nep-eec New Economics Papers
on European Economics
Issue of 2021‒09‒20
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Using xtbreak to study the impacts of European Central Bank announcements on sovereign borrowing By Natalia Poiatti
  2. Optimal capital ratios for banks in the euro area By Beau Soederhuizen; Bert Kramer; Harro van Heuvelen; Rob Luginbuhl
  3. Fiscal policy measures adopted since the second wave of the health crisis: the euro area, the United States and the United Kingdom By Daniel Alonso; Alejandro Buesa; Carlos Moreno; Susana Párraga; Francesca Viani
  4. The reform of the european Union’s fiscal governance Framework in a new Macroeconomic environment By Mario Alloza; Javier Andrés; Pablo Burriel; Iván Kataryniuk; Javier J. Pérez; Juan Luis Vega
  5. Asymmetric monetary policy rules for the euro area and the US By Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
  6. The ideological shade of the constitutional order: public law and political economy in the Eurozone By Lokdam, Hjalte
  7. ECB euro liquidity lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
  8. The challenging estimation of trade elasticities: Tackling the inconclusive Eurozone evidence By Sascha Keil
  9. Sectorial holdings and stock prices: the household-bank nexus By Matías Lamas; David Martínez-Miera
  10. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  11. Asset encumbrance and bank risk: theory and first evidence from public disclosures in Europe By Albert Banal-Estañol; Enrique Benito; Dmitry Khametshin; Jianxing Wei
  12. The impact of heterogeneous unconventional monetary policies on the expectations of market crashes By Irma Alonso; Pedro Serrano; Antoni Vaello-Sebastià
  13. Impact of the COVID-19 crisis on Spanish firms’ financial vulnerability By Roberto Blanco; Sergio Mayordomo; Álvaro Menéndez; Maristela Mulino
  14. Does political polarization affect economic expectations?: Evidence from three decades of cabinet shifts in Europe By Luis Guirola
  15. Does the expansion of the service sector slow down productivity growth? An empirical assessment across eight developed economies By Adrián Rial
  16. The Impact of Monetary Conditions on Bank Lending to Households By Gyozo Gyongyosi; Steven Ongena; Ibolya Schindele
  17. Dating business cycles in France: A reference chronology. By Antonin Aviat; Frédérique Bec; Claude Diebolt; Catherine Doz; Denis Ferrand; Laurent Ferrara; Eric Heyer; Valérie Mignon; Pierre-Alain Pionnier

  1. By: Natalia Poiatti (Instituto de Relações Internacionais - USP)
    Abstract: This paper investigates how the announcements of the European Central Bank have impacted the cost of sovereign borrowing in central and peripheral European countries. Using the xtbreak command (Ditzen, Karavias and Westerlund, 2021) in Stata, we tested whether the variations of European sovereign spreads can be explained by economic fundamentals in a model that allows for two structural breaks: the first, when investors realized the fiscal sustainability of the EMU should be understood in a decentralized fashion, when the ECB announced it would not bail out Greece; the second, when the ECB realized the existence of the euro was in check and announced it would be able to financial assist the countries in financial trouble. We show that a model that allows for structural breaks after the ECB announcements can explain most of the variations in European sovereign spreads.
    Date: 2021–09–12
  2. By: Beau Soederhuizen (CPB Netherlands Bureau for Economic Policy Analysis); Bert Kramer (CPB Netherlands Bureau for Economic Policy Analysis); Harro van Heuvelen (CPB Netherlands Bureau for Economic Policy Analysis); Rob Luginbuhl (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Capital buffers help banks to absorb financial shocks. This reduces the risk of a banking crisis. However, on the other hand capital requirements for banks can also lead to social costs, as rising financing costs can lead to higher interest rates for customers. In this research we make an exploratory analysis of the costs and benefits of capital buffers for groups of European countries. In this study, we estimate the optimal level of capital for banks in the euro area. As far as we know, we are the first to investigate this for the euro area. The optimal level results from a trade-off between the social costs and benefits of capital requirements. Depending on technical assumptions, we find an optimal capital buffer between 15 and 30 percent. Despite this considerable spread, the estimated optimum is in all cases higher than the current minimum requirements of Basel III. We also find significant heterogeneity in the optimum between euro area Member States. For Member States with a more stable economy and a banking sector that can easily attract funding we find lower optimal capital ratios.
    JEL: C33 C54 E44 G15 G21
    Date: 2021–09
  3. By: Daniel Alonso (Banco de España); Alejandro Buesa (Banco de España); Carlos Moreno (Banco de España); Susana Párraga (Banco de España); Francesca Viani (Banco de España)
    Abstract: The persistence of the health crisis made it necessary for the main advanced economies to approve fresh fiscal measures or extend the terms of those that expired. This paper summarises the main actions taken since autumn 2020 in the main euro area economies (Germany, France, Italy and Spain), the United States and the United Kingdom, supplementing a previous paper (Cuadro-Sáez et al. (2020)) that focused on the measures approved in the first half of 2020. Also, the actions taken within the State aid temporary framework, adopted by the European Commission to provide direct support to the most affected firms and to limit trade and competition distortions in the internal market, are detailed. This set of actions has helped to mitigate the risks associated with an early withdrawal of fiscal stimulus. Notable among the new measures adopted is the additional support for firms in European countries, the direct assistance to households in the United States and the new employment support provisions in the United Kingdom.
    Keywords: health crisis, fiscal policy, State aid, grants, public loan guarantees, short-time work schemes
    JEL: E62 E65 H00 H81 J08
    Date: 2021–08
  4. By: Mario Alloza (Banco de España); Javier Andrés (Universidad de Valencia); Pablo Burriel (Banco de España); Iván Kataryniuk (Banco de España); Javier J. Pérez (Banco de España); Juan Luis Vega (Banco de España)
    Abstract: The main proposals for the reform of the European Union’s fiscal policy framework affect three blocks of issues: (i) simplifying the rules to make them more transparent and flexible; (ii) incorporating new supranational risk-sharing instruments into the Economic and Monetary Union, in particular to facilitate the absorption of severe shocks; and (iii) the fiscal aspects necessarily being accompanied by reforms at the national (structural reforms) and supranational (e.g. pressing forward with the capital markets union) levels. Irrespective of their political feasibility, these proposals do not easily fit the current macroeconomic environment, which is far removed from that of the 1990s: structural trends, such as digitalisation, globalisation, the climate transition and population ageing, affecting the natural rates of interest and potential growth are emerging or taking hold. Also, after the Great Moderation, we have entered a period of severe global shocks. In this paper we argue that this setting calls for a paradigm shift in how the fiscal policy framework is designed, as opposed to the incremental reform approach of recent decades. This should include improved governance of fiscal rules, which should be simpler, more functional and more credible than the current ones, but it should also go a step further and incorpórate supranational risk-sharing components enabling the smooth operation of the monetary and fiscal policy mix, from a wider euro area perspective. We provide quantitative elements to illustrate several challenges with a bearing on any reform process in the current setting: (i) medium-term debt anchors should be adapted to the medium and long-term interest rate and potential growth expectations; (ii) economies may remain subject to very severe shocks, meaning that fiscal space must be recovered in the medium term; and (iii) realistic mechanisms for absorbing existing fiscal imbalances must be implemented.
    Keywords: fiscal policy, fiscal governance, fiscal rules, public debt, public deficit, interest rates
    JEL: E62 E63 H60 H61 H62 H63
    Date: 2021–08
  5. By: Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
    Abstract: We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades. JEL Classification: E52, E58, E31, E32
    Keywords: Bayesian Estimation, effective lower bound, Inflation targeting, Markov-switching DSGE, optimal monetary policy
    Date: 2021–09
  6. By: Lokdam, Hjalte
    Abstract: This paper argues that the Economic and Monetary Union (EMU) created at Maastricht conformed to the neoliberal theory of interstate federalism in seeking to constitute structural conditions that circumscribed the effective exercise of activist public authority at both the Member State and European level. A response to a perceived ‘crisis of governability,’ it was designed to address the problem of excessive, and ineffective, governmental interventions in economic matters. By separating monetary and fiscal policy, the EMU ensured that no single public authority at the Member State or European level could control all the main levers of economic government. The Eurozone Crisis challenged this construct by emphasising the need for a coherent and effective exercise of public authority. The problem was thus no longer an excess of government but the absence of effective governmental authority for the EMU as a whole. Eurozone Crisis reforms introduced a greater scope for federal interventions in the domestic affairs of Member States and such reforms have elicited a new constitutional imaginary, expressed by European elites, that emphasises the need to generate ‘European sovereignty.’ This imaginary departs radically from the original EMU by foreseeing an omnicompetent European governmental apparatus that is able to intervene in, and control, economic developments across the Union in accordance with political objectives. The constitutional imaginary of the EMU can thus no longer meaningfully be called neoliberal. The early response to the COVID-19 Crisis, furthermore, highlights that the objectives pursued under the reformed EMU may depart from the set of policies traditionally associated with neoliberalism. What it should be called instead, however, remains unclear.
    Keywords: Economic and Monetary Union; Eurozone Crisis; neoliberalism; federalism; economic constitution; law and political economy
    JEL: F3 G3
    Date: 2021–01–13
  7. By: Silvia Albrizio (Banco de España); Iván Kataryniuk (Banco de España); Luis Molina (Banco de España); Jan Schäfer (CEMFI)
    Abstract: The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
    Keywords: liquidity facilities, central banks swap and repo lines, spillbacks
    JEL: E44 E58 F33 G15
    Date: 2021–08
  8. By: Sascha Keil (Chemnitz University of Technology)
    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 cointegration are 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: 2021–06
  9. By: Matías Lamas (Banco de España); David Martínez-Miera (UC3M and CEPR)
    Abstract: We analyze the evolution and price implications of aggregate sectorial holdings of stocks, using detailed information on the universe of publicly traded stocks in the euro area. We document that: i) households’ (HH) direct holdings represent a higher fraction of total ownership in domestic bank stocks than in non-financial corporation (NFC) stocks; ii) HH holdings of stocks increase (decrease) following a decline (increase) in the stock price, especially for domestic bank stocks; and iii) an increase in domestic HH holdings is followed by future (persistent) increases in the price of NFC stocks, but not for bank stocks. Moreover, during equity issuances, an increase in the share of domestic HH holdings is followed by a future (persistent) decrease in the stock price of bank stocks, but not for NFC stocks. Our results are consistent with HH being liquidity providers in the stock market, and at the same time subject to negative information asymmetries. We argue that this latter effect is more prevalent in domestic bank stocks than in NFC given the close relationships between HH and banks.
    Keywords: household ownership, stock prices, equity issuance, banks, non-financial corporations, liquidity provision, informational asymmetries
    JEL: G11 G14 G21 G50
    Date: 2021–08
  10. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as re ected in negative biases in in ation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to in ation targeting, wefind that make-up strategies such as price-level targeting and average-in ation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound.
    Keywords: Effective lower bound,monetary policy,asset purchases,forward guidance,make-up strategies
    JEL: E31 E32 E37 E52 E58
    Date: 2021
  11. By: Albert Banal-Estañol (Universitat Pompeu Fabra and Barcelona GSE); Enrique Benito (City, University of London); Dmitry Khametshin (Banco de España); Jianxing Wei (University of International Business and Economics)
    Abstract: We document that overcollateralisation of banks’ secured liabilities is positively associated with the risk premium on their unsecured funding. We rationalize this finding in a theoretical model in which costs of asset encumbrance increase collateral haircuts and the endogenous risk of a liquidity-driven bank run. We then test the model’s predictions using a novel dataset on asset encumbrance of the European banks. Our empirical analysis demonstrates that banks with more costly asset encumbrance have higher rates of overcollateralisation and rely less on secured debt. Consistent with theory, the effects are stronger for banks that are likely to face higher fire-sales discounts. This evidence acts in favour of the hypothesis that asset encumbrance increases bank risk, although this relationship is rather heterogeneous.
    Keywords: asset encumbrance, collateral, bank risk, credit default swaps
    JEL: G01 G21 G28
    Date: 2021–08
  12. By: Irma Alonso (Banco de España); Pedro Serrano (Universidad Carlos III de Madrid); Antoni Vaello-Sebastià (Universitat des Illes Balears)
    Abstract: This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.
    Keywords: unconventional monetary policy, risk-neutral density, tail risk, event study, SVAR
    JEL: E44 E58 G01 G10 G14
    Date: 2021–08
  13. By: Roberto Blanco (Banco de España); Sergio Mayordomo (Banco de España); Álvaro Menéndez (Banco de España); Maristela Mulino (Banco de España)
    Abstract: This paper analyses the impact of the COVID-19 crisis on the financial vulnerability of the Spanish corporate sector. The simulations conducted show that the crisis significantly increased firms’ liquidity needs in 2020, although the measures adopted by national and international authorities eased access to credit under favourable conditions, which substantially mitigated the short-term liquidity risks. However, the sharp fall in profitability levels, coupled with debt growth, appears to have resulted in a marked increase in the proportion of vulnerable firms (i.e. those with negative equity or high debt levels), which would be more pronounced among SMEs and the sectors hardest hit by the pandemic. The projections for the period 2021-2023 indicate a gradual decline in these percentages, in keeping with the expected recovery in activity. The results also suggest that, as a result of the crisis, the proportion of firms at risk of becoming non-viable on account of persistent losses through to 2023 would rise by between 2 pp and 3 pp, while the proportion of those that will remain viable but struggle to repay their debts out of their expected future earnings (overindebted firms) would rise by between 3 pp and 4.7 pp. In addition, the simulations show that the unsustainable debt of firms that have become overindebted but remain viable would stand between €9 billion and €18.6 billion, depending on the scenario considered, with the bulk of this amount accounted for by SMEs.
    Keywords: COVID-19, liquidity needs, profitability, indebtedness, credit, solvency, viability
    JEL: E51 E52 G21
    Date: 2021–08
  14. By: Luis Guirola (Banco de España)
    Abstract: Polarization can have economic effects if the hostility between political camps (i.e., affective polarization) shapes economic expectations. This paper shows that, in polarized contexts, agents disagree more over their expectations, and that partisan hostility – rather than differences in individual economic circumstances or beliefs about government policies – drives this disagreement. The causal impact of partisanship is identied from the discontinuity created by shifts in Prime Ministers’ cabinet. The study of 134 shifts between 1993 and 2019 in 27 European countries reveals that left and right supporters with identical circumstances and information sets update their expectations in opposite directions, evidencing a partisan bias. Its size ranges from 1.5 to 0 standard deviations across these cabinet shifts. The polarization of parties – measured by their left-right positions or their cooperation within coalitions – explains half this variation, and adverse economic conditions amplify it. The analysis points to affective polarization (rather than disagreements over the likely effects of government policy) as the driver of partisan bias. Partisan bias extends to variables unaffected by future policy and, even when parties have similar economic positions, bias increases withpolarization on non-economic dimensions. Overall, these findings suggest that political conflicts originally unrelated to economic matters could affect household behavior and policy debates and extend to the economic sphere.
    Keywords: expectations, polarization, political partisanship, motivated beliefs
    JEL: D14 D84 E71 F34 G01 H12
    Date: 2021–09
  15. By: Adrián Rial (Universidad Complutense de Madrid)
    Abstract: This study examines the impact of the expansion of the service sector on labour productivity growth in eight developed economies, reaching back to the late 1970s. To that end, I develop a shift-share decomposition formula that satisfactorily integrates both Kaldorian and Baumolian effects. Firstly, my decomposition does not assume that productivity growth at the industry level is exogenous but rather incorporates the Verdoorn coefficients that I previously estimated using system GMM. Secondly, consistent with the Baumolian framework, my decomposition includes the impact that arises from the cumulative changes that take place in terms of the nominal value added and employment shares. My results show that, on average, tertiarisation only slows down productivity growth in three economies, where labour shifts away from industries with increasing returns. However, the cumulative reallocation of employment and nominal output leads to a gradual decrease in the productivity growth rate in seven of the eight economies.
    Keywords: Structural change; Kaldor–Verdoorn Law; Baumol’s disease; Labour productivity growth; Shift-share analysis
    JEL: E24 L16 O47
    Date: 2021–05
  16. By: Gyozo Gyongyosi (Leibniz Institute for Financial Research SAFE; Kiel Institute for the World Economy); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Ibolya Schindele (BI Norwegian Business School; Central Bank of Hungary)
    Abstract: We study how monetary conditions change the supply by banks of mortgage credit to households. We exploit the widespread presence of foreign currency mortgages in Hungary and study this country`s comprehensive credit registry. Changes in monetary conditions not only affect the supply of credit in volume, but also in its currency and risk composition. Hence, we establish a “bank‐lending‐to‐households” channel of monetary policy that is heterogeneous. While the availability of foreign currency mortgages weakens the domestic bank‐lending channel overall, weakly capitalized domestic banks relying on swap transactions for their foreign currency lending are more sensitive to changes in monetary conditions.
    Keywords: Bank balance‐sheet channel, household lending, monetary policy, foreign currency lending.
    JEL: E51 F3 G21
    Date: 2021–09
  17. By: Antonin Aviat; Frédérique Bec; Claude Diebolt; Catherine Doz; Denis Ferrand; Laurent Ferrara; Eric Heyer; Valérie Mignon; Pierre-Alain Pionnier
    Abstract: This paper proposes a reference quarterly chronology for periods of expansion and recession in France since 1970, carried out by the Dating Committee of the French Economic Association (AFSE). The methodology used is based on two pillars: (i) econometric estimations from various key data to identify candidate periods, and (ii) a narrative approach that describes the economic background that prevailed at that time to finalize the dating chronology. Starting from 1970, the Committee has identified four economic recession periods: the two oil shocks 1974-75 and 1980, the investment cycle of 1992-93, and the Great Recession 2008-09 spawned by the Global Financial Crisis. The peak before the Covid-19 recession has been identified in the last quarter of 2019.
    Keywords: Business cycles, French economy, Dating, Narrative approach, Econometric modeling.
    JEL: E32 E37 C24 N14
    Date: 2021

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