nep-eec New Economics Papers
on European Economics
Issue of 2022‒02‒14
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Financial Markets and ECB Monetary Policy Communication – A Second QE Surprise By Martin Baumgaertner
  2. European bank profitability: the Great Convergence? By Martien Lamers; Thomas Present; Rudi Vander Vennet
  3. The ECB and the Cost of Independence. Unearthing a New Doom-Loop in the European Monetary Union By Armando Marozzi
  4. The Effects of Natural Disasters on Price Stability in the Euro Area By John Beirne; Yannis Dafermos; Alexander Kriwoluzky; Nuobu Renzhi; Ulrich Volz; Jana Wittich
  5. Reducing sovereign debt levels in the post-Covid Eurozone with a simple deficit rule By Jost, Thomas; Tödter, Karl-Heinz
  6. Political Voice on Monetary Policy: Evidence from the Parliamentary Hearings of the European Central Bank By Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
  7. Financial Conditions and Macroeconomic Downside Risks in the Euro Area By Lhuissier Stéphane
  8. The Risks of Adopting the Bond Yield as the Anchor for the EU Fiscal Framework By Andersson, Fredrik N. G.; Jonung, Lars
  9. The RHOMOLO impact assessment of the 2014-2020 cohesion policy in the EU regions By CRUCITTI Francesca; LAZAROU Nicholas; MONFORT Philippe; SALOTTI Simone
  10. Social Distancing, Vaccination and Evolution of COVID-19 Transmission Rates in Europe By Alexander Chudik; M. Hashem Pesaran; Alessandro Rebucci
  11. Trend Inflation in Sweden By Österholm, Pär; Poon, Aubrey

  1. By: Martin Baumgaertner (THM Business School Giessen)
    Abstract: This paper shows that a different communication style of the European Central Bank (ECB) affects stock prices differently. A break in the ECB’s communication from 2016 onwards makes it necessary to adjust the identification of monetary policy surprises in the euro area. By modifying the high-frequency identification of monetary policy shocks in the euro area, I can show that two quantitative easing shocks occur per decision: One during the release and one during the press conference. Although the impact on policy rates is identical, the release window shock seems to have a more pronounced effect on stock prices.
    Keywords: Unconventional Monetary Policy, High-Frequency Data, ECB, Communication
    JEL: E44 E52 E58
    Date: 2022
  2. By: Martien Lamers; Thomas Present; Rudi Vander Vennet (-)
    Abstract: Have Euro Area banks restored viability in the post-crisis era? We investigate profitability convergence for Euro Area banks over the period 2009-2020 using the concepts of ß and s convergence and a club clustering algorithm. Our evidence is consistent with a slow catch up of the weaker banks, but we also document that better performing banks converge towards a lower profit level, suggesting a ‘great convergence’ towards the middle. Moreover, we identify a cluster of banks exhibiting dismal profit dynamics, indicating the need for a restructuring of part of the Euro Area banking sector.
    Keywords: Euro Area banks, bank profitability, ß convergence, s convergence, club clustering analysis
    JEL: C38 G20 G21
    Date: 2022–02
  3. By: Armando Marozzi
    Abstract: Central Bank Independence has often been praised as a "free lunch" as it lowers inflation with no costs to output. This paper, instead, claims that in a peculiar monetary union such as the European Monetary Union (EMU) defending the independence during a financial crisis can be macroeconomically costly: unconventional monetary policies may expose the European Central Bank (ECB) to the threat of fiscal dominance which, in turn, might endogenously shift the ECB’s fiscal stance toward fiscal conservatism. Fiscally hawkish signals can then depress GDP and inflation, thereby forcing the ECB to prolong the unconventional stimuli to achieve its target. This paper finds evidence of this new "doom-loop" at the core of the EMU.
    Keywords: ECB, monetary-fiscal interaction, CBI, unconventional monetary policy, EMU, fiscal communication
    JEL: E52 E58 E61 E63
    Date: 2021
  4. By: John Beirne; Yannis Dafermos; Alexander Kriwoluzky; Nuobu Renzhi; Ulrich Volz; Jana Wittich
    Abstract: This paper investigates the impact of natural disasters on price stability in the euro area. We estimate panel and country-specific structural vector autoregression (VAR) models by combining estimated damages of disaster events with monthly data for the Harmonised Index of Consumer Prices (HICP) for all euro area countries over the period 1996-2021. Besides estimating the effect on overall headline inflation, we examine effects on its 12 main sub-indices and further sub-categories of food price inflation. This allows us to disentangle differences in the direction and strength of price effects across consumption categories. Our results suggest significant positive effects of natural disasters on overall headline inflation, with diverging results at the sub-index level. Positive inflation effects are particularly pronounced for prices of food and beverages, while negative effects prevail for other sub-indices. Our country-specific results suggest heterogenous inflation effects of natural disasters across different countries. A key implication of our findings is that climate change is likely to make it increasingly difficult for the European Central bank to achieve its inflation target.
    Keywords: Natural disasters, climate, inflation, monetary policy, European Central Bank
    JEL: E31 E52 Q54
    Date: 2021
  5. By: Jost, Thomas; Tödter, Karl-Heinz
    Abstract: Debt levels in the eurozone have reached new record highs. The member countries have tried to cushion the economic consequences of the corona pandemic with a massive increase in government spending. There are various calls to abolish or soften the Maastricht rules of limiting sovereign debt. The authors see the risk of a new sovereign debt crisis in this decade if it is not possible to bring public debt down to an acceptable level. The authors propose a new fiscal rule that would be suitable and appropriate for this purpose. In contrast to the rigid 3% Maastricht-criterion, the rule is flexible and it addresses the main problem: excessively high public debt ratios. The authors argue that it lowers the existing incentives for highly indebted governments to exert expansionary pressure on monetary policy. If obeyed strictly, the rule reinforces the snowball effect and reduces the excessively high debt ratios within a manageable period, even if nominal growth is weak. This is confirmed by simulations with different scenarios as well as with the hypothetical application of the new fiscal rule to eurozone economies from 2022 to 2026. Finally, the authors take up the proposal by ESM economists to increase the permissible debt ratio from 60 to 100% of GDP in the eurozone.
    Keywords: Eurozone,fiscal rules,Maastricht criteria,sovereign debt,Stability and Growth Pact
    JEL: H62 H68 F55 F45
    Date: 2021
  6. By: Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
    Abstract: Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers.
    Keywords: Accountability; European Central Bank; politicians; European Parliament
    JEL: E50 E52 E58
    Date: 2021
  7. By: Lhuissier Stéphane
    Abstract: Motivated by empirically characterizing the relationship between financial conditions and downside macroeconomic risks in the euro area, I develop a regime-switching skew-normal model with time-varying probabilities of transitions. Using Bayesian methods, the model estimates show that a strong cyclical pattern emerges from the conditional skewness (a measure of the asymmetry of the predictive distribution), which has a tendency to rapidly decline to negative territory prior and during recessions. However, the inclusion of financial-specific information in time-varying probabilities does not help to anticipate such skewness nor more generally to provide advance warnings of tail risks.
    Keywords: Financial Conditions, Downside Risks, Predictability, Regime-Switching Models
    JEL: C11 C2 E32
    Date: 2022
  8. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: The EU’s fiscal rules, set out in the Maastricht Treaty of 1993 and the Stability and Growth Pact of 1997, are anchored to GDP. The debt ceiling and the deficit threshold are set to 60 percent and 3 percent of GDP, respectively. Recently, prominent economists and policymakers, have argued that that the debt ceiling should be raised due to falling bond yields. By extension, this argument suggests a shift from GDP anchoring to bond yield anchoring of the EU fiscal framework. We discuss the risks of basing the fiscal rules on the bond yield rather than on the GDP. While such a change would provide short-run relief to highly indebted EU member states, it implies high long-run risks to fiscal sustainability should bond yields rise in the future. We conclude that GDP serves as a better anchor for the EU fiscal framework than the bond rate under present circumstances.
    Keywords: Fiscal framework; European Union; ECB; Stability and Growth Pact; secular stagnation; modern monetary theory; government debt; fiscal policy
    JEL: E50 E60 H60 N10
    Date: 2022–01–19
  9. By: CRUCITTI Francesca (European Commission - JRC); LAZAROU Nicholas (European Commission - JRC); MONFORT Philippe; SALOTTI Simone (European Commission - JRC)
    Abstract: We assess the macroeconomic impact of the EU cohesion policy investments deployed during the 2014-2020 programming period, employing updated data on planned expenditures, which in most Member States will take place until 2023. We use the spatial dynamic general equilibrium RHOMOLO in order to quantify the direct and indirect effects of the policy investments in the NUTS 2 regions of the EU within a 20-year time frame. The results suggest that the impact of the policy is sizeable, especially in the less developed regions of the EU. Accordingly, regional disparities are shown to decrease thanks to the policy intervention. The policy also has a positive impact at the EU level, GDP in the EU being 0.4% higher in 2021 compared to a scenario without cohesion policy.
    Keywords: rhomolo, region, growth, Cohesion policy, regional growth, regional development, general equilibrium modelling
    Date: 2022–02
  10. By: Alexander Chudik; M. Hashem Pesaran; Alessandro Rebucci
    Abstract: This paper provides estimates of COVID-19 effective reproduction numbers worldwide and explains their evolution for selected European countries since the start of the pandemic, taking account of changes in voluntary and government-mandated social distancing, incentives to comply, vaccination and the emergence of mutations. Evidence based on panel data modeling indicates that the diversity of outcomes that we document resulted from the non-linear interaction of mandated and voluntary social distancing and the economic incentives that governments provided to support isolation, with no one factor independently capable of lowering the reproduction number below one. However, the importance of these factors declined over time, with vaccine uptake driving heterogeneity in country experiences in 2021. Our approach also allows us to identify the basic reproduction number, R0, and how it changes with mutations. It is precisely estimated and differs little across countries.
    Keywords: COVID-19; multiplication factor; under-reporting; social distancing; self-isolation; SIR model; reproduction number; pandemics; vaccine
    JEL: D0 F60 C4 I12 E7
    Date: 2022–02–04
  11. By: Österholm, Pär (Örebro University School of Business); Poon, Aubrey (Örebro University School of Business)
    Abstract: In this paper, we estimate trend inflation in Sweden using an unobserved components stochastic volatility model. Using data from 1995Q4 to 2021Q4 and Bayesian estimation methods, we find that trend inflation has been well-anchored during the period – although in general at a level below the inflation target – and it does not appear to have been affected much by the recent high inflation numbers.
    Keywords: Unobserved components model; Inflation target; Bayesian estimation
    JEL: C11 C32 C52 E32
    Date: 2022–01–18

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