nep-eec New Economics Papers
on European Economics
Issue of 2022‒10‒10
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Enhancing private and public risk sharing: lessons from the literature and reflections on the COVID-19 crisis By Cimadomo, Jacopo; Gordo Mora, Esther; Palazzo, Alessandra Anna
  2. Reactions of household inflation expectations to a symmetric inflation target and high inflation By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  3. Energy price shocks and stabilization policies in a multi-agent macroeconomic model for the Euro Area By Enrico Turco; Davide Bazzana; Massimiliano Rizzati; Emanuele Ciola; Sergio Vergalli
  4. How QE changes the nature of sovereign risk By Dirk Broeders; Leo de Haan; Jan Willem van den End
  5. How to release capital requirements during a pandemic? Evidence from euro area banks By Couaillier, Cyril; Reghezza, Alessio; Rodriguez d’Acri, Costanza; Scopelliti, Alessandro
  6. The Cyclical Behaviour of Fiscal Policy During the Covid-19 Crisis By Philipp Heimberger
  7. Immigrants and the distribution of income and wealth in the euro area: first facts and implications for monetary policy By Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
  8. An Estimation of Unemployment Hysteresis By Engelbert Stockhammer; Rob Calvert Jump
  9. Sovereign-bank diabolic loop: The government procurement channel By Diana Bonfim; Miguel A. Ferreira; Francisco Queiro; Sujiao (Emma) Zhao
  10. Improving inference and forecasting in VAR models using cross-sectional information By Prüser, Jan; Blagov, Boris
  11. Production Networks and International Fiscal Spillovers By Michael B Devereux; Karine Gente; Changhua Yu
  12. Excess liquidity and the usefulness of the money multiplier By Jan Marc Berk; Jan Willem van den End
  13. Uncovering the network structure of non-centrally cleared derivative markets: evidences from regulatory data By Zema, Sebastiano Michele
  14. Trade credit and the transmission of unconventional monetary policy By Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
  15. Inflation, price stability, and monetary policy: On the legality of inflation targeting by the Eurosystem By Siekmann, Helmut
  16. Breaking Bad: A Disaggregated Analysis of Inflation Inertia By Mr. Serhan Cevik
  17. Global Uncertainty and International Migration to Western Europe By Hippolyte d'Albis; Ekrame Boubtane; Dramane Coulibaly

  1. By: Cimadomo, Jacopo; Gordo Mora, Esther; Palazzo, Alessandra Anna
    Abstract: This article surveys the literature on consumption risk sharing, focusing on the findings for the euro area and for the United States, but also presenting evidence for other countries. The literature examined found that risk sharing is higher in more mature federations, such as the United States, than in the euro area. The papers surveyed suggest that state/country-specific output shocks are primarily smoothed out through the capital and credit channel, whereas the fiscal channel as a minor role, especially in the euro area. Overall, about 70% of shocks is smoothed in the United States while just 40% in the euro area. At the same time, our analysis of the response to the COVID-19 crisis indicates that risk sharing in the euro area has been more resilient than it was during the global financial crisis of 2008-09. Overall, our results point to the need for further improvements to the private and public risk-sharing channels in the euro area to ensure more effective cushioning against asymmetric shocks and to boost progress towards the completion of European Monetary Union (EMU). JEL Classification: C23, E62, G11, G15
    Keywords: COVID-19 crisis, EMU reform, Risk sharing
    Date: 2022–09
  2. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide evidence on the reactions of the level and probability distribution of households’ expectations of inflation in the euro area to the ECB’s monetary strategy change to a symmetric inflation target in July 2021, and to the subsequent strong rise in euro area inflation above target. We use a randomised control trial within a monthly representative Dutch household survey of short and long-term inflation expectations, where half of respondents receive information about the ECB’s inflation target and actual inflation. The survey responses give rise to three main findings. First, we find that households’ median expectations of euro area inflation ten years ahead showed no reaction to the introduction of a symmetric inflation target by the ECB, and short-term expectations changed very little. Second, and by contrast, median euro area expectations rose in response to the strong increase in inflation above target, both for short- and long term expectations. Taken together, the results document that the ECB strategy revision itself did not have a material impact on household inflation expectations, but the high realisations of actual inflation did. These findings suggest that when it comes to household inflation expectations and central bank credibility, inflation outcomes speak louder than words. The third finding is that households’ expected probabilities of high inflation (4% or higher) increased as well in response to high above-target inflation, both for the short- and long term horizons. These results suggest that long-term euro area inflation expectations of households have become less well anchored as inflation has increased strongly above target in the wake of the pandemic. While the long-term expectations of households who received information remained better anchored than those who did not, the expectations of both groups became less well anchored with inflation rising strongly above target.
    JEL: E31 E58
    Date: 2022–04
  3. By: Enrico Turco (Fondazione Eni Enrico Mattei and Complexity Lab in Economics, Department of Economics and Finance, Catholic University of Milan); Davide Bazzana (Fondazione Eni Enrico Mattei, Department of Economics and Management, University of Brescia); Massimiliano Rizzati (Fondazione Eni Enrico Mattei); Emanuele Ciola (Fondazione Eni Enrico Mattei, Department of Economics and Management, University of Brescia); Sergio Vergalli (Fondazione Eni Enrico Mattei, Department of Economics and Management, University of Brescia)
    Abstract: Soaring energy prices since fall 2021 have prompted European governments to introduce policy measures to support households and businesses. In this paper, we employ the MATRIX model, a multi-sector and multi-agent macroeconomic model calibrated on the Euro Area, to analyze the economic and distributional effects of different types of macro-stabilization policies in response to energy price shocks. Simulation results show that, in the absence of stabilization policies, an increase in fossil fuel price would lead to a sharp growth in price inflation and a severe contraction in real GDP, followed by a slow but steady recovery. We find no significant effects of generalized tax cuts and household subsidies, while firm subsidies promote a faster recovery but at the expense of greater financial instability in the medium term due to the resulting market distortions. If timely adopted, government-funded energy tariff reduction is the most effective policy in mitigating GDP losses at relatively low public costs, especially if coupled with an extra-profit tax on energy firms. Energy entrepreneurs benefit from rising fuel prices in all policy scenarios, but to a lesser extent under energy tariff cuts and windfall profits tax, favouring, in that case, workers and downstream firms owners.
    Keywords: Energy shocks, Policy analysis, Agent-based models, Macroeconomic dynamics
    JEL: C63 E63 O13 Q43
    Date: 2022–09
  4. By: Dirk Broeders; Leo de Haan; Jan Willem van den End
    Abstract: We examine the effect of Quantitative Easing (QE) by the ECB on the sovereign bond risks of Italy, Ireland, Spain and Portugal. First, outcomes of panel regression models suggest that QE lowered the effect of volatility on sovereign bond spreads by 1 to 2 percentage points. Compared to asset purchases aimed at easing the monetary stance, purchase programmes supporting monetary transmission by countering financial market stress most clearly reduced the effect of volatility on spreads. Second, using a contingent claims model (CCM), the values of the implicit put options provided by QE as a backstop to investors are calculated to be substantial. Our results guide policymakers on the use of backstop facilities for sovereign bond markets.
    Keywords: Quantitative Easing, Sovereign risk, Sovereign spreads, Contingent Claims Model
    JEL: E52 E58 G12
    Date: 2022–02
  5. By: Couaillier, Cyril; Reghezza, Alessio; Rodriguez d’Acri, Costanza; Scopelliti, Alessandro
    Abstract: This paper investigates the impact of the capital relief package adopted to support euro area banks at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks' capacity to supply credit to firms. Second, not all measures are equally successful. Banks adjust their credit supply only if the capital relief is permanent or implemented through established processes that foresee long release periods. By contrast, discretionary relief measures are met with limited success, possibly owing to the uncertainty surrounding their capital replenishment path. Moreover, requirement releases are more effective for banks with a low capital headroom over requirements and do not trigger additional risk-taking. These findings provide key insights on how to design effective bank capital requirement releases in crisis time. JEL Classification: E61, G01, G18, G21
    Keywords: bank capital requirements, coronavirus, countercyclical policy, credit register, macroprudential policy
    Date: 2022–09
  6. By: Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper analyses the cyclicality of fiscal policy (discretionary versus automatic) for 28 advanced economies over 1995-2021 by paying special attention to the Covid-19 crisis. We find evidence that discretionary fiscal policy during the Covid-19 crisis (2020-2021) was significantly more countercyclical than before – in particular in the Eurozone. We do not find comparable evidence for more counter-cyclicality during the financial crisis or Euro crisis, which lends support to the argument that discretionary fiscal policy responded especially forceful to stabilise the economy during the Covid-19 crisis. Furthermore, automatic fiscal stabilisers contributed significantly to counter-cyclical stabilisation, although their performance over 2020-2021 was more in line with the past than for discretionary fiscal policy. Overall, fiscal policy in non-Eurozone advanced countries is more countercyclical than in the Eurozone. However, the cyclicality varies markedly across countries. Our findings shed light on how the cyclical behaviour of fiscal policy varies across countries and time.
    Keywords: Fiscal policy; Covid-19 crisis; financial crisis; Euro crisis; automatic stabilisers; discretionary fiscal policy
    JEL: E62 H11 H61
    Date: 2022–09
  7. By: Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
    Abstract: We use household surveys to describe differences in wages, income, wealth and liquid assets of households born in their country of residence (“natives”) vs. those born in other EU and non-EU countries (“immigrants”). The differences in wealth are more substantial than the differences in wages and incomes: immigrants earn on average about 30% lower wages than natives and hold roughly 60% less net wealth. For all variables, only a small fraction of differences between natives and immigrants—around 30%—can be explained by differences in demographics (age, gender, marital status, education, occupation, sector of employment). Immigrants are more likely to be liquidity constrained: while about 17% of natives can be labelled as “hand-to-mouth” (holding liquid assets worth less than two weeks of income), the corresponding share is 20% for households born in another EU country and 29% for those born outside the EU. Employment rates of immigrants are substantially more sensitive to fluctuations in aggregate employment. Monetary policy easing stimulates more strongly employment of individuals born outside the EU. JEL Classification: J15, D31, E52
    Keywords: distribution of income and wealth, inequality, migration, monetary policy
    Date: 2022–09
  8. By: Engelbert Stockhammer; Rob Calvert Jump
    Abstract: This paper explores the degree of hysteresis in EU unemployment rates. The hysteresis hypothesis holds that actual (demand-determined) unemployment can turn into structural unemployment. The European Commission estimates and reports NAIRUs as part of the AMECO dataset, which also inform the EU fiscal policy rules. These exclude the possibility of hysteresis by assumption. We present a simple model to estimate hysteresis effects. We demonstrate that there is significant evidence for the existence of unemployment hysteresis in the majority of the EU15 countries. In the EU15 as a whole, we find the average degree of hysteresis to be 80%. Our findings suggest that the European Commission could profitably consider alternative NAIRU estimation strategies that allow for unemployment hysteresis. These results have two important consequences for policy makers. First, they indicate that a lack of government intervention in response to negative shocks has immediate effects in the form of increasing unemployment as well as long-lasting effects on the NAIRU. This is consistent with the OECD Employment Outlook 2017. Second, as the NAIRU estimates enter the calculation of the output gap and the structural deficit, the EU Fiscal Compact should be reconsidered.
    Keywords: unemployment, unemployment hysteresis, Europe, NAIRU
    JEL: E24 E60 E61
    Date: 2022–09
  9. By: Diana Bonfim; Miguel A. Ferreira; Francisco Queiro; Sujiao (Emma) Zhao
    Abstract: We show that banks' lending exposure to rms with government procurement con- tracts can amplify the diabolic loop between sovereigns and banks. Using the scal austerity measures implemented during the 2010-2011 European sovereign debt crisis as a shock to government procurement, we nd that banks with higher exposure to these rms reduced lending signi cantly more than banks with lower exposure, controlling for rm-speci c credit demand. The reduction in credit supply is economically as important as the e ect of banks' sovereign debt holdings, and a ected both rms with and without government contracts. Firms with lending relationships with a ected banks experienced lower sales growth, assets growth, employment growth, and investment. This decrease in real economic activity is likely to reduce tax revenue, further amplifying the diabolic loop.
    Keywords: Credit supply, Government procurement, Investment, Employment, Financial crises, Bank-sovereign loop, Austerity
    JEL: G01 G20 G31 H57
    Date: 2022
  10. By: Prüser, Jan; Blagov, Boris
    Abstract: We propose a prior for VAR models that exploits the panel structure of macroeconomic time series while also providing shrinkage towards zero to address overfitting concerns. The prior is flexible as it detects shared dynamics of individual variables across endogenously determined groups of countries. We demonstrate the usefulness of our approach via a Monte Carlo study and use our model to capture the hidden homo- and heterogeneities of the euro area member states. Combining pairwise pooling with zero shrinkage delivers sharper parameter inference that improves point and density forecasts over only zero shrinkage or only pooling specifications, and helps with structural analysis by lowering the estimation uncertainty.
    Keywords: BVAR,shrinkage,forecasting,structural analysis
    JEL: C11 C32 C53 E37
    Date: 2022
  11. By: Michael B Devereux (Vancouver school of economics, University of British Columbia, NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR); Karine Gente (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Changhua Yu (China Center for Economic Research, National School of Development, Peking University)
    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
    Date: 2022–07–13
  12. By: Jan Marc Berk; Jan Willem van den End
    Abstract: Despite being an identity, the money multiplier (MM) is also a useful summary of the financial intermediation process as it can be interpreted as the rate of substitution between inside and outside money. By modelling the supply and demand for inside and outside money, we provide this rate of money substitution with behavioural underpinnings. Our model illustrates how the creation of large outside money balances by central banks induces behavioural changes, creating an environment characterised by a low MM and low market interest rates. The outcomes of switching regressions for the US and the euro area confirm that such a low regime can be distinguished from a conventional MM regime. The low regime reflects a state in which the functioning of the financial system changes fundamentally due to excess supply of reserves. This so-called excess liquidity trap has adverse economic consequences, is persistent, and cannot be solved by monetary policy alone. We argue that government and supervisory measures taken during the pandemic provide an example of supporting policies that are effective in escaping the excess liquidity trap.
    Keywords: monetary policy; interest rates; money multipliers
    JEL: E51 E52
    Date: 2022–03
  13. By: Zema, Sebastiano Michele
    Abstract: The network structure of non-centrally cleared derivative markets, uncovered via the European Market Infrastructure Regulation (EMIR), is investigated with a focus on the Covid-19 market turmoil period. Initial and variation margin networks are reconstructed to analyze channels of potential losses and liquidity dynamics. Despite the absence of central clearing, the derivative network is found to be ultrasmall and a filtering tool is proposed to identify channels in the network characterized by the highest exposures. I find these exposures to be mainly toward institutions outside the euro-area (EA), emphasizing the need for cooperation across different jurisdictions. Anomalous behavior in terms of diverging first and second moments on the degree and strength distributions are detected, signaling the presence of large exposures generating extreme liquidity outflows. A reference table of parameters’ estimates based on real data is provided for different network sizes, with no break of confidentiality, making possible to simulate in a realistic way the liquidity dynamic in global derivative markets even when the access to supervisory data is not granted. JEL Classification: G01, G15, G23
    Keywords: complex networks, fat-tails, financial derivatives, maximum spanning trees, non-centrally cleared exposures
    Date: 2022–09
  14. By: Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
    Abstract: We show that production networks are important for the transmission of unconventional monetary policy. Firms with bonds eligible for purchase under the European Central Bank’s Corporate Sector Purchase Program act as financial intermediaries by extending more trade credit to their customers. The increase in trade credit is more pronounced from core countries to periphery countries and for financially constrained customers. Customers increase investment and employment in response to the increase in trade financing, while suppliers expand their customer base, contributing to upstream industry concentration. Our findings suggest that trade credit redistributes the effects of monetary policy across regions and firms.
    Keywords: Monetary policy, Trade credit, Corporate bonds, Investment, Employment
    JEL: E50 G30
    Date: 2022
  15. By: Siekmann, Helmut
    Abstract: In the communication of the European Central Bank (ECB), the statement that "we act within our mandate" is often referred to. Also among practitioners of the Eurosystem the term "mandate" has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term "mandate". It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation.
    Date: 2022
  16. By: Mr. Serhan Cevik
    Abstract: The post-pandemic rise in consumer prices across the world has renewed interest in inflation dynamics after decades of global disinflation. This paper contributes to the literature by providing a granular investigation of inflation persistence at the city level in Lithuania during the period 2000–2021, as well as a comparison of inflation persistence at the country level vis-àvis the eurozone over the same period. Using disaggregate monthly data collected in five major cities, the empirical analysis finds a mixed and ambiguous picture of inflation persistence. While the headline inflation does not appear to exhibit a high degree of persistence, most consumption categories have significant persistence. As a result, shocks may not remain transitory and instead have persistent effects that could spillover across subcomponents depending on the size of the shock.
    Date: 2022–09–02
  17. By: Hippolyte d'Albis (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ekrame Boubtane (CERDI - Centre d'Etudes et de Recherche en Droit de l'Immatériel - UP1 - Université Paris 1 Panthéon-Sorbonne - Université Paris-Saclay, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Dramane Coulibaly (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article quantifies the effects of increasing global geopolitical uncertainty on the size of migration flows to Western Europe. Uncertainty is measured by the number of victims of terrorist attacks worldwide. The effect on migration flows is quantified through the estimation of vector autoregressive models on a panel of 15 European countries and on France, thanks to an original migration dataset. The estimations suggest that the flows of permanent migrants are generally reduced by global terrorism. In particular, the increase in uncertainty that followed the attacks of September 11, 2001, caused an 8% drop in flows to Europe and a 19% drop in flows to France. The effect of global uncertainty on the flow of asylum seekers depends on the country: on average in Europe, asylum applications increase with terrorism, but for France, they decrease with terrorism. This difference can be explained by the geographical position and border control policies of France.
    Keywords: Uncertainty,Terrorism,Migration,September 11,2001
    Date: 2022–09

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