nep-eec New Economics Papers
on European Economics
Issue of 2023‒04‒03
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Drivers and spillover effects of inflation: the United States, the euro area, and the United Kingdom By Stephen G. Hall; George S. Tavlas; Yongli Wang
  2. Have inflation and monetary tightening changed the game? Long-run perspectives on the interest – growth difference on public debt By Freddy Heylen; Marthe Mareels; Christophe Van Langenhove
  3. Fiscal Policy in the Bundestag: Textual Analysis and Macroeconomic Effects By Albina Latifi; Viktoriia Naboka-Krell; Peter Tillmann; Peter Winker
  4. Macroprudential policy tightening, loan loss provisioning and income smoothing: Empirical evidence from European Economic Area banks By Malgorzata OLSZAK; Christophe J. GODLEWSKI; Sylwia ROSZKOWSKA; Dorota SKALA
  5. Financial fragilities and risk-taking of corporate bond funds in the aftermath of central bank policy interventions By Nicola Branzoli; Raffaele Gallo; Antonio Ilari; Dario Portioli
  6. The Heterogeneous Impact of Inflation on Households' Balance Sheets By Mayorga Clodomiro Ferreira; Miguel Cardoso; José Miguel Leiva; Alvaro Ortiz
  7. The more the merrier? Macroprudential instrument interactions and effective policy implementation By Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
  8. Do National Fiscal Rules Support Numerical Compliance with EU Fiscal Rules? By Cristiana Belu Manescu; Elva Bova; Martijn Hoogeland; Philipp Mohl
  9. The role of product digitization for productivity By Schubert, Torben; Ashouri, Sajad; Deschryvere, Matthias; Jäger, Angela; Visentin, Fabiana; Cunningham, Scott; Hajikhani, Arash; Pukelis, Lukas; Suominen, Arho
  10. The effectiveness of borrower-based macroprudential policies: a cross-country analysis using an integrated micro-macro simulation model By Giannoulakis, Stelios; Forletta, Marco; Gross, Marco; Tereanu, Eugen
  11. Insolvency Frameworks across the EU:Challenges after COVID-19 By Leonor Coutinho; Andreas Kappeler; Alessandro Turrini
  12. Differential Effects of Macroprudential Policy By Sophia Chen; Nina Biljanovska
  13. Perceptions Matter: Quasi-Experimental Evidence on the Effects of Minimum Income on Objective and Subjective Financial Wellbeing in Spain By Bilbao-Goyoaga, Eugenia

  1. By: Stephen G. Hall (Leicester University, Bank of Greece, and Pretoria University); George S. Tavlas (Bank of Greece and the Hoover Institution, Stanford University); Yongli Wang (Birmingham University)
    Abstract: We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply two methods to calculate shocks -- the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions
    Keywords: Inflation; VAR analysis; impulse responses; spatial spillovers
    JEL: C52 C53
    Date: 2022–12
  2. By: Freddy Heylen; Marthe Mareels; Christophe Van Langenhove (-)
    Abstract: The difference between the implicit nominal interest rate and the growth rate of nominal GDP is a key determinant of the dynamics and the sustainability of public debt. This paper studies the determinants of r - g in a panel of 17 OECD countries since the early 1980s. Whereas the focus of existing empirical studies is mainly on fiscal, monetary and financial drivers of the interest–growth difference, our approach and contribution are to highlight in particular the impact of real long-run drivers, such as technical progress, employment growth, demographic change, and income inequality. This allows us to derive empirically based projections for r - g beyond the next five or ten years. Our projections suggest that the major shocks that hit many economies in 2022-2023 have not fundamentally changed the game. Our baseline expectation is that the structural drivers of the interest rate and growth will keep r - g below zero for the next two decades in most European countries that we study. For the US, however, our baseline projection of r - g is positive.
    Keywords: public debt, r - g, fiscal sustainability, demographic change, inequality
    JEL: E43 E62 H63 H68 J11
    Date: 2023–02
  3. By: Albina Latifi (Justus Liebig University Giessen); Viktoriia Naboka-Krell (Justus Liebig University Giessen); Peter Tillmann (Justus Liebig University Giessen); Peter Winker (Justus Liebig University Giessen)
    Abstract: Fiscal policy is made in parliament. We go to the roots of changes of fiscal policy in Germany and use a novel data set on all parliamentary speeches in the Bundestag from 1960 to 2021. We propose an embedding-based approach, which allows the representation of words and documents in a shared vector space, in order to measure fiscal policy-related sentiment in parliamentary debates at a scale from contractionary to expansionary. For this purpose, a dictionary containing terms related to expansionary and contractionary policy measures is created. We put fiscal sentiment into a series of recursively-identified vector autoregressive (VAR) models to show that a change in fiscal sentiment causes a change in government spending and has strong effects on the macroeconomy. The results support the notion that the debate in parliament contains information for the identification of government spending shocks.
    Keywords: text mining, word embeddings, VAR models, identification, government spending
    JEL: C89 E60 E62
    Date: 2023
  4. By: Malgorzata OLSZAK (Wydzial Zarzadzania, Uniwersytet Warszawski); Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg); Sylwia ROSZKOWSKA (Uniwersytet Warszawski); Dorota SKALA (WNEiZ, University of Szczecin)
    Abstract: In this study, we provide evidence of the effects of macroprudential policy tightening on loan loss provisions (LLP) and income smoothing of European Economic Area (EEA) banks. Overall, we find that tightening actions of macroprudential policy reduce LLP, but the results depend on the period of analysis: the effect is positive in the pre-Basel III period (1996-2010), and it turns negative after 2010. Policy tightening increases (respectively decreases) income smoothing in the pre-Basel period (respectively Basel III period). We also find that our results depend on the category of macroprudential instruments. In particular, tools relating to LLP policy and taxes are associated with increased LLP and income smoothing in the pre-Basel III period. This outcome changes direction under the Basel III regulatory regime. We also show that the heterogeneity of the effects of the policy on LLP and income smoothing depends on the tool, on the type of the policy change (an activation of a new tool versus a recalibration of existing tools) and on market significance of a bank.
    Keywords: Loan loss provisions, macroprudential policy actions, income smoothing, policy tightening, EEA
    JEL: E44 E58 G21 G28
    Date: 2023
  5. By: Nicola Branzoli (Bank of Italy); Raffaele Gallo (Bank of Italy); Antonio Ilari (Bank of Italy); Dario Portioli (Bank of Italy)
    Abstract: This paper provides evidence that, by restoring market functioning, central banks' pandemic-related asset purchase programmes lowered payoff complementarities among investors in corporate bond funds, reinforcing asset managers' willingness to hold riskier assets to increase funds' returns. Controlling for potentially confounding factors, we show that funds more exposed to these interventions – i.e. those which immediately prior to the pandemic crisis held a high share of securities eligible for inclusion in purchase programmes – took on more credit and liquidity risks than less exposed ones. Risk-taking was stronger when more exposed funds under-performed their peers or held less liquid assets. We discuss the implications for the design of policy interventions in the aftermath of market stress and the regulation of the investment fund sector.
    Keywords: corporate bond funds, market stress, asset purchase programmes, risk-taking
    JEL: E50 G01 G11 G23
    Date: 2023–03
  6. By: Mayorga Clodomiro Ferreira; Miguel Cardoso; José Miguel Leiva; Alvaro Ortiz
    Abstract: We identify and study three key channels that shape how inflation affects wealth inequality: (i) the traditional Fisher channel through which inflation redistributes from lenders to borrowers; (ii) a nominal labour income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels for Spain in 2021 using both public surveys and a novel proprietary bank dataset that includes detailed information on clients’ assets and liabilities, credit and debit card payments, bills and labour related income. Results show that the Fisher and labour income channels are one order of magnitude larger than relative consumption. Middle-aged individuals were roughly unaffected by inflation while older ones suffered the most its consequences.
    JEL: E31 E21 D31
    Date: 2022–11
  7. By: Lo Duca, Marco; Hallissey, Niamh; Jurca, Pavol; Kouratzoglou, Charalampos; Lima, Diana; Pirovano, Mara; Prapiestis, Algirdas; Saldías, Martín; Tereanu, Eugen; Bartal, Mehdi; Giedraitė, Edita; Granlund, Peik; Lennartsdotter, Petra; Sangaré, Ibrahima; Serra, Diogo; Silva, Fatima; Tuomikoski, Kristiina; Vauhkonen, Jukka
    Abstract: Macroprudential policies since the global financial crisis have been central to safeguarding financial stability. Despite the increasing use of multiple policy instruments, a detailed understanding of interactions among them is still needed to assess how instrument combinations can enhance the effectiveness of macroprudential action. This paper proposes a conceptual framework for informing the choice of combinations of macroprudential instruments, looking at the role of micro and macroeconomic transmission channels, interactions across policy objectives, the importance of country specificities and linkages with other macroeconomic or supervisory policies. It also reviews considerations related to circumvention, leakages, time of activation and communication of policies, all of which may affect the desirability of different combinations of macroprudential instruments. The paper also discusses a possible operational use of combinations of macroprudential instruments to address selected risks and provides a rich analysis of instrument interactions within the categories of borrower-based and, respectively, capital-based measures. The paper concludes that the combinations of capital and borrower-based instruments ensures a comprehensive coverage of different systemic risks and entail important synergies. JEL Classification: G21, G28
    Keywords: banks, financial stability, macroprudential policy
    Date: 2023–03
  8. By: Cristiana Belu Manescu; Elva Bova; Martijn Hoogeland; Philipp Mohl
    Abstract: This paper investigates how national fiscal rules have supported numerical compliance with EU fiscal rules. Using a novel dataset of numerical compliance with national fiscal rules, the relationship between national and EU rule compliances is explored using both descriptive analysis and panel regression analysis applied for fiscal rules in place between 1998 and 2019. The descriptive analysis shows that compliance with national and EU rules is on average higher in low-debt situations, with compliance with EU fiscal rules somehow higher than for national rules. Panel regressions show that the simple presence of a national fiscal rule does not seem to matter for EU rule compliance. However, national rules that are complied with and are well designed are associated with compliance with almost all types of EU fiscal rules. Against the usual caveats on panel regressions, the results suggest that rule design, monitoring and enforcement can enhance ownership and therefore compliance with numerical fiscal rules.
    JEL: H60 H11 E62
    Date: 2023–02
  9. By: Schubert, Torben; Ashouri, Sajad; Deschryvere, Matthias; Jäger, Angela; Visentin, Fabiana (RS: GSBE other - not theme-related research, Mt Economic Research Inst on Innov/Techn); Cunningham, Scott; Hajikhani, Arash; Pukelis, Lukas; Suominen, Arho
    Abstract: Digitalization is considered an important driver of the unravelling societal and economic transformations. However, holding both promises and challenges, its effects on the performance of individual firms are still underexplored. In this paper, we recognize that digitalization may take many shapes and try isolating the effects specifically of product digitization on firm level labour productivity. Our analyses are based on a large Europe-wide unique dataset combining structured information from ORBIS and PATSTAT with novel web-scraped information on digitalization in firms involved in high-tech manufacturing. We show that digitalization benefits productivity. However, the effect appears to result exclusively from product digitization, while a general digital intensity measure turned out to be insignificant. Moreover, we show that the effects are stronger for firms with higher initial productivity and firms located in countries considered digitally leading. Our results from the European high-tech sector suggest that the digital transformation in Europe is slow paced and scaled-up in only a fraction of the firms.
    JEL: O49 C81 O33 D20 O47
    Date: 2023–02–14
  10. By: Giannoulakis, Stelios; Forletta, Marco; Gross, Marco; Tereanu, Eugen
    Abstract: This paper evaluates the resilience benefits of borrower-based macroprudential policies—such as LTV, DSTI, or DTI caps—for households and banks in the EU. To that end, we employ a further developed variant of the integrated micro-macro simulation model of Gross and Población (2017). Besides various methodological advances, joint policy caps are now also considered, and the resilience benefits are decomposed across income and wealth categories of borrowing households. Our findings suggest that (1) the resilience of households improves notably as a result of implementing individual and joint policy limits, with joint limits being more than additively effective; (2) borrower-based measures can visibly enhance the quality of bank mortgage portfolios over time, supporting bank solvency ratios; and (3) the policies’ resilience benefits are more pronounced for households located at the lower end of the income and wealth distributions. JEL Classification: C33, E58, G18
    Keywords: Borrower-based macroprudential policy, household micro data and modeling, macro-financial linkages
    Date: 2023–03
  11. By: Leonor Coutinho; Andreas Kappeler; Alessandro Turrini
    Abstract: Efficient insolvency frameworks align incentives in such a way that viable corporate debt is repaid, while unviable debt is resolved. Moreover, in a context of high corporate indebtedness, the insolvency framework requires sufficient capacity to adequately deal with a rising number of insolvency cases. The aim of the present paper is fourfold: (i) to illustrate the main concepts relating to insolvency frameworks and their economic relevance; (ii) to review the main characteristics of insolvency regimes across EU countries; (iii) to evaluate the severity of corporate vulnerabilities stemming from the COVID-19 crisis, taking into account how insolvencies and non-performing loans have developed in response to the global financial crisis; and (iv) to highlight the remaining challenges for insolvency systems in the EU on the basis of an estimate of the potential increase in insolvencies (insolvency gaps) and existing institutional settings and structural characteristics.
    JEL: D40 E31 L51
    Date: 2023–02
  12. By: Sophia Chen; Nina Biljanovska
    Abstract: We explore the differential effects of lender-based macroprudential policies on new mortgage borrowing for households of different income using a comprehensive dataset that links macroprudential policy actions with household survey data for European Union countries. The main results suggest that higher-income households on average experience a larger reduction in mortgage loan size than lower-income households when regulation targeting total lenders’ assets tightens. In contrast, lower-income households on average experience a larger reduction in mortgage loan size than higher-income households when regulation targeting lenders’ capital requirements tightens. We also provide evidence of the different channels through which the differential effects operate.
    Keywords: Household borrowing; macroprudential policy; income distribution
    Date: 2023–02–24
  13. By: Bilbao-Goyoaga, Eugenia (The London School of Economics)
    Abstract: This paper examines how minimum income schemes (MISs) affect households’ financial wellbeing and whether this effect differs across objective material conditions and households’ perceptions. Two reasons motivate this study. First, while the Covid-19 pandemic, the ecological transition and the cost-of-living crisis have all prompted a renewed interest in MISs, no consensus exists on how effective these schemes are in improving households’ financial wellbeing. Second, when evaluating MISs, the literature focuses on objective measures of financial wellbeing, namely monetary poverty. Yet, peoples’ perceptions of their own situation can be instrumental in affecting their health, productivity and decision-making and can reveal important information about adaptation mechanisms or spillovers to non-recipients. This paper examines the case study of Spain, a country that introduced a new MIS in 2020. The study uses Eurostat survey data for the 2010-2022 period in a Synthetic Control Method analysis. The results show that, while the policy had no significant effect on objective financial wellbeing measures (i.e. the poverty rate, the poverty gap and mean income) for its first year and a half of existence, it did considerably improve subjective financial wellbeing after two years and a half, as it helped households feel less pessimistic about the evolution of their finances during the Covid-19 and cost-of-living crises. The paper discusses several mechanisms explaining this differentiated impact of the policy, such as its lagged rollout, the improvements made to the benefit from 2022 as well as anticipation, placebo and positive spillover effects of the MIS. The findings highlight the importance for practitioners to consider subjective measures when assessing income support schemes.
    Date: 2023–02–24

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