nep-eec New Economics Papers
on European Economics
Issue of 2023‒08‒21
25 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. Some implications of micro price-setting evidence for inflation dynamics and monetary transmission By Dedola, Luca; Gautier, Erwan; Nakov, Anton; Santoro, Sergio; Henkel, Lukas; Fagandini, Bruno; De Veirman, Emanuel
  3. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Jan Pablo Burgard; Matthias Neuenkirch
  4. Explaining Long-Term Bond Yields Synchronization Dynamics in Europe By Crespo Cuaresma, Jesus; Fernandez, Oscar
  6. Price setting during the coronavirus (COVID-19) pandemic By Henkel, Lukas; Wieland, Elisabeth; Błażejowska, Aneta; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Jonckheere, Jana; Karadi, Peter; Macias, Paweł; Menz, Jan-Oliver; Seiler, Pascal; Szafranek, Karol
  7. Energy price shocks and inflation in the euro area By Stefano Neri; Fabio Busetti; Cristina Conflitti; Francesco Corsello; Davide Delle Monache; Alex Tagliabracci
  8. E-commerce and price setting: evidence from Europe By Strasser, Georg; Wieland, Elisabeth; Macias, Paweł; Błażejowska, Aneta; Szafranek, Karol; Wittekopf, David; Franke, Jörn; Henkel, Lukas; Osbat, Chiara
  9. Inflation perception and the formation of inflation expectations By Schmidt, Torsten; Müller, Henrik; Rieger, Jonas; Schmidt, Tobias; Jentsch, Carsten
  10. Trends and cycles during the COVID-19 pandemic period By José R. Maria; Paulo Júlio
  11. The COVID-19 recession on both sides of the Atlantic: A model-based comparison By Roberta Cardani; Philipp Pfeiffer; Marco Ratto; Lukas Vogel
  12. Effect of a European Carbon Border Adjustment Mechanism on the APAC Region: A structural gravity analysis By Aline MORTHA; ARIMURA Toshi H.; TAKEDA Shiro; Tatyana CHESNOKOVA
  13. Bank dividend restrictions and banks' institutional investors By Mücke, Christian
  14. The Anatomy of Small Open Economy Productivity Trends By Christoph Gortz; Konstantinos Theodoridis; Christoph Thoenissen
  15. DNB Working Paper No. 787 - Safe Asset Scarcity and Re-use in the European Repo Market By Justus Inhoffen; Iman van Lelyveld
  16. Do fiscal rules reduce public investment? Evidence from European regions By Mühlenweg, Leonard; Gerling, Lena
  17. A Note of Caution on the Relation Between Money Growth and Inflation By Mr. Helge Berger; Sune Karlsson; Pär Österholm
  18. Exploring the recent resilience of Italy's goods exports: Competitiveness, energy intensity and supply bottlenecks By Simona Giglioli; Claire Giordano
  19. Micro price heterogeneity and optimal inflation By Santoro, Sergio; Weber, Henning
  20. Approaching the terminal rate and the way forward: a model-based analysis By Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck; Alessandro Notarpietro; Andrea Papetti
  21. The Many Channels of Firm’s Adjustment to Energy Shocks: Evidence from France By Lionel Fontagné; Philippe Martin; Gianluca Orefice; Lionel Gérard Fontagné
  22. Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages By Mr. Niels-Jakob H Hansen; Mr. Frederik G Toscani; Jing Zhou
  23. EU Strategic Dependencies: A Long View By Vincent Vicard; Pauline Wibaux
  24. Complementarities between local public and private investment in EU regions By Brasili, Andrea; Brasili, Cristina; Musto, Giorgio; Tueske, Annamaria
  25. Rules of Origins Relaxation and Regional Supply Chains: Evidence from Europ By Pamela Bombarda; Elisa Gamberoni; Irene Iodice

  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
  2. By: Dedola, Luca; Gautier, Erwan; Nakov, Anton; Santoro, Sergio; Henkel, Lukas; Fagandini, Bruno; De Veirman, Emanuel
    Abstract: This paper analyses the implications of the evidence on micro price setting gathered by Price-setting Microdata Analysis Network (PRISMA) for inflation dynamics and monetary policy, relying on calibrated models and direct empirical evidence. According to models calibrated to the euro area micro evidence in Gautier et al. (2022, 2023), infrequent price changes and moderate state dependence in price setting should result in a meaningful Phillips curve in the euro area. Empirical estimates of the Phillips curve during the low-inflation period confirm previous findings of a relatively flat but stable slope. This estimated flat slope reflects both infrequent and subdued price adjustment in response to aggregate shocks, i.e. the presence of nominal and real rigidities. Model-based simulations show that, due to non-linearities in price setting, changes in trend inflation above 5-6% would have significant effects on the euro area Phillips curve. Similarly, shocks to nominal costs larger than 15% would result in non-linear effects on inflation dynamics in calibrated models. In line with these simulations, recent micro evidence suggests that the return of higher and more volatile inflation seems to be associated with higher frequencies of price changes, mainly because the frequency of price increases rises with the level and volatility of inflation. JEL Classification: E3, E5
    Keywords: heterogeneity, price Phillips curve, real and nominal rigidities, state-dependent price setting and non-linearities
    Date: 2023–07
  3. By: Hamza Bennani (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - ONIRIS - École nationale vétérinaire, agroalimentaire et de l'alimentation Nantes-Atlantique - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris] - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université - IUML - FR 3473 Institut universitaire Mer et Littoral - UM - Le Mans Université - UA - Université d'Angers - UBS - Université de Bretagne Sud - IFREMER - Institut Français de Recherche pour l'Exploitation de la Mer - CNRS - Centre National de la Recherche Scientifique - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université - Nantes Univ - ECN - École Centrale de Nantes - Nantes Univ - Nantes Université); Jan Pablo Burgard (Trier University); Matthias Neuenkirch (Trier University)
    Abstract: We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states, using an underlying logit model determining the relative state weights over time. We show that a widening of the credit spread and a tightening of credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. The credit spread and—to some extent—credit standards are also the key determinants of the underlying state of the economy; the prevalence of the crisis state is more pronounced in times of adverse credit conditions. Together with a stronger shock transmission in the crisis state, this provides further evidence for a financial accelerator in the euro area.
    Keywords: Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission
    Date: 2023
  4. By: Crespo Cuaresma, Jesus; Fernandez, Oscar
    Abstract: We examine the empirical determinants of sovereign yield synchronization dynamics in the European Monetary Union. Using a time-varying measure of (long-term) government bond yields synchronization and Bayesian Model Averaging methods, we show that the persistence of synchronization measures differs significantly between GIIPS countries (Portugal, Italy, Ireland, Greece, and Spain) and the rest of the monetary union, as well as across periods characterized by whether the zero lower bound of interest rates was binding or not and the post-Draghi whatever it takes era. The degree of synchronization in inflation rates with the rest of the currency area is a robust predictor of the synchronization of sovereign yields, as opposed to economic fundamentals describing the fiscal positions of individual countries. An out-of-sample forecasting exercise reveals that accounting for the most relevant economic fundamentals within the monetary union can lead to improvements in the directional accuracy of the forecasts of yield synchronization rates only for GIIPS countries.
    Keywords: Long-term government bond yields; European Monetary Union; Synchronization measures; Bayesian Model Averaging
    Date: 2023–07
  5. By: João Alcobia; Ricardo Barradas
    Abstract: The majority of policymakers in the more developed countries have engaged in Reaganomics and Thatcherism in the last four decades by privileging the adoption of wage restraint policies to sustain economic growth. During that time, the wage share has registered a sustained fall, and economic growth has been rather dismal, which seems to support the theoretical claims of post-Keynesian economics that wage restraint policies are detrimental to economic growth because their disruptive effects on private consumption do not counterbalance their supportive effects on private investment and net exports. We analyse the relationship between the wage share and economic growth by performing a panel data econometric analysis of all European Union countries from 1981 to 2021. Results confirm that wage share positively influences economic growth in the European Union countries, which in reality is a wage-led growth model. Results also show that the decline of the wage share has represented one of the main constrainers of growth in all European Union countries in the last four decades, particularly in the euro area countries. These results suggest that policymakers in the European Union countries should adopt pro-labour policies in order to revert the decreasing (increasing) trend of the wage (profit) share and avoid the consolidation of a secular stagnation in Europe.
    Keywords: Post-Keynesian Economics, Functional Income Distribution, Economic Growth Drivers, European Union, Panel Autoregressive Distributed Lag, Pooled Mean-Group Estimator.
    JEL: C23 D33 E12 O47
    Date: 2023–07
  6. By: Henkel, Lukas; Wieland, Elisabeth; Błażejowska, Aneta; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Jonckheere, Jana; Karadi, Peter; Macias, Paweł; Menz, Jan-Oliver; Seiler, Pascal; Szafranek, Karol
    Abstract: The coronavirus (COVID-19) pandemic caused a deep recession globally, as well as in the euro area, accompanied by a steep decline in inflation rates in 2020. This paper reviews some of the main challenges created by the pandemic for inflation measurement and provides micro price data analysis of how price setting has reacted to the strong COVID-19 shock. For this purpose, we use three different, but complementary, microdata sources for specific countries and sectors: micro price data underlying the official consumer price indices in Germany, Italy, Latvia and Slovakia; (scanner) data from German and Italian supermarkets; and online (web-scraped) prices for Poland. A common finding of the micro price studies in this paper is that state dependence significantly contributed to the price-setting response to the COVID-19 shock. Nevertheless, the extent and degree of responses varies widely by sector and even country, also depending on the severity of the pandemic situation. JEL Classification: D4, E31
    Keywords: consumer prices, COVID-19., heterogeneity, inflation, microdata, price rigidity
    Date: 2023–07
  7. By: Stefano Neri (Bank of Italy); Fabio Busetti (Bank of Italy); Cristina Conflitti (Bank of Italy); Francesco Corsello (Bank of Italy); Davide Delle Monache (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper evaluates the role of supply shocks in driving inflation in the euro area since mid-2021, focusing in particular on shocks to energy prices. The analysis uses different empirical models (including Vector AutoRegressive models, time-varying Phillips curves and dynamic factor models) and shows that shocks to energy prices have had both direct and indirect effects on inflation. The contribution of these shocks to headline inflation is estimated to be around 60 per cent in the fourth quarter of 2022, while that to core inflation to range from 20 to 50 per cent, depending on the model. There is also evidence of an increase in the pass-through of energy prices to core inflation following the outbreak of the pandemic.
    Keywords: inflation, energy prices, structural VAR, time-varying Phillips curve, Dynamic Factor model
    JEL: C22 C32 C38 E31
    Date: 2023–07
  8. By: Strasser, Georg; Wieland, Elisabeth; Macias, Paweł; Błażejowska, Aneta; Szafranek, Karol; Wittekopf, David; Franke, Jörn; Henkel, Lukas; Osbat, Chiara
    Abstract: E-commerce has become more prevalent throughout Europe in the last decade. The coronavirus (COVID-19) pandemic accelerated this trend, particularly in the retail sector. This paper focuses on the implications of increasing business-to-consumer e-commerce for prices and inflation in the euro area. It highlights three key results. First, whether online prices and inflation are higher or lower than their offline counterparts depends on the distribution model, the sector and the country. Moreover, properly selected online prices track official inflation indices even in real time. Second, the effect of e-commerce on inflation appears to be transient and differs between countries. However, as the penetration of some markets is still low, these transitory effects will likely persist at the euro area level for several years. Third, online prices change more frequently than offline prices. This might lead to greater price flexibility overall as online trade gains market share in a growing number of sectors. JEL Classification: D4, E31, L11
    Keywords: consumer prices, e-commerce, inflation, microdata, price rigidity
    Date: 2023–07
  9. By: Schmidt, Torsten; Müller, Henrik; Rieger, Jonas; Schmidt, Tobias; Jentsch, Carsten
    Abstract: In this paper, we present a new indicator to measure the media coverage of inflation. Our Inflation Perception Indicator (IPI) for Germany is based on a corpus of three million articles published by broadsheet newspapers between January 2001 and November 2022. It is designed to detect thematic trends, thereby providing new insights into the dynamics of inflation perception over time. Methodically, the IPI makes use of RollingLDA, a dynamic topic modeling approach refining the rather static original LDA to allow for changes in the model's structure over time. We then use time series for the overall inflation perception indicator as well as for specific topics to analyze time-varying correlations with time series for inflation expectations of firms and households. Our results reveal that the link between reporting about inflation and changes in inflation expectations is time-dependent. During periods of intensive newspaper coverage of inflation developments, a correlation with inflation expectations emerges that does not exist at other times. Such correlations are evident after the introduction of the euro, during the financial crisis and during the recent energy price shock.
    Keywords: Inflation, perception, expectations, media, attention cycle
    JEL: C22 C82 D84 E31
    Date: 2023
  10. By: José R. Maria; Paulo Júlio
    Abstract: We devise a simple yet versatile strategy to perform trend-cycle decompositions in severe crisis periods, such as the COVID-19 pandemic period. The proposed strategy propels a great deal of volatility during this period into pandemic-specific shocks, with minimal impacts on non-pandemic disturbances. We start by estimating two unobserved components models until 2019:4, for Portugal and the euro area. We then introduce several pandemicspecific disturbances and estimate their variances during the 2020-21 period, keeping fixed all remaining model parameters. Finally, we bring together the information from both estimation stages through a piecewise linear Kalman filter, assuming such heteroskedastic environment. Our strategy has the attractiveness of generating negligible historical revisions when the 2020-2021 period is added to the estimation sample, despite the large pandemic disruption. Results suggest that innovations affecting the cycle are key drivers of GDP during the pandemic period, while yielding negligible historical revisions.
    JEL: C11 C30 E32
    Date: 2023
  11. By: Roberta Cardani (ESM); Philipp Pfeiffer (European Commission, DG ECFIN); Marco Ratto (European Commission, JRC); Lukas Vogel (European Commission, DG ECFIN)
    Abstract: This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multi-region New Keynesian macroeconomic model. To capture quarterly dynamics from 2020 onwards, we introduce relevant extensions such as ‘forced’ savings, extensive versus intensive employment margins, and trade in commodities as inputs to production and final demand. Transitory (‘forced’) savings are central to account for the behaviour of economic activity in both regions during the pandemic, which was strongly driven by private consumption, alongside shocks to domestic demand and foreign activity. The model highlights the importance of demand recovery and rising commodity prices for the inflation acceleration during 2021-22. EA inflation has a stronger supply component (including commodity prices) compared to a stronger demand component in the US.
    Keywords: DSGE model, Bayesian estimation, COVID-19, Euro Area, United States, Inflation, Business cycles
    JEL: C11 E1 E20
    Date: 2023–07–19
  12. By: Aline MORTHA; ARIMURA Toshi H.; TAKEDA Shiro; Tatyana CHESNOKOVA
    Abstract: To address concerns over carbon leakage, the European Union (EU) has announced the introduction of a Carbon Border Adjustment Mechanism (CBAM). This study applies a structural gravity model to simulate the impact of CBAM on welfare, production, exports and emissions with a focus on four sectors: chemicals, iron and steel, non-ferrous metal and metal products. We also provide country-specific results for the Asian and the Pacific regions. Our results show that, while CBAM would have little effect on welfare, the policy would contribute to a reduction in exports, estimated between -0.29% (metal products) and -1.49% (iron and steel). In particular, we find that middle income economies are most affected by the policy, and that these countries tend to greatly reduce their exports to the EU. We also observe a rebound in production (and associated emissions) among the EU economies. Nevertheless, by including emissions from shipping activities, CBAM can result in a large decrease in emissions, most of which is due to export reduction.
    Date: 2023–08
  13. By: Mücke, Christian
    Abstract: This paper studies the impact of banks' dividend restrictions on the behavior of their institutional investors. Using an identification strategy that relies on the within investor variation and a difference in difference setup, I find that funds permanently decrease their ownership shares at treated banks during the 2020 dividend restrictions in the Eurozone and even exit treated banks' stocks. Using data before the introduction of the ban reveals a positive relationship between fund ownership and banks' dividend yield, highlighting again the importance of dividends for European banks' fund investors. This reaction also has pricing implications since there is a negative relationship between the dividend restriction announcement day cumulative abnormal returns and the percentage of fund owners per bank.
    Keywords: Dividend Policy, Mutual Funds, Institutional Investors' Ownership, Banking Supervision, COVID-19 Pandemic
    JEL: G12 G21 G23 G28 G35
    Date: 2023
  14. By: Christoph Gortz (University of Birmingham); Konstantinos Theodoridis (Cardiff University and European Stability Mechanism); Christoph Thoenissen (University of Sheffield)
    Abstract: We estimate a novel empirical (state-space) model to study the effects of international and domestic 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
  15. By: Justus Inhoffen; Iman van Lelyveld
    Abstract: We construct the first measure of collateral re-use at the bank and bond level for the European repo market using a regulatory transaction dataset. We show that banks materially increase the rate of re-use in response to tightened asset scarcity induced by the Eurosystem’s asset purchase program. We find that dealers accommodate clients’ demand for safe assets rather than liquidity and profit from the repo rate spread. Yet, dealers also re-use collateral to source liquidity which exposes them to collateral runs. Our results contribute to the policy debate on trade-offs between shock absorption and financial stability risks of collateral re-use.
    Keywords: collateral re-use; safe assets; scarcity; repo market
    JEL: E4 E5 G1 G2
    Date: 2023–07
  16. By: Mühlenweg, Leonard; Gerling, Lena
    Abstract: This paper analyses the impact of fiscal rules on different public spending categories, namely public expenditure and investment, at the subnational level in Europe. Building on the notion of the deficit bias, we suspect that in the presence of fiscal rules, politicians have an incentive to reduce public spending through disproportionate cuts in investments. To empirically test this hypothesis, we focus on subnational administrative levels since budget reallocations can be expected to be pronounced at these levels and because the empirical evidence here is scarce. We introduce a new index based on partially ordered set theory (POSET), using the EC's fiscal rules dataset, which allows us to analyze the stringency of fiscal rules for different levels of government. Our balanced dataset covers 179 NUTS2 regions in 14 EU member states from 1995 to 2018. The empirical analysis is based on Within, GMM, and instrumental variable estimators. Our empirical findings are highly robust. In our baseline model, a one standard-deviation increase in our fiscal rules stringency index reduces overall public expenditure by up to 1.28 percent, while investment declines by more than 4 percent. The results imply that more stringent fiscal rules lead to a disproportionate reduction in public investment as compared to overall expenditure.
    Keywords: European regions, local government, fiscal rules, fiscal policy, expenditure, investment, deficit bias, POSET
    JEL: E02 E62 H54 H60 H74
    Date: 2023
  17. By: Mr. Helge Berger; Sune Karlsson; Pär Österholm
    Abstract: We assess the bivariate relation between money growth and inflation in the euro area and the United States using hybrid time-varying parameter Bayesian VAR models. Model selection based on marginal likelihoods suggests that the relation is statistically unstable across time in both regions. The effect of money growth on inflation weakened notably after the 1980s before strengthening after 2020. There is evidence that this time variation is related to the pace of price changes, as we find that the maximum impact of money growth on inflation is increasing in the trend level of inflation. These results caution against asserting a simple, time-invariant relationship when modeling the joint dynamics of monetary aggregates and consumer prices.
    Keywords: Bayesian VAR; Time-varying parameters; Stochastic volatility
    Date: 2023–06–30
  18. By: Simona Giglioli (Bank of Italy); Claire Giordano (Bank of Italy)
    Abstract: We explore three possible explanations of the recent resilience of Italy's foreign sales in comparison with the other three main euro-area economies, namely price-competitiveness dynamics, developments in energy-intensive (EI) and non-energy-intensive (NEI) manufacturing sectors, the impact of global supply bottlenecks. Price-competitiveness trends were particularly favourable in Italy in 2022. Furthermore, the composition of Italy’s manufacturing exports was not strongly tilted towards EI sectors and the decline in EI foreign sales was relatively small, leading to a more limited negative contribution of these industries to aggregate export growth compared with Germany. Finally, according to cross-country firm survey data, manufacturing in Italy was significantly less affected by shortages of materials and equipment than in the other three countries. A standard regression analysis of goods exports trends confirms that the above factors contributed to explaining Italy's strong performance in 2022.
    Keywords: goods exports, price competitiveness, energy intensity, supply bottlenecks
    JEL: F01 F10 Q41
    Date: 2023–07
  19. By: Santoro, Sergio; Weber, Henning
    Abstract: This paper discusses the normative implications of the micro evidence on heterogeneity in price setting gathered by the Price-setting Microdata Analysis Network (PRISMA) for the level of inflation that central banks should target. The micro price data underlying the consumer price index are used to estimate relative price trends over the product life cycle. Minimising the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate in France, Germany and Italy: the steady-state inflation rate, jointly maximising welfare in all three countries, ranges from 1.1% to 1.7%. Other considerations not taken into account in the present paper may push up optimal inflation targets further. The welfare costs of targeting an inflation rate of zero, as suggested by monetary models ignoring relative price trends, or of targeting 4%, turn out to be substantial. JEL Classification: E31, E52
    Keywords: optimal inflation target, relative price trends, welfare
    Date: 2023–07
  20. By: Anna Bartocci; Alessandro Cantelmo; Martina Cecioni; Christian Hoynck (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Andrea Papetti (Bank of Italy)
    Abstract: Using as a baseline a macroeconomic scenario consistent with the key interest rate path implied by market-based expectations, we evaluate the economic implications and risks of two alternative, illustrative tightening paths for the ECB policy rates that, as in the baseline, bring inflation toward 2 per cent by the end of 2025. We consider a prudent path (labelled 'persistent'), where policy rates are kept at current levels for a prolonged period and subsequently reduced more slowly, and a more pro-active approach ('peak') in which policy rates reach a higher terminal level, but decrease faster. Model-based simulations show that, relative to the baseline scenario, the persistent path would leave inflation and output unchanged in 2023-24, while the peak path would lower inflation at the cost of output losses. The persistent path would be preferable over the period 2023-25 according to a quadratic loss function penalizing inflation and output volatility. The risks of an excessive worsening of financing conditions and the amplification effects attached to the peak scenario are assessed to be greater than those of an upward de-anchoring of inflation expectations and of second-round effects associated with the persistent path.
    Keywords: Central banking. monetary policy
    JEL: E52 E58 E61
    Date: 2023–07
  21. By: Lionel Fontagné; Philippe Martin; Gianluca Orefice; Lionel Gérard Fontagné
    Abstract: Based on firm level data in the French manufacturing sector, we find that firms adapt quickly, strongly and through multiple channels to energy shocks, even though electricity and gas bills represent a very small share of their total costs. Over the period 1996-2019, faced with an idiosyncratic energy price increase, firms reduce their energy demand, improve their energy efficiency, increase intermediate inputs imports and optimize energy use across plants. Firms are also able to pass-through the cost shock fully on their export prices. Their production, exports and employment fall. A consequence of these multiple adjustment mechanisms is that the fall in profits is either non-significant, small or specific to only the most energy intensive firms. We also find that the impact of electricity shocks has weakened over time, suggesting that only firms able to adapt their production process to energy cost shocks have survived. Importantly, when faced with large electricity and gas price increases, firms are less able to reduce their consumption. These results shed light on the mechanisms of resilience of the European manufacturing sector in the context of the present energy crisis.
    Keywords: energy crisis, employment, production, competitiveness, electricity, gas
    JEL: L60 Q41 Q43
    Date: 2023
  22. By: Mr. Niels-Jakob H Hansen; Mr. Frederik G Toscani; Jing Zhou
    Abstract: We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 percent. The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches. While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24 – slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation.
    Keywords: Inflation; Wages; Profits; Terms of Trade
    Date: 2023–06–23
  23. By: Vincent Vicard; Pauline Wibaux
    Abstract: We analyze how trade dependencies have evolved over time to better understand how they relate to vulnerabilities. We focus on the EU-27 and apply the bottom-up approach laid out by the European Commission (EC) using trade data from 1996 to 2019. The number of dependent products has shown no clear pattern since the mid-1990s, nor has their sectoral composition. The geography of dependencies has, however, evolved towards dependencies concentrated on Chinese suppliers, but this shift had already occurred in 2010. The products identified as dependent exhibit significant churning over time: one out of five dependent products in 2018 was not identified as such one year later in 2019 and close to half of dependent products in 2014 were not identified as such five years later.Creation-Date: 2023-06
    Keywords: Strategic autonomy;Dependent products;Trade dependencies;Economic security
    JEL: F5 F14
  24. By: Brasili, Andrea; Brasili, Cristina; Musto, Giorgio; Tueske, Annamaria
    Abstract: This work investigates the role of local public investment in stimulating private investment and in providing support to growth and development. The analysis is based on a combination of datasets, allowing to build an unbalanced panel for 98 NUTS2 European regions in 13 member states, and for Italy specifically, a balanced panel of 21 regions from 2000 to 2019. The empirical analysis includes both PVARs and local projections as a way to gain robustness in results. The main finding is that locally decided public investment correlates positively with private investment in the same area (with no evidence for reverse causality). The impact of public investment seems to be stronger in downturn phases. GDP growth is more sensitive to public investment in education, training and R&D, in public administration operations and in territorial infrastructures. For Italy, the impact on private investment is particularly strong for public investment in education, training and R&D. This highlights the point, rich of policy implication, that local governments may be more attentive and sensible to the needs of the private sector in terms of skills and labor supply composition and adapt to local specific features.
    Keywords: Fiscal multipliers, government investment, regional public investment, private investment
    JEL: C33 E62 H72
    Date: 2023
  25. By: Pamela Bombarda; Elisa Gamberoni; Irene Iodice (Université de Cergy-Pontoise, THEMA)
    Abstract: Free trade agreements (FTAs) incorporate regulations regarding rules of origin (RoO) and cumulation. RoO regulations, by restricting the use of inputs outside the FTA, can affect the flow of intermediates in supply chains. We construct a new database to assess the effects of RoO, enabling us to explore two major events that led to RoO re- laxation in the European context: PECS, which provided the possibility of cumulating stages of production across the European Union’s FTA peripheral partners, and EU enlargement, which eliminated RoO altogether. Our results show that the progressive reduction in RoO had a sizeable impact on reshaping regional and international sup- ply chains. Across both episodes, we estimate consistent elasticities, indicating that a 1% increase in the value requirement restriction before relaxation corresponds to an intermediate import increase ranging from 0.3% to 0.7% from countries where RoO restrictions have been lifted.
    Keywords: ntermediate inputs trade, rules of origin, cumulation, PECS, EU enlargement, input-output tables.
    JEL: F12 F13 F14 F15
    Date: 2023

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