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on European Economics |
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Issue of 2021‒08‒16
fourteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Blesse, Sebastian; Bordignon, Massimo; Boyer, Pierre C.; Carapella, Piergiorgio; Heinemann, Friedrich; Janeba, Eckhard; Raj, Anasuya |
| Abstract: | Using data from a unique survey of members of parliaments in France, Germany and Italy in 2018, we estimate the effects of three dimensions on EU and euro area fiscal reform preferences: nationality, political ideology, and populism. We predict and confirm that a German populist party on the right is most opposed to a more developed European fiscal union, while a non-populist politician on the political left in France or Italy is most integrationist. Furthermore, the relative position of French and Italian policymakers is issue dependent and the Left dimension outweighs the German dimension in two out of seven reform issues. Finally, populism intensifies the polarizing impact of national interests. |
| Keywords: | Euro Area Reforms,National Parliament,Survey,European Integration,Populist Parties,Next Generation EU |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21055&r= |
| By: | Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U. |
| Abstract: | The European Central Bank (ECB) is currently conducting a review of its monetary policy strategy. The last formal review took place in 2003. Now the focus is on the extent to which this strategy has contributed in recent years to fulfill the mandate set out in the Treaties of the European Union and whether certain elements need to be adjusted. Against this background, the Kronberger Kreis, the academic advisory board of the Stiftung Marktwirtschaft (Market Economy Foundation), examines whether the ECB's monetary policy strategy still holds promise for success, whether its mandate should be reinterpreted and how the use of specific instruments should be assessed. In its analysis, the Kronberger Kreis draws on the experience of the financial crisis, the euro debt crisis and the coronavirus crisis and argues that greater attention should be paid to the side effects and proportionality of monetary policy measures. The central banks of the Eurosystem are now the largest creditors of the member states. Fiscal dominance of monetary policy should be avoided. The ECB's hierarchical mandate prioritizing price stability should not be called into question. The envisaged numerical target for consumer price inflation of below, but close to, two percent remains reasonable. However, the ECB should also consider other measures of inflation in its decisions and their communication. In addition, the ECB should rely more strongly on quantitative benchmarks (interest rate rules, money supply growth). The transparency of monetary policy could be significantly increased, for example, by publishing surveys and forecasts of the ECB's Governing Council. In principle, all measures must take into account the need to strengthen the independence of the ECB and the stability of the monetary union. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:smwkro:67e&r= |
| By: | Adam, Klaus; Gautier, Erwan; Santoro, Sergio; Weber, Henning |
| Abstract: | Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal inflation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms. JEL Classification: E31, E52 |
| Keywords: | micro price trends, optimal inflation target, welfare |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212575&r= |
| By: | Tommaso Perez (Bank of Italy); Francesco Potente (Bank of Italy); Andrea Carboni (Bank of Italy); Alberto Di Iorio (Bank of Italy); Jacopo Raponi (Bank of Italy) |
| Abstract: | Level 2 (L2) and Level 3 (L3) assets and liabilities represent a substantial portion of European banks’ balance sheets, and valuing them is extremely difficult, since no liquid market prices are available. This paper relies on a large panel of euro-area banks between 2014 and 2019, and two different econometric frameworks, in order to estimate the relationship between the holdings of selected instruments (L2, L3 and Non-Performing Loans, NPLs) and banks’ key performance and risk profile metrics, namely Credit Default Swaps (CDSs), Price-to-Book (PtB) ratios and Z-scores. It finds that larger holdings of L2 tend to be associated with higher CDSs, at least in the short run, while larger amounts of NPLs and L3 tend to characterize banks with higher CDSs, lower PtB ratios and worse Z-scores, other things being equal. |
| Keywords: | fair value accounting, level 2 instruments, level 3 instruments, non-performing loans, prudential regulation, panel data models |
| JEL: | G21 G28 C33 M41 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_633_21&r= |
| By: | Darracq Pariès, Matthieu; Kok Sørensen, Christoffer; Rottner, Matthias |
| Abstract: | Could a monetary policy loosening in a low interest rate environment have unintended recessionary effects? Using a non-linear macroeconomic model fitted to the euro area economy, we show that the effectiveness of monetary policy can decline in negative territory until it reaches a turning point, where monetary policy becomes contractionary. The framework demonstrates that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector. The possibility of the reversal interest rate gives rise to a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, substantially mitigates the probability of encountering the reversal rate and increases the effectiveness of negative interest rate policies. This new motive emphasizes the strategic complementarities between monetary policy and macroprudential policy. |
| Keywords: | Reversal Interest Rate,Negative Interest Rates,MacroprudentialPolicy,Monetary Policy,ZLB |
| JEL: | E32 E44 E52 E58 G21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:242021&r= |
| By: | Parle, Conor (Central Bank of Ireland) |
| Abstract: | Using methods from natural language processing I create two measures of the monetary policy tilt of the ECB entitled the “Hawk-Dove Indices”, that outline the beliefs of the ECB on the current state of the economy and the outlook for growth and inflation. These measures closely track interest rate expectations over the tightening and loosening cycle, and can provide a useful measure of monetary policy tilt at zero lower bound episodes and contains information about the state of the economy. I exploit the time lag between decision announcements and the ECB’s monetary policy press conference to assess the immediate financial market impact of changes in communication within the press conference, free from the effects of the shock from the monetary policy decision. Consistent with the literature on the information channel of monetary policy, I find a non-negligible positive (negative) effect on stock prices of a more hawkish (dovish) tone in the press conference, indicating that the ECB reveals “private information” during these press conferences, and that market participants internalise this as good (bad) news regarding the future state of the economy, rather than internalising a future potential increase (decrease) in interest rates. This effect is stronger prior to the introduction of formal forward guidance, suggesting that since then ECB communication has been less surprising to markets in recent times. |
| Keywords: | Monetary policy, communication, machine learning, natural language processing, event study, information effects |
| JEL: | E52 E58 C55 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:4/rt/21&r= |
| By: | Fernandes, Cecilia Melo |
| Abstract: | This paper investigates the impact of ECB communication of its assessment of the economic outlook on ex-ante inflation uncertainty and sheds light on how central bank information shocks operate. The paper finds that ECB communication of new outlook information not only reduces professional forecasters’ disagreement (i.e., the cross-sectional dispersion of their average point forecasts of inflation) but also makes forecasters less uncertain about their own beliefs, thus reducing ex-ante average individual uncertainty. By combining and exploiting these types of ex-ante inflation uncertainty, results suggest that central bank information acts as a “coordination device” able to influence opinions and actions. Most importantly, it generates a “stabilizer effect” by substantially decreasing the dispersion among the inflation point forecasts, which converge towards their unconditional aggregate mean. The results of this paper not only help to explain the impact of new central bank information, but they are also useful for policymakers to define a communication strategy that attenuates ex-ante inflation uncertainty in the most effective way. JEL Classification: D83, E52, E58, E65, G14 |
| Keywords: | central bank communication, euro area, ex-ante inflation uncertainty, inflation expectations |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212582&r= |
| By: | Jens Klose (THM Business School Giessen) |
| Abstract: | This article develops the first granular database on daily real-time inflation rates and output. Four different European forecast sources and three computation methods are applied to calculate those daily data. These are used in two types of monetary policy rules, for three different interest rates as the dependent variable. The results indicate that the main source of differences in the forecast horizons and response coeffcients is not the data sources or the computation method but, rather, the monetary policy rule applied and the interest rate used. That is, the results differ if unconventional monetary policies are considered. Moreover, the results tend to be time-varying; that is, sudden shifts in the optimal forecast horizon can be identified, leading to substantially altered policy rules. |
| Keywords: | Monetary policy rules, ECB, medium-term orientation |
| JEL: | E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202129&r= |
| By: | Frohm, Erik |
| Abstract: | Tight labour markets are usually accompanied by mounting wage pressures. Yet, in the past decade, wage growth has remained subdued despite the appearance of widespread labour shortages. This paper re-examines labour market conditions since 2007 through the lens of a novel indicator, relative labour shortages (RLS), based on data from a large representative business survey in Sweden. Four main results emerge from the analysis: (1), the time-series average of RLS suggested much weaker labour market conditions during the 2013–2019 recovery from the Great Recession and during the Covid-19 pandemic in 2020 than qualitative surveys or the vacancy-unemployment ratio. (2), the reason is that RLS contains a time-varying intensive margin of labour shortages not recorded in most surveys, which has been trending downwards since the Great Recession. (3), fixed-effects regressions with several aggregate-, sector, region and establishment-level controls confirm that RLS is strongly and positively correlated with annual wage growth at the establishment level. (4), sector-level wage Phillips curves show that the subdued level of RLS can help explain the sluggish wage growth in Sweden since the Great Recession. JEL Classification: C80, E31, E60, J23, J31 |
| Keywords: | labour markets, survey data, wage inflation |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212576&r= |
| By: | Mahmoud Fatouh (Bank of England); Simone Giansante (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We investigate how the interaction of the Brexit and COVID waves of the Bank of England’s quantitative easing with the leverage ratio capital requirements or government COVID lending support schemes affected bank business lending. We find that the former QE programme was particularly successful in increasing lending to nonfinancial businesses, except for QE-banks subject to the UK leverage ratio, suggesting that the latter ratio incentivized QE-banks to lend to business anyway. The government schemes helped expand lending especially to SMEs post QE COVID, indicating that complementing QE with other credit easing programmes can improve its impact on lending to the real economy. During COVID-stress, changes to the UK leverage ratio supported better market-making in securities markets, and additional QE liquidity boosted stronger repo market intermediation. |
| Keywords: | Monetary policy, quantitative easing, bank lending, COVID-19 |
| JEL: | E51 G21 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2154&r= |
| By: | Gündüz, Yalin; Pelizzon, Loriana; Schneider, Michael; Subrahmanyam, Marti G. |
| Abstract: | We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full posttrade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a subset of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities. |
| Keywords: | Corporate Bonds,WpHG,Liquidity,Transparency,OTC markets |
| JEL: | G15 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212021&r= |
| By: | Guerino Ardizzi (Banca d'Italia); Diego Scalise (Banca d'Italia); Gabriele Sene (Banca d'Italia) |
| Abstract: | We study the relationship between interchange fees and card transactions in a large panel of countries and assess the impact of the Interchange Fee Regulation, introduced in 2015 in the European Union, on card usage. For our purposes, we take advantage of a newly assembled dataset covering almost 50 countries in the last decade and carry out two econometric exercises. Firstly, we estimate the relationship between card transactions per capita and average interchange fees by means of a panel estimator including both country and year fixed-effects, thus exploiting the broad heterogeneity across countries over time. Our results point toward a negative and significant relationship between the number and the growth rate of card-based transactions per capita and the level of interchange fees. Secondly, we adopt a difference-in-difference approach and compare the change in card payments in EU member countries (the treated group), before and after the implementation of the Interchange Fee Regulation in 2015, with that observed in a group of comparable countries (control group), which did not experience any change in interchange fee setting regulations. We find a strong and significant one-off impact of the Regulation immediately after its introduction and considerable propagation effects in the following years. Overall, we support the view that policy actions aiming at containing, but not eliminating, interchange fees can significantly contribute to the diffusion of electronic payments. |
| Keywords: | Interchange fees, Regulation, card payments |
| JEL: | E42 G2 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_628_21&r= |
| By: | Baer, Moritz; Campiglio, Emanuele; Deyris, Jérôme |
| Abstract: | This article studies how institutional dynamics might affect the implementation of climate-related financial policies. First, we propose a three-dimensional framework to distinguish: i) motives for policy implementation (prudential or promotional); ii) policy instruments (informational, incentive or coercive); and iii) implementing authorities (political or delegated). Second, we use this framework to show how sustainable financial interventions in certain jurisdictions - most notably, Europe - rely solely on informational policies to achieve both promotional and prudential objectives. Policymakers in other jurisdictions - e.g., China - also implement incentive or coercive financial policies to achieve promotional objectives. Third, we identify two main institutional explanations for this European ‘promotional gap’: i) limited control of political authorities on financial dynamics; and ii) strong powers and independence of delegated authorities. This governance configuration leads to an institutional deadlock in which only measures fitting with both political and delegated authorities’ objectives can be implemented. Finally, we discuss the scenarios that might originate from the current institutional setting. We identify three possible evolutionary paths: i) a drift towards a green financial technocracy; ii) a re-politicization of delegated authorities; iii) a move towards fiscal-monetary coordination. |
| Keywords: | sustainable finance; climate change; low-carbon transition; central banks; financial supervisors; delegation; Centre for Climate Change Economics and Policy; 853050 |
| JEL: | E44 E58 G28 G18 G14 |
| Date: | 2021–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:111492&r= |
| By: | Martin Biewen; Miriam Sturm |
| Abstract: | After an economically tough start into the new millennium, Germany experienced an unprecedented employment boom after 2005 only stopped by the COVID-19 pandemic. Persistently high levels of inequality despite a booming labour market and drastically falling unemployment rates constituted a puzzle, suggesting either that the German job miracle mainly benefitted individuals in the mid- or high-income range or that other developments offset the effects of the drastically improved labour market conditions. The present paper solves this puzzle by breaking down the observed changes in the distribution of disposable incomes between 2005/06 and 2015/16 into the contributions of eight different factors, one of them being the employment boom. Our results suggest that, while the latter did have an equalising impact, it was partially offseet by the disequalising impact of other factors and substantially dampened by the tax and transfer system. Our results point to a strong role of the German tax and transfer system as a distributional stabilizer implying that, if the COVID-19 shock were to persistently reverse all the employment gains that occurred during the boom, this would only have a moderately disequalising effect on the distribution of net incomes. |
| Keywords: | income distribution, employment, social insurance, labour market reform |
| JEL: | C14 D31 I30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp1139&r= |