nep-eec New Economics Papers
on European Economics
Issue of 2023‒09‒11
twelve papers chosen by
Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia

  1. Where do they care? : The ECB in the media and inflation expectations By Vegard Høghaug Larsen; Nicolò Maffei-Faccioli; Laura Pagenhardt
  2. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  3. Deposit market concentration and monetary transmission: evidence from the euro area By Stephen Kho
  4. A HANK² Model of Monetary Unions By Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
  5. Know your (holding) limits: CBDC, financial stability and central bank reliance By Meller, Barbara; Soons, Oscar
  6. Quantitative Easing and Safe Asset Scarcity: Evidence from International Bond Safety Premia By Jens H. E. Christensen; Nikola Mirkov; Xin Zhang
  7. Understanding the profitability gap between euro area and US global systemically important banks By Martín Fuentes, Natalia; Di Vito, Luca; Leite, João Matos
  8. Narratives on the causes of inflation in Germany: First results of a pilot study By Demgensky, Lisa; Fritsche, Ulrich
  9. Financial Integration and Economic Growth in Europe By Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
  10. The Investment Channel of Monetary Policy : Evidence from Norway By Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
  11. Regional incidence and persistence of high-growth firms: Testing ideas from the Entrepreneurial Ecosystems literature By Alex Coad; Clemens Domnick; Pietro Santoleri; Stjepan Srhoj
  12. Cash for Transactions or Store-of-Value? A comparative study on Sweden and peer countries By Claussen, Carl Andreas; Segendorff, Björn; Seitz, Franz

  1. By: Vegard Høghaug Larsen; Nicolò Maffei-Faccioli; Laura Pagenhardt
    Abstract: This paper examines how news coverage of the European Central Bank (ECB) affects consumer inflation expectations in the four largest euro area countries. Utilizing a unique dataset of multilingual European news articles, we measure the impact of ECB-related inflation news on inflation expectations. Our results indicate that German and Italian consumers are more attentive to this news, whereas in Spain and France, we observe no significant response. The research underscores the role of national media in disseminating ECB messages and the diverse reactions among consumers in different euro area countries.
    Keywords: ECB, Inflation expectations, News coverage, Textual analysis.
    JEL: D80 E32 E66
    Date: 2023–04–26
  2. By: Beck, Roland (European Central Bank); Coppola, Antonio (Stanford U); Lewis, Angus (Stanford U); Maggiori, Matteo (Stanford U); Schmitz, Martin (European Central Bank); Schreger, Jesse (Columbia U)
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “on- shore offshore financial centers†(OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    JEL: F3 F4 G2 G3
    Date: 2023–05
  3. By: Stephen Kho
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on the role of banking sector concentration. Using a local projections framework with 2003-2022 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to unexpected changes in monetary policy. However, more concentrated domestic banking sectors do pass on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy, which in turn may affect banking sector profitability as well as the macro-economic response to monetary policy.
    Keywords: Monetary transmission; deposit rates; market concentration
    JEL: E43 E52 D40
    Date: 2023–08
  4. By: Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich
    Abstract: How does a monetary union alter the impact of business cycle shocks at the household level? We develop a Heterogeneous Agent New Keynesian model of two countries (HANK2) and show in closed form that a monetary union shifts the adjustment to a shock horizontally—across countries—within the brackets of the union-wide wealth distribution rather than vertically—that is, across the brackets of the union-wide wealth distribution. Calibrating the model to the euro area reveals that a monetary union alters the impact of shocks most strongly in the tails of the wealth distribution but leaves the middle class almost unaffected.
    Keywords: HANK2, OCA theory, Two-country model, monetary union, spillovers, monetary policy, heterogeneity, inequality, households
    JEL: F45 E52 D31
    Date: 2023–08
  5. By: Meller, Barbara; Soons, Oscar
    Abstract: How do central bank digital currencies (CBDC) impact the balance sheets of banks and central banks? To tackle this question empirically, we built a constraint optimisation model that allows for individual banks to choose how to respond to outflows of deposits, based on cost considerations and subject to the availability of reserves and collateral, within the individual banks and system wide, and for a given level of liquidity risk tolerance. We simulate the impact of a fictitious digital euro introduction in the third quarter of 2021, using data from over 2, 000 euro area banks. That impact depends on i) the number of deposits withdrawn and the speed at which this occurs, ii) the liquidity available within the banking system at the time of the digital euro introduction, iii) the liquidity risk preferences of the markets and supervisors, iv) the bank’s business model, and v) the functioning of the interbank market. We find that a €3, 000 digital euro holding limit per person, as suggested by Bindseil (2020) and Bindseil and Panetta (2020), would have been successful in containing the impact on bank liquidity risks and funding structures and on the Eurosystem balance sheet, even in extremely pessimistic scenarios. JEL Classification: E52, E58, G21
    Keywords: digital currency, financial intermediation, financial stability, liquidity risk
    Date: 2023–08
  6. By: Jens H. E. Christensen; Nikola Mirkov; Xin Zhang
    Abstract: Through large-scale asset purchases, widely known as quantitative easing (QE), central banks around the world have reduced the available supply of safe assets. We examine the effects of the European Central Bank’s asset purchases in the 2015-2021 period on an international panel of bond safety premia from four highly rated countries: Denmark, Germany, Sweden, and Switzerland. We find statistically significant negative effects for all four countries. This points to a novel and important international spillover channel of QE programs to bond safety premia that operates via changes in the perceived relative scarcity of safe assets across international bond markets.
    Keywords: term structures; convenience yields; Conventional and unconventional US monetary policy; European Central Bank (ECB)
    JEL: E43 E47 G12 G13
    Date: 2023–08–15
  7. By: Martín Fuentes, Natalia; Di Vito, Luca; Leite, João Matos
    Abstract: This investigation starts with the observation that, over the last decade, profitability rates reported by euro area (EA) banks have remained, on average, persistently below those reported by peer banks in the United States (US). In particular, banks’ return on equity (ROE) has fluctuated around 5% in the EA, but around 10% in the US, indicating a profitability gap of around 5 percentage points. However, while comparisons are frequently made between EA and US banks in academic and political debate, they are not perfect benchmarks, nor should this paper be regarded as aiming for a like-for-like comparison. JEL Classification: G15, G21
    Keywords: Bank profitability, global systemically important (G-SIB) banks, return on equity
    Date: 2023–08
  8. By: Demgensky, Lisa; Fritsche, Ulrich
    Abstract: Since 2021, the inflation rate in Germany and the euro area has increased significantly. At the same time, there are increasing signs of ``de-anchoring'' of inflation expectations in Germany. This paper - building on the approach of Andre et al. (2022) - examines in a pilot study survey-based narratives for the rising inflation together with socio-economic factors. A mixed-methods approach is used to classify the narratives, with clustering based on statistical criteria. A regression analysis is used to examine the relationship between socio-economic factors and narratives on the one hand, and the relationship between narratives/clusters of narratives and a de-anchoring of inflation expectations on the other hand. We can associate certain narratives with socio-economic characteristics and political partisanship. Narrative complexity is a function of education and literacy. Narrative clusters correspond to certain milieus and dimensions of socio-economic stratification. Narratives of supply shortages and price gouging are positively correlated with anchored expectations; demand and government plus other narratives are negatively correlated with anchored expectations.
    Keywords: Narratives, expectation formation, inflation, Germany
    JEL: E31 E32 E71
    Date: 2023
  9. By: Guglielmo Maria Caporale; Anamaria Diana Sova; Robert Sova
    Abstract: This study examines the impact of financial integration on economic growth in the case of 31 European countries over the period from 2000 to 2021 using dynamic panel data models. The estimation results provide evidence of significant positive effects of financial integration on economic growth. They also suggest that the financial integration – economic growth relationship depends on country-specific characteristics such as the level of financial development and the quality of institutions. More precisely, financial integration appears to exert a greater positive influence on growth in the case of the European countries with a higher level of financial development and better institutions.
    Keywords: financial integration, economic growth, Europe, financial development, quality of institutions, dynamic panel models, GMM estimator
    JEL: C33 F36
    Date: 2023
  10. By: Jin Cao; Torje Hegna; Martin B. Holm; Ragnar Juelsrud; Tobias König; Mikkel Riiser
    Abstract: We investigate the transmission of monetary policy to investment using Norwegian administrative data. We have two main findings. First, financially constrained firms are more responsive to monetary policy, but the effect is modest; suggesting that firm heterogeneity plays a minor role in monetary transmission. Second, we disentangle the investment channel of monetary policy into direct effects from interest rate changes and indirect general equilibrium effects. We find that the investment channel of monetary policy is due almost exclusively to direct effects. The two results imply that a representative firm framework with investment adjustment frictions in most cases provides a sufficiently detailed description of the investment channel of monetary policy.
    Keywords: Monetary policy, Investment.
    JEL: E22 E52 D22 G31
    Date: 2023–05
  11. By: Alex Coad (Waseda University); Clemens Domnick (European Commission - JRC); Pietro Santoleri (European Commission - JRC); Stjepan Srhoj (University of Split)
    Abstract: Policy-makers and scholars often assume that a higher incidence of high-growth firms (HGFs) is synonymous with vibrant regional economic dynamics, and that HGF shares are persistent over time as Entrepreneurial Ecosystems (EEs) have slowly-changing features. In this paper we test these hypotheses, which are deeply rooted in the EE literature. We draw upon Eurostat data for up to 20 countries over the period 2008-2020 and study HGF shares in NUTS-3 regions in Europe. Analysis of regional rankings yields the puzzling finding that the leading EEs in Europe, apparently, are in places such as southern Spain and southern Italy. These places would not normally be considered Europe’s foremost entrepreneurial hotspots. Additional results do not provide strong support for the hypothesis that more developed regions feature higher HGF shares. We do find evidence consistent with HGF shares displaying persistency over time. However, we show that more developed regions do not have higher persistence in their HGF shares, and that the strength in persistence does not increase across the HGFs distribution, which does not support path-dependency as the main mechanism behind the observed persistence. Overall, we call for a more nuanced interpretation of both regional HGF shares and the EEs literature.
    Keywords: Entrepreneurial Ecosystems, High-Growth Firms, Persistence, Firm Growth, Entrepreneurship Policy, Regional Policy
    Date: 2023–07
  12. By: Claussen, Carl Andreas (Monetary Policy Department, Central Bank of Sweden); Segendorff, Björn (BIS Innovation Hub); Seitz, Franz (Weiden Technical University of Applied Sciences, Germany)
    Abstract: We estimate the demand for transaction and non-transaction cash balances in Canada, Denmark, Iceland, Sweden and Norway over the last decades using the seasonal method. These countries share many features that are relevant for cash demand, but nevertheless show large differences in terms of aggregate cash balances. While Canada, Iceland and Denmark have seen increased aggregate cash balances, Norway and especially Sweden have seen a dramatic decline. We find that transaction balances have decreased somewhat in all of the countries and the differences in aggregated cash balances is due to differences in the development of non-transactional cash balances. We argue that different de facto legal tender status, crisis exposures, foreign demand and cash supply-side policies help explain these findings.
    Keywords: cash; banknotes; seasonal method; transactions; hoarding
    JEL: E41 E51 E58
    Date: 2023–07–01

This nep-eec issue is ©2023 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.