nep-eec New Economics Papers
on European Economics
Issue of 2022‒07‒25
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Considerations on the Monetary Policy Framework of the European Central Bank By Andrea Giorgio Tosato
  2. A model of system-wide stress simulation: market-based finance and the Covid-19 event By di Iasio, Giovanni; Alogoskoufis, Spyridon; Kördel, Simon; Kryczka, Dominika; Nicoletti, Giulio; Vause, Nicholas
  3. How Could Oil Price and Policy Rate Hikes Affect the Near-Term Inflation Outlook? By Jan J. J. Groen; Adam I. Noble
  4. DInformation Spillovers and Sovereign Debt: Theory Meets the Eurozone CrisisAbstract: We develop a theory of information spillovers in sovereign bond markets in which investors can acquire information about default risk before trading in primaryand secondary markets. If primary markets are structured as multi-unitdiscriminatory-price auctions, an endogenous winner’s curse leads to strategiccomplementarities in information acquisition. As a result, shocks to default risk in one country may trigger crisis episodes with widespread information acquisition,sharp increases in the level and volatility of yields in risky countries, falling yields in safe countries, endogenous market segmentation, and arbitrage profits between primary and secondary markets. These predictions are consistent withthe behavior of primary and secondary market yields, market segmentation, and measures of information acquisition during the Eurozone sovereign debt crisis. By Harold Cole; Daniel Neuhann; Guillermo Ordonez
  5. Choosing the European Fiscal Rule By Bušs, Ginters; Grüning, Patrick; Tkačevs, Oļegs
  6. The Anatomy of the Global Saving Glut By Luis Bauluz; Filip Novokmet; Moritz Schularick
  7. The relative effectiveness of EU national and supranational fiscal rules By Melisso Boschi; Alessandro Girardi; Marco Ventura
  8. Migration and public finances in the EU By Carlo V. Fiorio; Tommaso Frattini; Andrea Riganti; Michael Christl
  9. Household Expectations and Dissent Among Policymakers By Moritz Grebe; Peter Tillmann
  10. Mandatory Disclosure of Standardized Sustainability Metrics: The Case of the EU Taxonomy Regulation By Marvin Nipper; Andreas Ostermaier; Jochen Theis
  11. Monetary policy transmission during QE times: role of expectations and term premia channels By Kaminska, Iryna; Mumtaz, Haroon
  12. Comparing Scenarios for a European Carbon Border Adjustment Mechanism: Trade, FDI and Welfare Effects with a Focus on the Austrian Economy By Niko Korpar; Mario Larch; Roman Stöllinger
  13. The local supply channel of QE: evidence from the Bank of England’s gilt purchases By Froemel, Maren; Joyce, Michael; Kaminska, Iryna

  1. By: Andrea Giorgio Tosato (Central Bank of Malta)
    Abstract: This working paper offers some considerations on the monetary policy framework of the European Central Bank. The trade-offs arising from adopting a point target configuration over a range target one are assessed in terms of their flexibility vs. inflation anchoring properties. This layout is then confronted with the policy framework in use in the euro area prior to the adoption of the new monetary strategy, which is interpreted as leaning on the side of flexibility. The increased likelihood of dis-anchoring of long-term inflation expectations experienced in the euro area since 2013, however, suggests that the policy framework could benefit from a rebalancing towards a formulation with stronger anchoring properties. The inflation aim of the ECB could thus be reformulated with the introduction of a symmetric 2%-point target. By evaluating this arrangement in terms of the price stability definition, two regions emerge where either the policy aim (symmetric 2%-point target) or the price stability definition (between 0% and 2%) are satisfied, but not both. To avoid any inconsistency in the policy framework, an inflation aim centred at 2% requires an amendment of the price stability definition.
    JEL: E42 E52 E58
    Date: 2022
  2. By: di Iasio, Giovanni; Alogoskoufis, Spyridon; Kördel, Simon; Kryczka, Dominika; Nicoletti, Giulio; Vause, Nicholas
    Abstract: We build a model to simulate how the euro area market-based financial system may function under stress. 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 in a two-layer approach. In Layer 1 the deterioration in the outlook for the corporate sector triggers portfolio reallocation by the model's agents. Layer 2 adds a rating downgrade shock where a fraction of investment grade corporate bonds is downgraded to high yield, which creates further rebalancing pressure and price movements. The model predicts (i) asset flows (buying and selling of marketable securities) across agents and (ii) balance sheet losses. It also provides quantitative evidence on equilibrium effects of the macroprudential regulation of nonbanks, which we illustrate by varying investment fund cash buffers. JEL Classification: G17, G21, G22, G23
    Keywords: COVID-19, market-based finance, stress testing, systemic risk
    Date: 2022–06
  3. By: Jan J. J. Groen; Adam I. Noble
    Abstract: Since the start of the year, oil prices have risen sharply owing to worsening expectations regarding global oil supply. We’ve also had an acceleration of inflation in the United States and the euro area, as well as a sharp steepening of the expected paths of policy rates in both economies. These factors, combined with the potential for a slowdown in growth, have made the inflation outlook quite uncertain. In this post, we combine the demand and supply oil price decomposition from the New York Fed’s Oil Price Dynamics Report with yield curve data to quantify the likely path of inflation in the United States and the euro area over the next twelve months. Based on our analysis, we anticipate that inflation will likely remain elevated through the second quarter of 2023, despite payback for the inflationary impact of current negative oil supply shocks during the second half of 2022 and the disinflationary effects of tighter monetary policy.
    Keywords: inflation; oil prices; interest rates; forecasting
    JEL: E2 G1
    Date: 2022–06–24
  4. By: Harold Cole (University of Pennsylvania); Daniel Neuhann (University of Texas at Austin); Guillermo Ordonez (University of Pennsylvania)
    Keywords: Schooling,
    Date: 2022–06–28
  5. By: Bušs, Ginters; Grüning, Patrick; Tkačevs, Oļegs
    Abstract: In order to contribute 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 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 using a modified public expenditure definition in the expenditure growth rule, in particular the removal of debt service payments. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to long-run macroeconomic stability. There is also a welfare gain for households from having only an expenditure growth rule.
    Keywords: Fiscal policy; DSGE; Small open economy; Fiscal-monetary policy interaction
    JEL: E27 E32 E62 E63 F41 H63
    Date: 2022–07
  6. By: Luis Bauluz (University of Bonn, WIL - World Inequality Lab); Filip Novokmet (University of Bonn, WIL - World Inequality Lab); Moritz Schularick (Institut d'Études Politiques [IEP] - Paris, University of Bonn, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: This paper provides a household-level perspective on the rise of global saving and wealth since the 1980s. We calculate asset-specific saving flows and capital gains across the wealth distribution for the G3 economies-the U.S., Europe, and China. In the past four decades, global saving inequality has risen sharply. The share of household saving flows coming from the richest 10% of household increased by 60% while saving of middle class households has fallen sharply. The most important source for the surge in top-10% saving was the secular rise of global corporate saving whose ultimate owners the rich households are. Housing capital gains have supported wealth growth for middle-class households despite falling saving and rising debt. Without meaningful capital gains in risky assets, the wealth share of the bottom half of the population declined substantially in most G3 economies.
    Keywords: N32 Income and wealth inequality,household portfolios,historical micro data
    Date: 2022–04
  7. By: Melisso Boschi; Alessandro Girardi; Marco Ventura
    Abstract: Given the EU economic governance, where two layers of fiscal rules co-exist at the supranational and national levels, this paper offers an empirical assessment of the additional impact of national frameworks, compared to EU level ones, on EU countries' budgetary outcomes. Building on the staggered difference-in-differences approach, we quantify the negligible benefits for budgetary discipline stemming from national fiscal rules when supranational ones are already in place.
    Keywords: Fiscal rules; European Union; Staggered Difference-in-Differences
    JEL: H61 C21 C23
    Date: 2022–06
  8. By: Carlo V. Fiorio (University of Milan, Irvapp-FBK and Dondena Centre); Tommaso Frattini (University of Milan, Centro Studi Luca D'Agliano, CEPR, CReAM and IZA); Andrea Riganti (University of Milan); Michael Christl (European Commission - JRC)
    Abstract: We provide novel and comprehensive evidence on the net fiscal contributions of natives and migrants to the governmental budgets of EU countries. We account for income taxes and cash benefits, along with indirect taxes and in-kind benefits, which are often missing in standard datasets. We find that on average, migrants were net contributors to public finances over the period of 2014-2018 in the EU and, moreover, that they contribute approximately EUR 1.5 thousand more per capita each year than natives. We also show that this difference is partly due to selection on characteristics that make migrants net fiscal contributors, such as demographic factors and employment probability.
    Keywords: Migration; EU; individual taxation; public benefits; individual fiscal contribution
    JEL: F22 H24 H50
    Date: 2022–06
  9. By: Moritz Grebe (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: This paper studies the impact of dissent in the ECB's Governing Council on uncertainty surrounding households' inflation expectations. We conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative. Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households' uncertainty about inflation. This effect is statistically significant once we allow for the interaction between the treatments and individual characteristics of respondents. The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. Our findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
    Keywords: central bank communication, disagreement, inflation expectations, randomized controlled trial, survey
    JEL: E52 E43 E32
    Date: 2022
  10. By: Marvin Nipper; Andreas Ostermaier; Jochen Theis
    Abstract: Sustainability reporting enables investors to make informed decisions and is hoped to facilitate the transition to a green economy. The European Union's taxonomy regulation enacts rules to discern sustainable activities and determine the resulting green revenue, whose disclosure is mandatory for many companies. In an experiment, we explore how this standardized metric is received by investors relative to a sustainability rating. We find that green revenue affects the investment probability more than the rating if the two metrics disagree. If they agree, a strong rating has an incremental effect on the investment probability. The effects are robust to variation in investors' attitudes. Our findings imply that a mandatory standardized sustainability metric is an effective means of channeling investment, which complements rather than substitutes sustainability ratings.
    Date: 2022–05
  11. By: Kaminska, Iryna (Bank of England); Mumtaz, Haroon (Queen Mary University of London)
    Abstract: This paper studies monetary policy transmission mechanisms during QE. Using high frequency yield curve event studies of monetary policy announcements in combination with a dynamic term structure model, we can identify four types of monetary policy surprises: action, signalling (working through expected policy rates), policy uncertainty and QE‑specific gilt supply (both working through term premia). Applying the method to the case of the UK, we find that these channels have often operated together. Importantly, their transmission mechanisms into financial markets and macroeconomy differ, as do their relative strengths. These findings emphasize that for a proper evaluation of QE macroeconomic effects, it is key to identify yield curve channels operating during a particular QE programme.
    Keywords: Monetary policy; quantitative easing; monetary transmission mechanism; high frequency data; dynamic term structure model; local projection model
    JEL: C58 E43 E52 E58 G12
    Date: 2022–05–13
  12. By: Niko Korpar (The Vienna Institute for International Economic Studies, wiiw); Mario Larch; Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: As the European carbon border adjustment (CBA) mechanism is high up on the European Commission’s agenda and soon to be implemented, it is important to understand the economic and environmental implications of alternative designs of such a mechanism. To this end and with a view to informing the decision-making process, this study analyses and compares a series of alternative scenarios, which differ along several dimensions of a potential CBA mechanism. Two main scenarios are defined the first one is labelled ‘future ETS price scenario', which assumes a carbon price of EUR 44 and a continuation of the current practice of free allowances; the other is labelled ‘IMF carbon tax scenario’ and assumes a carbon price of EUR 67, which is taken from a recent publication by the IMF, and that free allowances in the industries by the CBA mechanism are abandoned. The scenario analyses rely on the multi-sector quantitative trade model by Larch and Wanner (2017) for trade and on the quantitative FDI model by Anderson et al. (2019). Overall, we find relatively small effects on EU exports, GDP and CO2 emissions. These small quantitative changes at the aggregate, however, mask larger changes at the sectoral level. As expected, the CBA mechanism is more effective when designed in a comprehensive manner, including export rebates in addition to carbon border taxes. The greater economic and environmental effectiveness of such a comprehensive design must be weighed against a heightened legal risk and fiercer opposition by developing countries which perceive the CBA mechanism as ‘green protectionism’ in disguise.
    Keywords: Carbon border taxes, carbon tariffs, carbon leakage, climate change
    JEL: F13 F14 F17 F18 Q56
    Date: 2022–07
  13. By: Froemel, Maren (Bank of England); Joyce, Michael (Bank of England); Kaminska, Iryna (Bank of England)
    Abstract: One way quantitative easing (QE) purchases of government bonds by central banks may affect the yield curve is by creating scarcity in the purchased securities, leading to an increase in their prices or equivalently a reduction in their yields. We analyse and compare the importance of this so-called 'local supply' (or scarcity) channel across all of the Bank of England’s QE government bond purchase programmes during 2009 to 2020. We find strong evidence overall for the role of the local supply channel in explaining gilt yield reactions both to QE announcements ('ex ante'), as well as after purchases have begun ('ex post'). The largest impact on the yield curve through local supply seems to have been in response to the initial QE1 announcements in 2009, both in terms of total impact (the impact of the announced programme), marginal impact (the impact of a given amount of purchases) and relative impact (the proportion of the total change in yields explained). Our findings also imply there may have been an increase in the relative importance of other channels and/or policies over time.
    Keywords: QE; local supply; preferred habitat; yield curve; monetary policy.
    JEL: E43 E52 E58 E65 G11 G12
    Date: 2022–05–13

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