nep-eec New Economics Papers
on European Economics
Issue of 2022‒09‒05
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. 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
  2. The Term Structure of Interest Rates in a Heterogeneous Monetary Union By James Costain; Galo Nuño; Carlos Thomas
  3. Debt sustainability and monetary policy: the case of ECB asset purchases By Enrique Alberola-Ila; Gong Cheng; Andrea Consiglio; Stavros A. Zenios
  4. Forecasting euro area inflation using a huge panel of survey expectations By Florian Huber; Luca Onorante; Michael Pfarrhofer
  5. Medium-to-long term macroeconomic effects of the COVID crisis: an investigation with RHOMOLO By Miguel Sanchez Martinez; Martin Christensen
  6. The Disciplining Effect of Supervisory Scrutiny in the EU-Wide Stress Test By Cosimo Pancaro; Christoffer Kok; Carola Müller; Steven Ongena
  7. Production Networks and International Fiscal Spillovers By Michael B. Devereux; Karine Gente; Changhua Yu
  8. Stress tests and capital requirement disclosures: do they impact banks' lending and risk-taking decisions? By Paul Konietschke; Steven Ongena; Aurea Ponte Marques
  9. Global combinations of expert forecasts By Yilin Qian; Ryan Thompson; Andrey L. Vasnev
  10. Inflation target credibility in times of high inflation By Coleman, Winnie; Nautz, Dieter
  11. What drives repo haircuts? Evidence from the UK market By Christian Julliard; Gabor Pinter; Karamfil Todorov; Kathy Yuan
  12. Distressed firms, zombie firms and zombie lending: a taxonomy By Laura Álvarez; Miguel García-Posada; Sergio Mayordomo
  13. Fresh start policies and small business activity: evidence from a natural experiment By Marco Celentani; Miguel García-Posada; Fernando Gómez Pomar
  14. Local Information and Firm Expectations about Aggregates By Jonas Dovern; Lena Sophia Müller; Klaus Wohlrabe
  15. The Zombification of the Economy? Assessing the Effectiveness of French Government Support during Covid-19 Lockdown By Mattia Guerini; Lionel Nesta; Xavier Ragot; Stefano Schiavo

  1. 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: 2022–06
  2. By: James Costain; Galo Nuño; Carlos Thomas
    Abstract: We build a no-arbitrage model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a “default risk extraction” channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective.
    Keywords: sovereign default, quantitative easing, yield curve, affine model, Covid-19 crisis, ECB, pandemic emergency purchase programme
    JEL: E50 G12 F45
    Date: 2022
  3. By: Enrique Alberola-Ila; Gong Cheng; Andrea Consiglio; Stavros A. Zenios
    Abstract: We incorporate monetary policy into a model of stochastic debt sustainability analysis and evaluate the impact of unconventional policies on sovereign debt dynamics. The model optimizes debt financing to trade off financing cost with refinancing risk. We show that the ECB pandemic emergency-purchase programme (PEPP) substantially improves debt sustainability for euro area sovereigns with a high debt stock. Without PEPP, debt would be on an increasing (unsustainable) trajectory with high probability, while, with asset purchases, it is sustainable and the debt ratio is expected to return to pre-pandemic levels by about 2030. The improvement in debt dynamics extends beyond the PEPP and is larger for more gradual unwinding of the Central Bank balance sheet. Optimal financing under PEPP induces an extension of maturities reducing the risk without increasing costs. The analysis also shows that inflation surprises have relatively little impact on debt dynamics, with the direction and magnitude of the effect depending on the monetary policy response.
    Date: 2022–07
  4. By: Florian Huber; Luca Onorante; Michael Pfarrhofer
    Abstract: In this paper, we forecast euro area inflation and its main components using an econometric model which exploits a massive number of time series on survey expectations for the European Commission's Business and Consumer Survey. To make estimation of such a huge model tractable, we use recent advances in computational statistics to carry out posterior simulation and inference. Our findings suggest that the inclusion of a wide range of firms and consumers' opinions about future economic developments offers useful information to forecast prices and assess tail risks to inflation. These predictive improvements do not only arise from surveys related to expected inflation but also from other questions related to the general economic environment. Finally, we find that firms' expectations about the future seem to have more predictive content than consumer expectations.
    Date: 2022–07
  5. By: Miguel Sanchez Martinez (European Commission - JRC); Martin Christensen (European Commission - JRC)
    Abstract: This paper provides an analysis of scenarios on the evolution of the EU GDP and aggregate consumption over the period 2020-2030, focusing on the role played by the COVID-19 shock. The gap between estimated pre-crisis trends and projected paths for three important variables are obtained using forecasting tools. These variables are the labour force participation rate, private investment, and public consumption, all of which have been significantly disrupted during and after the crisis. By using these projections as shocks in the RHOMOLO model, a number of interesting results on the potential impact of the crisis on future economic growth are obtained. A comparative analysis across EU Member States reveals important differences as regards the potential severity of the issue.
    Keywords: COVID-19, hysteresis, labour force participation, scarring, long-term, GDP, consumption
    Date: 2022–07
  6. By: Cosimo Pancaro (European Central Bank (ECB)); Christoffer Kok (European Central Bank (ECB)); Carola Müller (Center for Latin American Monetary Studies – CEMLA; Halle Institute for Economic Research); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: Relying on confidential supervisory data related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise. We also find that a strong risk management culture is a prerequisite for the supervisory scrutiny to be effective. Finally, we show that a similar disciplining effect is not exerted neither by higher capital charges nor by more transparency and related market discipline induced by the stress test.
    Keywords: Stress Testing, Credit risk, Internal Models, Banking Supervision, banking regulation
    Date: 2022–08
  7. By: Michael B. Devereux (Vancouver school of economics, University of British Columbia, NBER and CEPR.); Karine Gente (Aix-Marseille Universite, CNRS, AMSE, Marseille, France.); Changhua Yu (China Center for Economic Research, National School of Development, Peking University, China.)
    Abstract: This paper analyzes the impact of fiscal spending shocks in a dynamic, multi-country model with international production networks. We first derive a decomposition of the effects of a fiscal spending shock on the GDP of any country. This decomposition defines the response as the sum of a Direct, Income, and Price effect. The Direct Effect depends only on structural parameters and is independent of assumptions about monetary policy, wage setting, or capital mobility, while the Price Effect is zero in the aggregate across countries. We apply this decomposition to an analysis of fiscal spillovers in the Eurozone, using the production network structure from the World Input Output Database (WIOD). We find that fiscal spillovers from Germany and some other large Eurozone countries may be large, and within the range of empirical estimates. Without international production network linkages, spillovers would be only a third as large as predicted by the baseline model. Finally, we explore the diffusion of identified government spending shocks at the sectoral level, both within and across countries, using an empirical measure of the response, based on the theoretical decomposition. The empirical estimates are strongly consistent with the theoretical model.
    Keywords: production network, fiscal policy, spillovers, Eurozone, nominal rigidities
    JEL: E23 E62 F20 F42 H50
    Date: 2022–07
  8. By: Paul Konietschke (European Central Bank (ECB)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Aurea Ponte Marques (European Central Bank (ECB))
    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 1,000 banks (stress-tested and non-tested), allow us to implement a dynamic difference-in-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.
    Keywords: Stress-testing, Credit supply, Profitability, Financial stability, Market discipline
    JEL: E51 E58 G21 G28
    Date: 2022–08
  9. By: Yilin Qian; Ryan Thompson; Andrey L. Vasnev
    Abstract: Expert forecast combination -- the aggregation of individual forecasts from multiple subject-matter experts -- is a proven approach to economic forecasting. To date, research in this area has exclusively concentrated on local combination methods, which handle separate but related forecasting tasks in isolation. Yet, it has been known for over two decades in the machine learning community that global methods, which exploit task-relatedness, can improve on local methods that ignore it. Motivated by the possibility for improvement, this paper introduces a framework for globally combining expert forecasts. Through our framework, we develop global versions of several existing forecast combinations. To evaluate the efficacy of these new global forecast combinations, we conduct extensive comparisons using synthetic and real data. Our real data comparisons, which involve expert forecasts of core economic indicators in the Eurozone, are the first empirical evidence that the accuracy of global combinations of expert forecasts can surpass local combinations.
    Date: 2022–07
  10. By: Coleman, Winnie; Nautz, Dieter
    Abstract: We use a representative online survey to investigate the inflation expectations of German consumers and the credibility of the ECB's inflation target during the recent high inflation period. We find that credibility has trended downwards since summer 2021, reaching an all-time low in April 2022. The high correlation between inflation expectations and the actual rate of inflation strongly indicate that inflation expectations have been de-anchored from the inflation target. With increasing inflation, German consumers are more convinced that - in contrast to the ECB's inflation target - inflation will be well above 2% over the medium term.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation
    JEL: C83 E31 E52 E58
    Date: 2022
  11. By: Christian Julliard; Gabor Pinter; Karamfil Todorov; Kathy Yuan
    Abstract: Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks are backed by high-quality collateral. Banks intermediate repo liquidity among different counterparties and use central counterparties to reallocate high-quality collateral among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders' liquidity position or default probabilities.
    Keywords: repurchase agreement, systemic risk, repo market, margin, haircut
    JEL: G01 G12 G21 G23
    Date: 2022–07
  12. By: Laura Álvarez (Banco de España); Miguel García-Posada (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: This papers develops a taxonomy of financially distressed and zombie firms using a rich dataset that combines detailed firm-level and bank-firm level information in Spain. A distressed firm exhibits both cash-flow and balance-sheet insolvency whereas a zombie firm is a distressed company that has received new credit. We carry out several analyses to test the validity of these definitions. For instance, we find that being distressed is negatively correlated with the probability of receiving new credit. However, the main bank of a distressed firm is more reluctant to restrict the supply of credit to such firm than a bank with no previous exposure to the company, which may reflect the incentives of the former to engage in loan evergreening. This financial support contributes to keeping zombie firms afloat for a longer period than distressed firms. Moreover, the contraction in capital, employment and sales is much larger in distressed firms than in zombie firms.
    Keywords: taxonomy of firms, distressed firms, zombie firms, credit supply, loan evergreening, real effects
    JEL: G21 G32 G33 L25
    Date: 2022–05
  13. By: Marco Celentani (Universidad Carlos III); Miguel García-Posada (Banco de España); Fernando Gómez Pomar (Universitat Pompeu Fabra)
    Abstract: There is no consensus in the academic literature on whether personal bankruptcy laws should be creditor-friendly or debtor-friendly in order to promote entrepreneurship and small business activity. This paper contributes to that literature by analyzing the effect of the introduction of a fresh start policy in Spain in 2015 on the performance of micro-firms as a natural experiment, using Spanish non-micro firms and Portuguese firms as control groups. We find that the reform substantially increased both the probability of filing for bankruptcy by Spanish micro-firms in financial distress (arguably to seek discharge of part of the firm owner’s debt) and the probability of these firms exiting the market, as the fresh start policy requires the liquidation of the debtor’s non-exempt assets. In addition, the reform increased investment and turnover in micro-firms but had no effect on their employment. Finally, the reform also promoted the creation of new micro-firms, especially those involved in innovation activities and in sectors with high productivity.
    Keywords: personal bankruptcy, fresh start, micro-firms, entrepreneurship
    JEL: K35 G33 L25 L26
    Date: 2022–03
  14. By: Jonas Dovern; Lena Sophia Müller; Klaus Wohlrabe
    Abstract: Using new survey data on quantitative growth expectations of firms in Germany, we show that firms resort to local information when forming expectations about aggregate growth. Firms extrapolate from the economic situation in their county, industry growth and their individual business situation. The effect is particularly strong for small firms and explains part of the high expectation dispersion across firms. Furthermore, we show that growth expectations are correlated with employment and investment decisions of firms, highlighting that differences in expectations do indeed seem to lead to differences in actual firm decisions. Our results confirm predictions of theoretical models with rational inattention.
    Keywords: GDP expectations, expectation heterogeneity, disagreement, rational inattention, ifo business tendency survey
    JEL: D84 E20 E32
    Date: 2022
  15. By: Mattia Guerini; Lionel Nesta; Xavier Ragot; Stefano Schiavo
    Abstract: This paper evaluates the risk of zombification of the French economy during the sanitary crisis, as a result of the unconditional financial support provided to firms by public authorities. We develop a simple theoretical framework based on a partial-equilibrium model to simulate the liquidity and solvency stress faced by a large panel of French firms and assess the impact of government support measures. Simulation results suggest that those policies helped healthy but illiquid firms to withstand the shock caused by the pandemic. Moreover, the analysis finds no evidence of a “zombification effect”, as government support has not disproportionately benefited less productive companies.
    Keywords: Covid-19, zombie firms, job-retention, schemes, microsimulation, policy evaluation
    JEL: H12 H32 J38 G33 L20
    Date: 2022

This nep-eec issue is ©2022 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.