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on European Economics |
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Issue of 2022‒10‒17
twenty-two papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin |
| Abstract: | This paper provides a chronology of the main financial events over the last 15 years, spanning three main crises. The first is the global financial crisis in 2008-09, and the second is the euro area sovereign debt crisis in 2010-12. Both events heralded significant reforms of the EU’s governance and financial architecture. On the tail of these two crises, the ongoing COVID-19 crisis that started in early 2020 enables us to assess the working of the resulting financial framework. Two aspects stand out. The first is that the coronavirus crisis was, in its origin, exogenous from previous banking sector behaviours -which was not the case during the 2008-2012 period. The second aspect stems from the combined policy responses to the pandemic, which lacked in the 2008-2012 period. Against this background, the aim of this paper is twofold. The first is to highlight the sequence of regulatory and institutional changes, with a focus on the ECB and Eurosystem, vis-Ã -vis the unfolding events and against the background of broader financial reforms. The second aim of this paper is to investigate whether the sequence of financial reforms has improved the sector’s ability to deal with major macro-financial shocks at the EU/euro area level, reducing the sovereign-bank doom loop. We focus primarily on developments affecting the banking sector, while noting that during the same period major developments within the EU non-bank financial sector were observed. The COVID-19 crisis has been characterized by the positive interaction of rapid fiscal and monetary responses (macro polices), and joint financial and supervisory responses. In this new policy environment the message of the paper is that the sequence of financial reforms, including the acquisition of supervisory and financial stability tasks by the ECB, have been instrumental in facilitating the effective response to the COVID-19 crisis thus far, especially compared to the previous two crises. The increased resilience and resolvability of the EU banking sector has enabled it to withstand the large and unexpe JEL Classification: E42, E58, F36, G21 |
| Keywords: | banking supervision, banking union, decision-making process., European Central Bank (ECB), financial stability, macroprudential policies, monetary policy, systemic risks |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2022305&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | We assess public finances solvency for Euro Area countries using quarterly data between 1999Q1 and 2020Q4. Through a country-by-country analysis, the answer to the title question is true. For most countries, (i) the primary budget balance reacts positively to the lagged public debt ratio and past primary government balances contribute to the reduction of the public debt ratio, indicating a Ricardian fiscal regime. Furthermore, in a panel framework: (ii) the response of revenues to government expenditures is higher from 2010 onwards, and, for higher average public debt ratios, the response is lower, while (iii) the response of the primary government balance to the lagged public debt ratio is lower from 2010 onwards and is higher for higher average public debt ratios; (iv) past primary budget balances allow the public debt ratio to be reduced, especially before 2010 and in countries whose average public debt ratio is between 60 and 90% of GDP. Using a rolling window method, we find that (v) fiscal sustainability coefficients are higher the higher the lagged public debt ratios, fiscal rule indexes and sovereign ratings. Conversely, after 2010 and in periods of legislative elections, those coefficients are lower. |
| Keywords: | fiscal sustainability, primary budget balance, public debt, panel data, rolling windows, Euro Area, quarterly fiscal data |
| JEL: | C23 H61 H63 E62 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9935&r= |
| By: | Stefano Neri (Bank of Italy); Guido Bulligan (Bank of Italy); Sara Cecchetti (Bank of Italy); Francesco Corsello (Bank of Italy); Andrea Papetti (Bank of Italy); Marianna Riggi (Bank of Italy); Concetta Rondinelli (Bank of Italy); Alex Tagliabracci (Bank of Italy) |
| Abstract: | This paper assesses the anchoring of long-term inflation expectations in the euro area, a key issue from a monetary policy perspective, using a range of measures of inflation expectations and methods. The overall reading of the evidence is that long-term inflation expectations in the euro area have rapidly returned to levels close to the new 2 per cent symmetric inflation target of the ECB announced in July 2021, in a context of elevated inflationary pressures linked to the recent surge in energy prices and persistent supply-side bottlenecks. Nonetheless, the risk of an upward de-anchoring of long-term inflation expectations deserves close and continuous monitoring. This risk has to be taken into account when assessing the appropriate pace of normalization of the ECB’s monetary policy stance, acknowledging that the inflation outlook is surrounded by high uncertainty, as signalled by all types of expectations. |
| Keywords: | inflation expectations, survey data, professional forecasters, consumers’ expectations, market based expectations |
| JEL: | E31 E52 C22 G12 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_712_22&r= |
| By: | Pia Hüttl; Matthias Kaldorf |
| Abstract: | This paper studies the effects of harmonizing collateral policy in a monetary union. In 2007, the European Central Bank replaced national collateral lists with a single list specifying which assets euro area banks can pledge as collateral. Banks holding newly eligible assets experience a reduction in their cost of funding and increase loan supply compared to banks without such assets. The effect is driven by core banks increasing credit supply to riskier and less productive firms located in periphery countries. These firms in turn experience growth in employment and investment. Our results suggest that a harmonized collateral framework facilitates cross-border lending to borrowing-constrained firms and, thereby, increases financial market integration in a monetary union. |
| Keywords: | Collateral policy, bank lending channel, financial integration, banking union, real effects |
| JEL: | E44 E52 E58 G20 G21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2012&r= |
| By: | Budnik, Katarzyna; Panos, Jiri; Boucherie, Louis |
| Abstract: | This paper proposes a methodology for measuring the macroprudential policy stance based on a distance-to-tail metric perspective. This approach employs a large-scale semi-structural model reflecting the dynamics of 91 significant euro area banks and 19 euro area economies and is presented through an assessment of the stance evolution for the aggregate euro area economy and for the individual euro area countries. Our results uncover mild tightening of the macroprudential policy stance before the end of 2019. This trend is abruptly interrupted at the onset of the Covid-19 pandemic but reappears at the end of 2020 before picking up again over the first half of 2021. Our assessment also reveals a marginal impact of the macro-financial policies applied, which is particularly notable throughout 2020. JEL Classification: E37, E58, G21, G28 |
| Keywords: | distance-to-tail metric, growth-at-Risk, lending-at-Risk, macroprudential policy, macroprudential policy stance |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2022301&r= |
| By: | Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek |
| Abstract: | This paper reveals new facts about inflation expectations in the euro area. By employing local projection and least squares techniques, the following five facts are documented. First, individual inflation expectations overreact to individual news. Second, the cross-section average of individual inflation expectations underreacts to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation expectations to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the US economy. |
| JEL: | E3 E4 E5 D83 D84 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:170&r= |
| By: | Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona |
| Abstract: | This paper reviews the experience of the ECB with the two-tier system for excess reserve remuneration that exempted a portion of banks’ excess liquidity (EL) holdings from the negative interest rate of the ECB’s deposit facility. JEL Classification: E41, E43, E52, E58, G11, G12 |
| Keywords: | excess liquidity, exemption scheme, monetary policy transmission, negative interest rates, two-tier system |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2022302&r= |
| By: | Árpád Ábrahám; João Brogueira de Sousa; Ramon Marimon; Lukas Mayr |
| Abstract: | We study the welfare effects of both existing and counter-factual European unemployment insurance policies using a rich multi-country dynamic general equilibrium model with labour market frictions. The model successfully replicates several salient features of European labor markets, in particular the cross-country differences in the flows between employment, unemployment and inactivity. We find that mechanisms like the recently introduced European instrument for temporary support to mitigate unemployment risks in an emergency (SURE), which allows national governments to borrow at low interest rates to cover expenditures on unemployment benefits, yield sizable welfare gains, contradicting the conventional classical view that costs of business cycles are small. Furthermore, we find that a harmonized benefit system that features a one-time payment of around three quarters of income upon separation is welfare improving in all Eurozone countries relative to the status quo. |
| Keywords: | labour markets, Unemployment Insurance, job creation, job destruction, risk-sharing, Economic Monetary Union |
| JEL: | J6 E2 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1330&r= |
| By: | Pietsch, Allegra; Salakhova, Dilyara |
| Abstract: | The green bond market has increased rapidly in recent years amid growing concerns about climate change and wider environmental issues. However, whether green bonds provide cheaper funding to issuers by trading at a premium, so-called greenium, is still an open discussion. This paper provides evidence that a key factor explaining the greenium is the credibility of a green bond itself or that of its issuer. We define credible green bonds as those which have been under external review. Credible issuers are either firms in green sectors or banks signed up to UNEP FI. Another important factor is investors’ demand as the greenium becomes more statistically and economically significant over time. This is potentially driven by increased climate concerns as the green bond market follows a similar trend to that observed in ESG/green equity and investment fund sectors. To run our analysis, we construct a database of daily pricing data on closely matched green and non-green bonds of the same issuer in the euro area from 2016 to 2021. We then use Securities Holdings Statistics by Sector (SHSS) to analyse investors’ demand for green bonds. JEL Classification: G12, G14, Q50, A56 |
| Keywords: | climate change, corporate sustainability, impact investing, sustainable finance |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222728&r= |
| By: | Lebastard, Laura |
| Abstract: | This paper studies for the first time the links between interbank liability and equity markets (financial exposure), and mergers and acquisitions (M&As) in the European banking sector, both at the micro and macro level. Using a binary logit model, the paper first examines – at the micro level – how financial exposures between banks affect the probability of M&A. It finds that financial interlinkages significantly increase the chances of them taking place. Using a gravity model, the paper then investigates – at the macro level – whether the micro results hold. Not only do financial links are positively and significantly correlated with the number of M&As between countries, but they are also a better predictor than trade – traditionally used in the macro literature on M&A. Since the Capital Market Union would help to geographically diversify banks’ portfolio, it would therefore also foster cross-border M&As. Finally, the paper builds a M&A compatibility index for each pair of EU countries. The study highlights strong M&As prospects linked to high financial interlinkages in core Europe, which could be the sign of a future asymmetrical financial integration in the EU. JEL Classification: G21, G34, F21, F34, F36 |
| Keywords: | Bank consolidation, financial exposure, gravity model, logit model |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222724&r= |
| By: | Christine Frayne; Agnieszka Szczypińska; Bořek Vašíček; Stefan Zeugner |
| Abstract: | House prices have been at the centre of the public debate recently. After years of sustained increases they accelerated further during the pandemic. The global financial crisis highlighted the impact that housing markets can have on financial stability and the real economy. However, housing market developments also affect housing affordability, which has been deteriorating as income growth did not keep pace with house prices. This paper looks at housing developments in the euro area countries from an affordability perspective, and shows its various dimensions, such as price-to-income, burden of housing cost, household borrowing capacity, but also regional patterns and the impact of affordability on broader economic developments. The paper discusses policy options for addressing high and increasing house prices and the impact these measures have on affordability. The paper documents how housing has evolved across time and countries. The main policy conclusion is that affordability requires policies ssupporting housing supply. While there is a full set of policies that can boost supply of housing, effectively introducing these policies is challenging as they are usually under the control of different actors, often implemented to address other issues and take long to make an impact. In contrast, demand-side policies can be introduced quickly and provide assistance to vulnerable groups. The excess of housing demand over supply gives rise to economic rents for property and land owners, which makes finding a balanced solution more challenging. |
| JEL: | G51 R21 R31 R52 R58 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:171&r= |
| By: | Giovanni Carnazza; Pierluigi Vellucci |
| Abstract: | European Monetary Union continues to be characterised by significant macroeconomic imbalances. Germany has shown increasing current account surpluses at the expense of the other member states (especially the European periphery). Since the creation of a single currency has implied the impossibility of implementing competitive devaluations, trade imbalances within a monetary union can be considered unfair behaviour. We have modelled Eurozone trade flows in goods through a weighted network from 1995 to 2019. To the best of our knowledge, this is the first work that applies this methodology to this kind of data. Network analysis has allowed us to estimate a series of important centrality measures. A polarisation phenomenon emerges in relation to the growth of German dominance. The common currency has then not been capable to remove trade asymmetry, increasing the distance between surplus and deficit countries. This situation should be addressed with expansionary policies on the demand side at national and supranational level. |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2209.09837&r= |
| By: | Kajdi, László |
| Abstract: | Payments are a key focus of central banks, as - together with the safe, efficient operation of the payments market – wide access to cash is fundamentally important for a healthy economy. In this study, three main research areas were investigated: 1. socioeconomic characteristics that can be associated with financial inclusion; 2. factors behind consumers´ payment choices; 3. underlying factors for holding cash in a wallet (i.e. for transactional purposes). Regression results for the first research question confirmed the findings of international literature, i.e. mainly older age, lower income and lower educational level is associated with the lack of access to electronic payment options. The study pursues various approaches to investigate consumer payments choices, and the results from most models showed that those with higher level of income and education, or lower level of cash income are more likely to prefer and actually use electronic payment methods. Finally, concerning the holding of cash the initial expectations were confirmed i.e. those who do not use cash for daily transactions tend to keep less cash in their wallet, while those who indicated preference for cash payments or higher importance of cash payment option are more likely to keep higher cash amounts. JEL Classification: D11, D12, E42, J33 |
| Keywords: | cash, financial inclusion, payments |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222729&r= |
| By: | Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian |
| Abstract: | The market turmoil in March 2020 highlighted key vulnerabilities in the EU money market fund (MMF) sector. This paper assesses the effectiveness of the EU's regulatory framework from a financial stability perspective, based on a panel analysis of EU MMFs at a daily frequency. First, we find that investment in private debt assets exposes MMFs to liquidity risk. Second, we find that low volatility net asset value (LVNAV) funds, which invest in non-public debt assets while offering a stable NAV, face higher redemptions than other fund types. The risk of breaching the regulatory NAV limit may have incentivised outflows among some LVNAV investors in March 2020. Third, MMFs with lower levels of liquidity buffers use their buffers less than other funds, suggesting low levels of buffer usability in stress periods. Our findings suggest fragility in the EU MMF sector and call for a strengthened regulatory framework of private debt MMFs. JEL Classification: G11, G15, G23, G28 |
| Keywords: | COVID-19, financial fragility, money market funds, regulation |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222737&r= |
| By: | Dürmeier, Stefan |
| Abstract: | The research question relates to the quantitative impact of government bond purchases of the European Central Bank on inflation and other economic variables at the zero lower bound. At the core is a standard New Keynesian Dynamic Stochastic General Equilibrium model with several financial frictions. The model replicates the intended effect of Quantitative Easing regarding the drop in the government bond yield at the expense of a rise in public debt, and displays the crowding out effect on the balance sheet of the bank which spurs credit and output. Amid lower levels of wages and consumption, the overall quantitative effect is nevertheless not inflationary but deflationary. After a shock to the credit supply, Quantitative Easing is activated more if the zero lower bound on the policy rate is in place. Output after the first period, consumption as well as wages and inflation drop more in the case of the zero lower bound and Quantitative Easing does not make up for the loss. The same findings for the economic performance marked by these four variables are obtained for the analysis at the zero lower bound when a shock hits the exposure of financial intermediaries to public debt. |
| Keywords: | Quantitative Easing,Taylor Rule,Zero Lower Bound,Moral Hazard |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:183&r= |
| By: | Antonis Kotidis (Board of Governors of the Federal Reserve System); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Elias Papaioannou (London Business School and CEPR) |
| Abstract: | In a surprise move during a crisis, the ECB excluded Greek Government Bonds from the set of eligible collateral in monetary policy operations. In turn, Greek banks turned to Emergency Liquidity Assistance (ELA) to meet their funding needs. ELA replenished losses from all funding sources, consistent with its role as LOLR. However, in anticipation to a switch to ELA, banks reduced their interbank and corporate lending as a result of its higher cost and conditionality. Although multi-lender firms compensated for the associated credit crunch, single-lender firms that were not able to establish new lending relationships experienced a reduction in their exports. |
| Keywords: | Central Bank Interventions; Lender of Last Resort (LOLR); Collateral Framework; Emergency Liquidity Assistance (ELA) |
| JEL: | E58 G21 G28 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:304&r= |
| By: | Weichenrieder, Alfons J. |
| Abstract: | This note argues that in a situation of an inelastic natural gas supply a restrictive monetary policy in the euro zone could reduce the energy bill and therefore has additional merits. A more hawkish monetary policy may be able to indirectly use monopsony power on the gas market. The welfare benefits of such a policy are diluted to the extent that some of the supply (approximately 10 percent) comes from within the euro zone, which may give rise to distributional concerns. |
| Keywords: | energy crisis,monetary policy,natural gas |
| JEL: | E52 Q31 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:360&r= |
| By: | Donato Ceci (Bank of Italy); Marcello Pericoli (Bank of Italy) |
| Abstract: | This paper provides an estimate of the fair value of the Italian ten-year sovereign spread, defined as a value consistent with the country’s macroeconomic fundamentals. It uses a multi-country model in which the spreads of the government bond yields of Italy, France and Spain with respect to the German bond yield are regressed on a set of fundamental macroeconomic variables and a set of variables approximating the risk perception of investors, for the period January 2007 – June 2022. The results show that, in the last ten years, the observed level has often been above the fair value, with significant upward deviations during periods of market tensions and/or political uncertainty. The dynamics of the debt-to-GDP ratio and those of expected growth show, respectively, a positive and a negative relationship with the trend of the fair value. In the last two years, expected inflation has also played an important role: while its decline exerted a downward effect on the fair value in 2020 and for part of 2021, the increase observed since the last quarter of 2021 has led to a rise in the fair value. |
| Keywords: | sovereign bond spread, macroeconomic fundamentals, risk aversion |
| JEL: | E44 G15 H63 |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_713_22&r= |
| By: | Lenarčič, Črt |
| Abstract: | This paper aims to explore how mortgage and consumer loans arrears are affected by household financial and social status as well as macroeconomic situation and banking standards and restrictions. In general, arrears could pose an elevated risk to the financial stability of banks and could consequently limit households’ access to credit in the future. At the same time, the arrears may decrease households’ well-being. From both perspectives, it is important to determine the drivers of both types of arrears in order to address the issue by applying appropriate economic policies. We find that affordability problems, such as housing costs and financial burdens, income inequality, employment status and credit standards are utterly important in determining the arrears. |
| Keywords: | Mortgage arrears, arrears of consumer loans, income inequality, housing cost, financial burden, credit standards, macroprudential policy. |
| JEL: | C33 D14 D31 E21 |
| Date: | 2022–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:114558&r= |
| By: | Del Vecchio, Leonardo; Giglio, Carla; Shaw, Frances; Spanò, Guido; Cappelletti, Giuseppe |
| Abstract: | One important source of systemic risk can arise from asset commonality among financial institutions. This indirect interconnection may occur when financial institutions invest in similar or correlated assets and is also described as overlapping portfolios. In this work, we propose a methodology to quantify systemic risk derived from asset commonality and we apply it to assess the degree of indirect interconnection of banks due to their financial holdings. Based on granular information of asset holdings of European significant banks, we compute the sensitivity based ∆ CoVaR which captures the potential sources of systemic risk originating from asset commonality. The novel indicator proves to be consistent with other indicators of systemic importance, yet it has a more transparent foundation in terms of the source of systemic risk, which can contribute to effective macroprudential supervision. JEL Classification: C58, E32, G01, G12, G18, G20, G32 |
| Keywords: | CoVaR, Financial networks, Financial regulation, Overlapping portfolios, Systemic risk |
| Date: | 2022–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20222725&r= |
| By: | Michael Grubb (University College London) |
| Abstract: | The energy crisis engulfing Europe is a crisis of both gas and electricity markets, with huge cost impacts on consumers across all European countries. In Britain, half of typical household energy expenditure arises from electricity. This paper examines how the cost of gas-powered generation feeds through to electricity bills, on the principle of marginal cost pricing, setting the price for most of the time though it accounts for only about 40% of GB generation. Combined with the steep decline in wind and solar costs over the past decade, this has resulted in an unprecedented degree of 'cost inversion' in the electricity system. We offer estimates of the increase of revenues across the wholesale market, and outline five principles for reform for addressing the combined challenges of energy costs and accelerating low-carbon transition. |
| Keywords: | Electricity market design; energy crisis; marginal cost pricing; energy transition; energy poverty |
| JEL: | L16 L51 L94 L98 Q4 Q28 Q58 |
| Date: | 2022–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp191&r= |
| By: | Nicola Gagliardi; Pedro Arévalo; Stéphanie Pamies |
| Abstract: | Assessing fiscal risks from climate change is a critical and challenging issue. In this paper, we analyse the fiscal implications of acute physical risks from climate change, as we aim to capture debt sustainability risks associated with extreme weather and climate events. This is done by providing stylised stress tests for selected EU Member States, designed as shocks to public finances and growth. To do so, we rely on a comparative approach. Climate-related aggravating factors to debt sustainability are captured via a global natural disaster database and available forward-looking estimates of economic losses from different climate events, projected under different global warming pathways. Our results highlight that extreme weather and climate events may pose risks to debt sustainability, although remaining manageable across the EU under standard global warming scenarios. Our findings emphasise the relevance of implementing large-scale, rapid, and immediate climate mitigation and adaptation measures to dampen the adverse economic and fiscal impacts of potentially more frequent and intense extreme events, thereby reducing countries’ exposure, their vulnerability, and debt sustainability risks. |
| JEL: | Q54 H12 H63 |
| Date: | 2022–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:168&r= |