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on European Economics |
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Issue of 2022‒03‒14
nine papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Motto, Roberto; Özen, Kadir |
| Abstract: | We identify a novel dimension of monetary policy from high-frequency changes in asset prices around ECB policy events, orthogonal to surprises extracted from risk-free interest rates. We find that it is present in policy events that were interpreted by real-time market commentaries as containing information about asset purchase programmes aimed to stabilise financial markets and safeguard the monetary policy transmission by implementing asset purchases in a flexible manner across asset classes and euro area countries. We label this dimension of policy “market-stabilization QE” to contrast it with conventional QE programmes such as the APP launched by the ECB in 2015 aimed to extract duration risk. When including our market-stabilization QE, the R2 for the regression of sovereign yields during the sovereign debt crisis increases by about 50 percentage points and the one of the stock market by 35 percentage points; during the COVID-19 pandemic by 25 and 15 percentage points, respectively. Although it moves euro area stressed-country sovereign yields down and German sovereign yields up as a result of the reversal of flight-to-safety dynamics, it generates strong expansionary macroeconomic effects in all euro area countries including Germany. JEL Classification: E43, E44, E52, E58, E65, G01, G14 |
| Keywords: | Central Bank Communication, COVID-19 pandemic, European debt crisis, monetary policy shocks, unconventional monetary policies |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222640&r= |
| By: | Christian Bittner (Bundesbank & Goethe University); Diana Bonfim (Banco de Portugal & Católica Lisbon); Florian Heider (ECB & CEPR); Farzad Saidi (University of Bonn & CEPR); Glenn Schepens (ECB); Carla Soares (Banco de Portugal) |
| Abstract: | This paper studies how banks’ balance sheets and funding costs interact in the transmission of monetary-policy rates to banks’ credit supply to firms. To do so, we use creditregistry data from Germany and Portugal together with the European Central Bank’s policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks’ funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks’ financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks’ funding costs reduces their ability to lever up and weakens their lending standards. |
| Keywords: | transmission of monetary policy, bank lending, bank risk taking, bank balance sheets, euro-area heterogeneity |
| JEL: | E44 E52 E58 E63 F45 G20 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:149&r= |
| By: | Patrick C. Harms |
| Abstract: | The paper adds to the literature as follows: starting from the benchmark model of Asdrubali et al. (1996), we reproduce the original specification with a data set obtained from the authors as well as possible. In a second step, this specification is brought to euro area data. Again, the results are broadly in line with the existing literature (Furceri and Zdzienicka, 2015). We report rolling window and recursive estimates and show high time variation in the coefficients. The parameter estimates are related to a recession dummy in the euro area (confirmed by structural break tests) and very sensitive to the exclusion of countries like Ireland and Luxembourg. Granger causality analysis in a VAR approach also points to a strong dependence on the macroeconomic environment. Last but not least we discuss shortcomings of the approach. All in all the high time variability of the results in a benchmark model in the spirit of Asdrubali et al. (1996) makes it difficult to draw robust policy recommendations for the euro area. |
| Keywords: | Economic and Monetary Union, Risk Sharing Mechanismus |
| JEL: | F41 F32 F36 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:208-2021&r= |
| By: | Georgarakos, Dimitris; Kenny, Geoff |
| Abstract: | This paper introduces the Consumer Expectations Survey (CES), a new online, high frequency panel survey of euro area consumers’ expectations and behaviour. The paper also investigates whether public perceptions about fiscal support measures introduced during the pandemic have influenced spending behaviour. We show that simple and factual information treatments about government support policies that are communicated to random subsets of respondents can help improve consumers’ perceptions about the adequacy of fiscal interventions relative to the perceptions of an untreated control group. We find evidence that this improvement in beliefs has a causal effect on consumer spending, in particular raising spending on large items like holidays and cars. Moreover, we show that such beliefs also influence household expectations about own income prospects, future access to credit and financial sentiment, while they do not affect expectations about future taxes, implying no evidence of Ricardian effects in household behaviour. We find that perceptions affect spending also among households that did not receive any government support, suggesting that fiscal interventions can have broader consequences as they influence the behaviour of groups beyond the targeted ones. JEL Classification: D12, E21, H31 |
| Keywords: | Consumer Expectations Survey, COVID-19, fiscal policy, household perceptions |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222643&r= |
| By: | Altavilla, Carlo; Boucinha, Miguel; Bouscasse, Paul |
| Abstract: | We propose a new methodology to identify aggregate demand and supply shocks in the bank loan market. We present a model of sticky bank-firm relationships, estimate its structural parameters in euro area credit register data, and infer aggregate shocks based on those estimates. To achieve credible identification, we leverage banks’ exposure to various sectors’ heterogeneous liquidity needs during the COVID-19 Pandemic. We find that developments in lending volumes following the pandemic were largely explained by demand shocks. Fluctuations in lending rates were instead mostly determined by bank-driven supply shocks and borrower risk. A by-product of our analysis is a structural interpretation of two-way fixed effects regressions in loan-level data: according to our framework, firm- and bank-time fixed effects only separate demand from supply under certain parametric assumptions. In the data, the conditions are satisfied for supply but not for demand: bank-time fixed effects identify true supply shocks up to a time constant, while firm-time fixed effects are contaminated by supply forces. Our methodology overcomes this limitation: we identify supply and demand shocks at the aggregate and individual levels. JEL Classification: E51, G21, G32 |
| Keywords: | credit demand, credit supply |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222646&r= |
| By: | Couaillier, Cyril; Lo Duca, Marco; Reghezza, Alessio; Rodriguez d’Acri, Costanza |
| Abstract: | While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic. JEL Classification: E61, G01, G18, G21 |
| Keywords: | bank lending, Buffer usability, coronavirus, credit register, macroprudential policy, MDA distance |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222644&r= |
| By: | Reiche, Lovisa; Meyler, Aidan |
| Abstract: | Consumers’ inflation expectations play a key role in the monetary transmission mechanism. As such, it is crucial for monetary policymakers to understand what they are and how they are formed. In this paper we introduce the (un)certainty channel as means to shed light on some of the more puzzling aspects of reported quantitative inflation perceptions and expectations. These include the apparent overestimation of inflation by consumers as well as the negative correlation observed between the economic outlook and inflation expectations. We also show that the uncertainty framework fits with some of the stylised facts of consumers’ inflation expectations, such as their correlation with socio-demographic characteristics and economic sentiment. JEL Classification: D11, D12, D84, E31, E52 |
| Keywords: | consumers, expectations, inflation, uncertainty |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222642&r= |
| By: | Luigi Bonatti,; Andrea Fracasso; Roberto Tamborini |
| Abstract: | We examine the role of inflation expectations in conditioning monetary policy, addressing three of its facets. The first concerns the channels through which inflation expectations impinge upon actual inflation, and their policy implications. The second facet regards the technical and empirical issues involved in keeping track of inflation expectations for monetary policy purposes. The final facet is an assessment of inflation expectations vis-à-vis the current upsurge of inflation, wondering whether, after being unanchored on the downside, can now become unanchored on the upside. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2022/1&r= |
| By: | Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan |
| Abstract: | By providing numerical inflation projections. Many central banks currently face inflation well above their targets and with that the challenge to prevent spillovers on inflation expectations. We study the effect of different communication about the 2021 inflation surge on German consumers' inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using information about inflation projections, where numerical information about professional forecasters' projections seems to reduce inflation expectations by more than policymaker’s characterization of inflation as a temporary phenomenon. |
| Keywords: | Short-run and long-run inflation expectations; inflation surge; randomized control trial; survey experiment; persistent or transitory in inflation shock |
| JEL: | E31 E52 E58 D84 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-694&r= |