Union, by including both domestic and Euro area variables into the system (policy rates, infation rates, exchange rate). It also enables us to exploit all information contained in the macroeconomic series of these countries, for which broken economic history translates into non-stationary time series with breaks. Our empirical results suggest that modelling structural breaks changes the number and/or nature of cointegrating relations between our variables compared to the standard error correction model without breaks. With this modelling, we find monetary policy spillover from the Euro area to Bulgaria, the Czech Republic, Hungary and Romania. The inclusion of Euro area inflation to our baseline model enriches the cointegrating relations for the Czech Republic and Bulgaria. Poland is found to be the most monetary-independent country of ourstudy across the various models estimated. On the other hand, Romania's monetary interdependence with Euro area is better modelled without taking into account any structural break. |
| Keywords: | Central Eastern and South Eastern European countries, Economic and Monetary Union, European Union, nominal convergence, monetary autonomy, structural breaks, cointegration, integration, CESEE, EU, EMU |
| JEL: | F31 F36 F42 P33 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-20&r= |
| By: | Christophe Blot (Sciences Po – OFCE & Université Paris Ouest Nanterre - EconomiX); Fabien Labondance (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France) |
| Abstract: | We investigate whether monetary policy influences the retail interest rates in the Euro Area when the policy rate reaches the effective lower bound. We estimate a panel-Error Correction Model that accounts for potential heterogeneities in the transmission of monetary policy. The analysis disentangles alternative non-standard measures implemented by the ECB. We find that unconventional measures have influenced banking interest rates beyond the pass-through of the current and expected policy rate. These effects are driven by liquidity provisions in core countries and by covered bond purchase programmes in peripheral ones. |
| Keywords: | Unconventional measures, retail interest rate, Heterogeneous panel |
| JEL: | E43 E52 E58 G21 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:crb:wpaper:2021-03&r= |
| By: | Stanisławska, Ewa; Paloviita, Maritta |
| Abstract: | Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in perceptions of current inflation. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy. |
| JEL: | D12 D84 E31 E58 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2021_010&r= |
| By: | Rémi Odry; Roman Mestre |
| Abstract: | In this paper, we investigate the role of the monetary policy adopted by the European Central Bank (ECB) in business cycle synchronization in Europe between 2000 and 2018. To this aim, we employ wavelets to compute the pairwise business cycle correlations (BCC) at different frequencies and use Generalized Method of Moments (GMM) dynamic estimators in panel to explain their variations. Our results show that monetary policy has a long-term impact on the synchronization of business cycles in Europe. More specifically, we find that the adopted unconventional monetary policies impact positively the synchronization. Finally, we show that fiscal policies can be used as tools to fix country-specific movements of business cycles. |
| Keywords: | Business cycle synchronization, Monetary policy, EMU, Europe |
| JEL: | E52 E58 E37 C01 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-19&r= |
| By: | Guido Bulligan (Bank of Italy); Francesco Corsello (Bank of Italy); Stefano Neri (Bank of Italy); Alex Tagliabracci (Bank of Italy) |
| Abstract: | This paper provides evidence of de-anchoring of long-term inflation expectations in the euro area based on both time series and panel methods and data from the ECB Survey of Professional Forecasters. Long-term inflation expectations recorded two sharp and permanent declines: the first after the 2013 disinflation, the second in early 2019. Long-term inflation expectations also started reacting to short-term developments in inflation after the 2013 disinflation. Long-term growth expectations have declined continuously since the early 2000s. Looking forward, the increased likelihood of a low growth and low inflation environment may reduce the monetary policy space. The positive correlation between long-term real GDP growth and inflation expectations suggests that forecasters view future macroeconomic developments as driven mainly by demand-side shocks. Under these circumstances, the risk of a further de-anchoring of long-term inflation expectations remains high. |
| Keywords: | survey data, panel data, professional forecasters, inflation expectations, monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_624_21&r= |
| By: | Ondrej Schneider (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper examines migration trends in the European Union since the enlargements of 2004-2007, which brought 100 million citizens of eleven Central and Eastern European countries into the EU. We examine country- and regional-level data on migration trends and show how European integration depleted the labor force in new member countries. Several of them lost 10% of their population since 2006, most of it via negative net migration. In 2019, 18% of Romanians, 14% of Lithuanians, 13% Croats, and Bulgarians lived in another EU country. The quantitative analysis shows that migration contributed positively to regional convergence, as every percentage point of net migration increased GDP per capita by roughly 0.01% and reduced unemployment by 0.1-0.2 percentage points. Further analysis will be needed to disentangle aggregate migration effects to quantify its impact on regions that lose their population via migration. |
| Keywords: | migration, labor markets, convergence, European Union |
| JEL: | F22 F66 J61 O15 R11 R23 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2021_23&r= |
| By: | Marina-Eliza Spaliara; Serafeim Tsoukas; Paul Lavery |
| Abstract: | Using firm-level data from 16 euro-area countries over 2008-2014, we investigate how the growth and investment of bank-affiliated private equity-backed companies evolve after the European Banking Authority (EBA) increases capital requirements for their parent banks. We find that portfolio companies connected to affected banks reduce their investment, asset growth, and employment growth following the capital exercise. We further show that the effect is stronger for companies likely to face financial constraints. Finally, the findings indicate that the negative effect of the capital exercise is muted when the private equity sponsor is more experienced. |
| Keywords: | Private equity buyouts; bank capital requirements; financial constraints; company performance |
| JEL: | G32 G34 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2021_11&r= |
| By: | Gardenier, Julius; Lac, Visieu; Ashfaq, Muhammad |
| Abstract: | This discussion paper aims at describing the risk-adjusted return of European sustainable and conventional investment portfolios and comparing them to determine whether sustainable investment portfolios generate superior risk-adjusted returns. The paper is based on the bachelor thesis of Julius Gardenier. In fulfilling this aim, we actively construct sustainable positively screenedand best-in-class portfolios using the Sustainalytics ESG risk rating with the help of modern portfolio theory. In a second step, the Sharpe Ratios of these portfolios are compared with those of the Euro Stoxx 50, as a proxy for a conventional portfolio, for the time horizon between 2005 and 2019 thatis divided into ten instances on whose SharpeRatios paired sample t-tests are applied. Results show a statistically significant higher mean Sharpe Ratio for both types of sustainable portfolios when compared to the Euro Stoxx 50 for the periodunder investigation. Additionally, it was found that best-in-class portfolios yielded higher mean Sharpe Ratios. We conclude that, under reference to the paper's limitations, sustainable investments yielded superior risk-adjusted returns when compared to the conventional investment portfolio. Furthermore, the paper's findings identify recommendations for future research and may contribute to the growing body of academic literature in the field of sustainable finance. |
| Keywords: | Sustainable finance,modern portfolio theory,Sharpe Ratio,ESG risk rating |
| JEL: | G11 Q56 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iubhbm:72021&r= |
| By: | Valerio Paolo Vacca (Banca d'Italia); Fabian Bichlmeier (Deutsche Bundesbank); Paolo Biraschi (Single Resolution Board); Natalie Boschi (Bafin); Antonio J. Bravo Alvarez (FROB Autoridad de Resolución Ejecutiva); Luciano Di Primio (Banca d'Italia); André Ebner (Deutsche Bundesbank); Silvia Hoeretzeder (Oesterreichische Nationalbank); Elisa Llorente Ballesteros (Banco de España); Claudia Miani (Single Resolution Board); Giacomo Ricci (Banca d'Italia); Raffaele Santioni (Banca d'Italia); Stefan Schellerer (Oesterreichische Nationalbank); Hanna Westman (Rahoitusvakausvirasto) |
| Abstract: | We present an analytical framework for quantifying the potential impact on the real economy stemming from a bank’s sudden liquidation, focusing on the consequences that arise when a credit institution interrupts its lending activities. In a first step, we quantify the potential credit shortfall faced by firms and households due to the sudden liquidation of a bank. In a second step, we estimate the impact of a firm’s credit shortfall on real outcomes via both a Factor-Augmented Vector Autoregression (FAVAR) model and a micro-econometric model. Appropriate reference values (benchmarks) are provided to assess the estimated outcomes. The illustrative results show that this harmonized approach is feasible across the Banking Union and it is applicable to banks of heterogeneous size and significance. Particularly in the case of the medium-sized banks, the implementation of this common analytical framework could provide useful insights to reduce the uncertainty about whether resolution is in the public interest, i.e. to what extent the failure of an institution would endanger financial stability. |
| Keywords: | bank resolution, bank insolvency, crisis management, public interest assessment |
| JEL: | E58 G01 G21 G28 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_626_21&r= |
| By: | Stavros Zenios |
| Abstract: | The author is a Professor at the University of Cyprus and Member of the Cyprus Academy of Sciences, Letters and Arts. Thanks are due to Roel Beetsma, Zsolt Darvas, Maria Demertzis, Demetris Georghiades, Barret Kupelian, Alexander Lehman, André Sapir, Rolf Strauch, Guntram Wolff, Georg Zachman, Theodoros Zachariades and participants in a European Stability Mechanism Seminar on Debt Sustainability Analysis (April 2021) for comments. Andrea Consiglio carried out the debt sustainability... |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:43839&r= |
| By: | Laurence Jacquet; Stéphane Robin (CY Cergy Paris Université, THEMA) |
| Abstract: | We examine the R&D, innovation and productivity effects of R&D tax credits (R&DTC) in 8 EU countries, in the context of a proposed EU-wide "super deduction" on R&D expenditures. Our econometric analysis, performed on industry-level panel data, shows that past R&D feeds current R&D, whether it is conducted under an R&DTC or not. Our estimate of additionality during an R&DTC phase is generally close to 1. R&D intensity also affects patenting intensity positively in Belgium, Czech Republic, France, Spain and the UK, but this relationship is R&DTC-related only in Belgium, France and Spain. Only in France and the UK do we observe a full (yet fragile) R&D – innovation – productivity relationship. In the UK, this relationship is not affected by the R&DTC scheme. In France, a 1% increase in R&D conducted under the second to fourth phases of R&DTC (1999-2017) entails a cumulated 0.37% increase in patenting intensity, which translates to a 0.16% increase in productivity. The main policy implication of these results is that a "super-deduction" on R&D is likely to help the EU reach its "R&D at 3% of GDP" objective, but only time will tell how generous it must be to really spur innovation and productivity. |
| Keywords: | R&D Tax Credits, Public Support to R&D, Science and Technology Policy, European Policy |
| JEL: | O38 H25 H54 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-14&r= |
| By: | Giacomo Caracciolo (Bank of Italy); Salvatore Lo Bello (Bank of Italy); Dario Pellegrino (Bank of Italy) |
| Abstract: | Relative to past pandemics, the mortality effects of Covid-19 on the demographic structure are likely smaller. However, the behavioural effects of the economic crisis on the decisions to have children and to migrate may be substantial. The literature on the relationship between the economic cycle and demographics uncovers the potential of the unemployment rate to predict fertility and migrations. Based on this evidence, we estimate the elasticity of the number of births per woman of child-bearing age and of the net migration rate to the unemployment rate in Italy, considering the 1980-2019 period. Accordingly, we forecast the impact of the pandemic on the birth rate and on migration flows in 2020-23, and we build alternative scenarios for the following years (2024-2065). Lastly, we examine the consequences of the same phenomena on the demographic structure and on GDP and on GDP per capita. Given the scenarios outlined in our work and in the absence of effective policies to support economic growth, the crisis may exacerbate the process of population ageing indicated by Istat projections, with significant repercussions for output. |
| Keywords: | demographic trends, macroeconomic effects, and forecasts, fertility, family planning, economic history (demography, comparative), population ageing. |
| JEL: | J11 J13 N30 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_622_21&r= |
| By: | Marco Bottone (Bank of Italy); Alex Tagliabracci (Bank of Italy); Giordano Zevi (Bank of Italy) |
| Abstract: | In this paper we use a unique dataset to study how awareness of the formulation of the ECB’s inflation aim, defined as "below, but close to, 2%", shapes the inflation expectations of a representative set of Italian firms. In particular, we show that in the period under consideration such awareness raises firms’ inflation expectations by about 25 basis points at all time horizons with respect to the control group. In the recent period of low inflation, this finding implies that being informed about the ECB’s aim stabilizes firms’ inflation expectations at higher levels, closer to its target. However, this occurs at the expense of a lower correspondence of such expectations with ex-post realized inflation, especially on short-term horizons. When explicitly asked, the majority of firms indicates the ECB inflation aim as being between 1.0% and 1.5%, while just a few of them see it as between 1.7% and 1.9%. This result might be related to the difficulty of interpreting the “below, but close to†formulation, and suggests that a precise definition of the ECB’s inflation aim could be easier to communicate and more likely to be properly understood. |
| Keywords: | ECB’s inflation aim, firms’ inflation expectations, monetary policy, information treatments, survey data |
| JEL: | D22 E31 E52 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_621_21&r= |
| By: | Maria Ludovica Drudi (Bank of Italy); Stefano Nobili (Bank of Italy) |
| Abstract: | The paper develops an early warning system to identify banks that could face liquidity crises. To obtain a robust system for measuring banks’ liquidity vulnerabilities, we compare the predictive performance of three models – logistic LASSO, random forest and Extreme Gradient Boosting – and of their combination. Using a comprehensive dataset of liquidity crisis events between December 2014 and January 2020, our early warning models’ signals are calibrated according to the policymaker's preferences between type I and II errors. Unlike most of the literature, which focuses on default risk and typically proposes a forecast horizon ranging from 4 to 6 quarters, we analyse liquidity risk and we consider a 3-month forecast horizon. The key finding is that combining different estimation procedures improves model performance and yields accurate out-of-sample predictions. The results show that the combined models achieve an extremely low percentage of false negatives, lower than the values usually reported in the literature, while at the same time limiting the number of false positives. |
| Keywords: | banking crisis, early warning models, liquidity risk, lender of last resort, machine learning |
| JEL: | C52 C53 G21 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1337_21&r= |
| By: | Gennaro Catapano (Bank of Italy); Francesco Franceschi (Bank of Italy); Valentina Michelangeli (Bank of Italy); Michele Loberto (Bank of Italy) |
| Abstract: | In this paper, we extend and calibrate with Italian data the Agent-based model of the real estate sector described in Baptista et al., 2016. We design a novel calibration methodology that is built on a multivariate moment-based measure and a set of three search algorithms: a low discrepancy series, a machine learning surrogate and a genetic algorithm. The calibrated and validated model is then used to evaluate the effects of three hypothetical borrower-based macroprudential policies: an 80 per cent loan-to-value cap, a 30 per cent cap on the loan-service-to-income ratio and a combination of both policies. We find that, within our framework, these policy interventions tend to slow down the credit cycle and reduce the probability of defaults on mortgages. However, with respect to the Italian housing market, we only find very small effects over a five-year horizon on both property prices and mortgage defaults. This latter result is consistent with the view that the Italian household sector is financially sound. Finally, we find that restrictive policies lead to a shift in demand toward lower quality dwellings. |
| Keywords: | agent based model, housing market, macroprudential policy |
| JEL: | D1 D31 E58 R2 R21 R31 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1338_21&r= |