nep-eec New Economics Papers
on European Economics
Issue of 2023‒02‒13
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Stagflation and fragmentation: The euro area at the crossroad By Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
  2. Balance Sheet Expansionary Policies in the Euro Area: Macroeconomic Impacts and a Vulnerable versus Non-Vulnerable Comparison - A Bayesian Structural VAR Approach By Francisco Gomes Pereira
  3. Does BRRD mitigate the bank-to-sovereign risk channel? By Martien Lamers; Thomas Present; Nicolas Soenen; Rudi Vander Vennet
  4. Navigating the well-being effects of monetary policy:Evidence from the European Central Bank By El Mehdi El Herradi; Aurelien Leroy
  5. A single monetary policy for heterogeneous labour markets: the case of the euro area By Sandra Gomes; Pascal Jacquinot; Matija Lozej
  6. Do the projected fiscal deficits play a role in ECB monetary policymaking? By Linas Jurkšas; Francisco Gomes Pereira
  7. Accounting for the role of investment frictions in recessions By del Río, Fernando; Lores, Francisco-Xavier
  8. Government Debt Deleveraging in the EMU By Cole, Alexandre Lucas; Guerello, Chiara; Traficante, Guido
  9. A Bottom-Up Reduced Form Phillips Curve for the Euro Area By Mr. Frederik G Toscani; Thomas McGregor
  10. The negative impact of disintegration on trade: the case of Brexit* By Juan de Lucio; Silviano Raúl Mínguez; Vicente Asier Minondo; Vicente Francisco Requena
  11. The impact of sovereign tensions on bank lending: identifying the channels at work By Fabiana Sabatini
  12. Why European banks adjust their dividend payouts? By Belloni, Marco; Grodzicki, Maciej; Jarmuzek, Mariusz
  13. The Impact of Positive Information Sharing on Banks’ Lending to Households By Tamas Briglevics; Artashes Karapetyan; Steven Ongena; Ibolya Schindele
  14. Poverty and social exclusion: which relationship with non-traditional household models? By Andrea Salustri; Valeria De Bonis; Maria Alessandra Antonelli; Angelo Castaldo
  15. Here Comes the Change: The Role of Global and Domestic Factors in Post-Pandemic Inflation in Europe By Mahir Binici; Mr. Serhan Cevik; Samuele Centorrino; Gyowon Gwon
  16. The Divergent Dynamics of Labor Market Power in Europe By Mr. Ippei Shibata; Mr. Davide Malacrino; Mr. Federico J Diez
  17. The Green Asset Ratio (GAR) - a new KPI for credit institutions By Brühl, Volker

  1. By: Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
    Abstract: The euro area may be about to experience something new: fragmentations in its financial markets in a situation characterized by a high inflation rate. We argue that the euro area has only two options in such a scenario. First, countries facing tight financing conditions could apply for European aid procedures at the European Stability Mechanism to activate the Outright Monetary Transactions program. Second, these countries could find protection in strengthening a central fiscal capacity and in compliance with new country-specific central fiscal rules. Selecting one of these alternative options would lead to designing a very different architecture for the European Union.
    Date: 2022–12
  2. By: Francisco Gomes Pereira
    Abstract: Employing a Bayesian structural vector autoregressive (VAR) model, we estimate the impact of the European Central Bank’s (ECB) balance sheet expansionary policies (BSEP) on a range of economic and financial variables including real GDP, inflation, long-term sovereign bond yields, systemic stress, unemployment, bank loans, and equity markets in the period from 2009:Q1 to 2021:Q4. The main conclusion from this study is that more vulnerable euro area countries had larger magnitudes in desirable impulse responses to BSEPs shocks. To reach this conclusion, we estimated the same model for 16 euro area countries and used maximum, minimum, and cumulative impulse responses to assess the heterogenous responses to BSEPs across member states. We then attempt to find correlations of impulse responses with measures of financial and economic vulnerability such as debt-to-GDP ratios, unemployment, GDP per capita (PPP), and tier 1 bank capital ratios. Our results suggest that the magnitude of the responses are more pronounced in countries with higher levels of vulnerability. These findings are akin to theoretical assumptions that suggest that unconventional monetary policies are most effective in periods of severe systemic stress.
    Keywords: ECB; monetary policy; unconventional monetary policy; BVAR; euro area
    JEL: C11 E02 E52 E58 G02
    Date: 2023–01
  3. By: Martien Lamers; Thomas Present; Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the transmission of credit risk from banks to their sovereign, using CDS spreads to capture bank and sovereign credit risk for a sample of 43 banks in 8 Euro Area countries over the period 2009-2020. If the BRRD bail-in framework is credible, changes in bank default risk should not be transmitted to sovereign risk. In a novel approach we use banks’ earnings announcements to identify exogenous shocks to bank credit risk and investigate to what extent bank risk is transmitted to sovereign risk before and during the BRRD era. We find that bank-to-sovereign risk transmission has diminished after the introduction of the BRRD, suggesting that financial markets judge the BRRD framework as credible. The decline in bank-sovereign risk transmission is particularly significant in the periphery Euro Area countries, especially Italy and Spain, where the bank-sovereign nexus was most pronounced during the sovereign debt crisis. We report that the lower bank-to-sovereign credit risk transmission is associated with the parliamentary approval of the BRRD and not with the OMT program launched by the ECB to affect sovereign yield spreads, nor with specific bail-in or bailout cases which occurred during the BRRD era. Finally, we document that the reduction in risk transmission is most pronounced for banks classified as a Global Systemically Important Bank (G-SIB), stressing the importance of additional capital buffers imposed by Basel III.
    Keywords: BRRD, bank-sovereign nexus, bank-to-sovereign risk channel, bank earnings announcement, CDS spread
    JEL: C58 G28 G32
    Date: 2023–01
  4. By: El Mehdi El Herradi (BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique); Aurelien Leroy (UB - Université de Bordeaux, BSE - Bordeaux Sciences Economiques - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper assesses whether monetary policy announcements have an impact on households' (subjective) well-being by analysing life satisfaction on the days before and after monetary surprises in Germany. To do so, we use individual-level information on life satisfaction from the German Socio-Economic Panel (SOEP) survey and identify the day on which each answer is submitted to the survey. We also exploit the Euro Area Monetary Policy event study Database (EA-MPD) to obtain daily-level information on European Central Bank (ECB) monetary surprises. Our results show that life satisfaction is significantly affected by monetary policy surprises: tightening surprises decrease life satisfaction, while easing surprises increase it.
    Keywords: Monetary policy, Subjective Well-Being, Survey data, European Central Bank
    Date: 2022–12–14
  5. By: Sandra Gomes; Pascal Jacquinot; Matija Lozej
    Abstract: Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of crosscountry heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households.
    JEL: E24 E32 E43 E52 F45
    Date: 2023
  6. By: Linas Jurkšas; Francisco Gomes Pereira
    Abstract: We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly find if fiscal stance matters for the monetary policy conduct. We use GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 with the thick-modelling approach. The results revealed that ECB actions have exhibited desirable stabilising monetary policy properties and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit usually is not statistically significant in explaining ECB monetary policy stance. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These findings speak against the “fiscal dominance” regime in the euro area where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the precise specification of the GMM and SVAR models and if the sample period is shortened from 2012.
    Keywords: ECB; monetary policy; reaction function; Taylor rule; fiscal deficits; fiscal stance
    JEL: E43 E52 E58 E61 E62 H62
    Date: 2023–01
  7. By: del Río, Fernando; Lores, Francisco-Xavier
    Abstract: We conduct Business Cycle Accounting analyses for both the Euro Area and the United States. If the observed changes in the factor income shares reflect the frictionless competitive adjustment of productive factors, then we find that the capital-efficiency wedge was the main force driving the output growth slowdown during the U.S. Great Recession, with the labour and investment wedges being significant, but secondary forces. The countercyclical evolution of the labour-efficiency wedge helped to mitigate the output growth slowdown. Our results suggest that the investment frictions, which raise the firm's costs of investment, may be the primary cause of the U.S. Great Recession. However, in the U.S. 1982 Recession and the Euro Area Great Recession, the labour-efficiency wedge was the main driving force of the output growth slowdown, with the labour wedge being a significant, but secondary force and the investment wedge being negligible.
    Keywords: Business Cycle Accounting, Capital-Efficiency Wedge, Labour-Efficiency Wedge, Labour Wedge, Investment Wedge, Resource Constraint Wedge, Productivity, Labour Share, Hours Worked, Great Recession.
    JEL: E13 E32 O40
    Date: 2023–01–17
  8. By: Cole, Alexandre Lucas; Guerello, Chiara; Traficante, Guido
    Abstract: We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under different scenarios for fiscal policy coordination. We find that greater stabilization is achieved when the two countries coordinate by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging compared to government transfers. Our policy prescriptions for the Euro Area are to reduce government debt less during recessions and liquidity traps, and to do so using distortionary taxes, while concentrating on reducing international demand imbalances.
    Keywords: Sovereign Debt, International Policy Coordination, Monetary Union, New Keynesian
    JEL: E12 E63 F42 F45 H63
    Date: 2023–01–08
  9. By: Mr. Frederik G Toscani; Thomas McGregor
    Abstract: We develop a bottom-up model of inflation in the euro area based on a set of augmented Phillips curves for seven subcomponents of core inflation and auxiliary regressions for non-core items. We use the model’s disaggregated structure to explore which factors drove the deterioration in forecasting performance during the pandemic period and use these insights to improve on the ability to forecast inflation. In the baseline, the projection for core inflation is centered above 3 percent at end-2023, while headline inflation is expected to drop quite sharply over 2023, with energy base effects pulling inflation down from the currently very elevated levels to below 3 percent by 2023q4. The confidence intervals around these projections are wide given elevated uncertainty. We argue that the bottom-up approach offers a useful complement to the forecasters toolbox – even in the current uncertain environment - by improving forecast accuracy, shedding additional light on the drivers of inflation and providing a framework in which to apply ex post judgement in a structured way.
    Keywords: Euro area; Inflation; Phillips curve; inflation expectation; inflation pressure; augmented Phillips curves; forecast accuracy; drivers of inflation; Natural gas sector; Fuel prices; Oil prices; Food prices; Global
    Date: 2022–12–16
  10. By: Juan de Lucio (Universidad de Alcalá. Pza. San Diego, s/n, 28801, Alcalá de Henares (Spain).); Silviano Raúl Mínguez (Cámara de Comercio de España and Universidad Antonio de Nebrija. Calle de Santa Cruz de Marcenado, 27, 28015, Madrid (Spain).); Vicente Asier Minondo (Deusto Business School, University of Deusto, Camino de Mundaiz 50, 20012 Donostia - San Sebastián (Spain).); Vicente Francisco Requena (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).)
    Abstract: Using firm-level export and import transactions and by applying an event-study methodology, we quantify the impact of the UK's withdrawal from the EU's single market and customs union on Spain-UK trade flows. We find that Spanish exports and imports to the UK decreased by 23% and 27%, respectively, relative to the period before the Brexit referendum. Spanish exporters and importers entry into the UK declined and the probability of ending a trade relationship with the UK increased. Products affected by sanitary and phytosanitary measures, and more stringent rules of origin experienced a stronger decline in trade flows. Large firms faced a more severe decrease in exports than small ones after disintegration.
    Keywords: Brexit, trade costs, trade policy uncertainty, Spanish rms, rules of origin, European Union.
    JEL: F10 F14
    Date: 2023–01
  11. By: Fabiana Sabatini (Bank of Italy)
    Abstract: Banks’ holdings of sovereign bonds are an important component of the multifaceted bank-sovereign nexus. This paper exploits the unexpected increase in sovereign yields in Italy in May 2018 to quantify the impact of a drop in value of banks’ government bond portfolios on their supply of loans (direct channels). It disentangles the effect stemming from the worsening in banks’ capitalization (balance sheet channel) from that associated with a reduced ability to raise funds using government bond holdings as collateral (liquidity channel). Results show that banks with large government bond portfolios reduced their lending more; evidence indicates that this is a consequence of the balance-sheet channel. The liquidity channel was not activated, partly thanks to the ample availability of Eurosystem funds held by banks. I then control for the channels at work for the banking system as a whole, regardless of government bond holdings (indirect channels), and find that the generalized increase in the cost of funding for banks (cost of funding channel) has a negative impact on bank lending.
    Keywords: credit supply, banks’ sovereign holdings, bank lending channel
    JEL: G01 G21 E5 E51
    Date: 2022–12
  12. By: Belloni, Marco; Grodzicki, Maciej; Jarmuzek, Mariusz
    Abstract: Economic literature suggests that banks change their dividend payouts for three main reasons. They may be willing to signal good future profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. The COVID-19 pandemic led to introduction of sector-wide recommendation by regulators to suspend dividend payouts in view of prevailing large uncertainty. Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the three motivations found in the literature. The results are robust to selection of alternative variables representing these motivations. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations shown in the paper suggest that, in the absence of supervisory recommendations, banks would likely have reduced the payouts only slightly in the first year of the pandemic. JEL Classification: G21, G35
    Keywords: bank dividends, financial regulation, payout policies
    Date: 2023–01
  13. By: Tamas Briglevics (Boston College; Federal Reserve Bank of Boston); Artashes Karapetyan (ESSEC Business School); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Ibolya Schindele (Central European University; Central Bank of Hungary)
    Abstract: What is the impact of positive information sharing on households’ access to credit? Exploiting a nation-wide introduction of mandatory information sharing between banks on borrowers` current exposures, we differentiate between borrowers who apply to new banks and those who reapply to banks with already established credit contracts, as well as between borrowers with and without past negative information. We find an overall increase in credit access, in application success and credit amount, for all borrower groups. In addition, we show that while credit access increases, default rates decrease, hence “positive” information sharing may boost aggregate welfare.
    Keywords: information sharing, bank lending, household access to credit
    JEL: G21 G28
    Date: 2022–12
  14. By: Andrea Salustri; Valeria De Bonis; Maria Alessandra Antonelli; Angelo Castaldo (Università Sapienza di Roma - Dipartimento di Studi Giuridici, Filosofici ed Economici)
    Abstract: In this paper, we investigate how the changes in households-models affect family poverty in Europe. We ground the analysis on a multidimensional concept of household poverty that includes both relative income poverty and social deprivation that hampers social inclusion. Using a panel of 28 European countries over a fourteen-year period time (2005 to 2018), we implement both panel fixed- and random- effects models, and the system-GMM dynamic panel method. In this framework, we find that, while the break-ups of couples and single-parent families with children positively affects poverty, multigenerational (extended) families play an insurance role against poverty risk. Our results suggest that also family policies represent an effective tool to contrast social exclusion, there effect being more evident in a long-run perspective.
    Keywords: household poverty, family models, defamilization policies, system-GMM, Europe.
    Date: 2023–01
  15. By: Mahir Binici; Mr. Serhan Cevik; Samuele Centorrino; Gyowon Gwon
    Abstract: Global inflation has surged to 7.5 percent in August 2022, from an average of 2.1 percent in the decade preceding the COVID-19 pandemic, threatening to become an entrenched phenomenon. This paper disentangles the confluence of contributing factors to the post-pandemic rise in consumer price inflation, using monthly data and a battery of econometric methodologies covering a panel of 30 European countries over the period 2002-2022. We find that while global factors continue to shape inflation dynamics throughout Europe, country-specific factors, including monetary and fiscal policy responses to the crisis, have also gained greater prominence in determining consumer price inflation during the pandemic period. Coupled with increasing persistence in inflation, these structural shifts call for significant and an extended period of monetary tightening and fiscal realignment.
    Keywords: Inflation; output gap; globalization; Phillips curve; dynamic factor model; fixed effect estimator; local projection method; inflation dynamics; consumer price inflation; fiscal policy response; inflation expectation; inflation process; commodity price; core CPI; Commodity prices; COVID-19; Energy prices; Global; Europe
    Date: 2022–12–09
  16. By: Mr. Ippei Shibata; Mr. Davide Malacrino; Mr. Federico J Diez
    Abstract: We use firm-level data from 10 European countries to establish several new stylized facts about firms’ labor market power. First, we find the pervasive presence of labor market power across countries and sectors, measured by average and median markdowns above unity. Second, focusing on the dynamics, we find that weighted average markdowns have increased 1.3 percent between 2000 and 2017. However, median and unweighted average markdowns have actually decreased over the same time period, suggesting the existence of divergent paths across the markdown distribution. Third, we show that high-markdown firms tend to have a large footprint in both their product and input (labor) markets, and are most commonly listed and found among services sectors. Finally, a Melitz-Polanec decomposition of the change in weighted average markdown finds that the increase has been driven by a reallocation of resources towards high-markdown incumbents and by the extensive margin via the net entry of high-markdown firms while, in contrast, there was a decline in within-firm markdowns. Our findings highlight the importance of using granular and broad-based data for a thorough analysis of firms’ labor market power.
    Keywords: Monopsony; labor market power; markdowns; secular trends; high-markdown firm; weighted average markdown; high-markdown incumbent; markdown distribution; Labor markets; Employment; Services sector; Wages; Europe
    Date: 2022–12–09
  17. By: Brühl, Volker
    Abstract: The financial sector plays an important role in financing the green transformation. Various regulatory initiatives in the EU aim to improve transparency in relation to the sustainability of financial products and the sustainability of economic activities of non-financial and financial undertakings. For credit institutions, the Green Asset Ratio (GAR) has been established by the European regulatory authorities as a KPI for measuring the proportion of Taxonomy-aligned on-balance-sheet exposure in relation to the total assets. The breakdown of the total GAR by type of counterparty, environmental objective and type of asset provides in-depth information about the sustainability profile of a credit institution. This information, which has not been available to date, may also initiate discussions between management and shareholders or other stakeholders regarding the future sustainability strategy of credit institutions. This paper provides an overview of the regulatory background and the method of calculating the GAR along different dimensions. Finally, the potential benefits and limitations of the GAR are discussed.
    JEL: G10 G20
    Date: 2023

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