nep-eec New Economics Papers
on European Economics
Issue of 2021‒11‒29
nine papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Funding liquidity, credit risk and unconventional monetary policy in the Euro area: a GVAR approach By Graziano Moramarco
  2. Paying Banks to Lend? Evidence from the Eurosystem's TLTRO and the Euro Area Credit Registry By Emilie Da Silva; Vincent Grossmann-Wirth; Benoit Nguyen; Miklos Vari
  3. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
  4. Medium- vs. short-term consumer inflation expectations: evidence from a new euro area survey By Ewa Stanisławska; Maritta Paloviita
  5. Unemployment Persistence in Europe: Evidence from the 27 EU Countries By Guglielmo Maria Caporale; Luis A. Gil-Alana; Pablo Vicente Trejo
  6. The one trillion euro digital currency: How to issue a digital euro without threatening monetary policy transmission and financial stability? By Paolo Fegatelli
  7. Two-way relationship between inequality and growth within fiscal policy channel: an empirical assessment for European countries By José Carlos Coelho; José Alves
  8. Investment Response to Monetary Policy in a Low Interest Rate Environment: Evidence from the ECB's Corporate QE By Guillaume Horny; Supriya Kapoor
  9. Aging, migration and monetary policy in Poland By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa

  1. By: Graziano Moramarco
    Abstract: This paper investigates the transmission of funding liquidity shocks, credit risk shocks and unconventional monetary policy within the Euro area. To this aim, a financial GVAR model is estimated for Germany, France, Italy and Spain on monthly data over the period 2006-2017. The interactions between repo markets, sovereign bonds and banks' CDS spreads are analyzed, explicitly accounting for the country-specific effects of the ECB's asset purchase programmes. Impulse response analysis signals core-periphery heterogeneity and persistent flight to quality. A simulated reduction in any ECB programme ultimately results in rising yields and bank CDS spreads in Italy and Spain, as well as in falling repo trade volumes and rising repo rates in all four countries.
    Date: 2021–11
  2. By: Emilie Da Silva; Vincent Grossmann-Wirth; Benoit Nguyen; Miklos Vari
    Abstract: Since March 2020 the Eurosystem has provided subsidies to Euro-Area banks, via its Targeted Longer-Term Refinancing Operations (TLTRO). Under this program, banks can borrow from the Eurosystem at a rate as low as -1%, conditional on their lending to the real economy. This paper uses a simple theoretical model to disentangle between so-called “targeted” and “profitability" channels. We test those channels on the new Euro-Area credit registry data (AnaCredit). To overcome reverse causality, we employ novel identification strategies based on TLTRO parameters set before the pandemic and unexpected changes afterward. We find support for both channels and conclude the targeted channel is stronger.
    Keywords: TLTRO ; ECB ; Funding-for-Lending; AnaCredit
    JEL: G11 G15 G23 H55 Q54 Q56
    Date: 2021
  3. By: Pablo Garcia; Pascal Jacquinot; Crt Lenarcic; Matija Lozej; Kostas Mavromatis
    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.
    Keywords: DSGE Modelling, International Spillovers, Monetary Union, Euro Area, COVID-19
    JEL: C53 E32 E52 F45
    Date: 2021–10
  4. By: Ewa Stanisławska (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    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 inflation perceptions. 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.
    Keywords: Inflation expectations, consumer survey, micro-data
    JEL: D12 D84 E31 E58
    Date: 2021
  5. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Pablo Vicente Trejo
    Abstract: This paper investigates unemployment persistence in the 27 EU member states by applying fractional integration methods to quarterly data (both seasonally adjusted and unadjusted) from 2000q1 to 2020q4. The obtained evidence points to high levels of persistence in all cases. With seasonally adjusted data, a small degree of mean reversion is found in the case of Belgium, Luxembourg and Malta, but this evidence disappears under the assumption of weakly correlated disturbances. More cases of mean reversion are found instead when analysing the unadjusted series. In particular, countries such as Belgium, France, Croatia, Italy, Luxembourg and Malta display orders of integration significantly lower than 1. In addition, significant negative time trends are found in the case of Bulgaria, Croatia, Malta and Romania, and a positive one for Luxembourg. Finally, the Covid-19 pandemic had mixed effects, with (seasonal) persistence increasing in some countries whilst decreasing in others and not changing in a minority of cases. On the whole, our results support the hysteresis hypothesis for the European economies.
    Keywords: unemployment persistence, long memory, Europe, fractional integration
    JEL: C22 E24 O52
    Date: 2021
  6. By: Paolo Fegatelli
    Abstract: The introduction of a general-purpose central bank digital currency (CBDC) carries the risk of bank disintermediation, potentially jeopardizing financial stability and monetary policy transmission through the bank lending channel. By adapting the theoretical framework of Dutkowsky and VanHoose (2018b, 2020) to the euro area, this study clarifies the conditions under which a digital euro could be introduced on a large scale without leading to bank disintermediation or a credit crunch. First, the central bank would need to set up proper mechanisms to manage the volume and the user cost of CBDC in circulation. Second, since some bank deposits will be converted into CBDC, the central bank should continue to facilitate access to its long-term lending facilities in order to provide banks with an alternative funding source at an equivalent cost. Depending on its design, a digital euro could improve bank profitability by absorbing large amounts of idle (and expensive) excess reserves without penalizing lending. A digital euro could also improve banks’ competitive position relative to non-bank lenders and encourage bank digitalization.
    Keywords: Central bank digital currency, cash, central bank, monetary policy, excess reserves, reserve requirements, universal central bank reserves, bank deposits, bank profitability, bank credit, inside money, collateral
    JEL: E41 E42 E51 E52 E58 G21
    Date: 2021–08
  7. By: José Carlos Coelho; José Alves
    Abstract: We investigate the role of fiscal policy, through several measures of government revenues and expenditures and redistribution, on disposable and market income inequality and economic growth as well as the interaction between inequality and growth for 31 European countries from 1995 to 2019. In this article, we employ SUR regressions and SEM models, and we conclude that: i) while post-tax and transfers inequality has a negative impact on public expenditure variables and redistribution, pre-tax and transfers inequality has a positive impact; ii) public expenditure variables and direct taxation negatively influence economic growth; iii) average post-tax and transfers inequality has a negative effect on growth and average pre-tax and transfers inequality has a positive impact; iv) growth contributes to the reduction of average post-tax and transfers inequality and to the increase in average pre-tax and transfers inequality; and v) fiscal policy allows for the attenuation of disposable income inequality. The different results between the role of pre and post-tax and transfers inequality levels lead us to suggest tax progressivity as an important feature to take into account when analyse the trivariate relationship between fiscal policy, growth, and inequalities.
    Keywords: inequality; economic growth; fiscal policy; seemingly unrelated regressions; three-stage least squares
    JEL: D63 E62 O47
    Date: 2021–11
  8. By: Guillaume Horny (Banque de France); Supriya Kapoor (Technological University Dublin)
    Abstract: We study how an easing in corporate bond funding conditions affect the asset structure of firms’ fixed assets. This paper employs ECB's Corporate Sector Purchase Program as a quasi-natural experiment that reduces bond yields for firms eligible to ECB purchases. We identify eligible firms using information on their bond ratings. Using consolidated balance sheet information on non-financial firms in France, we find that firms increase investment expenses but only to replace existing assets, whether tangible and intangible, instead of investing in new equipment to grow in scale. This replacement is however not homogeneous across asset classes, since intangible assets increase in importance relative to tangible ones. The shift towards intangible assets is stronger for firms with a BBB rating than for safer firms (AAA-A rating). This suggest that while BBB rated firms were to some extent constraint in their funding, they do not use the proceeding to reinforce the collateral value of their assets. These effects are robust to the inclusion of several fixed effects. We conclude that an easier access to market debt can have an effect on the mix of fixed assets used by firms to produce. This raises questions as to whether firms eligible to CSPP purchases increased their productivity since new equipment can be more efficient than the deprecated ones.
    Keywords: CSPP, bond issuances, monetary policy, credit risk, investment
    JEL: D24 E52 G01 G32
    Date: 2021–10
  9. By: Marcin Bielecki (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski); Marcin Kolasa (SGH Warsaw School of Economics)
    Abstract: Poland faces a particularly sharp demographic transition. The old-age dependency ratio is expected to increase from slightly above 20% in 2000 to over 60% in 2050. At the same time the country has recently witnessed a huge wave of immigration, mostly from Ukraine. In this paper we investigate how aging and migration will affect the Polish economy and what consequences these adjustments have for its monetary policy. Using a general equilibrium model with life-cycle considerations, we show that the decline in the natural rate of interest (NRI) due to demographic processes is substantial, amounting to more than 1.5 percentage points, albeit spread over a period of 40 years. The impact of migration flows is relatively small and cannot significantly alleviate the downward pressure on the NRI induced by populating aging. If the central bank is slow in learning about the declining NRI, an extended period of inflation running below the target is likely. In this case, the probability of hitting the zero lower bound (ZLB) becomes a major constraint on monetary policy while it could remain under control if the central bank uses demographic trends to update the NRI estimates in real time.
    Keywords: aging, monetary policy, migration, life-cycle models
    JEL: E43 E52
    Date: 2021

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