nep-eec New Economics Papers
on European Economics
Issue of 2023‒01‒09
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Different Motives for Holding Cash in France: an Analysis of the Net Cash Issues of the Banque de France By Franz Seitz; Lucas Devigne; Raymond de Pastor
  2. Energy shocks in the Euro area: disentangling the pass-through from oil and gas prices to inflation By Casoli, Chiara; Manera, Matteo; Valenti, Daniele
  3. Is the Slope of the Euro Area Phillips Curve Steeper than It Seems? Heterogeneity and Identification By Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
  4. Bank bond holdings and bail-in regulatory changes: evidence from euro area security registers By Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
  5. Emotion in Euro Area Monetary Policy Communication and Bond Yields: The Draghi Era By Dimitrios Kanelis; Pierre L. Siklos
  6. Procyclical and Countercyclical Fiscal Policies in non-Euro EU Member Countries By IANCU, AUREL; OLTEANU, DAN CONSTANTIN
  7. The impact of derivatives collateralisation on liquidity risk: evidence from the investment fund sector By Jukonis, Audrius; Letizia, Elisa; Rousová, Linda
  8. The Conditional Path of Central Bank Asset Purchases By Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
  9. The Covid-19 Pandemic and European Trade Patterns: A Sectoral Analysis By Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
  10. EU-induced Financialisation and Its Impact on the Greek Wage Share, 1999-2021 By Gouzoulis, Giorgos; Iliopoulos, Panagiotis; Galanis, Giorgos
  11. Dynamic scoring of tax reforms in real time By BARRIOS Salvador; REUT Adriana; RISCADO Sara; VAN DER WIELEN Wouter
  12. European real estate markets during the pandemic: Is COVID-19 also a case for house price concerns? By Koetter, Michael; Noth, Felix
  13. Endogenous Product Adjustment and Exchange Rate Pass-Through By Andreas Freitag; Sarah M. Lein; Sarah Marit Lein
  14. Intra-financial assets and the intermediation role of the financial sector By Daniel Carvalho
  15. THE EUROPEAN WHOLESALE ELECTRICITY MARKET: FROM CRISIS TO NET ZERO By Willems, Bert; Pollitt, Michael; von der Fehr, Nils-Henrik; Banet, Catherine
  16. The macroeconomic implications of financialisation on the wealth distribution By Meijers, Huub; Muysken, Joan
  17. Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data By Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter

  1. By: Franz Seitz; Lucas Devigne; Raymond de Pastor
    Abstract: The present paper analyzes the net cash issues of the Banque de France. It is divided in two parts. The first estimates cash demand functions for different denominational groups (small, medium, large). We find that many of the different motives for holding cash are present in the French case. In a second step we try to estimate the amounts used for transaction and store of wealth purposes, internal hoardings and foreign demand with indirect methods with a special focus on different variants of the so-called seasonal method. Our results reveal that in 2019 only around 15 % of the cumulated net issues are used for domestic transactions. Around 60 % are held outside France, either in other euro area countries or outside the euro area.
    Keywords: Cash, Banknotes, Net Issues, Seasonal Method.
    JEL: C22 E41 E58
    Date: 2022
  2. By: Casoli, Chiara; Manera, Matteo; Valenti, Daniele
    Abstract: We develop a Bayesian Structural VAR (SVAR) model to study the relationship between different kinds of energy shocks and inflation dynamics in Europe. Specifically, we include in our specification two separate energy markets (oil and natural gas) and two target macroeconomic variables, measuring inflation expectations and the realized headline inflation. Our results demonstrate that, during the last year, inflation in the Euro area is more affected from energy price shocks, particularly those coming from the natural gas sector. The high peaks of the Eurozone inflation are mainly associated with gas consumption demand shocks and, to a lesser extent, to oil and gas supply shocks.
    Keywords: Public Economics, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy
    Date: 2022–12–19
  3. By: Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
    Abstract: Heterogeneity in Phillips Curve slopes among members of a monetary union can lead to downward biases to estimates of the union-wide slope in reduced form regressions. The intuition is that in a monetary union with heterogeneous regional Phillips Curve slopes, the central bank, aiming at stabilizing demand shocks, will react stronger to shocks in regions with steep slopes compared to shocks in regions with flat slopes. Using a simple New-Keynesian model of a monetary union that omitting controls for this heterogeneity, we show that reduced form estimates of the union-wide slope suffer from a substantial bias towards zero. Empirically, we show that controlling for slope heterogeneity in Euro Area data increases reduced form estimates of the slope in the period since 2009.
    Keywords: Phillips curve, heterogeneity, monetary meeting
    JEL: E24 E31 E58
    Date: 2022
  4. By: Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
    Abstract: We assess the impact on bank bond holdings of regulatory changes in the requirements for bail-inable liabilities designed to facilitate an orderly resolution process, while reducing taxpayers-funded bailouts. Analyzing confidential data on securities holdings by banks, we document that the introduction of the minimum requirements for eligible liabilities (MREL) induced banks to increase their holdings of eligible bank bonds, especially if issued by other banks. The requirement for own funds and eligible liabilities (TLAC) instead raised the incentives for non-issuing banks to invest in eligible subordinated debt issued by global systemically important banks. Finally, we find evidence of increased within-country bank interconnectedness and concentration risks in the banking sector that might potentially introduce frictions in bail-in implementations. JEL Classification: G01, G21, G28
    Keywords: bail-inable debt, bank bonds, MREL, regulatory changes, TLAC
    Date: 2022–12
  5. By: Dimitrios Kanelis; Pierre L. Siklos
    Abstract: We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to analyze how the vocal emotions and language of ECB President Mario Draghi affect the yield curve of major euro area economies. Vocal emotions significantly impact the yield curve. However, their impact varies in size and sign: positive signals raise German and French yields, while Italian yields react negatively, which is reflected in an increase in yield spreads. A by-product of our study is the construction and provision of a synchronized data set for voice and language.
    Keywords: Communication, ECB, Neural Networks, High-Frequency Data, Speech Emotion Recognition, Asset Prices
    JEL: E50 E58 G12 G14
    Date: 2022–12
  6. By: IANCU, AUREL (National Institute for Economic Research - Romanian Academy); OLTEANU, DAN CONSTANTIN (National Institute for Economic Research - Romanian Academy)
    Abstract: The aim of this study is to determine the nature of the discretionary fiscal policy practiced by non-euro EU member states, namely to deduce some bias for one of the two types of fiscal policies - procyclical or countercyclical. For this purpose, we used time series for the period 1995-2020, of the cyclically-adjusted primary balance, the output gap, as well as additional indicators - public debt, fiscal rules index and election years. From the signs and magnitude of the correlation and regression coefficients, it results that almost all countries have learned the necessary lessons from the economic / financial crisis, in order to move from a procyclical policy, during 1995-2008, to an countercyclical policy, in 2009-2020.
    Keywords: discretionary fiscal policy, fiscal reaction function, procyclicality, countercyclicality, economic cycle
    JEL: H61 H62 E62 E65 E32
    Date: 2022–12
  7. By: Jukonis, Audrius; Letizia, Elisa; Rousová, Linda
    Abstract: Stricter derivative margin requirements have increased the demand for liquid collateral but euro area investment funds which use derivatives extensively have been reducing their liquid asset holdings. Using transaction-by-transaction derivatives data, we assess whether the current levels of funds’ holdings of cash and other highly liquid assets would be adequate to meet funds’ liquidity needs to cover variation margin calls on derivatives under a range of stress scenarios. The estimates suggest that between 13% and 33% of euro area funds with sizeable derivatives exposures may not have sufficient liquidity buffers to meet the calls. As a result, they are likely to redeem MMF shares, procyclically sell assets and draw on credit lines, thus amplifying the market dynamics under such stress scenarios. Our findings highlight the importance of further work to assess the potential role of macroprudential policies for non-banks, particularly regarding liquidity risk in funds. JEL Classification: C60, G23, G13, G17
    Keywords: big data, EMIR data, market stress, non-bank financial intermediaries, variation margin
    Date: 2022–12
  8. By: Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
    Abstract: We investigate the financial market effects of central bank asset purchases by exploiting the unique setting provided by ECB’s PSPP and PEPP policies. These programs consist in purchases of identical assets. The PSPP aimed to reduce deflationary risks, while the PEPP was announced to alleviate sovereign risks. We assess the effects of both policies on these two intermediate objectives. We find that the PSPP positively affects inflation swaps whereas the PEPP negatively impacts sovereign spreads. We explore the reasons for these differentiated effects. Making the rationale of a policy clear and credible influences its transmission to asset prices.
    Keywords: Monetary Policy, Asset Prices, Central Bank Communication, Central Bank Reaction Function, Intermediate Objectives
    JEL: G12 E52 E58
    Date: 2022
  9. By: Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
    Abstract: This paper examines how the Covid-19 pandemic affected European trade patterns. Specifically, dynamic panel data models are estimated to assess the effects on exports and imports of various sectors and products (selected on the basis of their trading volume or strategic importance) of the restrictions and of other policy measures adopted by national governments during the crisis. The results suggest that the impact of the Covid-19 pandemic was heterogeneous across sectors and product types, both the initial drop and the subsequent rebound being different depending on sectoral characteristics and the degree of resilience. In particular, trade flows of durable products were more significantly affected by the pandemic compared to those of non-durable ones.
    Keywords: Covid-19 pandemic, trade patterns, sectoral analysis, product analysis, stringency, policy responses, uncertainty, Europe, dynamic panel models, GMM estimator
    JEL: C25 E61 F13 F15
    Date: 2022
  10. By: Gouzoulis, Giorgos; Iliopoulos, Panagiotis; Galanis, Giorgos
    Abstract: This paper examines the determinants of the income share of wage earners in the non-financial, private sectors of Greece since its introduction to the Eurozone in 1999. The main outcome of the integration of Greece into the Eurozone has been the financialisation of its economy, which has been particularly influential for households since it led to the rapid rise of household indebtedness. Building on recent research within industrial relations, sociology of work, and political economy, which shows that financialisation is a key driver of wage bargaining outcomes, we demonstrate that the relative size of the FIRE sectors and the increase in household debt have been negative drivers of the wage share in Greece over the last 22 years. Our findings also suggest that the employment-tied social benefits system and tertiary education provision have also been important determinants of workers' income share.
    Keywords: Financialisation, Household Debt, EU Integration, Wage Share, Greece
    JEL: E24 E25 D33 F36 G51
    Date: 2022
  11. By: BARRIOS Salvador (European Commission - JRC); REUT Adriana; RISCADO Sara; VAN DER WIELEN Wouter
    Abstract: In this paper, we propose a novel approach for the ex-ante assessment of tax reforms accounting for second-round effects, i.e. the dynamic scoring of tax reforms. We combine a microsimulation model for selected European countries with VAR estimates of macro responses and, exploiting a unique database of tax reforms in the EU, compare our estimates with the real-time assessment of tax reforms conducted by the EU Member States as well as with ex-post realisations. This is the first time dynamic scoring of tax reforms is conducted in real-time and compared to ex-post realizations in a systematic way. The novelty of our approach hinges on the use of a macro-econometric model combined with a microsimulation model which represents a more flexible tool than (computable) general equilibrium models in order to conduct real-time dynamic scoring analysis. Our results suggest that on average personal income tax cuts resulted in medium-term increases in output and employment; however, the second-round revenue impact is found to be small relative to the first-round microsimulation results.
    Keywords: Fiscal policy, tax reforms, real-time, microsimulation, EUROMOD, VAR models
    Date: 2022–12
  12. By: Koetter, Michael; Noth, Felix
    Abstract: We use a new database on European real estate purchase and rental prices - the IWH European Real Estate Index - to document the relationship between staggered COVID-19 dynamics and real estate prices in 14 EU countries between January 2020 and December 2021. For most countries, we find no statistically significant response of monthly purchase and rental prices due to an increase of regional COVID-19 cases. For the UK we find that more COVID-19 cases depressed both purchase and rental prices significantly, but the economic magnitude of effects was mild during this sample period. In contrast, rents in Italy increased in response to hiking COVID-19 cases, illustrating the importance to consider heterogeneous crisis patterns across the EU when designing policies. Overall, COVID-19 dynamics did not affect real estate values significantly during the pandemic, thereby mitigating potential financial stability concerns via a mortgage lending channel at the time.
    Date: 2022
  13. By: Andreas Freitag; Sarah M. Lein; Sarah Marit Lein
    Abstract: We document how product quality responds to exchange rate movements and quantify the extent to which these quality changes affect the aggregate pass-through into export prices. We analyze the substantial sudden appreciation of the Swiss franc post removal of the 1.20-CHF-per-euro lower bound in 2015 using export data representing a large share of the universe of goods exports from Switzerland. We find that firms upgrade the quality of their products after the appreciation. Furthermore, they disproportionately remove lower-quality products from their product ranges. This quality upgrading and quality sorting effect accounts for a substantial share of the total pass-through one year after the appreciation. We cross-check our results with the microdata underlying the Swiss export price index, which includes an adjustment factor for quality based on firms’ reported product replacements, and obtain similar results.
    Keywords: large exchange rate shocks, exchange rate pass-through, quality adjustment
    JEL: E30 E31 E50 F14 F41
    Date: 2022
  14. By: Daniel Carvalho (Banco de Portugal)
    Abstract: This paper provides two main contributions. First, it proposes a measure of intra-financial assets, i.e., financial assets within the financial sectors, and documents the rapid growth of these claims in European countries. Second, it looks at the relationship of total and intra-financial assets of banks and non-banks and credit provided to the non-financial sectors. Results show that while total assets of both banks and non-banks are strongly associated with loans to non-financial corporations and households, intra-financial assets of banks are associated with loans to non-financial corporations only and intra-financial assets of non-banks with loans to households.
    Keywords: Banksandnon-banksinterconnectedness, credit, finance-growthnexus
    JEL: F36 G10 G21 G23
    Date: 2022–12
  15. By: Willems, Bert (Tilburg University, School of Economics and Management); Pollitt, Michael; von der Fehr, Nils-Henrik; Banet, Catherine
    Date: 2022
  16. By: Meijers, Huub (RS: GSBE MORSE, RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: UNU-MERIT Theme 1); Muysken, Joan (RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: GSBE - MACIMIDE)
    Abstract: Deregulation and globalization since the early 1990s caused a boom in the current global financial cycle, which cumulated in the financial crisis in 2007. Austerity fiscal policies after the financial crisis induced Central Banks all over the world to intervene by stimulating ‘unconventional’ monetary policies. In earlier papers, we developed several stock flow consistent models for an open Euro Area economy to investigate various aspects of the impact of these developments, with special attention to the role of the Central Bank with low interest policy and quantitative easing. We analysed the influence on mortgage growth and house prices, the growing amount of funded pension savings held abroad and the destabilising impact of low interest rates on pension claims, and the phenomenon that firms more and more use their savings for share buy-backs and (speculative) investments abroad – see Muysken and Meijers (2022) for an overview. However, we did not pay explicit attention to the distributional consequences these developments might have. The social and economic impact of the COVID crisis since early 2020 stimulated the awareness in the literature and the policy debate that the increase in house prices and asset prices invigorated wealth inequality. These developments create social tensions and therefore can have severe economic consequences. In the present paper, we bring all our earlier models together in one stock-flow consistent model, which we estimate and simulate for the Netherlands. The model is based on a stock-flow consistent set of macroeconomic data, which we collected for the Netherlands. In line with our previous research we argue that these phenomena can be captured very well by a stock flow consistent model in the tradition of Godley and Lavoie, which we estimate and simulate for the Netherlands. From simulations with our model we show that both housing price bubbles and asset price bubbles occur due to low interest rates and riskier bank behaviour, induced by a central bank policy of Quantitative Easing. The intended aim of this central bank policy – enhancing economic growth – is not reached, because the monetary stimulus is absorbed by the financial sector. Moreover, a presumably unintended consequence of Quantitative Easing in the Netherlands is an increase in wealth inequality.
    JEL: E44 B50 E60 G21 G32 F40
    Date: 2022–10–26
  17. By: Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
    Abstract: We show that U-shaped monetary policy rate dynamics are strongly associated with financial crisis risk. This finding holds both in long-run cross-country macro data covering many crises and monetary policy cycles, and in detailed micro, administrative data covering the post-1995 period in Spain. In the macro data, we find that pre-crisis monetary policy follows a U shape, with policy rates first cut and then increased over the 7 years before the onset of the crisis. This U shape holds across a wide variety of crisis definitions, short-term rate measures, and becomes stronger after World War 2. Differently, even though inflation and real rates show some of these dynamics before a crisis, these results are much less robust. The patterns are also much weaker when it comes to long-term rates and non-crisis recessions. We show that monetary policy rate hikes (both raw, and instrumented using the trilemma IV of Jordà et al, 2020) increase crisis risk, but, different to previous studies, we show that this effect is driven by rate hikes which were preceded by a series of cuts. To understand why U-shaped monetary policy is linked to crises, we show that the initial loosening of policy is followed by high growth in credit and asset prices, putting the economy into a vulnerable financial "red zone''. After the subsequent monetary tightening these vulnerabilities materialize, leading to larger-than-usual declines in credit, asset prices, and real activity. To dig into the underlying mechanisms, we use administrative data on the universe of bank loans and defaults during the 1990s and 2000s boom-bust cycles in Spain. Consistently, we find that U-shaped monetary policy increases the probability of ex-post loan defaults, but effects are much stronger for ex-ante riskier firms and for banks with weaker balance sheets. Overall, our paper shows that monetary policy dynamics have important implications for financial stability.
    Keywords: monetary policy, financial stability, financial crises, credit, asset prices, banks, macro-finance
    JEL: E51 E52 E44 G01 G21 G12
    Date: 2022–12

This nep-eec issue is ©2023 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.