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on European Economics |
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Issue of 2021‒12‒06
twenty papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Donata Faccia (Department of Economics, Trinity College Dublin, and European Central Bank); Giuseppe Corbisiero (Central Bank of Ireland) |
| Abstract: | This paper uses a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to study simultaneously the role that bank and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrowers' and lenders' characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area. |
| Keywords: | Credit supply, Bank lending, Credit crunch, European sovereign debt crisis |
| JEL: | E44 F36 G01 G21 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0320&r= |
| By: | Kouvavas, Omiros; Osbat, Chiara; Reinelt, Timo; Vansteenkiste, Isabel |
| Abstract: | Price inflation in the euro area has been stable and low since the Global Financial Crisis, despite notable changes in output and unemployment. We show that an increasing share of high markup firms is part of the explanation of why inflation remained stubbornly stable and low in the euro area over the past two decades. For this purpose, we exploit a rich firm-level database to show that over the period 1995–2018 the aggregate markup in the euro area has been on the rise, mainly on account of a reallocation towards high-markup firms. We document significant heterogeneity in markups across sectors and countries and, by linking these markup developments to the evolution of sectoral level producer and consumer price inflation, we find that (i) inflation in high-markup sectors tends to be less volatile than in low-markup sectors and (ii) inflation in high-markup sectors responds significantly less to oil supply, global demand and euro area monetary policy shocks. JEL Classification: D2, D4, N1, O3 |
| Keywords: | firm markups, inflation, price setting |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212617&r= |
| By: | Andrejs Zlobins (Latvijas Banka) |
| Abstract: | This paper (re-)evaluates the effectiveness of central bank asset purchases in the euro area given their prominent role in the ECB's response to the pandemic as well as the evidence from the US suggesting diminishing returns of this policy measure over time. We analyse their macroeco- nomic impact in the euro area using a time-varying parameter structural vector autoregression with stochastic volatility and perform identification via sign and zero restrictions of Arias et al. (2018), their fusion with high frequency information approach akin to Jarocinski and Karadi (2020) and a novel method which merges high frequency identification with narrative sign re- strictions of Antolin-Diaz and Rubio-Ramirez (2018). We find that the potency of the ECB's asset purchases to lift inflation has indeed considerably declined over time with several factors contributing to a more muted response of prices to central bank asset purchases. Our results show that the reanchoring channel is no longer active while the counterproductive effects via the mechanism outlined in Boehl et al. (2020), which we dub the capacity utilization channel, have emerged lately and are further complemented with disinflationary effects stemming from the cost channel. Also, the effects passed through more standard transmission channels of central bank asset purchases like portfolio rebalancing and signalling, while still significant, appear to be less persistent recently. Overall, our findings point to a diminishing returns of the ECB's asset purchases to stabilize inflation and its expectations in the euro area. |
| Keywords: | quantitative easing, central bank asset purchases, monetary policy, euro area, non-linearities |
| JEL: | E50 E52 |
| Date: | 2021–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:202102&r= |
| By: | Fortin, Ines (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria); Hlouskova, Jaroslava (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Dept. of Economics, Faculty of National Economy, University of Economics in Bratislava, Slovakia); Soegner, Leopold (Macroeconomics and Business Cycles, Institute for Advanced Studies, Vienna, Austria and Vienna Graduate School of Finance (VGSF), Vienna, Austria) |
| Abstract: | We estimate new indices measuring financial and economic (in)stability in Austria and in the euro area. Instead of estimating the level of (in)stability in a financial or economic system we measure the degree of predictability of (in)stability, where our methodological approach is based on the uncertainty index of Jurado, Ludvigson and Ng (2015). We perform an impulse response analysis in a vector error correction framework, where we focus on the impact of uncertainty shocks on industrial production, employment and the stock market. We and that financial uncertainty shows a strong significantly negative impact on the stock market, for both Austria and the euro area, while economic uncertainty shows a strong significantly negative impact on the economic variables for the euro area. We also perform a forecasting analysis, where we assess the merits of uncertainty indicators for forecasting industrial production, employment and the stock market, using different forecast performance measures. The results suggest that financial uncertainty improves the forecasts of the stock market while economic uncertainty improves the forecasts of macroeconomic variables. We also use aggregate banking data to construct an augmented financial uncertainty index and examine whether models including this augmented financial uncertainty index outperform models including the original financial uncertainty index in terms of forecasting. |
| Keywords: | financial (in)stability, uncertainty, financial crisis, forecasting, stochastic volatility, factor models |
| JEL: | C53 G01 G20 E44 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihswps:36&r= |
| By: | Stéphane Auray; Aurélien Eyquem (UL2 - Université Lumière - Lyon 2) |
| Abstract: | The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially offset by lower inflation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in inflation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple setup accounts for the bulk of post-euro fluctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade. |
| Keywords: | monetary union,inflation convergence,current account imbalances,borrowing constraints |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03394885&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | We study the relationship between the budget balance and the current account balance for European Union (EU) countries, using quarterly data from 1995 to 2020. Through the use of panel Granger causality tests and a panel SUR model, we conclude that the relationship is bi-directional for the EU panel as a whole. Furthermore, we find that in Eurozone countries, before 2010, for those countries with an average current account balance-toGDP ratio outside the range of -4 to 6%, and also in countries whose average debt-toGDP ratio is greater than 60%, the impact of the budget balance on the current account balance is greater. Conversely, in non-Eurozone countries, after 2010, in countries with a current account balance-to-GDP ratio of -4 to 6%, and also in countries with an average debt-to-GDP ratio of less than 60%, the impact of the fiscal balance on the current account balance is less relevant. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_69&r= |
| By: | Saiz, Lorena; Ashwin, Julian; Kalamara, Eleni |
| Abstract: | This paper shows that newspaper articles contain timely economic signals that can materially improve nowcasts of real GDP growth for the euro area. Our text data is drawn from fifteen popular European newspapers, that collectively represent the four largest Euro area economies, and are machine translated into English. Daily sentiment metrics are created from these news articles and we assess their value for nowcasting. By comparing to competitive and rigorous benchmarks, we find that newspaper text is helpful in nowcasting GDP growth especially in the first half of the quarter when other lower-frequency soft indicators are not available. The choice of the sentiment measure matters when tracking economic shocks such as the Great Recession and the Great Lockdown. Non-linear machine learning models can help capture extreme movements in growth, but require sufficient training data in order to be effective so become more useful later in our sample. JEL Classification: C43, C45, C55, C82, E37 |
| Keywords: | business cycles, COVID-19, forecasting, machine learning, text analysis |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212616&r= |
| By: | Oscar Arce (Banco de España); Miguel Garcia-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich - Department of Banking and Finance; NTNU Business School; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | What is the long-term impact of negative interest rates on bank lending? To answer this question we construct a unique summary measure of negative rate exposure by individual banks based on exclusive survey data and banks’ balance sheets and couple it with the credit register of Spain and firms’ balance sheets to identify this impact on the supply of credit to firms. We find that only after a few years of negative rates do affected banks (relative to non-affected banks) decrease their supply and increase their rates, especially when lowly capitalized and lending to risky firms. This suggests that the adverse effects of the negative interest rates on banks’ intermediation capacity only show up after a protracted period of ultra-low rates. |
| Keywords: | negative interest rates, risk taking, lending policies |
| JEL: | G21 E52 E58 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2175&r= |
| By: | Susana Campos-Martins; Cristina Amado |
| Abstract: | We develop a novel approach to investigate the presence of financial contagion during the European sovereign debt crisis. The novelty lies in modelling bond yield market comovements allowing the individual long-run variances to be time-dependent and the correlations to change smoothly between two extreme states according to time and observable financial variables. The new model has the flexibility to discern between long-run and short-run contagion effects on the basis of the variable used as indicator for the time-variation in correlations. The main results provide evidence of long-run contagion effects across peripheral countries following the more acute phase of the sovereign crisis. |
| Keywords: | Financial contagion; European sovereign debt crisis; Multivariate GARCH model; Dynamic correlations; Multiplicative decomposition of volatility. |
| Date: | 2021–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:946&r= |
| By: | Ginters Buss (Latvijas Banka); Patrick Gruning (Latvijas Banka, Vilnius University); Olegs Tkacevs (Latvijas Banka) |
| Abstract: | Contributing to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules – the structural balance rule and the expenditure growth rule – using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes, but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by the modifications of the public expenditure definition in the expenditure growth rule, in particular, the removal of debt service payments. Accounting for debt service payments in fiscal rules strengthens the monetary-fiscal policy interaction but it may turn vicious to macroeconomic stability at business cycle frequencies. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to macroeconomic stability in the long run. The households' welfare gain from having the expenditure growth rule instead of the structural balance rule is 4% for a small country in a monetary union and 5% for a country with sovereign monetary policy. |
| Keywords: | fiscal policy, DSGE, small open economy, fiscal-monetary policy interaction |
| JEL: | E0 E2 E3 E6 F4 H2 H3 H6 |
| Date: | 2021–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:202103&r= |
| By: | Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (University of Zurich) |
| Abstract: | Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy. |
| Keywords: | Yield curve, central bank, collateral policy, monetary policy, haircuts, repo, asset prices, liquidity, central-bank money, government bonds |
| JEL: | G12 E43 E52 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2174&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | The paper attempts to recover empirical evidence related to the European Structural and Investment Funds (ESIF) to promote growth for the management of the Recovery & Resilience Facility (RRF). We analyse the impact of the EU Cohesion Policy on regional development over the period 1986-2018, using dynamic panel data models. In doing so, we use a neoclassical Solow growth model, extending the current literature in at least three ways. First, we make use of a new dataset, which contains highly detailed data on regional commitments and payments of Structural Funds; secondly, we address the endogeneity via a difference GMM estimator; finally, we control for the spatial interdependence among regions via a Spatial Durbin model. We find that the Cohesion Policy fosters regional growth both in the short and long run, regardless of the Objective considered. The role of the business cycle in the speed of regional convergence is quantified. The funds’ effectiveness is hindered during the crisis, especially in the least developed regions, partly due to lower absorptive rates. Furthermore, human capital and quality of government are crucial growth determinants necessary for improving the performance of the Structural Funds. Finally, we discuss if the combination of ESIF & RRF funds will be appropriate for accelerating the post-pandemic recovery versus the financial recession recovery. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_68&r= |
| By: | Mr. Raphael A Espinoza |
| Abstract: | In this paper, we estimate the aggregate and sectoral fiscal multipliers of EU Structural Investment (ESI) Funds and of public investment at the EU level. We complement these results with a specific application to the case of Slovenia. We first analyze aggregate data and find large and significant multipliers and strong crowding-in of private investment. Our main findings show that positive shocks to ESI Funds are followed by an increase in output that ranges from 1.2 percent on impact, to 1.8 percent after 1 year, and by an increase in private investment between 0.7 and 0.8 percent of GDP. We address country heterogeneity by dividing countries according to key characteristics that have been known to affect multipliers. In particular, we find higher multipliers in a group of CEE countries that are important recipients of European funds and are characterized by fixed exchange rate regimes and sound public investment governance (e.g. Croatia and Slovenia). We also complement the aggregate analysis by estimating the effect of different types of public investment and the effect of public investment on different sectors of the economy. |
| Keywords: | aggregate multiplier; sectoral multiplier; aggregate analysis; public investment; impact multiplier; Public investment spending; Private investment; Public employment; Manufacturing; Employment; Eastern Europe |
| Date: | 2021–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/118&r= |
| By: | Jose M Garrido; Ms. Chanda M DeLong; Amira Rasekh; Anjum Rosha |
| Abstract: | The Directive on Restructuring and Insolvency sets minimum standards for restructuring and certain insolvency matters, but its harmonization effect will be limited given multiple options for implementation, likely leading to divergent restructuring models in Europe. These options reveal different policy approaches to the regulation of restructuring and insolvency. The analysis in this paper aims to illustrate the breadth of the policy choices and their consequences for restructuring activity. States should carefully design restructuring procedures to avoid the negative economic effects of certain options that could undermine creditors’ rights or result in unpredictable outcomes, particularly in cross-border cases. |
| Keywords: | restructuring, insolvency, European countries; EU Directive; policy option; insolvency in Europe; policy choice; implementation option; Solvency; Early warning systems; Corporate insolvency; Data collection; Europe |
| Date: | 2021–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/152&r= |
| By: | Grimm, Niklas; Laeven, Luc; Popov, Alexander |
| Abstract: | To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt financing conditions induced by corporate debt purchases under the ECB’s Corporate Sector Purchase Program. Companies eligible for the program increase significantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained firms. JEL Classification: E5, G10, O3 |
| Keywords: | corporate innovation, productivity growth, quantitative easing, unconventional monetary policy |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212615&r= |
| By: | Joan Calzada (Universitat de Barcelona); Nestor Duch-Brown (Joint Research Centre); Ricard Gil (Smith School of Business, Queen’s University) |
| Abstract: | Search engines are one of the main channels to access news content of traditional newspapers. In the European Union, organic search traffic from Google accounts for 35% of news outlets’ visits. Yet, the effects of Google Search on market competition and information diversity are ambiguous, as the firm indexes news outlets considering both domain authority and information accuracy. Using detailed daily data traffic for 606 news outlets from 15 European countries, we assess the effect of Google Search’s indexation on search visits. Our identification strategy exploits nine core algorithm updates rolled out by Google between 2018 and 2020 in order to achieve exogenous variation in news outlets’ indexation. Several conclusions follow from our estimations. First, Google core updates overall reduce the number of keywords that news outlets have in top positions in search results. Second, keywords ranked in top search position have a positive effect on news outlets’ visits. Third, our results are robust when we focus the analysis on different types of news outlets, but are less conclusive when we consider national markets separately. Our paper also analyzes the effects of Google core updates on media market concentration. We find that the three “big†core updates identified in this period reduced market concentration by 1%, but this effect was mostly compensated by the rest of the updates. |
| Keywords: | Media market, Google Search, Europe, core algorithm updates. |
| JEL: | L1 L5 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ewp:wpaper:415web&r= |
| By: | Carlos San Juan Mesonada; Carlos Sunyer Manteiga |
| Abstract: | The paper attempts to recover empirical evidence related to the European Structural and Investment Funds (ESIF) to promote growth for the management of the Recovery & Resilience Facility (RRF). We analyse the impact of the EU Cohesion Policy on regional development over the period 1986-2018, using dynamic panel data models. In doing so, we use a neoclassical Solow growth model, extending the current literature in at least three ways. First, we make use of a new dataset, which contains highly detailed data on regional commitments and payments of Structural Funds; secondly, we address the endogeneity via a difference GMM estimator; finally, we control for the spatial interdependence among regions via a Spatial Durbin model. We find that the Cohesion Policy fosters regional growth both in the short and long run, regardless of the Objective considered. The role of the business cycle in the speed of regional convergence is quantified. The funds’ effectiveness is hindered during the crisis, especially in the least developed regions, partly due to lower absorptive rates. Furthermore, human capital and quality of government are crucial growth determinants necessary for improving the performance of the Structural Funds. Finally, we discuss if the combination of ESIF & RRF funds will be appropriate for accelerating the post-pandemic recovery versus the financial recession recovery. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_67&r= |
| By: | Mauro Caselli; Jasmine Mondolo; Stefano Schiavo |
| Abstract: | This study investigates the recent trends in labour market power in Italy and assess-es the impact of a potential minimum wage using a large sample of manufacturing firms. We show that, despite an average shift of labour market power from the own-ers to the workers, monopsony power is still widespread, especially in some sectors and regions. The introduction of a minimum wage would be beneficial to workers and the economy as it reduces the monopsony power of highly productive firms paying low wages; however, it may also have a negative impact, since firms with low wages and low labour productivity may react by reducing the number of their em-ployees or even by exiting the market. Finally, we defined that an optimal minimum wage, which minimises the negative effect and maximises the positive effect for the economy, ranges between 8.25 and 9.65 euro per hour. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econwp:_70&r= |
| By: | Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima |
| Abstract: | We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies - Canada, Chile, the Czech Republic and Norway - using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies' monetary policy when rates shift to and from the very low end of the distribution. |
| Keywords: | Cross-border monetary policy spillover, international bank lending channel, low and negative interest rate environment (LNIRE), portfolio channel |
| JEL: | E43 E52 E58 F34 F42 G21 G28 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/6&r= |
| By: | Alexander F. Tieman; Jason Harris; Yugo Koshima; Alessandro De Sanctis |
| Abstract: | This paper compiles the Intertemporal Public Sector Balance Sheets for all G7 countries and examines their relationship with government borrowing costs. In 2018, all G7 countries have negative Intertemporal Net Financial Worth (INFW), falling short of their intertemporal budget constraint. A decomposition of the evolution of INFW shows that short-term fluctuations are mainly driven by fiscal policy changes, while in the long run demographic changes and health and pension obligations play a larger role. We find that on average a 10 percentage point of GDP increase in INFW reduces the (future) 10-1 year sovereign yield curve spread by 2.8 basis points. This results suggest that financial markets pay attention to governments’ future policy obligations, in addition to its current assets and liabilities. |
| Keywords: | balance sheet framework; negative Intertemporal Net Financial Worth; INFW 0; evolution of INFW; INTERTEMPORAL NET; Financial statements; Health care spending; Fiscal stance; Pension spending; Global |
| Date: | 2021–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/128&r= |