nep-eec New Economics Papers
on European Economics
Issue of 2023‒06‒26
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Has the reaction function of the European Central Bank changed over time? By Tatar, Balint
  2. Central bank communication and trust: an experimental study on the European Central Bank and the general public By Mochhoury, Sarah
  3. Media Treatment of Monetary Policy Surprises and Their Impact on Firms’ and Consumers’ Expectations By Julien Pinter; Evžen Kocenda
  4. Liquidity buffers and open-end investment funds: containing outflows and reducing fire sales By Dekker, Lennart; Molestina Vivar, Luis; Wedow, Michael; Weistroffer, Christian
  5. From Policy to Regime: the changing posture of the ECB between liquidity and collateral through the lens of Monetary Regime By Giordano, Matteo; Goghie, Alexandru-Stefan
  6. Money and output asymmetry: The Unintended consequences of central banks' obsession with inflation By Taniya Ghosh; Abhishek Gorsi
  7. Asset prices, collateral and bank lending: the case of Covid-19 and real estate By Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
  8. Costly, but (Relatively) Ineffective? An Assessment of Germany’s Temporary VAT Rate Reduction during the Covid-19 Pandemic By Victoria Baudisch; Matthias Neuenkirch
  9. Exchange rate pass-around By Crozet, Matthieu; Hinz, Julian; Trionfetti, Federico
  10. EU structural funds and GDP per capita: spatial VAR evidence for the European regions By Sergio Destefanis; Valter Di Giacinto
  11. Bank private information in CDS markets By Bilan, Andrada; Ongena, Steven; Pancaro, Cosimo
  12. Pricing climate transition risk: Evidence from European corporate CDS By Vozian, Katia; Costola, Michele
  13. Public Opinion and Immigration in Europe: Can Regional Migration Flows Predict Public Attitudes to Immigration? By Lenka Dražanová; Jérôme Gonnot
  14. Who is to suffer? Quantifying the impact of sanctions on German firms By Görg, Holger; Jacobs, Anna; Meuchelböck, Saskia
  15. The SME Finance Gap in The European Union By Thorsten Beck; Natalie Kessler
  16. The digital euro: A precautionary device, not a deus ex machina By Angeloni, Ignazio
  17. The transmission of negative nominal interest rates in Finland By Kwan, Simon H.; Ulate, Mauricio; Voutilainen, Ville
  18. Determinants of EU greentech investments: The role of financial market conditions By de Haan Montes, Gabrielle; Gvetadze, Salome; Lottner, Felina; Milander, Henry; Pan, Xianxing; Tian, Chloe; Torfs, Wouter
  19. Swiss National Bank: Is the recent loss a threat to monetary policy? A research note By Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli

  1. By: Tatar, Balint
    Abstract: I have assessed changes in the monetary policy stance in the euro area since its inception by applying a Bayesian time-varying parameter framework in conjunction with the Hamiltonian Monte Carlo algorithm. I find that the estimated policy response has varied considerably over time. Most of the results suggest that the response weakened after the onset of the financial crisis and while quantitative measures were still in place, although there are also indications that the weakening of the response to the expected inflation gap may have been less pronounced. I also find that the policy response has become more forceful over the course of the recent sharp rise in inflation. Furthermore, it is essential to model the stochastic volatility relating to deviations from the policy rule as it materially influences the results.
    Keywords: Monetary policy rules, Bayesian time-varying parameter estimation, unconventional monetary policy, Hamiltonian Monte Carlo
    JEL: E52 C11 C22 C51
    Date: 2023
  2. By: Mochhoury, Sarah
    Abstract: While it has become clear that communication is a monetary policy tool for central banks, and extensive research has been conducted on central bank communication with financial markets, little is known so far on central bank communication with the general public. My research provides new insights into this field, confirming that the efforts of central banks to connect with a wider public are not in vain. In a randomised controlled trial, I focus on the determinants of trust in the European Central Bank (ECB) and on understanding of its communication about the Pandemic Emergency Purchase Programme, which was set up as part of the ECB’s response to the COVID-19 crisis. I find that the ECB’s simplified and relatable communication leads to greater trust in the central bank among the general public, as it has a positive impact on perceptions of the ECB among laypeople. The simplified content also proves to contribute to increased understanding of the central bank’s messages among the wider public. JEL Classification: C83, C93, D83, E52, E58
    Keywords: Behavioural economics, Central bank communication, European Central Bank, Experimental economics, Trust
    Date: 2023–06
  3. By: Julien Pinter; Evžen Kocenda
    Abstract: Do firms’ and consumers’ expectations react to central bank announcements? Past literature has come to divergent conclusions, but it has systematically ignored how media treat the announcements. This paper investigates the link between monetary policy announcements and expectations by taking into account their media treatment. We initially rely on the standard monetary policy surprise measures in the euro area to identify exogenous changes in monetary policy stances. We then analyze how the main general newspapers in France report on announcements. 85 % of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign that is inconsistent with the media report. Only when we consider media-consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. We then build our own measure of media monetary policy surprises and confirm that these matter. Further analysis reveals that the tonality of the media reports on the economy drives the sign of consumers’ response.
    Keywords: firm expectations, consumer expectations, monetary policy surprises, European Central Bank, information effect
    JEL: D84 E02 E52 E31
    Date: 2023
  4. By: Dekker, Lennart; Molestina Vivar, Luis; Wedow, Michael; Weistroffer, Christian
    Abstract: Using a sample of open-end corporate bond funds domiciled in the euro area, we exploit the COVID-19 market turmoil in March 2020 to examine two channels through which liquidity buffers can reduce procyclicality in the investment fund sector. First, we find that liquidity buffers reduced outflows during March 2020 only to a limited extent. Second, we find that funds entering the crisis with higher liquidity buffers were less likely to involve in cash hoarding and more likely to use cash buffers to meet outflows. Our results suggest that higher liquidity buffers can reduce procyclicality primarily through supporting the liquidity management strategies employed by fund managers. JEL Classification: G01, G11, G23
    Keywords: corporate bond funds, COVID-19 pandemic, investor redemptions, liquidity management
    Date: 2023–06
  5. By: Giordano, Matteo; Goghie, Alexandru-Stefan
    Abstract: The evolution of the European Central Bank (ECB) and of the forms of monetary policy implemented in the Eurozone since its inception outline a more radical shift in the posture of the ECB rather than the simple recourse to new instruments of monetary policy. This paper explores the concept of monetary regime to understand under a systemic lens the changes occurred in the conventional and unconventional monetary policy operations, and how they have shaped the position of the ECB within the increasingly market-based financial system. We argue that the features of a monetary regime affect the processes of de- and re-politicization of the ECB. To do so, we explore three key but under-studied changes in the operations of the ECB: the shift from a corridor to a floor system with the fixed-rate full allotment (FRFA) procedure for its refinancing operations in 2008, the implementation of Securities Lending in the second half of the 2010s, and the introduction of the Transmission Protection Mechanism in 2022. These events, in turn, hinge on the evolving dynamics between liquidity and collateral, which not only define the frame of the monetary regime, but also allow for the central bank’s operations to have significant, though involuntary and indirect, fiscal consequences. Ultimately, this paper highlights the shift from monetary and fiscal concerns to financial ones, thus arguing that macroeconomic policies have become subordinated to financial logics that imply an increasing blurring of the separations between monetary and fiscal spheres.
    Date: 2023–05–26
  6. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Abhishek Gorsi (Indira Gandhi Institute of Development Research)
    Abstract: The study reexamines the relationship between money and output for the US, UK, and the Euro Area using quarterly data up to 2022. Modern central banks are focused on controlling inflation, and adjust their monetary policy and liquidity accordingly. However, it is common practise to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as been done currently by some major economies, may have long-term effects on those economies' output.
    Keywords: Monetarism, Monetary Aggregates, Monetary Policy, Money, Money-Income-Output, NARDL, Non-Linear Granger Causality
    JEL: E42 E52 E58 E64
    Date: 2023–05
  7. By: Horan, Aoife; Jarmulska, Barbara; Ryan, Ellen
    Abstract: Our paper uses credit registry data for the euro area to examine how the banking system transmits asset price shocks to credit via revaluation of collateral and subsequent lending decisions. Specifically we examine banks’ treatment of real estate collateral during the Covid-19 crisis. First we find evidence of significant frictions in the trans-mission of asset price dynamics to collateral values. Despite this we find that lending relationships reliant on real estate collateral received one third less credit following the outbreak of the pandemic and that firms experiencing downward revaluations of their collateral were significantly less likely to be given new loans. Our findings confirm that the collateral channel does create an economically significant link between real estate values and credit but suggest that the banking system’s role in transmission may be more complex than traditional economic theory would imply. JEL Classification: G21, R3, C55
    Keywords: banking, collateral channel, financial accelerator, microdata, real estate
    Date: 2023–06
  8. By: Victoria Baudisch; Matthias Neuenkirch
    Abstract: We evaluate Germany’s temporary value-added tax (VAT) rate reduction as a tool to stimulate consumer spending during the Covid-19 pandemic using a comparative case study approach. We construct a credible counterfactual for Germany in a two-step procedure. First, we carry out a careful pre-selection of the donor pool countries to obtain a control group that is highly similar to Germany regarding important post-treatment characteristics. Second, we apply a reweighting scheme on the pre-selected donor countries. The synthetic control group only differs from Germany in the way that it did not implement the temporary VAT rate reduction. Our results indicate that the German VAT cut policy and partial VAT reductions in other countries were relatively ineffective in stimulating consumption with regards to their costs when compared to other measures such as (targeted) direct cash transfers. We attribute this to the fact that direct cash transfers are more comprehensible, salient, and actionable, in particular, in a dynamic environment with high uncertainty induced by unclear future economic prospects.
    Keywords: consumption, Covid-19, synthetic control, temporary VAT cut, unconventional fiscal policy
    JEL: E21 E62 E65 H31
    Date: 2023
  9. By: Crozet, Matthieu; Hinz, Julian; Trionfetti, Federico
    Abstract: In January 2015, The Swiss Franc (CHF) appreciated unexpectedly against the Euro by approximately 15%. We document a new fact: French firms that exported to both the Swiss market and the Eurozone also exhibited a sudden change in their export prices to the Eurozone. We coin this the 'exchange rate pass-around' effect. We rationalise this fact with a simple model based on the endogenous decision of some firms to give up pricing-to-market and opt for single-pricing to all markets. An important implication of this finding is that single-pricing may be one of the causes of the incomplete pass-through. This mechanism has so far remained unexplored in the literature, which may have led to overestimating the importance of other factors. Based on monthly French export data, our empirical analysis confirms the existence of the pass-around. Firms directly affected by the CHF exchange rate shock increased their prices in neighboring markets by 0.8% compared to other exporters. The effect was stronger for firms with lower ex-ante price heterogeneity across markets and for firms with smaller trade costs to Switzerland. However, the effect was short-lived. As time passed, exporters tended to decouple the prices they set on the Swiss market from those for the Eurozone, and the pass-around effect faded.
    Keywords: Exchange rate pass-through, International trade, Pricing-to-market
    JEL: F14 F31 D61 D62
    Date: 2023
  10. By: Sergio Destefanis (University of Salerno); Valter Di Giacinto (Bank of Italy)
    Abstract: This paper focuses on the impact of EU structural funds (SFs) on the GDP per capita of 183 European NUTS2 regions from 1990 to 2016. To allow for the endogeneity of funds allocation to regions, we estimate a bivariate structural panel VAR model, controlling for unobserved heterogeneity through a broad array of deterministic variables. Our main identifying restriction is rooted in the widely documented long lags affecting the implementation of the EU’s Cohesion Policy. Through a spatial VAR specification, we also estimate spillovers from local SF expenditure on other areas. We find significant multipliers measuring the local response of GDP to an exogenous shock in local SF expenditure, with a long-run value settling at 2.6. Spillovers for GDP from an exogenous shock to SFs are also positive and significant, but much smaller (about one fifth of within-region responses). When partitioning our sample according to features suggested by the literature (stage of development, EU funding regimes, size), we find that within-region multipliers are higher in lagging regions, especially in recipient countries of the Cohesion Fund, and in regions with a larger population. Spillovers are also heterogeneous across different groups of regions, turning out to be negative in regions in countries that are not recipients of the Cohesion Fund. All this evidence is validated in qualitative terms by robustness checks on model specification and the choice of spatial weights.
    Keywords: cohesion policy, spatial structural VAR model, fiscal multipliers, spillovers, EU NUTS-2 regions
    JEL: C33 E62 H50
    Date: 2023–04
  11. By: Bilan, Andrada; Ongena, Steven; Pancaro, Cosimo
    Abstract: Can banks trade credit default swaps (CDSs) referenced on their current corporate clients at competitive prices, or are banks penalized for potentially holding private information? To answer this question we merge CDS trades reported under the European Market Infrastructure Regulation (EMIR) with syndicated loans from DealScan, and compare the prices on similar CDSs that the same dealer offers to banks and to other investors. We find that banks lending to a corporation purchase CDSs on this corporation at lower prices, and that, after trading with banks, dealers can earn higher margins on these CDSs when trading with other investors. Our findings suggest that banks hold valuable private information which is shared in their trades with dealers. Dealers then disseminate this information to financial markets. JEL Classification: G14, G21, G23
    Keywords: banks, credit derivatives, EMIR, price discovery, syndicated loans
    Date: 2023–05
  12. By: Vozian, Katia; Costola, Michele
    Abstract: The European low-carbon transition began in the last few decades and is accelerating to achieve net-zero emissions by 2050. This paper examines how climate-related transition indicators of a large European corporate firm relate to its CDS-implied credit risk across various time horizons. Findings show that firms with higher GHG emissions have higher CDS spreads at all tenors, including the 30-year horizon, particularly after the 2015 Paris Agreement, and in prominent industries such as Electricity, Gas, and Mining. Results suggest that the European CDS market is currently pricing, to some extent, albeit small, the exposure to transition risk for a firm across different time horizons. However, it fails to account for a company's efforts to manage transition risks and its exposure to the EU Emissions Trading Scheme. CDS market participants seem to find challenging to risk-differentiate ETS-participating firms from other firms.
    Keywords: climate change, transition risk, credit risk, credit default swap, emissionstrading system (ETS), financial markets
    JEL: G1 E58 G32 Q51 D53
    Date: 2023
  13. By: Lenka Dražanová; Jérôme Gonnot
    Abstract: This article investigates how European public opinion has responded to short-term variations inregional foreign-born immigration over the past decade (2010-2019). Combining data from theEuropean Social Survey and the European Union Labour Force Survey, we test how natives’opinions over migration policy and the contribution of immigrants to society have changed with thenet rate of international migrants in 183 EU regions from 21 countries. We find that while EuropeanUnion natives living in regions with a higher share of foreign-born populations are generally less antiimmigrant, a short-term increase in the number of immigrants within a given region is associated withmore negative attitudes in Western Europe only. Moreover, our gender and origin decompositionindicate that male immigrants and those born outside of the European Union are driving most ofthe negative association between public opinion and changes in the level of immigration in WesternEuropean countries, while the educational attainment of migrants makes little difference. The scopeof our analysis for Central and Eastern Europe is more limited due to the smaller share of foreignbornimmigrants living in those regions. Despite this caveat, our analysis suggests that inflows ofEuropean migrants in Central and Eastern Europe are generally associated with more positiveviews towards immigration, regardless of their skill level. Our findings demonstrate the importanceof temporal dynamics for attitudes to immigration. They also point to the need to analyse not onlycross-country differences but also regional differences in those attitudes.
    Keywords: Attitudes to immigration, migration flows, public opinion, regions
    Date: 2023–03
  14. By: Görg, Holger; Jacobs, Anna; Meuchelböck, Saskia
    Abstract: In this paper, we use a novel firm level dataset for Germany to investigate the effect of sanctions on export behaviour and performance of German firms. More specifically, we study the sanctions imposed by the EU against Russia in 2014 in response to the annexation of Crimea and Russia's countermeasures. We find a substantial negative effect on both the extensive and intensive margin of German exports. While the negative effects are strongest for firms exporting products subject to trade restrictions, we provide further evidence on the indirect effects of sanctions. Analysing the impact on broader measures of firm performance, we document that the cost of sanctions is heterogeneous across firms but overall modest. Our results reveal that the negative impact of the shock was concentrated primarily among a small number of firms that were highly dependent on Russia as an export market and those directly affected by the sanctions.
    Keywords: sanctions, foreign policy, trade, firm behaviour, Germany
    JEL: F1 F14 F51 L25
    Date: 2023
  15. By: Thorsten Beck; Natalie Kessler
    Abstract: This paper presents SME financing gaps across European countries over the period 2013 to 2020, using two different methodologies, one reliant on firm balance sheets and one on firm-level surveys. We show significant variation in financing gaps across countries and sectors. Variation over time, on the other hand, is not as strong or intuitive. The account- and survey-based measures are only weakly correlated with each other, reflecting their different nature, and both are only weakly correlated with a survey-based measure of self-reported firm financing constraints.
    Keywords: SME Finance, financing gap, firm-level surveys, access to banking
    Date: 2023–03
  16. By: Angeloni, Ignazio
    Abstract: There is much discussion today about a possible digital euro (PDE). Is this attention exaggerated? Are "central bank digital currencies" (CBDCs) "a solution in search of a problem", as some have argued? This article summarizes the main facts about the PDE and concludes that, if the decision on adoption had to be taken today, the arguments against would outweigh those in favor. However, there may be future circumstances in which having a CBDC ready for use can indeed be useful. Therefore, preparing is a good thing, even if the odds of its usefulness in normal conditions are slim.
    Keywords: Digital, Euro, Financial Stability, Monetary Policy, Central Bank, CBDC, Banks
    Date: 2023
  17. By: Kwan, Simon H.; Ulate, Mauricio; Voutilainen, Ville
    Abstract: Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB's changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.
    Keywords: nominal interest rate, monetary policy transmission, Finland
    Date: 2023
  18. By: de Haan Montes, Gabrielle; Gvetadze, Salome; Lottner, Felina; Milander, Henry; Pan, Xianxing; Tian, Chloe; Torfs, Wouter
    Abstract: This working paper contributes to the understanding of how Greentech ecosystems develop by considering the impact of EU countries' local financial market environment on the prevalence of Greentech investment deal activity. The empirical analysis demonstrates that the occurrence of IPOs in a country incentivises Greentech investors and entrepreneurs, and stimulates deal activity in earlier stages of the market. This suggests an important role for policy intervention at EU-level, as EU policymakers are best positioned to bridge the scale-up gap through the use of innovative financing instruments and thereby support the development of a European Greentech ecosystem.
    Date: 2023
  19. By: Kämpf, Vanessa; Stadtmann, Georg; Zimmermann, Lilli
    Abstract: The Swiss National Bank (SNB) announced to refrain from profit distribution in 2022 owing to the accumulation of a huge financial loss. In this note we examine the key determinants of the SNB's loss and shed light on its implications to conduct monetary policy. In particular, we show that different accounting principles yield different results concerning the equity position of a central bank's balance sheet, yet not affecting the ability to run monetary policy.
    Keywords: Swiss National Bank, central bank, monetary policy
    JEL: E5 G15
    Date: 2023

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