nep-eec New Economics Papers
on European Economics
Issue of 2021‒10‒18
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sudden stops and asset purchase programmes in the euro area By Fabiani, Josefina; Fidora, Michael; Setzer, Ralph; Westphal, Andreas; Zorell, Nico
  2. Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area By Nikolay Hristov; Oliver Hülsewig; Benedikt Kolb
  3. The impact of the euro on trade: two decades into monetary union By Gunnella, Vanessa; Lebastard, Laura; Lopez-Garcia, Paloma; Serafini, Roberta; Mattioli, Alessandro Zona
  4. Sovereign bond market spillovers from crisis-time developments in Greece By Daragh Clancy; Carmine Gabriele; Diana Zigraiova
  5. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Garcia, Pablo; Jacquinot, Pascal; Lenarčič, Črt; Lozej, Matija; Mavromatis, Kostas
  6. Liquidity and tail-risk interdependencies in the euro area sovereign bond market By Daragh Clancy; Peter G. Dunne; Pasquale Filiani
  7. Small firms and domestic bank dependence in Europe’s Great Recession By Mathias Hoffmann; Egor Maslov; Bent E. Sørensen
  8. Investment funds, risk-taking, and monetary policy in the euro area By Giuzio, Margherita; Kaufmann, Christoph; Ryan, Ellen; Cappiello, Lorenzo
  9. A mixed frequency BVAR for the euro area labour market By Consolo, Agostino; Foroni, Claudia; Hernández, Catalina Martínez
  10. Market finance as a spare tyre? Corporate investment and access to bank credit in Europe By Andersson, Malin; Maurin, Laurent; Rusinova, Desislava
  11. Do inflation expectations improve model-based inflation forecasts? By Bańbura, Marta; Leiva-Leon, Danilo; Menz, Jan-Oliver
  12. Quantifying risks to sovereign market access: Methods and challenges By Diana Žigraiová; Aitor Erce; Xu Jiang
  13. The COVID-19 consumption game-changer: evidence from a large-scale multi-country survey By Hodbod, Alexander; Hommes, Cars; Huber, Stefanie J.; Salle, Isabelle
  14. The dynamic relationship between the sovereign CDS market and the Eurozone sovereign bond market (classified by maturity): Contagion or Spillovers? By amri amamou, souhir; hellara, slaheddine
  15. The time-varying evolution of inflation risks By Korobilis, Dimitris; Landau, Bettina; Musso, Alberto; Phella, Anthoulla
  16. Unconventional monetary policy, funding expectations, and firm decisions By Ferrando, Annalisa; Popov, Alexander; Udell, Gregory F.
  17. E-QUEST – A Multi-Region Sectoral Dynamic General Equilibrium Model with Energy Model Description and Applications to Reach the EU Climate Targets By Janos Varga; Werner Roeger; Jan in ’t Veld

  1. By: Fabiani, Josefina; Fidora, Michael; Setzer, Ralph; Westphal, Andreas; Zorell, Nico
    Abstract: This paper analyses the incidence and severity of sudden stops in euro area countries before and after the introduction of the ECB’s asset purchase programmes. We define sudden stops as abrupt declines in private net financial inflows, i.e. total flows adjusted for EU and IMF loans and changes in TARGET2 balances. Distinguishing between mild and severe sudden stops, we document that sudden stops were overall more frequent and more severe in euro area countries compared to other OECD economies over the period 1999–2020. On the basis of a multinomial logit model, we find that the susceptibility of euro area countries to severe sudden stops mainly reflects domestic fundamentals whereas there is no clear evidence of an adverse direct effect of being part of the euro area. On the contrary, TARGET2 appears to act as an “automatic stabiliser”, counteracting sudden stops in private financial i nflows. Moreover, our econometric analysis suggests that the asset purchase programmes implemented by the ECB since 2015 have overall almost halved the risk of severe sudden stops in euro area countries. We find tentative evidence that this effect operates through confidence channels. JEL Classification: F21, F31, F32, F41, F45
    Keywords: ECB asset purchase programmes, financial flows, monetary policy, sudden stops
    Date: 2021–10
  2. By: Nikolay Hristov; Oliver Hülsewig; Benedikt Kolb
    Abstract: We explore how changes in capital-based macroprudential regulation in the euro area affect the exposure of national banking sectors to domestic government debt, thus strengthening or weakening the sovereign-bank nexus. To do so, we construct a measure of macroprudential policy based on the Macroprudential Policy Evaluation Database (MaPPED) and estimate responses to the unsystematic component of macroprudential policy in panel vector autoregressive models for euro area ”core” and ”periphery” countries. Our main finding suggests that an unsystematic capital-based macroprudential policy tightening increases banks’ exposure to domestic sovereign bonds in the periphery countries and thus deepens the sovereign-bank nexus. By contrast, banks in the core countries expand their loan portfolios, rather than adjusting their domestic sovereign bond holdings, in response to the shock. We show that this result can be tied to the theoretical literature and investigate several transmission channels. Our results are highly robust to changes in the econometric set-up and the macroprudential indicator used.
    Keywords: macroprudential policy, euro area, sovereign-bank nexus, panel vector autoregressive model
    JEL: C33 G21 G28 H63
    Date: 2021
  3. By: Gunnella, Vanessa; Lebastard, Laura; Lopez-Garcia, Paloma; Serafini, Roberta; Mattioli, Alessandro Zona
    Abstract: The consensus back in 2008 – ten years after the introduction of the euro – was that the adoption of a common currency had made a limited impact of around 2% in total on the trade flows of the first wave of euro area countries (Baldwin et al., 2008). Since then, six more countries have joined the euro area, and firms have internationalised their production processes. These two phenomena are interrelated and may have changed the way the common currency affects the euro area economy. Therefore, with the common currency now into its third decade – and with more countries queuing to adopt it – this paper revisits the trade effects of the euro, focusing on the newer euro adopters (i.e. those countries that have adopted the euro since 2007) and their interaction with the first wave of euro area members via supply chains. The contribution of the paper is twofold. First, it revisits the estimated aggregate impact of the euro on euro area trade, as well as on trade within and between the two waves of adopters. Data on bilateral flows between 1990 and 2015 for an extended sample of countries to estimate a gravity equation indicate a significant trade impact, ranging between 4.3% and 6.3% in total on average, with the magnitude being the highest for exports from the second wave of adopters to the first wave of adopters. If a synthetic control approach (Abadie and Gardeazabal, 2003; Abadie et al., 2010) is used instead, the estimated gains associated with euro adoption are greater. In particular, exports of both intermediate and final products from countries belonging to the first wave of euro adopters to those belonging to the second wave are estimated to have increased by about 30% using this approach. The second contribution made by this paper relates to the channels through which trade might be affected by a currency union. This question is explored by looking separately at trade in intermediate goods and final products. While we find that trade gains were mainly driven by trade in intermediate goods among countries that adopted the currency earlier (5.3%), our results also show that the euro had a positive effect on the exports of final products from the second wave of adopters to other euro area countries. This effect is as high as 10.6% with the gravity model and 32% with the synthetic control approach. One of the reasons for the difference in the range of estimates between the two approaches might be that the gravity model can control for unobserved characteristics via fixed effects, while the synthetic control approach may fail to do so. These results suggest that the euro facilitated the establishment and expansion of international production chains in Europe. In turn, this is likely to have increased business cycle synchronisation in the euro area and to have supported market access for later adopters. JEL Classification: F14, F15
    Keywords: euro, global value chains, gravity equation, synthetic control approach, trade flows
    Date: 2021–10
  4. By: Daragh Clancy (ESM); Carmine Gabriele (ESM); Diana Zigraiova (ESM)
    Abstract: The systemic importance of a country is a crucial component in the European Stability Mechanism's assessment of financial assistance requests. However, disentangling the effect of developments in one country on other countries in real time is fraught with difficulties. Using empirical methods that provide ex-ante measures of risk exposure, we find that changes in the tail risks of Greek sovereign bond returns resulted in immediate and significant cross-market spillovers to other euro area sovereign bond returns. Our approach provides real-time insights on evolving cross-market interdependencies, such as Germany gradually becoming a safe haven from Greece. We confirm that developments in Greece drive our tail-risk results by linking them to a newly developed intra-day event database. This approach also allows us to provide a more intuitive quantification of the spillovers emanating from Greece. Taken together, our findings demonstrate that developments in Greece significantly affected other euro area sovereign bond markets over and beyond global, euro area and country-specific factors. Our results provide evidence for the systemic importance of Greece throughout the European sovereign debt crisis.
    Keywords: crisis, events, narrative, sovereign bonds, spillovers, tail risks
    JEL: C22 G01 G15 F36
    Date: 2020–06–11
  5. By: Garcia, Pablo; Jacquinot, Pascal; Lenarčič, Črt; Lozej, Matija; Mavromatis, Kostas
    Abstract: This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers - both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption. JEL Classification: C53, E32, E52, F45
    Keywords: COVID-19, DSGE modelling, euro area, international spillovers, monetary union
    Date: 2021–10
  6. By: Daragh Clancy (ESM); Peter G. Dunne (Central Bank of Ireland); Pasquale Filiani (Central Bank of Ireland)
    Abstract: The likelihood of severe contractions in an asset's liquidity can feed back to the ex-ante risks faced by the individual providers of such liquidity. These self-reinforcing effects can spread to other assets through informational externalities and hedging relations. We explore whether such interdependencies play a role in amplifying tensions in European sovereign bond markets and are a source of cross-market spillovers. Using high-frequency data from the inter-dealer market, we find significant own- and cross-market effects that amplify liquidity contractions in the Italian and Spanish bond markets during times of heightened risk. The German Bund's safe-haven status exacerbates these amplification effects. We provide evidence of a post-crisis dampening of cross-market effects following crisis-era changes to euro area policies and institutional architecture. We identify a structural break in Italy's cross-market conditional correlation during rising political tensions in 2018, which significantly reduced liquidity. Overall, our findings demonstrate potential for the provision of liquidity across sovereign markets to be vulnerable to sudden fractures, with possible implications for euro area economic and financial stability.
    Keywords: Liquidity; Tail risks; Feedback loops; Spillovers
    JEL: G01 G15 F36
    Date: 2019–11–08
  7. By: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen
    Abstract: After the inception of the euro, the real economy in most member countries remained dependent on credit by domestic banks, which increasingly funded themselves through cross-border interbank funding. We find that this pattern of ‘double-decker’ banking integration exposed domestic banks to sharp declines in cross-border interbank lending during the eurozone crisis. As a result, domestic banks reduced lending which led to large declines in output in sectors with many small (bank-dependent) firms. We propose a quantitative small open economy model to account for these patterns and conclude that a global banking shock leading to a sudden stop in cross-border interbank lending in the eurozone is required to account for them.
    Keywords: Small and medium enterprises, sme access to finance, banking integration, domestic bank dependence, interbank dependence, international transmission, eurozone crisis
    JEL: F30 F36 F40 F45
    Date: 2021–10
  8. By: Giuzio, Margherita; Kaufmann, Christoph; Ryan, Ellen; Cappiello, Lorenzo
    Abstract: We examine the transmission of monetary policy via the euro area investment fund sector using a BVAR framework. We find that expansionary shocks are associated with net inflows and that these are strongest for riskier fund types, reflecting search for yield among euro area investors. Search for yield behaviour by fund managers is also evident, as they shift away from low yielding cash assets following an expansionary shock. While higher risk-taking is an intended consequence of expansionary monetary policy, this dynamic may give rise to a build-up in liquidity risk over time, leaving the fund sector less resilient to large outflows in the face of a crisis. JEL Classification: E32, G11, G23
    Keywords: liquidity management, monetary policy, non-bank financial intermediation
    Date: 2021–10
  9. By: Consolo, Agostino; Foroni, Claudia; Hernández, Catalina Martínez
    Abstract: We introduce a Bayesian Mixed-Frequency VAR model for the aggregate euro area labour market that features a structural identification via sign restrictions. The purpose of this paper is twofold: we aim at (i) providing reliable and timely forecasts of key labour market variables and (ii) enhancing the economic interpretation of the main movements in the labour market. We find satisfactory results in terms of forecasting, especially when looking at quarterly variables, such as employment growth and the job finding rate. Furthermore, we look into the shocks that drove the labour market and macroeconomic dynamics from 2002 to early 2020, with a first insight also on the COVID-19 recession. While domestic and foreign demand shocks were the main drivers during the Global Financial Crisis, aggregate supply conditions and labour supply factors reflecting the degree of lockdown-related restrictions have been important drivers of key labour market variables during the pandemic. JEL Classification: J6, C53, C32, C11
    Keywords: Bayesian VAR, labour market, mixed frequency data
    Date: 2021–10
  10. By: Andersson, Malin; Maurin, Laurent; Rusinova, Desislava
    Abstract: We estimate a FAVAR with Bayesian techniques in order to investigate the impact of loan supply conditions on euro area corporate investment and its financing structure. We identify shocks to overall demand and loan supply with sign and impact restrictions. Although tightened financial conditions have adversely impacted corporate investment during and after the sovereign debt crisis, the resulting impediments in loan supply, illustrated by lower loan volumes and higher spreads, have been partly alleviated by strengthened corporate debt issuance. We show that (1) part of the protracted increase in debt to loan ratio since the crisis reflects bottlenecks in the provision of bank credit and (2) the tightened loan supply has been more adverse for small corporations with limited market access. Overall, our analysis of macro-financial developments suggests the need for policy actions to deepen the European corporate debt market and enhance market access for smaller corporates. JEL Classification: E22, E66, G21
    Keywords: corporate debt issuance, FAVAR model, financing structure, size spread, small and medium size corporates
    Date: 2021–10
  11. By: Bańbura, Marta; Leiva-Leon, Danilo; Menz, Jan-Oliver
    Abstract: Those of professional forecasters do. For a wide range of time series models for the euro area and its member states we find a higher average forecast accuracy of models that incorporate information on inflation expectations from the ECB’s SPF and Consensus Economics compared to their counterparts that do not. The gains in forecast accuracy from incorporating inflation expectations are typically not large but significant in some periods. Both short- and long-term expectations provide useful information. By contrast, incorporating expectations derived from financial market prices or those of firms and households does not lead to systematic improvements in forecast performance. Individual models we consider are typically better than univariate benchmarks but for the euro area the professional forecasters are more accurate, especially in recent years (not always for the countries). The analysis is undertaken for headline inflation and inflation excluding energy and food and both point and density forecast are evaluated using real-time data vintages over 2001-2019. JEL Classification: C53, E31, E37
    Keywords: Bayesian VAR, forecasting, inflation, inflation expectations, Phillips curve
    Date: 2021–10
  12. By: Diana Žigraiová (ESM, Charles University); Aitor Erce (European Investment Bank, European University Institute); Xu Jiang (ESM)
    Abstract: In this paper we use data from the euro area to study episodes when sovereigns lose market access. We construct a detailed dataset with potential indicators of market access tensions, and evaluate their ability to forecast episodes when market access is lost, using various econometric approaches. We find that factors associated with high market access tensions are not limited to financial markets, but also encompass developments in global demand, macroeconomic conditions and the fiscal stance. Using the top-performing indicators, we construct a number of market tension indices and use them as single predictors of market access tensions. While such indices are helpful in capturing worsening conditions, they do not yield satisfactory out-of-sample results. On the other hand, using the same top- performing indicators in various multivariate models generates good forecasts of upcoming difficulties in accessing sovereign bond markets. Our results thus point to a trade-off between communicability and accuracy that policymakers face in the search for tools to evaluate risks to market access.
    Keywords: Euro area sovereign bond market; forecasting; sovereign debt crises, sovereign market access; variable selection
    JEL: C53 G01 G15
    Date: 2020–01–06
  13. By: Hodbod, Alexander; Hommes, Cars; Huber, Stefanie J.; Salle, Isabelle
    Abstract: Prospective economic developments depend on the behavior of consumer spending. A key question is whether private expenditures recover once social distancing restrictions are lifted or whether the COVID-19 crisis has a sustained impact on consumer confidence, p references, and, hence, spending. The elongated and profound experience of the COVID-19 crisis may durably affect consumer preferences. We conducted a representative consumer survey in five European countries in summer 2020, after the release of the first wave’s lockdown restrictions, and document the underlying reasons for households’ reduction in consumption in five key sectors: tourism, hospitality, services, retail, and public transports. We identify a large confidence shock in the Southern European countries and a shift in consumer preferences in the Northern European countries, particularly among high-income earners. We conclude that the COVID-19 experience has altered consumer behavior and that long-term sectoral consumption shifts may occur. JEL Classification: D12, D81, D84, E21, E60, E71, G51, H30
    Keywords: consumer preferences, consumption, COVID-19, economic resilience, expectations, experiences, fiscal policy, household behavior, sectoral changes, zombification
    Date: 2021–10
  14. By: amri amamou, souhir; hellara, slaheddine
    Abstract: This paper aims to test the Credit default swaps (CDS) as vectors of contagion towards the bond market, classified by maturity, during the sovereign crisis for a sample of 10 developed Eurozone countries. By implementing an approach based on a VECM model subject to several econometric tests, this paper contributes to the literature by providing conclusions about the impact of a maturity effect on the vulnerability of a sovereign bond in the contagion facing the sovereign CDS market. Our findings suggest that the dynamic relationship between the CDS market and the public bond market is significantly related to the quality of the debt studied.
    Keywords: Sovereign CDS, sovereign bonds, contagion, spillover effects
    JEL: F3 G01 G13
    Date: 2021–08–03
  15. By: Korobilis, Dimitris; Landau, Bettina; Musso, Alberto; Phella, Anthoulla
    Abstract: This paper develops a Bayesian quantile regression model with time-varying parameters (TVPs) for forecasting inflation risks. The proposed parametric methodology bridges the empirically established benefits of TVP regressions for forecasting inflation with the ability of quantile regression to model flexibly the whole distribution of inflation. In order to make our approach accessible and empirically relevant for forecasting, we derive an efficient Gibbs sampler by transforming the state-space form of the TVP quantile regression into an equivalent high-dimensional regression form. An application of this methodology points to a good forecasting performance of quantile regressions with TVPs augmented with specific credit and money-based indicators for the prediction of the conditional distribution of inflation in the euro area, both in the short and longer run, and specifically for tail risks. JEL Classification: C11, C22, C52, C53, C55, E31, E37, E51
    Keywords: Bayesian shrinkage, euro area, Horseshoe, inflation tail risks, MCMC, quantile regression, time-varying parameters
    Date: 2021–10
  16. By: Ferrando, Annalisa; Popov, Alexander; Udell, Gregory F.
    Abstract: We study the transmission of (unconventional) monetary policy to the real sector when firm decisions depend on both current and future credit market conditions. For a given level of current credit access, investment and employment increases more at firms expecting bank credit to improve in the future. Three separate unconventional policies by the ECB—the OMT, the introduction of negative rates, and the CSPP—improved expectations of future credit access for SMEs borrowing from banks that were expected to increase SME lending due to the policy. Our results enhance our understanding of the bank balance sheet channel of monetary policy. JEL Classification: D22, D84, E58, G21, H63
    Keywords: corporate investment, funding expectations, Unconventional monetary policy
    Date: 2021–10
  17. By: Janos Varga; Werner Roeger; Jan in ’t Veld
    Abstract: This paper describes a micro-founded, fully forward-looking dynamic general equilibrium (DGE) model with energy sectors that is used to analyse the macroeconomic impact of climate mitigation policy in the European Union (EU). The paper presents simulation results for the transitional costs of moving towards a net zero emissions economy. It does not attempt to assess the effects on growth of the green investments envisaged in the framework of the European Green Deal or the Recovery and Resilience Facility. Our model allows for substitutability between fossil fuels and clean energy inputs and considers different recycling options for the revenues collected by carbon taxes. We find that the costs of moving towards a net zero emissions economy can be significantly reduced when carbon taxes are used and are recycled to reduce other distortive taxes, or for subsidising clean energy.
    JEL: D5 Q43 Q50
    Date: 2021–09

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