nep-eec New Economics Papers
on European Economics
Issue of 2023‒09‒04
fourteen papers chosen by
Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia

  1. Sovereign bond and CDS market contagion: A story from the Eurozone crisis By Georgios Bampinas; Theodore Panagiotidis; Panagiotis Politsidis
  2. Underlying inflation and asymetric risks By Hervé Le Bihan; Danilo Leiva-León; Matías Pacce
  3. The 2012 Greek Retrofit and Borrowing Costs in the European Periphery By Patrick Bolton; Ugo Panizza; Mitu Gulati; Xuewen Fu
  4. Drivers of Large Recessions and Monetary Policy Responses By Giovanni Melina; Stefania Villa
  5. How to measure inFLAtion volatility. A note By Alfredo García-Hiernaux; María T. González-Pérez; David E. Guerrero
  6. Analysis of the usability of capital buffers during the crisis precipitated by COVID-19 By Luis Fernández Lafuerza; Matías Lamas; Javier Mencía; Irene Pablos; Raquel Vegas
  7. Public Guarantees and Private Banks’ Incentives: Evidence from the COVID-19 Crisis By Gabriel Jiménez; Luc Laeven; David Martínez-Miera; José-Luis Peydró
  8. Same same but different: credit risk provisioning under IFRS 9 By Behn, Markus; Couaillier, Cyril
  9. Long-term deposit funding and demand for central bank funds: Evidence from targeted longer-term refinancing operations By Fudulache, Adina-Elena; Goetz, Martin R.
  10. The pass-through from inflation perceptions to inflation expectations By Huber, Stefanie J.; Minina, Daria; Schmidt, Tobias
  11. On the empirical relevance of the exchange rate as a shock absorber at the zero lower bound By Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
  12. Unpacking the green box: Determinants of Environmental Policy Stringency in European countries By Donatella Gatti; Gaye-Del Lo; Francisco Serranito
  13. The Robustness of Preferences during a Crisis: The Case of Covid-19 By Paul Bokern; Jona Linde; Arno Riedl; Peter Werner
  14. The long-term causal effects of winning an ERC grant By Corinna Ghirelli; Enkelejda Havari; Elena Meroni; Stefano Verzillo

  1. By: Georgios Bampinas (Panteion University of Social and Political Sciences); Theodore Panagiotidis (UoM - University of Macedonia [Thessaloniki]); Panagiotis Politsidis (Audencia Business School)
    Abstract: We examine the asymmetric and nonlinear nature of the cross-and intra-market linkages of eleven EMU sovereign bond and CDS markets during 2006-2018. By adopting the excess correlation concept of Bekaert et al. (2005) and the local Gaussian correlation approach of Tjøstheim and Hufthammer (2013), we find that contagion phenomena occurred during two major phases. The first, extends from late 2009 to mid 2011 and concerns the outright contagion transmission from EMU South bond markets towards all European CDS markets. The second, is during the revived fears of a Greek exit in November 2011 and is characterized by contagion from (i) CDS spreads in the EMU South towards bond yields in the same bloc and Belgium, and (ii) from Italian and Spanish CDS spreads towards all European CDS spreads. Consistent with their "too big to bail out" status, Italy and Spain emerge as pivotal for the evolution of sovereign credit risk across the Eurozone. Our examination of the relevant mechanisms, highlights the importance of credit risk over liquidity risk, and the containment effect of the naked CDS ban.
    Keywords: sovereign bond market, sovereign CDS market, nonlinear dependence, contagion, local Gaussian correlation JEL Classification: G01 G14 G15 C1 C58, local Gaussian correlation JEL Classification: G01, G14, G15, C1, C58
    Date: 2023–07
  2. By: Hervé Le Bihan (Banque de France); Danilo Leiva-León (European Central Bank); Matías Pacce (Banco de España)
    Abstract: We propose a new measure of underlying inflation that provides real-time information on asymmetric risks in the outlook for inflation. The asymmetries are generated by nonlinearities induced by economic activity. The new indicator is based on a multivariate regime-switching framework estimated using disaggregated sub-components of euro area HICP and has several additional advantages. First, it is able to swiftly infer abrupt changes in underlying inflation. Second, it helps track turning points in underlying inflation on a timely basis. Third, the proposed indicator also performs satisfactorily vis-à-vis several criteria relevant to inflation monitoring.
    Keywords: underlying inflation, asymmetric risks, regime-switching, Bayesian methods
    JEL: E17 E31 C11 C22 C24
    Date: 2023–07
  3. By: Patrick Bolton (Columbia University GSB); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva); Mitu Gulati (University of Virginia, Law School); Xuewen Fu (University College, London)
    Abstract: This article examines the impact of Greece retroactively, via legislation, changing the terms in hundreds of billions of euros worth of Greek government bonds governed by domestic Greek law. As the abrogation of gold clauses in US government bonds by the US Congress in 1933 had been, the Greek action was decried as violative of the rule of law and sure to negatively impact the future ability of Euro area sovereigns to borrow. We test whether the Greek action had negative spillovers on European government debt markets. We find no evidence of increased borrowing for even the most peripheral European economies from the Greek action.
    Date: 2023–08–14
  4. By: Giovanni Melina; Stefania Villa
    Abstract: Shocks to capital utilization are introduced in a structural macroeconomic closed-economy model with financial frictions to capture disruptions on the ability of the capital stock to provide capital services used in production. Estimates for the Euro Area and the United States show that these shocks were among the most important drivers of the output contraction during the Global Financial Crisis and the COVID-19 Crisis, while financial shocks were more relevant during the Global Financial Crisis. Thanks to the timely and strong intervention of the European Central Bank and the U.S. Federal Reserve, monetary policy shocks exerted a sizable positive contribution to output and inflation during the COVID-19 Crisis.
    Keywords: Covid-19, Global Financial Crisis, Great Lockdown, monetary policy, capital utilization
    JEL: E40 E50 E60
    Date: 2023
  5. By: Alfredo García-Hiernaux (DANAE and ICAE); María T. González-Pérez (Banco de España); David E. Guerrero (CUNEF)
    Abstract: This paper proposes a statistical model and a conceptual framework to estimate inflation volatility assuming rational inattention, where the decay in the level of attention reflects the arrival of news in the market. We estimate trend inflation and the conditional inflation volatility for Germany, Spain, the euro area and the United States using monthly data from January 2002 to March 2022 and test whether inflation was equal to or below 2% in this period in these regions. We decompose inflation volatility into positive and negative surprise components and characterise different inflation volatility scenarios during the Great Financial Crisis, the Sovereign Debt Crisis, and the post-COVID period. Our volatility measure outperforms the GARCH(1, 1) model and the rolling standard deviation in one-step ahead volatility forecasts both in-sample and out-of-sample. The methodology proposed in this article is appropriate for estimating the conditional volatility of macro-financial variables. We recommend the inclusion of this measure in inflation dynamics monitoring and forecasting exercises.
    Keywords: inflation, inflation trend, inflation volatility, rational inattention, positive and negative surprises.
    JEL: C22 C32 E3 E4 E5
    Date: 2023–06
  6. By: Luis Fernández Lafuerza (BANCO DE ESPAÑA); Matías Lamas (BANCO DE ESPAÑA); Javier Mencía (BANCO DE ESPAÑA); Irene Pablos (BANCO DE ESPAÑA); Raquel Vegas (BANCO DE ESPAÑA)
    Abstract: This paper analyses the ability of banks to use voluntary and regulatory capital buffers, taking advantage of the experience of the COVID-19 pandemic. In the first place, we find that the usability of macroprudential buffers is not hampered in Spain by other parallel banks’ requirements. Additionally, we find that the existing voluntary buffers over capital requirements at the beginning of the pandemic have had significant effects on the financial markets, affecting the evolution of European bank stock prices, as well as the holdings of bank shares by investment funds. Lastly, we find no significant aggregate effect of voluntary capital buffers on the provision of financing to non-financial companies in Spain. However, we do identify negative effects in the supply of credit from banks with lower voluntary buffers to companies with which they had more recent relationships. Likewise, if the analysis is carried out exclusively on credit operations without public guarantees, we observe that those banks with lower voluntary capital buffers reduced credit more.
    Keywords: capital usability, voluntary capital buffers, bank stock prices, provision of credit
    JEL: G20 G21 G28
    Date: 2023–03
  7. By: Gabriel Jiménez (Banco de España); Luc Laeven (European Central Bank and CEPR); David Martínez-Miera (UC3M and CEPR); José-Luis Peydró (Imperial College London, ICREA-UPF-CREIBSE and CEPR)
    Abstract: This paper shows that private incentives influence the allocation of public guaranteed lending (PGL), resulting in weaker banks shifting riskier corporate loans’ risk to taxpayers. We exploit data from the Banco de España’s Central Credit Register during the COVID-19 shock in Spain, and a stylized model is used to structure the empirical results. Unlike non-PGL, banks provide more PGL to riskier firms accounting for a higher share of their total lending to firms before the crisis. Importantly, the effects are stronger for weaker banks. Results using firm (bank) fixed effects and loan volume/price information suggest a supply-driven mechanism. Exploiting exogenous variations across similar firms with different access to PGL, we show that PGL increases banks’ lending to riskier firms, both overall and as a share of their total lending, especially for weaker banks.
    Keywords: banking, private incentives, COVID-19, public guarantees, risk-shifting
    JEL: G01 G21 G38 E62 H81
    Date: 2023–07
  8. By: Behn, Markus; Couaillier, Cyril
    Abstract: We analyse the impact of the adoption of expected credit loss accounting (IFRS 9) on the timeliness and potential procyclicality of banks’ loan loss provisioning. We use granular loan-level data from the euro area’s credit register and investigate both firm-level credit events and macroeconomic shocks (2020 COVID-19 pandemic, 2022 energy price shock). We find that provisions under the new standard are higher before default and more responsive to shocks. However, the majority of provisioning still occurs at the time of default and the dynamics around default events are similar to pre-existing national standards. Additionally, banks with a larger capital headroom provision significantly more, particularly for loans using IFRS 9. This suggests a higher risk of underprovisioning for less capitalized banks. JEL Classification: G21, G28, G32
    Keywords: bank regulation, credit risk, financial stability, loan loss accounting
    Date: 2023–08
  9. By: Fudulache, Adina-Elena; Goetz, Martin R.
    Abstract: We exploit variation in the share of seniors across European banking markets to construct an IV for banks' dependence on long-term deposit funding and find that greater long-term deposit funding reduces demand for long-term central bank funding via targeted longer-term refinancing operations (TLTRO). This effect is stronger when banks face less competition. Long-term central bank funding further motivates banks to reduce their dependence on debt issuance and increase their money markets borrowing. Our findings are consistent with the idea that banks' access to stable funding can crowd out their incentive to apply for (long-term) central bank funding.
    Keywords: Monetary policy, bank funding, deposit financing
    JEL: E50 G20 G28
    Date: 2023
  10. By: Huber, Stefanie J.; Minina, Daria; Schmidt, Tobias
    Abstract: This paper documents a strong relationship between households' perceptions about inflation over the past 12 months and households' short- and long-term expectations about future inflation. This relationship is strong during periods of high-inflation but even stronger during low-inflation periods. We establish a causal relationship by implementing a randomized information provision experiment in a large and representative survey to generate an exogenous variation in inflation perceptions. Our results show that household perceptions about past inflation drive their expectations about future inflation rates. The strength of the pass-through from perceptions to expectations varies across socioeconomic groups. We identify two critical moderating factors for this heterogeneity; differences in individual uncertainty about future inflation and information acquisition. Further, we show that the large majority of households rely on their shopping experience when forming their perceptions about past inflation and pay particular attention to food and fuel prices. The shopping experience affects inflation expectations indirectly - through perceptions.
    Keywords: inflation dynamics, expectations, perceptions, uncertainty, household finance, monetary policy, randomized control trial
    JEL: D10 D84 D90 E31 E52 G40 G50
    Date: 2023
  11. By: Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: We estimate the effects of a negative asymmetric demand shock on the real exchange rate for the euro area vis-à-vis the United States, Canada, and Japan by state-dependent sign-restricted local projection methods. We find a real depreciation when interest rates are not at the ZLB, but also when they are. The exchange rate can accomodate considerable variations in output, confirming its shock-absorbing capacity before and during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECB's balance sheet at the ZLB, while it remained unaffected in the pre-ZLB period. Our empirical results can be reconciled with an open economy New Keynesian model extended with unconventional monetary policy measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects, Unconventional Monetary Policy, Demand Shocks
    JEL: F31 E31 E37 C54
    Date: 2023
  12. By: Donatella Gatti (University Sorbonne Paris Nord, CEPN UMR-CNRS 7234); Gaye-Del Lo (University Sorbonne Paris Nord, CEPN UMR-CNRS 7234); Francisco Serranito (University Paris Nanterre, EconomiX UMR-CNRS 7235)
    Abstract: This paper identifies the determinants of OECD Environmental Policy Stringency (EPS) index using a panel of 21 European countries for the period 2009-2019. If there is a large literature on the macroeconomic, political, and social determinants of EPS, the people’s attitudes or preferences toward environmental policies is still burgeoning. Thus, the main goal of this paper is to estimate the effects of people’s awareness regarding environmental issues on the EPS indicator. Due to the endogeneity of preferences, we have applied an instrumental variable framework to estimate our empirical model. Our most important result is to show that individual environmental preferences have a positive and significant effect on the level of EPS indicator : on average, a rise in individual preferences of 10% in a country will increase its EPS indicator by 2.30%. Our results have important policy implications.
    Keywords: Environmental policy stringency, Environmental attitudes/concerns, Inequality, Environmental Kuznets curve, EU
    JEL: Q0 Q1 Q3 Q50 Q54 Q56
    Date: 2023–08
  13. By: Paul Bokern; Jona Linde; Arno Riedl; Peter Werner
    Abstract: We investigate how preferences have been affected by exposure to the COVID-19 crisis. Our main contributions are: first, our participant pool consists of a large general population sample; second, we elicited a wide range of preferences (risk, time, ambiguity, and social preferences) using different incentivized experimental tasks; third, we elicited preferences before the onset of the crises and in three additional waves during the crises over a time period of more than a year, allowing us to investigate both short-term and medium-term preference responses; fourth, besides the measurement of causal effects of the crisis, we also analyze within each wave during the crisis, how differential exposure to the crisis in the health and financial domain affects preferences. We find that preferences remain remarkably stable during the crisis. Comparing them before the start and during the crisis, we do not observe robust differences in any of the elicited preferences. Moreover, individual differences in the exposure to the crisis at best show only weak effects in the financial domain.
    Keywords: preference robustness, crisis, risk-, time-, ambiguity- and social preferences, Covid-19
    JEL: C90 D01
    Date: 2023
  14. By: Corinna Ghirelli (Banco de España); Enkelejda Havari (IESEG School of Management); Elena Meroni (European Commission, Joint Research Centre (JRC)); Stefano Verzillo (European Commission, Joint Research Centre (JRC))
    Abstract: This paper investigates the long-term causal effects of receiving an ERC grant on researcher productivity, excellence and the ability to obtain additional research funding up to nine years after grant assignment. We use data on the universe of ERC applicants between 2007 and 2013 and information on their complete publication histories from the Scopus database. For identification, we first exploit the assignment rule based on rankings, comparing the outcomes of the winning and non-winning applicants in a regression discontinuity design (RDD). We fail to find any statistically significant effect on research productivity and quality, which suggests that receiving an ERC grant does not make a difference in terms of scientific impact for researchers with a ranking position close to the threshold. Since RDDs help identify a local effect, we also conduct a difference-in-differences (DID) analysis using the time series of bibliometric indicators available, which allows us to estimate the effect on a wider population of winning and non-winning applicants. By contrast with the RDD results, DID estimates show that obtaining an ERC grant leads to positive long-term effects on scientific productivity, impact and the capacity to attract other EU funds in the fields of Chemistry, Universe and Earth Sciences, Institutions and Behaviours, Human Mind Studies and Medicine. Further analysis of heterogeneous effects leads us conclude that the positive results obtained with DID seem to be driven by the top-ranked applicants in these fields.
    Keywords: research grants, ERC, regression discontinuity design, difference-in-differences, EU funds, policy evaluation
    JEL: I23 D04 O31
    Date: 2023–05

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