nep-eec New Economics Papers
on European Economics
Issue of 2022‒08‒22
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The impact of weight shifts on inflation: Evidence for the euro area HICP By Knetsch, Thomas A.; Schwind, Patrick; Weinand, Sebastian
  2. Uncertainty spill-overs: when policy and financial realms overlap By Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
  3. New facts on consumer price rigidity in the euro area By Erwan Gautier; Cristina Conflitti; Riemer P. Faber; Brian Fabo; Ludmila Fadejeva; Valentin Jouvanceau; Jan-Oliver Menz; Teresa Messner; Pavlos Petroulas; Pau Roldan-Blanco; Fabio Rumler; Sergio Santoro; Elisabeth Wieland; Hélène Zimmer
  4. The impact on the Polish economy of the Structural Open Market Operations programme conducted by NBP By Katarzyna Hertel; Marcin Humanicki; Marcin Kitala; Tomasz Kleszcz; Kamila Kuziemska-Pawlak; Jakub Mućk; Bartosz Rybaczyk; Maciej Stefański
  5. Climate change versus price stability: How "green" central bankers and members of the European parliament became pragmatic (yet precarious) bedfellows By Massoc, Elsa C.
  6. The European Structural and Investment Funds and Public Investment in the EU Countries By Karsten Staehr; Katri Urke
  7. Tracking economic growth in real time during the pandemic: a rationale for a revision of €-coin By Valentina Aprigliano; Simone Emiliozzi; Marco Lippi
  8. Targeted monetary policy, dual rates and bank risk taking By Barbiero, Francesca; Burlon, Lorenzo; Dimou, Maria; Toczynski, Jan
  9. Analysis of labor flows and consumption in Spain during COVID-19 By Piluca Alvargonzález; Marina Gómez; Carmen Martínez-Carrascal; Myroslav Pidkuyko; Ernesto Villanueva
  10. Assessing Debt Stationarity and Sustainability in the Longer-Run with Fourier DF Unit Root Tests and Time-Varying Fiscal Reaction Functions By Jamel Saadaoui; Marco Chi Keung Lau; Yifei Cai
  11. Sovereign Bailouts: Are Ex-Ante Conditions Useful? By Perazzi, Elena
  12. The Economic Impacts on Germany of a Potential Russian Gas Shutoff By Galen Sher; Jing Zhou; Ting Lan
  13. Monetary policy normalization, central bank profits, and seigniorage By Zbigniew Polański; Mikołaj Szadkowski

  1. By: Knetsch, Thomas A.; Schwind, Patrick; Weinand, Sebastian
    Abstract: The shifts in household consumption caused by the coronavirus pandemic affect inflation measurement in the euro area via the updating of product weights. We propose a decomposition of the inflation rate, measured by the annual percentage change of the Harmonised Index of Consumer Prices (HICP), into the aggregate price change, keeping weights constant at the previous year's level, and a weighting component. We discuss this decomposition against the backdrop of the HICP concept, considering the evolution of measurement rules over time and marking differences to a decomposition into pure price change and quantity components. Our empirical results show that euro area inflation was distinctly influenced by weighting effects for the first time in 2021. This can equally be observed for France and Italy, while comparable weighting effects in Germany already occurred prior to 2021, albeit rarely. For the period from 2013 onwards, we also provide results for the quantity effect in HICP inflation of these countries. The empirical evidence shows a close relationship between weighting and quantity effects. As weighting effects can be calculated directly from publicly available HICP data over its entire history and are comparable across individual euro area countries, we argue that this decomposition is relevant in terms of providing timely information, especially for analysts and policy-makers.
    Keywords: Inflation measurement,HICP,Updating of weights
    JEL: E31 C43
    Date: 2022
  2. By: Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
    Abstract: No matter its source, financial- or policy-related, uncertainty can feed onto itself, concealing its true origin and leading to identification challenges in empirical applications. We add to the existing stock of analytical methods able to disentangle among various types of uncertainty shocks, by generalising an identification approach based on magnitude restrictions to a multi-country setting. Within the Euro Area, we find evidence of sizable spill-overs arising from country-specific uncertainty shocks, with financial realm being a more important source than the policy realm. By leveraging on the flexibility of our identification strategy, we quantify the valuation ‘mistakes’ that arise from the inability to separate uncertainty shock types within a given country; we then show that the implicit under/over-valuations can be related to some simple cross-sectional indicators of financial and political stability, especially before the 2008/2009 crisis. A comparison between the responses of sovereign yields within and outside the Euro Area suggests strong within institutional arrangements and risk-sharing mechanisms that can blur the thin separation line between uncertainty shock types. In this context, we find that ECB reacted to those identified uncertainty shocks with the highest potential to spill over abroad, thus filling a leadership vacuum within the Euro Area.
    JEL: C3 E58 E60 F36 F40
    Date: 2022–08
  3. By: Erwan Gautier (Banque de France); Cristina Conflitti (Banca d'Italia); Riemer P. Faber (National Bank of Belgium); Brian Fabo (National Bank of Slovakia); Ludmila Fadejeva (Latvijas Banka); Valentin Jouvanceau (Lietuvos Bankas); Jan-Oliver Menz (Deutsche Bundesbank); Teresa Messner (Oesterreichische Nationalbank); Pavlos Petroulas (Bank of Greece); Pau Roldan-Blanco (Banco de España); Fabio Rumler (Oesterreichische Nationalbank); Sergio Santoro (European Central Bank); Elisabeth Wieland (Deutsche Bundesbank); Hélène Zimmer (National Bank of Belgium)
    Abstract: Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
    Keywords: price rigidity, inflation; consumer prices; micro data
    JEL: D40 E31
    Date: 2022–08
  4. By: Katarzyna Hertel (National Bank of Poland); Marcin Humanicki (National Bank of Poland); Marcin Kitala (National Bank of Poland); Tomasz Kleszcz (National Bank of Poland); Kamila Kuziemska-Pawlak (National Bank of Poland); Jakub Mućk (National Bank of Poland); Bartosz Rybaczyk (National Bank of Poland); Maciej Stefański (National Bank of Poland)
    Abstract: The paper presents estimates of the macroeconomic effects of the Structural Open Market Operations (SOMO) programme implemented by NBP in 2020 in response to the COVID-19 pandemic shock. In order to assess the ex-ante impact of bond purchases by the central bank on the real economy and prices in Poland, (i) the impact of unconventional monetary policy on financing conditions, identified indirectly using the shadow policy rate concept, and (ii) the impact of the SOMO on the exchange rate of the Polish zloty against the euro were estimated. The results of the NECMOD model simulations indicate that the unconventional monetary policy conducted by NBP reduced the extent of the decline in GDP growth and inflation by 0.1 and 0.2 percentage points in 2020 and 0.5 percentage points each in 2021. At the same time, the macroeconomic impact of the SOMO was similar to the effect of the interest rate cuts in the first half of 2020.
    Keywords: monetary policy, open market operations, COVID-19
    JEL: E31 E52 E5
    Date: 2022
  5. By: Massoc, Elsa C.
    Abstract: The European Central Bank (ECB) recently proclaimed a more active role for itself in the fight against climate change. Did the European Parliament (EP) play a part in this regard, and if so what was it? To answer this question, this paper builds on a multi-method text analysis of original datasets compiling communications between the ECB and the EP across three accountability forums between 2014 and 2021. The paper shows that there has been discursive convergence between central bankers and parliamentarians concerning the role of the ECB in combatting climate change. It argues that this convergence has resulted from a pragmatic (yet precarious) adoption of a common repertoire1 between 'green' central bankers and parliamentarians who have favored a more active role for the ECB in the fight against climate change. The adoption of a common repertoire is pragmatic, in that it results from the strategic use of specific discursive elements that are ambitious enough to address their respective opponents and trigger political change, yet vague enough to allow both sets of actors to converge on them momentarily. It is also precarious in the sense that it involves discarding fundamental political tensions, which is hardly tenable in the long term. The paper shows that both organizational and politicization dynamics have been at work in the emergence of this pragmatic yet precarious bedfellowship between 'green' central bankers and parliamentarians.
    Keywords: accountability,politicization,European Central Bank,European Parliament,climate,price stability
    Date: 2022
  6. By: Karsten Staehr; Katri Urke
    Abstract: Public investment is low and has declined in many EU countries since the global financial crisis. This paper estimates the effects of the various European Structural and Investment Funds (ESIF) on public investment in the EU countries. The analysis is run on annual data from 2000 to 2018 using dynamic panel data specifications. Funding from the Cohesion Fund, the EU’s facility for its less developed members, has an almost one-to-one effect on public investment in the short term and more in the longer term. Funding from the European Regional Development Fund may have some effect, but it cannot be estimated precisely. Other ESIF funds do not have predictive effects on public investment in the EU countries.
    Keywords: public investment, structural and investment funds, EU
    JEL: H54 H61 H77
    Date: 2022–03–24
  7. By: Valentina Aprigliano (Bank of Italy); Simone Emiliozzi (Bank of Italy); Marco Lippi (Einauidi Institute for Economics and Finance)
    Abstract: Covid-19 caused an abrupt disruption in the world economy and posed big challenges to macroeconomic and time-series analysis. The deep trough in the business cycle was unprecedented in momentum and magnitude, was not approached smoothly, and the pandemic shock was not heralded by any warning signal, as opposed to the run-up to crises triggered by economic factors. Differently from the global financial crisis and the sovereign debt crisis, when €-coin performed quite well, during the pandemic the indicator failed to track the intensity of the collapse and of the subsequent recovery in euro area economic activity. In this paper, we investigate the causes of the slow reaction of €-coin to the Covid-19 outbreak and we describe some revisions made to the indicator to get it back on track in estimating the medium- to long-run growth of the economy during the pandemic.
    Keywords: measurement of economic activity, business cycle, Covid-19, frequency domain, dynamic factor model
    JEL: E32 E66
    Date: 2022–06
  8. By: Barbiero, Francesca; Burlon, Lorenzo; Dimou, Maria; Toczynski, Jan
    Abstract: We assess whether central bank credit operations influence the size and composition of bank credit in a negative interest rate environment. We exploit confidential information from the newly established European credit registry to capture bank lending conditions and bank risk taking. For identification, we use high-frequency reactions of bank bonds around the announcement of the April 2020 recalibration of the ECB’s Targeted Longer-Term Refinancing Operations (TLTROs). We find that the credit easing measures had a strong positive effect on bank credit, even when controlling for possible confounding factors. The increase in lending was not accompanied by excessive risk-taking, especially for banks with low intermediation margin, that is, those that were poised to benefit the most from TLTROs’ borrowing rates below the interest rates on central bank reserves. JEL Classification: E51, E52, G01, G21
    Keywords: bank lending, dual rates, risk taking, unconventional monetary policy
    Date: 2022–07
  9. By: Piluca Alvargonzález (Banco de España); Marina Gómez (Banco de España); Carmen Martínez-Carrascal (Banco de España); Myroslav Pidkuyko (Banco de España); Ernesto Villanueva (Banco de España)
    Abstract: This article analyzes the link between household consumption and its determinants during the pandemic in Spain. For this purpose, both quantitative and qualitative data on consumption included in the Consumer Survey Expectations (CES) carried out by the European Central Bank are used. First, we construct a consumption index on the basis of its qualitative data on spending trends during the pandemic, and its heterogeneity across population groups points towards both unsatisfied consumption (due to existing restrictions on consumption) and the deterioration in the labor market being drivers of the decline of consumption during the pandemic. Likewise, the results show that, in line with the less stringent measures in place to control the pandemic, the strong negative link between income levels and consumption developments (linked to forced savings) has moderated in 2021 (with data up to August) with respect to the previous year. Then, we estimate what proportion of the recovery in household expenditure during the third quarter of 2020, after the large decline observed in the first semester, can be explained by the observed changes in the distribution of hours worked. First, we combine information on hours, industry, gender and age in the Spanish Labor Force Survey and consumption in the Spanish Survey on Household Finances (EFF) to estimate the potential change in expenditure associated with the change of hours worked for different population groups (age, gender, and education level). Those estimations also inform about the groups of the population whose expenditure has been most affected by the pandemic (low-schooling and individuals below 55 years of age). In a second step, we then compare potential and actual changes in consumption observed in the ECB's Consumer Expectation Survey to gauge quantitative contribution of changes in hours to the evolution of expenditure vs other factors (such as postponed expenditure). We find that changes in hours worked can explain almost half of consumption recovery in the 3rd quarter of 2020. Expected consumption trends are also analyzed. Results based on the analysis of qualitative data on expected consumption developments in the CES database indicate that in 2020 consumption perspectives were similar for households with different income levels, even if higher income families accumulated larger forced savings during this period. During 2021, once the phase of larger uncertainty about the economic and sanitary situation was overcome, higher income households also showed better consumption prospects. This suggests that savings accumulated during the pandemic may add greater momentum to the pick-up in consumption once the uncertainty about the epidemiological and economic situation abates. Likewise, individuals that have suffered a recent decline in hours worked (and, particularly, those that have run into unemployment) seem to be also more pessimistic about their labor situation perspectives, affecting their consumption expectations. This suggests that that the consolidation of the recovery of the labor market observed recently is likely to have a key role in explaining future consumption developments.
    Keywords: consumption, expectations, labor market dynamics, coronavirus
    JEL: D12 D15 E21 J22
    Date: 2022–02
  10. By: Jamel Saadaoui (University of Strasbourg); Marco Chi Keung Lau (The Hang Seng University of Hong Kong); Yifei Cai (Teesside University, International Business School)
    Abstract: Thanks to various Fourier DF unit root tests, time-varying fiscal reaction functions and threshold regressions, this study examines the stationarity and the sustainability of public finance for six industrial countries over the period spanning from 1870 to 2017. Longer-run debt sustainability is not rejected for the UK, Sweden, and for the US. The evidence is more mixed for Canada, Italy and Portugal.
    Keywords: Fourier DF unit root test, Debt sustainability, Primary balance
    JEL: H
    Date: 2022
  11. By: Perazzi, Elena
    Abstract: Bailout guarantees create moral hazard, even when full repayment can be enforced. In a strategic default model calibrated to the GIIPS countries, I show that, with unconditional bailout guarantees, government deficits are 6 to 15 percentage points higher than they would be in the absence of guarantees, for a given level of debt. Even if the frequency of outright defaults is reduced, this results in a high frequency of bailouts, which may be inefficient if providing a bailout is costly. In this case ex-ante fiscal conditions can be an effective way to make bailouts a time-consistent policy. The model provides a rationale to a recent reform of the European Stability Mechanism (ESM).
    Keywords: Bailouts, Moral Hazard, Ex-ante conditions
    JEL: E6 F41 H6
    Date: 2022–06–17
  12. By: Galen Sher; Jing Zhou; Ting Lan
    Abstract: We analyze the potential impacts on the German economy of a complete and permanent shutoff of the remaining Russian natural gas supplies to Europe, accounting for the curtailment of flows through Nord Stream 1 that has already taken place. We find that such a scenario could lead to gas shortages of 9 percent of national consumption in the second half of 2022, 10 percent in 2023 and 4 percent in 2024, which would be worse in the winter months, and would likely fall on firms, given legal protections on households. We combine the effects of less gas on production with the consequent effects of reduced supply of intermediate goods and services to downstream firms, and with reduced economic activity due to rising uncertainty. Together, these three channels reduce German GDP relative to baseline levels by about 1.5 percent in 2022, 2.7 percent in 2023 and 0.4 percent in 2024, with no gains in subsequent years from deferred economic activity. The associated rise in wholesale gas prices could increase inflation by about 2 percentage points on average in 2022 and 2023. Our simulations suggest that the economic impacts can be reduced significantly by having households voluntarily share a small part of the burden, and by rationing gas supplies more to more gas-intensive and downstream firms. We also suggest other ways to enhance German energy security.
    Keywords: Energy supply; energy security; natural gas; embargo; rationing; fragmentation
    Date: 2022–07–19
  13. By: Zbigniew Polański (SGH Warsaw School of Economics and National Bank of Poland); Mikołaj Szadkowski (SGH Warsaw School of Economics and National Bank of Poland)
    Abstract: This paper advances a simple framework explaining how monetary policy normalization (“exit policies”) may impact central bank profits and seigniorage formation with further implications for central bank transfers to the government. The cases of seven central banks of major and smaller economies serve as an illustration. The notion of the break-even point is applied to study the financial situation of these institutions for the period of 2014-2020. During the normalization process, interest rate increases may adversely affect profit changes, and through transfers may have an impact on the fiscal space available to the governments, creating political economy concerns. Possible remedies are discussed together with accompanying policy dilemmas.
    Keywords: central bank profit, seigniorage, break-even point, monetary policy normalization, exit policies
    JEL: E52 E58 E59
    Date: 2022

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