nep-eec New Economics Papers
on European Economics
Issue of 2022‒10‒24
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. What drives the risk of European banks during crises? New evidence and insights By Ion Lapteacru
  2. How do firms respond to demand shocks? Evidence from the European sovereign debt crisis By Manuel Adelino; Paulo Fagandini; Miguel A. Ferreira; Francisco Queiro
  3. Banking across Borders in Luxembourg By Gabriele Di Filippo
  4. Market Effects of Central Bank Credit Markets Support Programs in Europe By Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
  5. Financing gaps of companies during the Covid-19 pandemic By Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
  6. Assessment of the Nature of the Pandemic Shock: Implications for Monetary Policy By Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
  7. Softening the blow: Job retention schemes in the pandemic By Jolan Mohimont; Maite de Sola Perea; Marie-Denise Zachary
  8. Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries By Don Bredin; Stilianos Fountas
  9. Global Uncertainty and International Migration to Western Europe By Hippolyte d'Albis; Ekrame Boubtane; Dramane Coulibaly
  10. Non-Linearity between Price Inflation and Labor Costs: The Case of Central European Countries By Alena Pavlova
  11. Where Would Ukrainian Refugees Go if They Could Go Anywhere? By Elinder, Mikael; Erixson, Oscar; Hammar, Olle
  12. Monetary Policy Shocks for Sweden By Kilman, Josefin

  1. By: Ion Lapteacru (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Based on an extensive dataset of 1,156 European banks over the 1995-2015 period, we aim to provide new insights on the determinants of European banks' risk-taking during crisis events, employing a novel asymmetric Z-score. Our results suggest that more capital, lower ratios of loans to deposits and of liquid assets to total assets and lower share of non-deposit and short-term funding in total funding are associated with lower bank risk and this relationship is stronger during the crises. Moreover, having low costs compared to their revenues reduces the risk of European banks in normal times and has the same impact during the crises. Being involved in non-interest-generating activities makes banks riskier. Finally, being large and having higher net interest margin make banks more stable, but this positive effect is diminished for the size and vanished for the profitability during crisis times. And some differences are observed between Western and Eastern European countries.
    Keywords: European banking,bank risk,financial crisis,Z-score. JEL: G21
    Date: 2022–09–12
  2. By: Manuel Adelino; Paulo Fagandini; Miguel A. Ferreira; Francisco Queiro
    Abstract: We examine how firms respond to domestic demand shocks using the large and unanticipated shock to government spending in European periphery countries during the 2010-2011 sovereign debt crisis. We find that firms with higher ex-ante exposure to government procurement contracts significantly increase their exports after the shock or exit. Older and larger firms are better able to substitute domestic sales with entry into export markets than younger and smaller firms. Firms with high-skill workers, high productivity and more educated managers are also more likely to start exporting. Our results suggest that mature and high-quality firms drive the response of tradable industries to domestic demand shocks.
    Date: 2022
  3. By: Gabriele Di Filippo
    Abstract: This paper examines the role of Luxembourg in the international banking system through the Locational Banking Statistics compiled by the Bank for International Settlements. Across European countries, Luxembourg features the largest cross-border banking positions relative to GDP. Indeed, Luxembourg is a small open economy with an international financial centre, whose banking sector consists mostly of foreign-controlled banks. The cross-border banking positions focus on loans and deposits between banks and notably intragroup positions. The geographical counterparts of cross-border banking positions in Luxembourg are mainly Western European countries (especially the euro area) and North America (notably the United States), whether for claims or liabilities. By order of importance, the main country counterparts are Germany, France, Great Britain, Switzerland, Italy, the United States, the Netherlands and Belgium. Within the international banking network, the importance of cross-border banking positions in Luxembourg resembles that of Belgium, Ireland, Japan and the Netherlands. These countries feature fewer connections than the United States, Germany and France. At the top of the network, Great Britain stands as the leading international banking centre. The structure of the international banking network evolves over time. During periods of financial stress, the density of connections stagnates or diminishes and the network becomes less resilient. This was notably the case during the global financial crisis of 2007-2008 and the European sovereign debt crisis of 2010-2012. Over time, the international banking network became more fragmented with more communities developing. This suggests a regionalisation of cross-border banking flows, as cross-border banking activity becomes more concentrated within specific groups of countries.
    Keywords: Cross-border banking positions, BIS Locational Banking Statistics, Network analysis
    JEL: F30 E50
    Date: 2022–09
  4. By: Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
    Abstract: Using responses of credit default swap indexes to ECB monetary policy announcements, we isolate a novel credit policy component of monetary policy surprises. We examine how such unconventional monetary policy surprises affect investor perceptions of credit risk and the functioning of primary corporate debt markets. Favorable credit surprises cause declines in uncertainty about credit risk and suggest a more stable outlook on its dynamics over the following months. Both net and gross corporate bond issuance increase as a result of favorable credit surprises, with the largest response in investment grade issuance. We argue that this provides evidence for the efficacy of a local channel of unconventional monetary policy.
    Keywords: CDS; Central banks; Credit derivatives; Credit programs; Debt issuance; Uncertainty
    JEL: E58 G10
    Date: 2022–08–30
  5. By: Demary, Markus; Hagenberg, Anna-Maria; Zdzralek, Jonas
    Abstract: For firms' business and investment decisions their access to finance is a critical determinant. In times when access to finance becomes tight, corporations face either higher capital costs or they have to postpone their investment decisions when credit lines are not prolongated. Since business investment is a prerequisite to spur economic growth, access to finance is a critical variable in business cycle stabilization. Therefore, central banks take a close look at the financing conditions of companies, and they have to loosen monetary policy when access to finance becomes tighter. In contrast to the US, where firms rely to a great degree on capital market financing, euro area firms are dominantly funded by banks. For our empirical analysis we use data from the Survey of Access to Finance of Small and Medium-sized Enterprises (SAFE) from the ECB. SAFE is a semi-annual survey and it covers the relevant data on financing conditions from the viewpoint of euro area firms with a focus on SMEs. The first wave started in the first half of 2009. Regression analyses with only three macroeconomic variables (yield on sovereign bonds, GDP growth and unemployment rate) on the percentage of vulnerable firms yield the result of a strong positive correlation with long-term interest rates. This effect is reduced when adding access to finance or the change in the external financing gap to the equation, which are also positively correlated to the vulnerability of SMEs. At the same time, the vulnerability of companies is negatively correlated with GDP growth indicating that in times of economic crisis, the vulnerability is higher than in times of economic boom. However, the coefficient loses its significance, when the change in the financing gap and access to finance were added to the regression. Since these two variables are also dependent on the business cycle, they better explain the vulnerability than GDP.
    JEL: E32 E44 E58
    Date: 2022
  6. By: Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
    Abstract: The coronavirus pandemic and the related anti-epidemic measures represented an unprecedented negative shock to the global economy in the form of a dramatic fall in economic activity. Since the onset of the pandemic, the question has been to what extent the contraction of economic activity, largely related to anti-epidemic measures (lockdowns), can be interpreted as a negative anti-inflationary shock to demand and, conversely, what proportion of the observed decline in GDP can be attributed to a negative (cost) inflationary shock on the supply side. To contribute to the debate, we have set out our own narrative and conducted model analyses. We have focused on the world's two largest advanced economies - the US and the euro area. An empirical comparison of the pandemic-induced crisis with the global financial and economic crisis and model simulations indicate that the sharp economic downturn observed in 2020 bears, for the most part, the hallmarks of a supply shock. The combination of a negative supply shock, worldwide accommodative monetary policy and large fiscal stimuli led to strong inflationary overheating across the globe. The Czech National Bank reassessed the macroeconomic story from a demand to supply driven economic downturn. This reassessment, together with a gradual, but steady, recovery of economic activity, enabled the CNB - as one of the first central banks in the world to do so - to appropriately tighten its monetary policy from mid-2021 onwards.
    Keywords: E31, E32, F47
    Date: 2022–09
  7. By: Jolan Mohimont (: Economics and Research Department, National Bank of Belgium); Maite de Sola Perea (Economics and Research Department, National Bank of Belgium); Marie-Denise Zachary (Economics and Research Department, National Bank of Belgium)
    Abstract: We evaluate the welfare effects of the economic consequence of the COVID shock and job retention schemes (JRS) in a heterogenous agents DSGE model calibrated to the euro area. We find that the welfare cost of the COVID shock is large. Households who hold a limited stock of financial wealth and are unable to perfectly insure against shocks to their labor incomes experience larger welfare losses. JRS implemented in response to the pandemic have large favorable welfare effects and benefit all households. These gains are particularly strong for liquid-asset-poor households, especially for those that are also unemployed or furloughed. JRS bring stronger benefits in economies characterized by labor markets with low exit/entry rates from/to unemployment.
    Keywords: : COVID-19, job retention schemes, furlough, household inequality, idiosyncratic risks, labor markets, welfare cost, DSGE.
    JEL: E21 E24 E52 E62
    Date: 2022–09
  8. By: Don Bredin (Graduate School of Business, University College Dublin); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over a forty-year period. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman’s belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., with short-run inflation uncertainty.
    Keywords: Inflation, Inflation uncertainty, Markov process, regime-switching heteroskedasticity
    JEL: C22 C51 C52 E0
    Date: 2022–03
  9. 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
  10. By: Alena Pavlova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This article explores the relationship between labor costs and price inflation under two conditions. Firstly, with linear assumption and classical techniques. Secondly, without assuming linearity, by a novel non-parametric machine learning method, namely gradient boosting. With quarterly data from 1996 to 2022 for V4 countries, we find linear and non-linear dependency between labor cost and price inflation. However, the magnitude of the connection is country-specific and changes over time. Our findings indicate that a significant linear relationship between considered variables does not lead to the higher predictability power of labor cost in a non-parametric model, which predicts inflation. Even opposed, the Czech Republic, the country with the highest correlation between unit labor cost(ULC) and deflator, shows better prediction in a case when the ULC is not in the set of independent variables. This fact highlights the importance of non-linearity for the inflation model.
    Keywords: inflation, labor cost, non-linear model, V4 countries
    JEL: E24 E31 E37
    Date: 2022–10
  11. By: Elinder, Mikael (Department of Economics, Uppsala University); Erixson, Oscar (Department of Economics, Uppsala University); Hammar, Olle (Research Institute of Industrial Economics (IFN))
    Abstract: We present estimates of the number of refugees expected to flee Ukraine and to which countries they are expected to migrate based on migration preferences data from the Gallup World Poll. This is important in terms of both immediate refugee assistance efforts and long-term integration policies. Our key finding is that as many as twelve million people may want to leave Ukraine permanently and that refugee policies in potential destination countries are likely to have a substantial impact on the distribution of Ukrainian refugees between different countries. More specifically, international solidarity in response to the migration crisis would significantly reduce the refugee flows to EU countries, incur a limited burden on non-EU countries, and, at the same time, better take the preferences of the Ukrainians into account.
    Keywords: Ukraine; Refugees; Migration preferences
    JEL: F22 J15 O15
    Date: 2022–09–21
  12. By: Kilman, Josefin (Department of Economics, Lund University)
    Abstract: This paper estimates monetary policy shocks for Sweden between 1996-2019. I employ the Romer and Romer (2004) (R&R) approach and use annual forecasts of output growth and inflation to estimate monetary policy shocks. I complement the analysis with shocks from a recursive VAR including output, prices, and the repo rate, as well as a set of high-frequency shocks. A comparison of the three sets of shocks shows that the R&R and VAR shocks are similar, while the high-frequency shocks are fewer and smaller in size. Local projections show expected impulse responses on most economic variables, regardless of data frequency, but responses to the recursive VAR shocks are more in line with textbook findings compared to responses to the R&R and high-frequency shocks. Overall, results are robust to alternative model specifications and lag lengths in local projections.
    Keywords: Monetary policy; monetary policy shocks; vector autoregression; local projections
    JEL: C22 C32 E32 E43 E52 E58
    Date: 2022–09–15

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