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on European Economics |
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Issue of 2022‒08‒15
eighteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Quelhas, João |
| Abstract: | In this paper, we construct a proxy for uncertainty that tracks monetary policy in the Euro area by text-mining thousands of newspaper articles in the press. We calibrate a nonlinear interacted vector autoregression model to study the impact of monetary policy uncertainty on the real economy and on the effectiveness of monetary policy. We find that higher uncertainty leads to a contraction in economic activity, with a higher dampening effect in uncertain times. Uncertainty also influences how strongly movements in the policy rate affect output, investment and consumption as, in uncertain times, average responses are up to three times less powerful than in tranquil times. |
| Keywords: | Monetary Policy, Uncertainty, Euro Area, Textual Analysis, SEIVAR Model |
| JEL: | E32 E40 E50 E52 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:113621&r= |
| By: | Bittner, Christian; Bonfim, Diana; Heider, Florian; Saidi, Farzad; Schepens, Glenn; Soares, Carla |
| 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 credit-registry 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:222022&r= |
| By: | Herr, Hansjörg; Nettekoven, Zeynep Mualla |
| Abstract: | The Covid-19 pandemic hitting the world in 2020 also caused a high death toll in Germany and in the European Monetary Union (EMU) at large. The health crisis worldwide and the precautions against Covid-19 rapidly induced a demand and supply recession simultaneously. The Covid-19 crisis was marked as the worst crisis since the Great Depression of the 1930s. It hit the EMU in an unfortunate moment, when economic growth was already low before the Covid-19 crisis started. The effects of the Great Financial Crisis and Great Recession 2008/2009 were not overcome at the beginning of the Covid-19 recession. Mega-expansionary monetary policy was still in place stimulating bubbles in stock and real estate markets in an overall constellation of partly very high levels of private and public debt. Macroeconomic policies in form of expansionary monetary policy, large-scale fiscal stimuli, and public guarantees, in Germany and the EMU smoothed the disastrous economic and social effects of the pandemic. Overall, the stabilisation policy during the Covid-19 pandemic in Germany was successful and prevented escalating inequalities. But the pandemic intensified long-lasting problems which have to be solved in the future. Public debt quotas cannot increase permanently without leading to an economically fragile situation. It also shows the need for a fiscal union in the EMU as an equal partner for the European Central Bank (ECB). In early 2022, the ECB is in a difficult situation. Price shocks drove the inflation rate up, but restrictive monetary policy as a response to such shocks slowdown growth and lead to unemployment. |
| Keywords: | Covid-19 crisis,Germany,EU,fiscal policy,monetary policy |
| JEL: | E61 F62 I18 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:1852022&r= |
| By: | Pablo Burriel (Banco de España); Iván Kataryniuk (Banco de España); Javier J. Pérez (Banco de España) |
| Abstract: | Loans to Member States under the SURE programme were part of the unprecedented European Union (EU) response to the COVID-19 crisis in 2020-2021. Resources were used to finance countries’ public spending on temporary unemployment schemes. The EU raised funds on the capital markets by issuing securities, and channelled them to recipient countries in the form of bilateral loans. The programme was implemented in a period in which countries had full access to capital markets under very favourable financing conditions. Nonetheless, the full envelope of the programme was used up. In this paper we compare government interest payments under the SURE programme with a counterfactual in which governments themselves raised the same amount of funds on the markets. We focus on the cases of Belgium, Spain, Portugal and Italy. We extend a state-of-the-art DSA framework with a rich modelling set-up in which the dynamics of interest payments on loans and securities, maturing debt and new debt issuance, are jointly determined. Two results stand out: (i) under the financial conditions prevailing at the time of the implementation of SURE, interest savings for the four countries analysed are estimated to be significant (between 3% and 12% of the total amount disbursed over the first 10 years), with amounts depending on the current spread between the EU yield curve and the national one and the maturity structure of the national debt; (ii) under counterfactual scenarios of stressed market conditions during the duration of the loans, savings would be even larger. The latter illustrates the key role these instruments may play in episodes of market stress. |
| Keywords: | public debt, fiscal sustainability, interest payments, European Union |
| JEL: | E44 E61 E62 F36 F45 G14 H63 H68 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2210&r= |
| By: | Harold L. Cole; Guillermo Ordoñez; Daniel Neuhann |
| Abstract: | We develop a theory of information spillovers in sovereign bond markets in which investors can acquire information about default risk before trading in primary and secondary markets. If primary markets are structured as multi-unit discriminatory-price auctions, an endogenous winner’s curse leads to strategic complementarities 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 with the behavior of primary and secondary market yields, market segmentation, and measures of information acquisition during the Eurozone sovereign debt crisis. |
| JEL: | D44 E6 F34 G15 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30216&r= |
| By: | Juan José Almagro Herrador; Mihai Macovei; Moritz Bizer |
| Abstract: | This paper explores the role of the euro in the Southern neighbourhood of the EU, notably in Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco and Tunisia. Our analysis is based on a survey conducted by the European Commission in 2021 on the use of the euro and other currencies in these countries, as well as other relevant sources and is performed across five main dimensions: cross-border trade transactions, remittances, foreign exchange reserves, external public debt and the commercial banking sector. It finds that the use of the euro in Southern Neighbourhood countries is higher, on average, than in the world and in the EU’s Eastern Neighbours (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine), although the US dollar remains the foreign currency of reference in the region. The US dollar’s continued strong role reflects historical developments and monetary arrangements, as well as the greater liquidity and dominant role of the US dollar in global financial markets. The region remains a heterogeneous group, with the euro playing a more prominent role than the US dollar in Maghreb countries (i.e. Algeria, Morocco and Tunisia). The extensive use of the euro for trade invoicing across countries seems highly correlated with the depth of economic and trade relations with euro area countries and the EU at large. Around one third of inward remittances are denominated in euro and over one third of the external public debt stock is denominated in euro on average, higher than the global average. The banking sector and foreign reserves remain heavily dollarised across countries. Based on these findings, the paper highlights new areas, such as green finance and NextGenerationEU bond issuance, which together with other policy initiatives could foster a higher use of the euro in the region. |
| JEL: | E41 E42 E52 E58 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:163&r= |
| By: | Nicholas Lazarou (European Commission - JRC); Anabela Marques Santos (European Commission - JRC); Juan Carlos Del Rio (European Commission - JRC); Stylianos Sakkas (European Commission - JRC) |
| Abstract: | Young people (15-29 years old) were the most impacted due to the Covid-19 pandemic crisis in terms of their labour market situation. In response to the crisis, the European Commission launched the Recovery and Resilience Facility (RRF), which became operative through Member States’ (MS) Recovery and Resilience Plans (RRPs). About 9% of the measures included in the RRPs approved by March 2022 are youth-related. Youth-related measures comprise investments to improve labour productivity and labour supply, as well as public infrastructures investments. The RHOMOLO analysis reported here quantifies the potential impact of these measures on GDP and employment at the NUTS2 level. RRF youth-related measures have the potential to increase GDP and employment by 0.8% and 0.5% respectively. The regions with the highest youth unemployment rates should benefit the most. |
| Keywords: | rhomolo, general equilibrium, economic growth |
| JEL: | C68 R13 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc129687&r= |
| By: | Giuseppe Cascarino (Bank of Italy); Raffaele Gallo (Bank of Italy); Francesco Palazzo (Bank of Italy); Enrico Sette (Bank of Italy) |
| Abstract: | We study the public loan guarantee programs implemented in Italy in the aftermath of the Covid-19 pandemic. Guided by a theoretical model and relying on a unique loan-level dataset covering the period between December 2019 and March 2021, including both guaranteed and non-guaranteed loans, we quantify to what extent public guarantees created additional credit across programs with different coverage ratios and over time. Credit additionality was highest, at around 84 cents per euro of guarantees, for the fully guaranteed loans originated in the first quarter of the program (Q2-2020). In the following quarters, the additionality of the different programs decreased, hovering around 50-60 cents per euro of guarantees. We also document that bank capitalization affected additionality for loans with lower coverage, in which banks have more skin in the game. In contrast, the additionality of the public guarantees varied very little across firms with different levels of risk, liquidity, and size. |
| Keywords: | public loan guarantees, credit additionality, bank capital, pandemic |
| JEL: | G21 G24 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1369_22&r= |
| By: | Micossi, Stefano |
| Abstract: | Following the proposal by Avgouleas and Micossi (2021) and Micossi (2021), several authors (Amato and Saraceno 2022, Baglioni and Bordignon 2022, Cottarelli and Galli 2021, D’Amico et al. 2022) have engaged in the debate on how to manage the sovereign debt portfolio accumulated by the European System of Central Banks (ESCB) as a result of their purchase programmes undertaken since 2015 to fight deflation in the eurozone and provide emergency support to the economy in response to the Covid-19 pandemic. These proposals share the common goal of addressing an important and urgent public policy problem but differ in their specific institutional solutions. This paper provides an assessment of their consistency with present European legal and institutional arrangements in order to assess their practical relevance. The conclusion is that a new mechanism is needed to free the ESCB of the encumbrance of the sovereigns acquired following their assets purchase programmes. The ESM could perform that task while respecting all relevant European law. |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:35443&r= |
| By: | Corti, Francesco; Gros, Daniel; Ruiz de la Ossa, Tomás; Liscai, Alessandro; Kiss-Gálfalvi, Tamás; Gstrein, David; Herold, Elena; Dolls, Mathias |
| Abstract: | This Policy Brief analyses to what extent the funds distributed through the EU’s Recovery and Resilience Facility (RRF) are used by Member States to finance new projects, thus boosting their economic recovery from the Covid-19 pandemic, which is the primary goal of the RRF. Specifically, this Policy Brief provides an in-depth analysis of the National Recovery Resilience Plans submitted by Austria, Belgium, Germany, Spain, Italy and Portugal. Overall, the analysis shows that there is no significant relationship between the total amount of RRF grants (in terms of the percentage of GDP) and an acceleration in public investment. This suggests that RRF funds are mainly being used to finance existing investment projects. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:34969&r= |
| By: | Heliodoro Temprano Arroyo |
| Abstract: | This paper assesses the implications of the large issuance of euro-denominated bonds under the NGEU and SURE instruments, as well as of other measures taken by the EU in response to the pandemic, for the global role of the euro. It focuses on the impact of the new facilities on the supply of safe assets in euros, highlighted by the literature as one of the main constraints so far on the internationalisation of the euro. After discussing this and other reasons why the euro is still punching internationally below the euro area’s economic weight, the paper estimates the expected quantitative impact of the new facilities and other measures, including the euro area’s national fiscal responses to the COVID-19 crisis, on the issuance of euro safe assets. It concludes that, although the NGEU and SURE facilities represent an important step, they are unlikely to sufficiently boost on their own the euro’s global role, reflecting their temporary nature and the partly offsetting acquisition of safe bonds under the ECB’s asset purchase programmes. The paper argues that, if the EU wants to achieve its objective of strengthening the euro’s global status, it should complement these efforts with other measures, as part of a comprehensive strategy. Ongoing structural changes in the world economy, including financial technology, and changes in the geopolitical environment create a more propitious context for this policy to bear its fruits because they make it more plausible that the world will move towards a true multi-polar currency system, overcoming the incumbency advantages that have protected the dollar’s hegemonic position since World War II. |
| JEL: | F33 F31 E5 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:164&r= |
| By: | Nektarios Michail (Central Bank of Cyprus); Agorasti Patronidou (Central Bank of Cyprus); Ioanna Evangelou (Central Bank of Cyprus) |
| Abstract: | The paper examines whether euro area monetary policy was able to affect the consumption and investment behaviour of households in Cyprus, using household level data for Cyprus obtained from the Household Finance and Consumption Survey. Using a panel analysis, we find that monetary policy only affects the deposit and consumption behaviour of indebted households, suggesting that the main transmission channel of monetary policy is via the change in loan instalments. Households without loans appear to be, in general, unaffected by monetary policy changes. This suggests that monetary policy can paradoxically be less effective when most needed, as, in times of financial stress, households tend to focus on deleveraging. Additional avenues with regards to the potential impact of monetary policy on investing behaviour are also explored. |
| Keywords: | HFCS; survey; monetary policy; interest rate; households |
| JEL: | C83 E52 G50 |
| Date: | 2021–10 |
| URL: | http://d.repec.org/n?u=RePEc:cyb:wpaper:2021-1&r= |
| By: | Julian di Giovanni; Sebnem Kalemli-Ozcan; Alvaro Silva; Muhammed A. Yildirim (Center for International Development at Harvard University) |
| Abstract: | We study the impact of the Covid-19 pandemic on Euro Area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: 1) Compositional effects – the switch from services to goods consumption – are amplified through global input-output linkages, affecting both trade and inflation. 2) Inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks. 3) Foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining Euro Area inflation over 2020-21. 4) International trade did not respond to changes in GDP as strongly as it did during the 2008-09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks. |
| Keywords: | Macroeconomics, International Economics, Trade, COVID-19 |
| JEL: | E00 F10 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:cid:wpfacu:414&r= |
| By: | Konietschke, Paul; Ongena, Steven; Ponte Marques, Aurea |
| Abstract: | How do banks respond to changes in capital requirements as a result of the stress tests? Does the disclosure of stress test results matter? To answer these questions, we study the impact of European stress tests on banks’ lending, their corresponding risk-taking, the ensuing effect on their profitability and the respective publication effect. Exploiting the centralised European stress tests in conjunction with two unique confidential databases containing (i) stress test information for the 2016 and 2018 exercises covering a total of 93 and 87 banks, respectively; and (ii) quarterly supervisory information on approximately 1000 banks (stress-tested and non-tested), allow us to implement a dynamic differencein-differences strategy for a comparable sample of banks. We find that banks participating in the stress tests reallocate credit away from riskier borrowers and towards safer ones in the household sector, making them in general safer but also less profitable. This is especially the case for the set of banks part of the Supervisory Review and Evaluation Process with undisclosed stress tests, which were also not disclosing their Pillar 2 Requirements voluntarily. Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability. JEL Classification: E51, E58, G21, G28 |
| Keywords: | Credit supply, Financial stability, Market discipline, Profitability, Stress-testing |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222679&r= |
| By: | Widiantoro, Dimas Mukhlas |
| Abstract: | Countercyclical capital buffer came in 2009 after Basel Committee proposed it through Basel III regulation to build banking resilience and tame the systemic risk due to excessive growth in the credit cycle. Basel committee proposed the credit to GDP gap or credit gap as the indicator of when such buffer is activated. In 2014, the European Central Bank recommended that European Economies adopt the countercyclical capital buffer or CCB in their macroprudential policies. However, in the implementation, every financial authority in EU markets imposed the CCB differently. Some groups use CCB to build resilience as their primary objective. At the same time, the other group attempted not only resilience but also to control the excessive credit growth as their primary objective. The next challenge in implementing CCB is the negative feedback on the usage of the credit gap as the indicator and guidance on setting the CCB rate. The input lies in the Hodrick-Prescott or HP filter containing polynomial drift with a structural break, creating a spurious result. There are two novelties in this paper. First, the paper attempts to see whether the differences in such purposes will affect the country's resilience and ability to tame excessive credit growth. Second, the paper will employ the boosted Hodrick-Prescott filter or bHP from Phillips and Shi (2021) and compare it to the original Hodrick-Prescott filter. The empirical analysis uses data from Germany as the resilience focus market and France focusing on resilience and taming the rapid financial cycle. Using quarterly data from 1999 to 2021, we find that the boosted HP filter significantly improves the accuracy of the credit gap and output gap by removing the polynomial drift in the original HP filter. By analyzing the speed of economic recovery after financial shock, Germany, which focuses primarily on building economic resilience, recovers faster than France. Later, we find no significant difference between the two markets in their ability to tame the financial cycle by analyzing the credit gap cycle after the CCB implementation shock. And last, we find that after 2014, Germany has been able to moderate credit procyclicality, better than the period before. |
| Keywords: | boosted Hodrick-Prescott filter, Output gap, Credit to GDP gap, Countercyclical capital buffer |
| JEL: | E61 E65 |
| Date: | 2022–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:113507&r= |
| By: | Elena Bastianelli (Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", Università di Firenze); Raffaele Guetto (Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", Università di Firenze); Daniele Vignoli (Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", Università di Firenze) |
| Abstract: | It is theoretically ambiguous whether a more loosely regulated labour market should inhibit or foster fertility in a society. Micro-level studies on the effects of employment instability on family formation have primarily focused on single episodes of unemployment or temporary employment, by means of event history analyses modelling the instantaneous effects of labour market transitions. This approach has highlighted the existence of a negative association between employment instability and fertility but makes it difficult to evaluate the overall fertility consequences of the several waves of labour market deregulation reforms implemented in Europe. Furthermore, the few existing studies analysing the relationship between employment protection legislation (EPL) and fertility have found mixed evidence. This paper reconciles the ambivalent conclusions of previous studies by analysing the impact of labour market (de)regulation reforms on total fertility across 19 European countries between 1990 and 2019. We operationalize the country-specific regulatory strictness of regular and temporary contracts over time through the OECD EPL indexes. Our results indicate that an increase in employment protection for regular workers positively affects total fertility. However, an increasing gap between the regulation of regular and temporary employment – that is, labour market segmentation – negatively impacts total fertility. These effects are relatively homogeneous across age groups and geographical areas and are especially pronounced among the lower-educated. We conclude that labour market segmentation, rather than a rigid EPL per se, depresses fertility. |
| Keywords: | Labour market deregulation; Employment protection legislation (EPL); Total fertility rate (TFR); Europe; Regression analysis; Fixed-effect estimator |
| JEL: | J13 J21 J41 J64 J48 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:fir:econom:wp2022_04&r= |
| By: | Dedola, Luca; Osbat, Chiara; Reinelt, Timo |
| Abstract: | We estimate the response of product-level retail prices to changes in the corporate tax rates paid by wholesale producers (pass-through). Under perfect competition in goods and factor markets, pass-through of corporate taxes should be zero, and their incidence mainly falls on factor prices. We use variation in tax rates across time and space in Germany, where municipalities set the local business tax once a year, to provide estimates of tax pass-through into the retail prices of more than 125,000 food and personal care products sold across Germany. By leveraging 1,058 changes in the local business tax rate between 2013 and 2017, we find that a one percentage point tax increase results in a 0.4% increase in the retail prices of goods produced by taxed _rms and purchased by consumers in the rest of Germany, who thus end up bearing a substantial share of the tax burden. This finding suggests that manufacturers may exploit their market power to shield profits from corporate taxes, complicating the analysis of the redistributive effects of tax reforms. We also explore various dimensions of heterogeneity in pass-through related to market power, including producer size, market shares, and retail store types. While producer heterogeneity does not seem to matter, the significant passthrough of corporate taxes to consumer prices in the low inflation period covered by our sample is mostly due to price changes in supermarkets and hypermarkets. JEL Classification: F12, F45, E13, H71, L11 |
| Keywords: | corporate taxes, imperfect competition, producer pass-through to retail prices, vertical interactions |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222681&r= |
| By: | Michał Rubaszek; Karol Szafranek |
| Abstract: | Unprecedented increases in European natural gas prices observed in late 2021 and early 2022 raise a question about the sources of these events. In this article we investigate this topic using a time-varying parameters structural vector autoregressive model for crude oil, US and European natural gas prices. This flexible framework allows us to measure how disturbances specific to the analyzed markets propagate within the system and how this propagation mechanism evolves in time. Our findings are fourfold. First, we show that oil prices are hardly affected by shocks specific to natural gas markets, whether in the US or Europe. Second, we demonstrate that oil shocks have limited impact on US gas prices, which points to the decoupling of both markets. Third, we evidence that over longer horizons natural gas prices in Europe are still mostly determined by oil shocks, with idiosyncratic shocks leading to short-lived decoupling of both commodity prices. Fourth, we illustrate that along the gradual shift from oil price indexation to gas-on-gas competition, the contribution of idiosyncratic shocks to European natural gas prices has increased. Nonetheless, we discuss why the notion that EU natural gas and crude oil prices have decoupled might be premature. |
| Keywords: | Energy market, oil-gas relationship, TVP-VAR model, Bayesian inference. |
| JEL: | C11 C32 Q31 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2022078&r= |