nep-eec New Economics Papers
on European Economics
Issue of 2023‒01‒16
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Unemployment in the Euro Area and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  2. Estimating the impact of quality adjustment on consumer price inflation By Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
  3. Chinese supply chain shocks By Khalil, Makram; Weber, Marc-Daniel
  4. The effect of rising energy and consumer prices on household finances, poverty and social exclusion in the EU By MENYHERT Balint
  5. Resource Productivity and Eco-Innovation Convergence in the Service of Sustainability. Evidence from the EU-28 By Nikos Chatzistamoulou; Phoebe Koundouri
  6. Physical and transition risk premiums in euro area corporate bond markets By Joost Bats; Giovanna Bua; Daniel Kapp
  7. Lower Taxes At All Costs? Evidence from a Survey Experiment in Four European Countries By Bremer, Björn; Bürgisser, Reto
  8. Lost in Negative Territory? Search for Yield! By Girotti Mattia; Horny Guillaume; Sahuc Jean-Guillaume
  9. Macroeconomic uncertainty and bank lending By Vegard H. Larsen; Ragnar E. Juelsrud
  10. On the macroeconomic effects of reinvestments in asset purchase programmes By Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
  11. The exchange rate elasticity of the Swiss current account By Johannes Eugster; Giovanni Donato
  12. Measuring Global Interest Rate Comovements with Implications for Monetary Policy Interdependence By Renée Fry-McKibbin; Kate McKinnon; Vance L Martin

  1. By: Oliver Hülsewig; Horst Rottmann
    Abstract: We examine the impact of the European Central Bank’s monetary policy on the euro area labor markets over the period 2010-2018. Using Jordà’s (2005) local projection method, we find that unemployment rates decline in response to expansionary monetary policy surprises that can be related to unconventional policy measures. At the same time, hours worked rise. In the periphery countries, the reduction in unemployment rates is relatively pronounced, while in the core countries it is only minor. Thus, labor markets in the euro area were impacted differently by unconventional monetary policy measures.
    Keywords: Euro area, unconventional monetary policy, labor markets, local projections
    JEL: E24 E52 E58 C23
    Date: 2022
  2. By: Menz, Jan-Oliver; Wieland, Elisabeth; Mehrhoff, Jens
    Abstract: How much does quality adjustment matter in measuring consumer price inflation? To address this question, we use different sources of micro and macro price data for Germany and the euro area. For Germany, we find that quality adjustment applies to a large range of goods and services but, on average, price adjustments due to quality changes reduce headline inflation only by 0.06 percentage points, which is balanced out by an increase due to quantity adjustment (e.g. a smaller package size) of the same amount. For the euro area, we assess the impact of heterogeneous quality adjustment methods by deriving the distribution of member states' cumulative inflation rates for typical quality-adjusted products. Our macro-based estimate makes up to ± 0.2 percentage points for headline HICP inflation and ranges between ± 0.1 and 0.3 percentage points for core inflation, when controlling for income differentials between member states. Finally, we illustrate the role of heterogeneous quality adjustment methods in the euro area based on micro price data for washing machines. We show that the price development of this product would have been lower by about 3.5 percentage points during the first years of the euro area and by about half a percentage point during recent years, if prices in the member states had been quality-adjusted in exactly the same way.
    Keywords: inflation measurement,quality adjustment,inflation differentials,micro price data
    JEL: E31 C43
    Date: 2022
  3. By: Khalil, Makram; Weber, Marc-Daniel
    Abstract: In structural vector autoregressive models of United States and euro area manufacturing, we use sign restrictions to identify shocks that alter the frictions to Chinese supply chain trade. We find a quantitatively significant role of such shocks for the decline of US manufacturing output at the height of the Sino-American trade tensions in 2019. At the beginning of the Covid-19 pandemic in early 2020, the results pointed towards large spillovers from the shutdown in China to manufacturing in the US and the euro area. Moreover, for the recovery in late 2020 and 2021, favourable Chinese supply chain shocks related to the shift of preferences towards goods with a large China valued-added content played a relevant role. Interestingly, the impact of Chinese supply chain shocks is not limited to manufacturing sectors that are highly exposed to China. Furthermore, negative Chinese supply chain shocks cause upward price pressure across the whole manufacturing industry.
    Keywords: Cross-border supply-chain disruptions,trade frictions,China,trade tensions,Covid-19 recession,US and euro area manufacturing
    JEL: E32 F41 F62
    Date: 2022
  4. By: MENYHERT Balint (European Commission - JRC)
    Abstract: This report contains an empirical analysis based on microdata from European household surveys to provide a preliminary assessment of the potential social consequences of increasing energy and consumer prices in the EU. It uses detailed information on recent price developments and the structure of household expenditures to quantify the extent of living cost increases and purchasing power losses in a granular and customised manner across different household types and income groups in the EU. The Report is also the first attempt to calculate the potential effects of rising prices on indicators of material and social deprivation and measures of absolute poverty. It finds that, since early 2021, inflation is predicted to have increased material and social deprivation in the EU by about 2 percentage points on average, while the corresponding increase in absolute poverty may be closer to 5 percentage points. The adverse social effects of inflation are significantly larger in many Central and Eastern European Member States, especially among disadvantaged and/or vulnerable groups. This is likely to further deepen existing gaps in poverty and social exclusion between EU15 and non-EU15 countries, and calls for a strong and coordinated policy response.
    Keywords: poverty and social exclusion, inflation, household finances, material and social deprivation, energy poverty, absolute poverty
    Date: 2022–10
  5. By: Nikos Chatzistamoulou (AUEB); Phoebe Koundouri
    Abstract: The European Green Deal prioritizes green growth through resource efficiency and eco-innovation to achieve the transition in a sustainable and inclusive growth orbit. To monitor progress in such endeavor the EU Resource Efficiency Scoreboard was launched. Focusing on the resource productivity, which is the main sustainability development indicator and policy evaluation tool for Europe and the eco-innovation performance of the EU-28 over a twenty-year period, from 2000 though 2019, we explore convergence patterns and club formation. Descriptive analysis via growth rates of the resource productivity and eco-innovation indicates productivity differentials among the countries giving rise to heterogeneity groups. Econometric results using convergence algorithms advocate in favor of convergence for both variables. However, convergence clubs surface highlighting that there is heterogeneity to consider when designing policies to promote sustainability transition to ensure that no one is left behind serving the priority of inclusive and sustainable growth.
    Keywords: Resource Productivity, Eco-Innovation, Sustainability, Convergence, Technological Heterogeneity, European Green Deal
    Date: 2022–12–15
  6. By: Joost Bats; Giovanna Bua; Daniel Kapp
    Abstract: We study climate risk premiums in euro area corporate bond markets. As gauges of climate risk, we distinguish between physical and transition risks using textual analysis. Our findings show that, since the Paris agreement, physical risk is significantly priced in corporate bonds with longer-term maturities. Physical risk is also priced in bonds with shorter-term maturities, but the premium is smaller and less significant. The estimated physical risk premium reflects investors demanding higher future returns on bonds that underperform during adverse physical risk shocks. Our findings also point to a sizable transition risk premium, although the transition risk estimates are insignificant.
    Keywords: Climate risk; physical risk; transition risk; corporate bonds
    JEL: G12 Q51 Q54
    Date: 2023–01
  7. By: Bremer, Björn (Max Planck Institute for the Study of Societies); Bürgisser, Reto (University of Zurich)
    Abstract: It is commonly assumed that voters favor lower taxes, which undermines the ability of governments to raise revenues. How does the demand for lower taxes change when it involves fiscal trade-offs? Who supports tax cuts at all costs? We use a survey experiment conducted in four European countries (Germany, Italy, Spain, and the UK) to answer these questions, studying preferences on income taxes, value added taxes (VAT), and top income taxes. The results show that support for income tax and VAT cuts drops profoundly when it implies lower government spending or higher government debt. Lower top income taxes are always unpopular. Both interest and ideology influence preferences, but for cross-pressured people, ideology dominates: high-income voters that are left-wing oppose tax cuts. The results are important because they suggest that a progressive coalition against lower taxes – including low-income voters and the high-income left – is possible.
    Date: 2022–12–27
  8. By: Girotti Mattia; Horny Guillaume; Sahuc Jean-Guillaume
    Abstract: We study how negative interest rate policy (NIRP) affects banks’ loan pricing. Using contract-level data from France, we show that NIRP affects bank lending rates to firms through a portfolio rebalancing channel: banks holding a one standard deviation more of cash and central bank reserves offer a 8.6 basis points lower loan rate after NIRP is introduced. The impact concentrates on medium-term loans (with maturity comprised between three and six years) but not on loans to risky firms, indicating that banks conduct a search for yield focused on term spreads. These findings suggest that NIRP complements quantitative easing policies.
    Keywords: Negative Interest Rates, Portfolio Rebalancing, Search for Yield, term spreads, Banks
    JEL: E43 E58 G21
    Date: 2022
  9. By: Vegard H. Larsen; Ragnar E. Juelsrud
    Abstract: We investigate the impact of macro-related uncertainty on bank lending in Norway. We show that an increase in general macroeconomic uncertainty reduces bank lending. Importantly, however, we show that this effect is largely driven by monetary policy uncertainty, suggesting that uncertainty about the monetary policy stance is key for understanding why macro-related uncertainty impacts bank lending.
    Keywords: Macroeconomic uncertainty, Textual analysis, Bank lending
    Date: 2022–11
  10. By: Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
    Abstract: A feature of recent monetary policy asset purchase programmes is the reinvestment policy: the central bank announces to keep the overall volume of assets on its balance sheet constant for some time. In this paper, we systematically assess the macroeconomic effects of such reinvestment policies. Conceptually, monetary policy can achieve a given macroeconomic stimulus by substituting higher overall volumes (more net purchases) with longer reinvestments. Quantitatively, we find that omitting reinvestments in a programme that embeds key features of the Eurosystem's pandemic emergency purchase programme reduces the effect on inflation by roughly one third. Stochastic simulations reveal that reinvestment policies can be applied to mitigate the constraints of upper purchase limits. Introducing bounded rationality attenuates the effects of reinvestment policies.
    Keywords: Reinvestment,Stock effect,State-dependent asset purchases,Cognitive discounting,Bayesian estimation
    JEL: D78 E31 E44 E52 E58
    Date: 2022
  11. By: Johannes Eugster; Giovanni Donato
    Abstract: This paper investigates the effects of Switzerland's real effective exchange rate (REER) on its current account. Using dynamic empirical methods, we focus on exchange rate movements that are unrelated to real and monetary developments, i.e., those more likely to be driven by the Swiss franc's safe-haven proprieties or unexpected exchange rate policy decisions. The paper's key result is that the Swiss headline current account has been largely inelastic to the exchange rate at the business cycle frequency. Three factors explain this somewhat counterintuitive result. A) A negative but short-lived effect on the trade balance is partly offset by a positive effect on net investment income. B) Large and often volatile net exports of nonmonetary gold blur the aggregate reaction. C) Improved terms-of-trade largely offset the negative effect on the (real) goods trade balance, as import prices tend to fall by more than export prices. The limited sensitivity of the current account, however, does not mean that the Swiss economy is insensitive to the exchange rate. Our results confirm that consumer prices, as well as corporate profits in particularly exposed sectors, decline significantly following an appreciation. These results suggest that an appreciation of the Swiss franc likely doesn't reduce Switzerland's current account quickly but rather tightens monetary conditions, reduces GDP, and hampers prospects in the longer term.
    Keywords: Exchange rate, current account, pass-through
    JEL: E31 F31 F32 F41
    Date: 2022
  12. By: Renée Fry-McKibbin; Kate McKinnon; Vance L Martin
    Abstract: A general measure of the strength of U.S. and local interest rate comovement is developed to identify changes in monetary policy interdependence between January 1999 and May 2020. Entropy theory captures comovements through second-order comoments and higher-order comoments of coskewness, cokurtosis and covolatility. The sample contains monthly short-term shadow rates, with local rates for Australia, Canada, Europe, Japan, New Zealand, Switzerland, and the U.K. Monetary policy overall became more interdependent during the Global Financial Crisis but progressively more independent after adopting unconventional monetary policy by central banks. Measures using second-order comoments do not entirely capture changes in interest rate interdependence.
    Keywords: entropy; generalised exponential family; higher-order comoment; decomposition; independence testing; zero-lower bound
    Date: 2022–06

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