nep-eec New Economics Papers
on European Economics
Issue of 2023‒07‒31
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The effects of monetary policy surprises and fiscal sustainability regimes in the Euro Area By António Afonso; José Alves; Serena Ionta
  2. Whose inflation rates matter most? A DSGE model and machine learning approach to monetary policy in the Euro area By Stempel, Daniel; Zahner, Johannes
  3. Googling “Inflation”: What does Internet Search Behaviour Reveal about Household (In)attention to Inflation and Monetary Policy? By Christian Buelens
  4. Monetary policy transmission below zero By Fungáécová, Zuzana; Kerola, Eeva; Laine, Olli-Matti
  5. Investigating the inflation-output-nexus for the euro area: Old questions and new results By Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
  6. Macrofinancial Dynamics in a Monetary Union By Daniel Monteiro
  7. SYMMETRY OF DEMAND AND SUPPLY SHOCKS IN THE EUROZONE By Pedro Oliveira, Maria Paula Fontoura, Nuno Sobreira
  8. Financial heterogeneity and monetary union By Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajsek
  9. National Productivity Boards: Institutional Set-up and Analyses of Productivity By Luis García; Luigi Giamboni; Mauro Vigani
  10. Science and productivity in European Firms: How do regional innovation modes matter? By Natália Barbosa; Ana Paula Faria
  11. Supply chains shocks and inflation in Europe By Jakub Mućk; Łukasz Postek
  12. The Anatomy of Small Open Economy Productivity Trends By Christoph Gortz; Konstantinos Theodoridis; Christoph Thoenissen
  13. First-Order and Higher-Order Inflation Expectations: Evidence about Households and Firms By Pascal Kieren; Christian König-Kersting; Robert Schmidt; Stefan Trautmann; Franziska Heinicke

  1. By: António Afonso; José Alves; Serena Ionta
    Abstract: We study the effect of monetary surprise shocks on real output and the price level, conditioned on different fiscal sustainability regimes in the period 2001Q4-2021Q4. First, we estimate time-varying fiscal sustainability coefficients based on Bohn’s (1998) approach through Schlicht’s (2003) method. Then, by taking these sustainability coefficients in a nonlinear local projection model for the Euro Area (aggregate data), Germany, Italy, and Portugal, we analyze the interaction between both policies under (un)sustainable fiscal regimes. Our results show that in a Ricardian regime, output and prices respond to monetary tightening by contracting, while in a non-Ricardian regime the effect on output and price levels is negligible (or even positive). The dependence of the effectiveness of monetary policy on fiscal solvency is valid for Euro-Area and all the countries assessed, and does not depend on whether a country is “core” or “periphery”, but on the policy conduct over time.
    Keywords: monetary surprises, fiscal sustainability, local-projection models, fiscal-monetary policy mix, Euro area, Germany, Italy, Portugal
    JEL: C32 E58 E62 E63
    Date: 2023–07
  2. By: Stempel, Daniel; Zahner, Johannes
    Abstract: In the euro area, monetary policy is conducted by a single central bank for 20 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. They authors find that a neural network performs best out-of-sample. They use this algorithm to generally classify historical EMU data, and to determine the exact weight on the inflation rate of EMU members in each quarter of the past two decades. Their findings suggest disproportional emphasis of the ECB on the inflation rates of EMU members that exhibited high inflation rate volatility for the vast majority of the time frame considered (80%), with a median inflation weight of 67% on these countries. They show that these results stem from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
    Keywords: New Keynesian Models, Monetary Policy, European Monetary Union, Neural Networks, Transfer Learning
    JEL: E58 C45 C53
    Date: 2023
  3. By: Christian Buelens
    Abstract: This paper shows that internet search intensity for the term “inflation” provides a meaningful direct measure of attention to inflation by households across the euro area. In support of the theory of rational inattention, it finds that inflation attention is contingent on the level of inflation and increases in it in a non-linear manner, pointing to different inflation attention-regimes. As inflation increases, economic agents abandon their state of inattention at an accelerating rate, which may have lasting implications on inflation expectations and the way they are formed. Attention to inflation in some euro area countries is also found to be triggered by other factors, notably monetary policy decisions or a deterioration in households’ economic situation. This suggests that households do establish a link between inflation and monetary policy decisions, and think about inflation when economic sentiment drops. However, there is strong heterogeneity across the euro area, both in terms of inflation attention levels and sensitivity. These findings have implications for public communication in high inflation attention-regimes and for the modelling of inflation expectations when there are information frictions.
    JEL: C82 D83 D84 E31 E52 E58 E7
    Date: 2023–03
  4. By: Fungáécová, Zuzana; Kerola, Eeva; Laine, Olli-Matti
    Abstract: This study considers the pass-through of different ECB monetary policy measures to bank corporate lending rates of different maturities during 2010-2020. We find changes in the pass-through as policy rates first dip below zero in 2014 and again when negative interest rates become more persistent during the "low-for-long" period beginning in 2016. Overall, the transmission of monetary policy to bank lending rates appears to have become less efficient below zero, particularly in the case of corporate loans with short maturities. The effect is most pronounced for banks that did not lower their own retail deposit rates below zero or held significant amounts of negative interest-bearing central bank deposits. We see a reversal in the pass-through during the low-for-long period with banks raising their lending rates as monetary policy is eased. Unconventional monetary policy measures such as targeted longer-term refinancing operations (TLTROs) and quantitative easing (QE) appear to have mitigated these contractionary effects, even during the low-for-long period. In our examination of below-zero policy tools, we provide evidence that negative policy rates and TLTROs complement each other, while negative policy rates and QE do not.
    Keywords: negative interest rates, unconventional monetary policy, lending rates, bank lending channel, euro area
    JEL: E52 E58 G21
    Date: 2023
  5. By: Gerdesmeier, Dieter; Reimers, Hans-Eggert; Roffia, Barbara
    Abstract: The relationship between inflation and real GDP growth is one of the most widely researched topics in macroeconomics. At the same time, it is certainly not exaggerated to claim that this nexus also stands at the heart of monetary policy, given the fact that low inflation in combination with high and sustained output growth should be the central objective of any sound economic policy. The latter notion becomes even more obvious, when taking account of the fact that many central banks all over the world have selected target levels for inflation and communicated them to the public. Against this background, it is of utmost importance for central banks to know more about the nature and form of the relationship between inflation and real GDP. This study tries to shed more light on the concrete shape of this relationship for the euro area and, more specifically, on the issue of possible regime shifts therein. The analysis provides strong evidence for non-linear effects in the euro area. As a by-product, the methods used allow for a quantification of the point of switch across the different regimes and it is found that this breakpoint closely matches the ECB's previous definitions of price stability and its new inflation target of 2%. While these results look encouraging, further research in this area seems warranted.
    JEL: E31 E52 E58
    Date: 2023
  6. By: Daniel Monteiro
    Abstract: We develop a dynamic stochastic general equilibrium model of a monetary union and employ it to study in an integrated manner different macrofinancial disturbances and related policy options. The model is calibrated to the euro area, comprises two regions subject to real, nominal and financial rigidities, and features microfounded regional banking sectors and portfolio selection mechanisms allowing for empirically-consistent properties. Among the questions to which we devote our analysis are the transmission of conventional and unconventional monetary policy, the effects of private- and government-sector default risk, the implications of different macroprudential policies, the endogenous emergence of country risk premia in a context of crossborder financial flows, and the stabilising properties of joint sovereign debt issuance.
    JEL: E32 E44 E52 F36 F45 G28 H63
    Date: 2023–06
  7. By: Pedro Oliveira, Maria Paula Fontoura, Nuno Sobreira
    Abstract: This paper uses quarterly data for the period of 2004-2019 to investigate the symmetry of cross-country demand and supply shocks in the Eurozone. For this purpose, the structural Vector Autoregressive model (VAR) from BLANCHARD and QUAH (1989) is used to disentangle both types of shocks from cyclical fluctuations in real output and prices, followed by the computation of correlation coefficients of shocks between Euro partners and three alternative benchmarks – Germany, European Union 27 (EU-27) and France. It also investigates whether increased trade integration has contributed positively to a more symmetrical spread of demand and supply shocks. The overall results point to heterogeneous co-movements of demand and supply-side shocks, with several countries displaying negative or very low correlations with the benchmarks and an increasing tendency towards asymmetry, especially on the demand side. Specialization appears to contribute negatively to the symmetry of demand shocks, but positively on the supply side, which can be explained by the spread across countries of technological spillovers. In addition, the results also show that intra-industry trade has contributed positively to a more symmetric spread of demand shocks through aggregate spending spillovers. Since trade in the Eurozone is mainly of the intra-industry type, these results support the occurrence of a Frankel-Rose endogeneity effect.
    Keywords: EMU; demand shocks; supply shocks; trade intensity; intra-industry trade; specialization; symmetric shocks; business cycle synchronization; technological spillovers.
    JEL: F10 F11 F14 F44 F45 L81
    Date: 2023–06
  8. By: Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajsek
    Abstract: During the 2010–12 eurozone crisis, deviations of price and wage dynamics from those implied by canonical Phillips curves were systematically related to differences in financial strains across countries. Most notably, markups in financially "weak" (periphery) countries rose, while those in financially "strong" (core) countries declined. In a monetary union model, where financial frictions interact with the firms' pricing decisions because of customer-market considerations, firms in the periphery maintain cashflows in response to an adverse financial shock by raising markups in both domestic and export markets, while firms in the core reduce markups, undercutting their financially constrained competitors to gain market share. In this framework, a unilateral fiscal-devaluation-style policy by the periphery stabilizes the local economy by improving the condition of firm balance sheets and by boosting household demand-it does not, however, reverse the real exchange rate appreciation in the periphery.
    Keywords: eurozone, financial crisis, monetary union, customer markets, inflation dynamics, markups, fiscal devaluation
    JEL: E31 E32 F44 F45
    Date: 2023–07
  9. By: Luis García; Luigi Giamboni; Mauro Vigani
    Abstract: In 2016, the Council of the European Union called on all euro area Member States to set up an NPB. NPBs consist of sectoral institutions aiming to foster debate on matters related to productivity and competitiveness. Six years after the adoption of the Council recommendation on the establishment of NPBs, the network of NPBs is now well established, although still incomplete. NPBs publish regular reports, thus contributing to evidence-based policymaking. Existing literature on NPBs, such as the two progress reports published by the European Commission, has mostly analysed their institutional set-up. This paper, while also reviewing the NPBs’ institutional characteristics and aspects to improve, in addition summarises the main findings of their annual reports, an area that has to date, received less attention. The topics discussed reflect a key challenge for EU economies, namely that of maintaining satisfactory rates of productivity growth, which is key not only to improve living standards sustainably and to foster real convergence, but also to address macrofinancial imbalances and more recently, to ease possible temporary tensions between addressing climate change and economic growth.
    JEL: E02 E60 O32 O40 O43
    Date: 2023–06
  10. By: Natália Barbosa; Ana Paula Faria (Department of Economics and NIPE, University of Minho; Department of Economics and NIPE, University of Minho,)
    Abstract: Productivity disparities in the European regions tend to persist. In order to understand the underlying sources of this phenomenon we assess the importance of science and regional innovation modes on firms’ productivity growth on a sample of 150, 712 firms across 161 NUTSII European regions, over the period 2012-2017. We find that science is a major source of firms’ productivity growth, and it has been particularly important to firms located in Southern Europe and, to less extent, in Eastern EU regions, indicating that a science-push convergence process is at work in the EU peripheral regions. Our findings also show that the fast-growing productivity firms are those who benefit more from external knowledge and innovation. Growth by imitation seems to be a viable strategy restricted to the slow-growing productivity firms. These results help to conciliate contentious evidence regarding firms’ benefits from spillovers, namely from scientific knowledge.
    Keywords: Territorial innovation patterns, Firm productivity, Europe, Quantile regression
    JEL: O33 O38 L25 R11
    Date: 2023–07
  11. By: Jakub Mućk (Narodowy Bank Polski and SGH Warsaw School of Economics); Łukasz Postek (Narodowy Bank Polski and University of Warsaw, Faculty of Economic Sciences)
    Abstract: This article quantifies the effects of supply chains disruptions on inflation in European economies. We apply the local projection method in a panel framework and estimate responses of nine measures of consumer and producer inflation to shortages in materials and equipment reported by enterprises in the business surveys conducted by the European Commission. We find that supply chains disruptions are proinflationary for all considered measures of inflation, and a larger effect can be observed for inflation of prices of goods rather than services. The peak of impulse responses can be observed 4-6 quarters after shock, while the effect usually dies out after 8-12 quarters. The forecast error variance decomposition (FEVD) suggests that supply chain disruptions are much more important in explaining inflation changes at medium- rather than short-run forecast horizon. Moreover, supply chain shocks seem to matter relatively more for the variance of inflation of consumer prices of goods than for other measures of inflation. Interestingly, the positive estimates of the impact of supply chains disruptions on inflation can be related mainly to the period corresponding with the COVID-19 pandemics as well as the full-scale invasion of Ukraine and may exhibit asymmetric or regime-switching nature.
    Keywords: supply chains shock, inflation, local projection, panel data.
    JEL: E31 E32 F41 C33
    Date: 2023
  12. By: Christoph Gortz (Department of Economics, University of Birmingham); Konstantinos Theodoridis (Business School, Cardiff University); Christoph Thoenissen (Department of Economics, University of Sheffield)
    Abstract: We estimate a novel empirical (state-space) model to study the effects of international and domes- tic technology trend shocks on the UK economy. We jointly identify anticipated and unanticipated domestic and international technological innovations arising from changes in total factor productivity (TFP) and investment specific technology (IST). The long-run restrictions used to jointly identify the structural trends in the data are informed by a standard two-country structural model. Our results point to large and persistent swings in productivity. International non-stationary TFP and IST shocks explain about 30% and 24% of the variance of UK GDP, respectively. UK-specific TFP and IST shocks are somewhat less important, but still a relevant factor. Notably, it is the anticipated components of these international and domestic productivity shocks, rather than their unanticipated counterparts, which account for the bulk of the volatility in the data. We dissect the historical role of different shocks as drivers of UK labor productivity growth. We find that a decline in the contribution of international IST shocks, combined with weak domestic TFP growth, can explain the widely documented slowdown in UK labor productivity after the financial crisis. A standard two-country model implies widely-used restrictions on the relative price of investment which we find to be inconsistent with our empirical evidence that relies on a minimum of structure. We show that a two-sector version of this model with adjustment cost in investment and costly sectoral labor reallocation can capture the empirical dynamics.
    Keywords: International Transmission of Productivity Shocks, Total Factor Productivity, Investment Specific Technology, Small Open Economy Dynamics, News Shocks, State Space Model
    JEL: E32 E3 F41 F44
    Date: 2023–07
  13. By: Pascal Kieren; Christian König-Kersting; Robert Schmidt; Stefan Trautmann; Franziska Heinicke
    Abstract: We study first-order and higher-order inflation expectations of German households and firms elicited from surveys. The data allows to shed light on the relation between different orders of beliefs, and to derivate implications for noisy-information models with infinite regress. Moreover, since the elicited data is identical for households and firms, it also allows studying whether the relation between first-order and higher-order beliefs differs between the two samples. While we find that this relation is mostly identical between households and firms in our data, we identify differences to previously elicited data in the literature. We discuss potential sources for these differences and their theoretical implications.
    Keywords: Inflation expectations, higher-order beliefs, noisy-information models, surveys
    JEL: D84 E31 G17
    Date: 2023–10

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