nep-eec New Economics Papers
on European Economics
Issue of 2023‒03‒20
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro area banks’ market power, lending channel and stability: the effects of negative policy rates By Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
  2. Giving up the euro can be a good and a bad idea By Thomas COUDERT; Blandine ZIMMER
  3. Green bond home bias and the role of supply and sustainability preferences By Anouk Levels; Claudia Lambert; Michael Wedow
  4. Evaluating the impact of dividend restrictions on euro area bank market values By Andreeva, Desislava; Bochmann, Paul; Schneider, Julius
  5. The impact of demand and supply shocks on inflation. Evidence for the US and the Euro area By Dreger, Christian
  6. House prices and ultra-low interest rates: exploring the non-linear nexus By Dieckelmann, Daniel; Hempell, Hannah S.; Jarmulska, Barbara; Lang, Jan Hannes; Rusnák, Marek
  7. Age, wealth, and the MPC in Europe: A supervised machine learning approach By Dutt, Satyajit; Radermacher, Jan W.
  8. Credibility gains from communicating with the public: evidence from the ECB’s new monetary policy strategy By Ehrmann, Michael; Georgarakos, Dimitris; Kenny, Geoff
  9. Effects of foreign and domestic central bank government bond purchases in a small open economy DSGE model: Evidence from Sweden before and during the coronavirus pandemic By Akkaya, Yildiz; Belfrage, Carl-Johan; Di Casola, Paola; Strid, Ingvar
  10. Financial Integration and European Tourism Stocks By Guglielmo Maria Caporale; Stavroula Yfanti; Menelaos Karanasos; Jiaying Wu
  11. Crossing Borders: Labor Market Effects of European Integration By Illing, Hannah
  12. Does IFRS 9 increase banks’ resilience? By Kund, Arndt-Gerrit; Rugilo, Daniel
  13. To Demand or Not to Demand: On Quantifying the Future Appetite for CBDC By Mr. Marco Gross; Elisa Letizia
  14. Passive monetary policy and active fiscal policy in a monetary union By Maćkowiak, Bartosz; Schmidt, Sebastian

  1. By: Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
    Abstract: This paper investigates to what extent the introduction of negative monetary policy rates altered competitive behaviour in the euro area banking sector. Specifically, it analyses the effect that negative policy rates had on euro area banks’ market power in comparison to banks that have not been subject to negative rates. The analysis, considering a sample of 4, 223 banks over the period 2011–2018 and relying on a difference-in-differences methodology, finds that negative monetary policy rates led to an increase in euro area banks’ market power. Furthermore, it shows that, during the negative interest rate policy period, change in banks’ competitive behaviour affected the bank lending channel and discouraged banks from taking excessive risks. JEL Classification: E44, E52, E58, G20, G21
    Keywords: Bank lending channel, Bank Stability, DiD, Lerner index, NIRP
    Date: 2023–02
  2. By: Thomas COUDERT (LaRGE Research Center, Université de Strasbourg); Blandine ZIMMER (LaRGE Research Center, Université de Strasbourg)
    Abstract: This paper investigates whether Denmark, Sweden and the UK made the right choice in giving up the euro by examining the consequence of this decision on their GDP per capita. We use the synthetic control approach to create a counterfactual scenario of how their GDP per capita would have behaved if they had joined the euro area. Our estimates suggest that only Denmark would have benefited from the adoption of the euro. In contrast, for Sweden and the UK, until 2010, the euro would have had a zero or negligible positive effect on their GDP. From 2010 onwards, however, we observe a significant divergence between their GDP and the counterfactual, revealing that both countries would have lost out with the euro. Still, this effect is more significant for Sweden than for the UK.
    Keywords: Euro, per capita income, synthetic control method
    JEL: F15 F33 N14 O52
    Date: 2023
  3. By: Anouk Levels; Claudia Lambert; Michael Wedow
    Abstract: Using nascent euro area green bond markets as an experimental set-up, we are able to show that home bias is a universal phenomenon. Exploiting dynamics around the scarcity of an asset class, we show that investors tend to turn to their domestic market as soon as their home market becomes available. Moreover, investors’ home bias slowly increases further as the domestic market develops, even if these investors have previously acquired sufficient information about the non-domestic market through investing abroad first. Us- ing confidential bond-level holdings data of euro area investors between Q4 2013 and Q3 2021 in combination with green bond labels, we document that home bias in the euro area bond market is currently lower than in conventional bond markets. Green bond home bias increases over time, however, as investors revert back to their home market as soon as (more) green bonds become available domestically. Moreover, banks’ sustainability ambi- tion drives cross-border green bond investments, although the results are heterogeneous across countries and the beneficial impact of banks’ sustainability ambition on green bond home bias dissipates quickly once banks’ domestic green bond market grows.
    Keywords: home bias; sustainable finance; financial integration; green bonds; banks; capital markets
    JEL: F15 F36 G15 G21 G23 G28 Q54
    Date: 2023–03
  4. By: Andreeva, Desislava; Bochmann, Paul; Schneider, Julius
    Abstract: This paper evaluates the impact of the March 2020 European Central Bank recommenda-tion that banks do not pay dividends or buy back shares on their market values. It documents a causal negative impact on bank share prices of around 7% during the two weeks following its announcement. The recommendation affected the market values of banks directly, by delaying investor cash flows and indirectly, by increasing the uncertainty about future distri-butions and thus banks’ equity risk premia. The impact differed across banks depending on their distribution plans and risk-adjusted profitability. Our analysis highlights the impor-tance of managing perceptions about dividend uncertainty through credible communication about the expected duration, frequency and severity of dividend restrictions to limit their unintended side effects. JEL Classification: G12, G21, G28, G35
    Keywords: bank capital, bank cost of equity, bank dividends, banking supervision, COVID-19 pandemic
    Date: 2023–02
  5. By: Dreger, Christian
    Abstract: After a long period of price stability, inflation returned to record levels in many parts of the world economy. This paper investigates the role of demand and supply shocks behind this process. Structural VAR models are specified for the US and the euro area. Shocks are identified by sign restrictions and external instruments. Demand shocks dominate in the US and can explain roughly 75 percent of the inflation experience. Supply side shocks like bottlenecks in global value chains account for the remaining 25 percent of the variance of inflation forecast errors. In the euro area, the shocks are balanced. Depending on the specification, supply shocks may even play a larger role over longer periods. Higher interest rates can tame inflation due to their adverse effects on demand. However, supply factors are beyond the control of central banks. Thus, monetary policy might become overly restrictive if the impact of the non-demand drivers is neutralized. Due to the larger weight of supply shocks in the euro area, the risk of stagflation, i.e. a longer period of high inflation and low output growth is especially high in that region. To return to the inflation target of around 2 percent, a resolution of supply side pressures is required in any case.
    Keywords: Inflation, global value chains, supply and demand shocks, external instruments
    JEL: E31 E52 F62
    Date: 2023–02–13
  6. By: Dieckelmann, Daniel; Hempell, Hannah S.; Jarmulska, Barbara; Lang, Jan Hannes; Rusnák, Marek
    Abstract: The acceleration of house price growth amidst falling interest rates to record-low levels across euro area countries between 2015 and 2021 has sparked renewed interest in the link between the two variables. Asset-pricing theory suggests that real house prices respond to changes in real interest rates in a non-linear fashion. This non-linearity should be especially pronounced at very low real interest rates. Most existing empirical studies estimate models with a con-stant semi-elasticity, thereby ruling out by design the potential non-linearities between house prices and interest rates. To address this issue, we estimate a panel model for the euro area countries with a constant interest rate elasticity (as opposed to a constant semi-elasticity), which is consistent with asset pricing theory. Our empirical results suggest that, in a low interest rate environment such as the period between 2015 and 2021, non-linearities in the house price response to interest rate changes are important: an increase of real interest rates from ultra-low levels could lead to downward pressure on real house prices three to eight times higher than the literature suggests. JEL Classification: E43, E52, R21, R30
    Keywords: elasticity, house prices, interest rates, non-linearity
    Date: 2023–02
  7. By: Dutt, Satyajit; Radermacher, Jan W.
    Abstract: We investigate consumption patterns in Europe with supervised machine learning methods and reveal differences in age and wealth impact across countries. Using data from the third wave (2017) of the Eurosystem's Household Finance and Consumption Survey (HFCS), we assess how age and (liquid) wealth affect the marginal propensity to consume (MPC) in the Netherlands, Germany, France, and Italy. Our regression analysis takes the specification by Christelis et al. (2019) as a starting point. Decision trees are used to suggest alternative variable splits to create categorical variables for customized regression specifications. The results suggest an impact of differing wealth distributions and retirement systems across the studied Eurozone members and are relevant to European policy makers due to joint Eurozone monetary policy and increasing supranational fiscal authority of the EU. The analysis is further substantiated by a supervised machine learning analysis using a random forest and XGBoost algorithm.
    Date: 2023
  8. By: Ehrmann, Michael; Georgarakos, Dimitris; Kenny, Geoff
    Abstract: We show that the announcement of the ECB’s Strategy Review and the revision of its inflation target in summer 2021 went largely unnoticed by the wider public. Although it is hard to reach out to this group, we find evidence that communicating key elements of the strategy can enhance the perceived credibility that price stability will be maintained in the medium-term. Randomised information treatments reveal that providing additional explanations about monetary policy’s stabilising role has the strongest positive impact on credibility, boosting credibility also among the less financially literate and generating more persistent credibility gains, even after inflation increased. JEL Classification: E52, E58, E31
    Keywords: central bank communication, Consumer Expectations Survey, credibility, financial literacy, randomised control trial
    Date: 2023–02
  9. By: Akkaya, Yildiz (Monetary Policy Department, Central Bank of Sweden); Belfrage, Carl-Johan (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (European Central Bank); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper evaluates the macroeconomic effects of foreign and domestic central bank government bond purchases on the Swedish economy before and during the Corona pandemic using a small open economy DSGE model with segmented asset markets. In this model, the effects of foreign and domestic quantitative easing on the Swedish economy occur mainly through the exchange rate channel. The calibrated model is able to broadly capture the movements in foreign and domestic bond yields, capital flows and the Krona exchange rate associated with QE since the global financial crisis in 2007-2009. We find that foreign quantitative easing strengthened the Krona exchange rate and had modestly negative effects on Swedish GDP and inflation. Domestic QE, on the other hand, depreciated the Krona and had modestly positive macroeconomic effects. In 2015-2019 the government bond purchases on average depreciated the Krona by 2.5 percent, increased GDP by 0.2 percent, and increased inflation by 0.2 percentage points. The government bond purchases following the pandemic, which were more limited in size, had roughly half of these effects.
    Keywords: Unconventional Monetary Policy; Quantitative Easing; Effective Lower Bound; International Spillovers; DSGE model
    JEL: E44 E52 F41
    Date: 2023–02–01
  10. By: Guglielmo Maria Caporale; Stavroula Yfanti; Menelaos Karanasos; Jiaying Wu
    Abstract: This study examines the macro drivers of the time-varying (dynamic) connectedness between eleven European tourism sectors. Financial integration between the travel and leisure markets, measured by their dynamic correlations or co-movement, is explained by common global fundamentals. The empirical results provide new evidence on the counter-cyclical behaviour of the correlations; in particular, stronger cross-country interdependence can be attributed to economic slowdowns characterized by higher uncertainty and geopolitical risk, tighter credit and liquidity conditions, and sluggish economic and real estate activity. Further, economic and political uncertainty is found to intensify the macro effects on tourism correlations. Finally, crises such as the 2008 financial turmoil, the subsequent European debt crisis, and the recent Covid-19 pandemic crash, also magnify the impact of macro drivers on the evolution of co-movement and integration in the tourism sector.
    Keywords: cross-country tourism correlations, economic policy uncertainty, financial/health crisis, financial integration, sectoral contagion, travel and leisure industry
    JEL: C32 D80 G01 L83 Z39
    Date: 2023
  11. By: Illing, Hannah (University of Bonn)
    Abstract: This paper studies the labor market effects of out- and in-migration in the context of cross-border commuting. It investigates an EU policy reform that granted Czech citizens full access to the German labor market, resulting in a Czech commuter outflow across the border to Germany. Exploiting the fact that the reform specifically impacted the Czech and German border regions, I use a matched difference-in-differences design to estimate its effects on local labor markets in both countries. Using a novel dataset on Czech regions, I show that municipalities in the Czech border region experienced a decrease in unemployment rates due to the worker outflow, and a corresponding increase in vacancies. For German border municipalities, I find evidence for slower employment growth (long-term) and slower wage growth (short-term), but no displacement effects for incumbent native workers.
    Keywords: out-migration, in-migration, local labor markets
    JEL: J61 J15 R23
    Date: 2023–02
  12. By: Kund, Arndt-Gerrit; Rugilo, Daniel
    Abstract: IFRS 9 substantially affects the financial sector by changing the impairment methodology for credit losses. This paper analyzes the implications of the change from IAS 39 to IFRS 9 in the context of bank resilience. We shed light on two effects. First, the “cliff-effect”, which refers to sudden increases in impairments. It occurred under IAS 39, as credit losses were only recognized with hindsight, and thus late and abruptly. IFRS 9 was designed to mitigate this issue through a staging approach, which gradually recognizes expected credit losses (ECL). These anticipated impairments, however, constitute a significant “front-loading”, which is the second effect we investigate. The earlier recognition of losses may adversely impact bank resilience through lower capital levels. In the absence of archival data of IFRS 9 and their potential biases due to the COVID-19 pandemic, we use the European bank stress test results as a natural experiment, in which all banks are subject to the same regulations and exogenous shocks. This characteristic allows us to isolate otherwise immeasurable effects and empirically investigate, whether the conjunction of both effects constitutes a net benefit to banks’ resilience. Furthermore, the vigorousness of procyclicality under IFRS 9 can be compared to IAS 39 by contrasting a hypothetical baseline and an adverse scenario. JEL Classification: E58, G21, G28, M41, M48
    Keywords: Bank stress test, CET1, impairment, procyclicality
    Date: 2023–03
  13. By: Mr. Marco Gross; Elisa Letizia
    Abstract: We set up a model of banks, the central bank, the payment system, and the surrounding private sector economic environment. It is a structural, choice-theoretic model which is deeply rooted in data. We use the model to conduct a structural counterfactual that introduces a Central Bank Digital Currency (CBDC) which is optionally interest-bearing. The model can be used to provide estimates of the emerging CBDC-in-total-money shares, the drop of deposit rate spreads to policy rates, the impact on reserve needs, the implied rotation of profits away from banks toward central banks, and the extent to which monetary policy pass-through may become stronger. We obtain upper bound estimates for the CBDC-in-money shares of about 25 percent and 20 percent, respectively for the U.S. and euro area, when CBDC would be remunerated at the policy rates and be perceived as “deposit-like” by the public. Actual take-up may likely be below such upper bound estimates. The model codes—to replicate all results and to apply them to other countries—are made available along with the paper.
    Keywords: Central bank digital currency; bank funding costs; central bank seigniorage; monetary policy pass-through; reinforcement learning; Authorss e-mail; bank agent; Central Bank digital currencies; Deposit rates; Central bank policy rate; Monetary base; Bank deposits; Global
    Date: 2023–01–20
  14. By: Maćkowiak, Bartosz; Schmidt, Sebastian
    Abstract: How is the price level determined in a monetary union when the common monetary policy pegs the nominal interest rate? How are the price levels in the member countries determined? We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Price level determinacy follows if fiscal policy at the level of the union as a whole is active. Different combinations of national fiscal policies and a common fiscal policy with “Eurobonds” amount to active fiscal policy for the union, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy for union-wide policy to be active. JEL Classification: E31, E63, F45
    Keywords: Eurobonds, monetary union, fiscal rules, fiscal theory of the price level
    Date: 2023–02

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