nep-eec New Economics Papers
on European Economics
Issue of 2022‒05‒30
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. European Exchange Rate Adjustments in Response to COVID-19, Containment Measures and Stabilization Policies By Jens Klose
  2. The future of European fiscal governance: a comprehensive approach By Marzia Romanelli; Pietro Tommasino; Emilio VadalÃ
  3. A model of system-wide stress simulation: market-based finance and the Covid-19 event By Giovanni di Iasio; Spyridon Alogoskoufis; Simon Kordel; Dominika Kryczka; Giulio Nicoletti; Nicholas Vause
  4. What drives the risk of European banks during crises? New evidence and insights By Ion Lapteacru
  5. Instinctive versus reflective trust in the European Central Bank By Angino, Siria; Secola, Stefania
  6. Optimal Unemployment Insurance in a THANK Model By Stéphane Auray; Aurélien Eyquem
  7. Trust and monetary policy By Paul De Grauwe; Yuemei Ji
  8. The Determinants of Risk Weighted Asset in Europe By Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio; Matarrese, Marco Maria
  9. The position of the EU in the semiconductor value chain: evidence on trade, foreign acquisitions, and ownership By Ciani, Andrea; Nardo, Michela
  10. Climate change and credit risk: the effect of carbon taxes on Italian banks’ business loan default rates By Maria Alessia Aiello; Cristina Angelico

  1. By: Jens Klose (THM Business School Giessen)
    Abstract: This paper estimates the effects of nine exchange rates for european countries vis-a-vis the Euro in the COVID pandemic. Using data on COVID cases, three containment and two stabilization measures relative to the euro area counterparts, it is shown that a more severe spread of the virus leads to a depreciation of the domestic currency. The same holds with respect to stricter movement restrictions, health care measures and more supportive monetary policies. More expansionary fiscal policies by the domestic country on the other hand lead to an appreciation of the currency. Two extensions show that the results differ with respect to whether the country is a scandinavian or eastern european country and whether the euro area countries or the other european countries introduce the measures.
    Keywords: Exchange rates, COVID-19, Europe, stabilization policies, containment measures, panel VAR
    JEL: E44 E52 E62
    Date: 2022
  2. By: Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy); Emilio Vadalà (Bank of Italy)
    Abstract: We review the general reasons for limiting the discretion of national fiscal policies in the context of a monetary union and, on this basis, we assess the shortcomings of the current Euro area fiscal framework as well as the merits of the main proposals for its reform. Taking into account the elements of consensus that emerged in the debate, we outline a possible revision of the European fiscal rules. The framework we propose aims at public debt sustainability – focusing on those policies which are clearly harmful to member countries – and it is simple and transparent – avoiding the use of unobservable variables. The new framework would be based on a medium-term debt target and a multi-annual headline deficit profile consistent with that target. The new rules should be complemented with a common fiscal capacity, to compensate for the loss of policy discretion at the national level and to internalize cross-country fiscal spillovers. In particular, we suggest introducing a “contingent†facility, which would be activated in cases specified ex ante or for the realization of common projects of exceptional nature (such as the green transition).
    Keywords: fiscal policy rules, fiscal policy, euro area, fiscal federalism, fiscal union
    JEL: F45 E61 E62 H77
    Date: 2022–04
  3. By: Giovanni di Iasio (Bank of Italy); Spyridon Alogoskoufis (European Central Bank); Simon Kordel (European Central Bank); Dominika Kryczka (European Central Bank); Giulio Nicoletti (European Central Bank); Nicholas Vause (Bank of England)
    Abstract: We build a model to simulate how the euro-area market-based financial system may function under stressed conditions, such as the COVID-19 turmoil. The core of the model is a set of representative agents reflecting key economic sectors, which interact in asset, funding and derivatives markets and face solvency and liquidity constraints on their behaviour. We illustrate the model’s behaviour with a two-layer approach. In Layer 1, we consider the deterioration in the outlook for the nonfinancial corporate sector. Agents reallocate their portfolios and risky asset prices fall. Layer 2 adds a rating downgrade shock to Layer 1, where a fraction of investment grade nonfinancial corporate bonds is downgraded to high yield. The additional shock creates further rebalancing pressure and price movements. For both layers we present asset flows (i.e. buying and selling marketable securities) across agents and balance sheet losses. The model provides quantitative support to the equilibrium effects of the macroprudential regulation of investment funds, which we illustrate by varying their liquidity buffers.
    Keywords: Systemic risk, market-based finance, stress testing, COVID-19
    JEL: G17 G21 G22 G23
    Date: 2022–04
  4. By: Ion Lapteacru (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Based on an extensive dataset of 1,156 European banks over the 1995-2015 period, we aim to provide new insights on the determinants of European banks' risk-taking during crisis events, employing a novel asymmetric Z-score. Our results suggest that more capital, lower ratios of loans to deposits and of liquid assets to total assets and lower share of non-deposit and short-term funding in total funding are associated with lower bank risk and this relationship is stronger during the crises. Moreover, having low costs compared to their revenues reduces the risk of European banks in normal times and has the same impact during the crises. Being involved in non-interest-generating activities makes banks riskier. Finally, being large and having higher net interest margin make banks more stable, but this positive effect is diminished for the size and vanished for the profitability during crisis times. And some differences are observed between Western and Eastern European countries.
    Keywords: European banking,bank risk,financial crisis,Z-score
    Date: 2022–03–30
  5. By: Angino, Siria; Secola, Stefania
    Abstract: Political science research has established that trust in institutions, including central banks, is shaped by socio-economic and demographic factors, as well as by the assessment of institutional features and by slow-moving components such as culture. However, the role of cognitive processes has largely been neglected, especially in the analysis of central bank trust. In this paper we aim to address this gap focusing on the case of the European Central Bank (ECB). We introduce the concepts of “instinctive trust”, which captures an on-the-spot judgement on the institution’s trustworthiness, and of “reflective trust”, which refers to a more pondered opinion on the matter. Using a survey experiment, we find that deeper consideration about the ECB promotes less trust in the institution compared to an on-the-spot judgement. This result is mainly driven by women, and in particular by those who say they possess a low understanding of the central bank’s policies. JEL Classification: C83, D83, E58, Z13
    Keywords: central bank, Institutional trust, survey experiment
    Date: 2022–05
  6. By: Stéphane Auray (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Aurélien Eyquem (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, Université de Lyon)
    Abstract: A Tractable HANK (THANK) model with three agents, incomplete markets, unemployment and sticky prices and wages, is used to analyze the dynamics, welfare and distributional effects of Ramsey-optimal unemployment insurance (UI) policies. First, the optimal transition from a steady state that replicates several empirical regularities of the European labor market to the Ramsey steady state is analyzed. In the long run, the vacancy creation motive dominates, as the replacement rate falls, lowering the unemployment rate. In the short run however, the insurance motive dominates until unemployment falls enough to generate larger welfare gains from a lower unemployment rate. Over the business cycle around the Ramseyoptimal steady state, we nd that the optimal changes in the replacement rate depend (i) on the nature of the shock and (ii) on the presence of price and wage rigidities. After productivity shocks, the vacancy creation motive dominates. After separation shocks, the planner has almost no traction over vacancy creations. Only the insurance and aggregate demand stabilization motives remain, and both point to a counter-cyclical UI policy.
    Keywords: Incomplete markets,Borrowing constraints,Unemployment,Unemployment Insurance
    Date: 2022–04–05
  7. By: Paul De Grauwe; Yuemei Ji
    Abstract: We analyze how trust affects the transmission of negative demand and supply shocks. We define trust to have two dimensions: there is trust in the central bank’s inflation target and trust in the future of economic activity. We use a behavioural macroeconomic model that is characterized by the fact that individuals lack the cognitive ability to understand the underlying model and to know the distribution of the shocks that hit the economy. We find, first, that when large negative demand shocks occur the subsequent trajectories taken by output gap and inflation typically coalesce around a good and a bad trajectory. Second, these good and bad trajectories are correlated with movements in trust. In the bad trajectories trust collapses, in the good trajectories it is not affected. This feature is stronger when a negative supply shock occurs than in the case of a negative demand shock. Third, initial conditions (history) matters. Unfavorable initial conditions drive the economy into a bad trajectory, favorable initial conditions produce good trajectories.
    Date: 2022–05
  8. By: Leogrande, Angelo; Costantiello, Alberto; Laureti, Lucio; Matarrese, Marco Maria
    Abstract: We have estimated the level of Risk Weighted Assets among 30 countries in Europe, in 30 trimesters, using data of the European Banking Authority-EBA of 139 variables. We perform an econometric model using Pooled OLS, Panel Data with Fixed Effects, Panel Data with Random Effects, Weighted Least Squares. We found that Risk Weighted Assets is negatively associated, among others, to the level of NFC loans in mining and quarrying, in public administration and defence, and in financial and insurance activities and positively associated, among others to distribution of NFC loans in human health services and social work activities, in education and the level of net fee and commission income. Furthermore, we apply a cluster analysis with the k-Means algorithm, and we find the presence of two clusters. A comparison was then made between eight different machine learning algorithms for predicting the value of the RWAs and we found that the best predictor is the linear regression. The RWA value is predicted to increase by 1.5%.
    Keywords: Financial Institutions and Services; General; Banks, Depository Institutions, Micro Finance Institutions, Mortgages; Investment Banking, Government Policy, and Regulation
    JEL: G0 G20 G21 G24 G28
    Date: 2022–05–01
  9. By: Ciani, Andrea (European Commission); Nardo, Michela (European Commission)
    Abstract: We map companies belonging to the semiconductor value chain at the world level and investigate the turnover of the companies by jurisdiction of their ultimate owner. Total turnover for the top-10 companies, with respect to revenue, among the manufacturers of semiconductors amounts to 266 Billion EUR for year 2020. The same group of companies accounts for 87% of market capitalization of this industry in 2021. Our coverage is uneven across jurisdictions. We have a richer coverage for Europe than for the US and China, given the interest in analysing the European landscape. Data on turnover by segment shows that EU-owned companies represent a relevant share of the input suppliers for the production of semiconductors (evidence confirmed by De Jong, 2020, as well as by Kleinhans and Baisakova, 2020). Indeed EU companies are among the largest suppliers of chemicals and gases in this supply chain, accounting for 34% of world turnover in 2020. US companies are leaders in the production of equipment used for the production of semiconductors with 31% of the turnover, closely followed by European ones with 27%. The picture changes when looking at the turnover of EU-owned chip producers (foundries) and chip designers (fabless companies), which is negligible. Taiwanese firms share with South Korean manufacturers the leadership in the foundry segment.
    Keywords: Semiconductors, Europe, Companies, Ownership
    JEL: F23 F10 L63 G32
    Date: 2022–04
  10. By: Maria Alessia Aiello (Bank of Italy); Cristina Angelico (Bank of Italy)
    Abstract: Climate change poses severe systemic risks to the financial sector through multiple transmission channels. In this paper, we estimate the potential impact of different carbon taxes (€50, €100, €200 and €800 per ton of CO2) on the Italian banks’ default rates at the sector level in the short term using a counterfactual analysis. We build on the micro-founded climate stress test approach proposed by Faiella et al. (2021), which estimates the energy demand of Italian firms using granular data and simulates the effects of the alternative taxes on the share of financially vulnerable agents (and their debt). Credit risks stemming from introducing a carbon tax – during periods of low default rates – are modest on banks: on average, in a one-year horizon, the default rates of firms increase but remain below their historical averages. The effect is heterogeneous across different sectors and rises with the tax value; however, even assuming a tax of €800 per ton of CO2, the default rates are lower than the historical peaks.
    Keywords: climate change, carbon tax, climate stress test, banks’ credit risk
    JEL: Q43 Q48 Q58 G21
    Date: 2022–04

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