nep-eec New Economics Papers
on European Economics
Issue of 2023‒11‒20
sixteen papers chosen by
Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia

  1. The Unintended Consequences of ECB’s Asset Purchases. How Excess Reserves Shape Bank Lending. By Philipp Roderweis; Jamel Saadaoui; Francisco Serranito
  2. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes  By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  3. System-wide dividend restrictions: evidence and theory By Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Gothe
  4. The impact of endogenous product and labour market reforms on unemployment: New evidence based on local projections By Rasmus Wiese; Jakob de Haan; João Tovar Jalles
  5. Inflation Dynamics in Bulgaria: The Role of Policies By Anh D. M. Nguyen; Hajime Takizawa; Iglika Vassileva
  6. How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe By Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
  7. Electricity Market Crisis in Europe and Cross Border Price Effects: A Quantile Return Connectedness Analysis By Do, Hung Xuan; Nepal, Rabindra; Pham, Son Duy; Jamasb, Tooraj
  8. Is the Price Cap for Gas Useful? Evidence from European Countries By Francesco Ravazzolo; Luca Rossini
  9. Financial Conditions in Europe: Dynamics, Drivers, and Macroeconomic Implications By Giovanni Borraccia; Mr. Raphael A Espinoza; Vincenzo Guzzo; Romain Lafarguette; Fuda Jiang; Vina Nguyen; Miguel A. Segoviano; Mr. Philippe Wingender
  10. Do larger firms exert more market power? Markups and markdowns along the size distribution By Matthias Mertens; Bernardo Mottironi
  11. Why net worth is the wrong concept for explaining consumption: evidence from Italy By Riccardo De Bonis; Danilo Liberati; John Muellbauer; Concetta Rondinelli
  12. Housing Tenure, Consumption and Household Debt: Life-Cycle Dynamics During a Housing Bust in Spain By Clodomiro Ferreira; Julio Gálvez; Myroslav Pidkuyko
  13. European Funds and Firm Performance: Evidence from a Natural Experiment By Mesquita, José; Pereira dos Santos, João; Tavares, José
  14. Deadwood Labor: The Effects of Eliminating Employment Protection By Emmanuel Saez; Benjamin Schoefer; David G. Seim
  15. The dynamics of automation adoption: Firm-level heterogeneity and aggregate employment effects By Laura Bisio; Angelo Cuzzola; Marco Grazzi; Daniele Moschella
  16. Has financial fair play changed European football? By Ariela Caglio; Sebastien Laffitte; Donato Masciandaro; Gianmarco Ottaviano

  1. By: Philipp Roderweis; Jamel Saadaoui; Francisco Serranito
    Abstract: An unintended by-product of asset purchases by the European Central Bank (ECB) has been a huge increase in excess reserves, leading to a structural liquidity surplus in the banking sector of the euro area. These exogenously imposed excess reserves imply higher balance sheet costs, forcing banks to offset these costs by changing their lending behavior. We observe this effect particularly in periods of low-interest rates. Thus, we identify a shock that represents an exogenous imposition of excess reserves on banks. We then employ linear and nonlinear local projection methods to analyze how lending changes in the context of unconventional monetary policy. We find that excess reserves injected by the ECB crowd out certain types of credit. An increase in excess liquidity does not stimulate lending to nonfinancial corporations in the euro area. On the contrary, it tends to discourage it while amplifying household credit for consumption and housing, as well as loans to financial corporations. Impulse response analysis via smooth local projection methods highly confirms these findings.
    Keywords: excess reserves, bank lending channel, bank balance sheet costs, local projection, smooth local projection.
    JEL: C32 E44 E51 E52
    Date: 2023
  2. By: Sangyup Choi; Kimoon Jeong; Jiseob Kim
    Abstract: This paper underscores the underappreciated role of bank mortgage lending standards in conjunction with imbalances stemming from the common monetary policy framework as drivers of divergent economic trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a country-specific monetary policy stance gap and estimate the panel VAR model of credit and macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative to individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by markedly different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different responses in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border lending to periphery countries, enabling them to relax lending standards toward mortgage loans.
    Keywords: Euro area, mortgage credit, monetary policy stance gap, bank lending survey, macroprudential policy, cross-border banking flows
    JEL: E21 E32 E44 F52 G21
    Date: 2023–10
  3. By: Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Gothe
    Abstract: We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks' capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.
    Keywords: dividend recommendation, dividend prudential target (DPT), COVID-19, usable capital buffers, welfare
    JEL: E44 E58 E61
    Date: 2023–10
  4. By: Rasmus Wiese; Jakob de Haan; João Tovar Jalles
    Abstract: We examine the impact of structural reforms on unemployment in 25 OECD countries between 1970- 2020. Our local projection (LP) results suggest that labour market reforms reduce unemployment, but only after four years (for youth unemployment it takes longer for the effect to set in), while product market reforms have no statistically significant effect on unemployment. However, if we control for the endogeneity of reforms, the effect of labour market reform becomes statistically significant within a year, while product market reforms temporarily increase unemployment. We also find that labour market reforms hardly have an impact on unemployment in the euro area and that labour market reforms do not significantly affect unemployment when the economy is below trend. The effects of structural reforms on unemployment are stronger under high collective bargaining.
    Keywords: unemployment; structural reforms; local projections; endogeneity of reforms; nonlinearities; collective bargaining; AIPW
    JEL: E62 H30 J21 J65 L43 L51 O43 O47
    Date: 2023–10
  5. By: Anh D. M. Nguyen; Hajime Takizawa; Iglika Vassileva
    Abstract: This paper analyses inflation dynamics in Bulgaria using different complementary econometrics technics. We find that common factors play a large role in the EU’s inflation variation but impact individual countries differently due to country-specific factors. Greater weight of energy and food in Bulgaria’s CPI basket amplifies the impact of shocks on headline inflation. Furthermore, second-round effects in Bulgaria are likely pronounced, associated with a higher inflation persistence compared to the EU countries. Recent ECB monetary tightening has been insufficient for Bulgaria and its transmission is weak. Fiscal policy supported the recovery from the COVID crisis but added to inflation.
    Keywords: Inflation; Monetary policy; Fiscal policy; ECB interest rates; Phillips curve; Principal Component Analysis; VARl Sign restrictions.; inflation dynamics; HICP inflation; ECB Policy rate; inflation variation; inflation development; inflation in EU country; Energy prices; Inflation persistence; Food prices; Global
    Date: 2023–09–29
  6. By: Viral V. Acharya; Matteo Crosignani; Tim Eisert; Christian Eufinger
    Abstract: We document how supply-chain pressures, household inflation expectations, and firm pricing power interacted to induce the pandemic-era surge in consumer price inflation in the euro area. Initially, supply-chain pressures increased inflation through a cost-push channel and raised inflation expectations. Subsequently, the cost-push channel intensified as firms with high pricing power increased product markups in sectors witnessing high demand. Eventually, even though supply-chain pressures eased, these firms were able to further increase markups due to the stickiness of inflation expectations. The resulting persistent impact on inflation suggests supply-side impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power.
    JEL: D84 E31 E58 L11
    Date: 2023–10
  7. By: Do, Hung Xuan (School of Economics and Finance, Massey University); Nepal, Rabindra (Faculty of Business and Law, University of Wollongong); Pham, Son Duy (Finance, University of Aberdeen Business School); Jamasb, Tooraj (Department of Economics, Copenhagen Business School)
    Abstract: Despite the massive impacts of the COVID-19 pandemic and the Russia-Ukraine war on the European energy market, little is known about their effects on the transmission of risks between member states’ electricity markets and key electricity sources. In this paper, we first employ the quantile connectedness approach to quantify the return connectedness between eleven European electricity markets, natural gas, and carbon market, then examine the impacts of the two crises on the interconnectedness. We find a significant return interconnectedness of the system, mainly driven by the spillover effects among European electricity markets. An investigation of the connectedness across quantiles shows that the spillover effects are much stronger at the tails of conditional distribution and the natural gas and carbon markets are net recipients of return shocks across quantiles. More importantly, our results reveal opposite effects of the two crises on interconnectedness. While the COVID-19 pandemic reduces the interconnectedness, the Russia-Ukraine war intensifies the return shock transmission.
    Keywords: Natural gas; European Emission Allowance; Electricity markets; COVID-19; Russia-Ukraine war; Quantile connectedness
    JEL: D04 L94 Q43
    Date: 2023–06–02
  8. By: Francesco Ravazzolo (Norwegian Business School and Free-University of Bozen-Bolzano); Luca Rossini (University of Milan and Fondazione Eni Enrico Mattei)
    Abstract: Since Russia’s invasion of Ukraine, many countries have pledged to end or restrict their oil and gas imports to curtail Moscow’s revenues and hinder its war effort. Thus, the European ministers agreed to trigger a cap on the gas price. To detect the importance of the price cap for gas, we provide a mixture representation for the gas price to detect the presence of outliers made by a truncated normal distribution and a uniform one. We focus our analysis on Germany and Italy, which are major Russian gas importers by exploiting the response of the different commodities to a gas shock through a Bayesian vector autoregressive (VAR) model. As a result, including a lower gas price cap smooths the impact of a gas shock on electricity prices, while not considering a price cap will increase exponentially this impact.
    Keywords: Bayesian time series, Forecasted error variance decomposition, Gas price cap, Impulse response function, Mixture representation
    JEL: C11 C32 Q41 Q43
    Date: 2023–10
  9. By: Giovanni Borraccia; Mr. Raphael A Espinoza; Vincenzo Guzzo; Romain Lafarguette; Fuda Jiang; Vina Nguyen; Miguel A. Segoviano; Mr. Philippe Wingender
    Abstract: We develop a new measure of financial conditions (FCs) that targets the growth of financial liabilities using the partial least square methodology. We then estimate financial condition indexes (FCIs) across European economies, both at the aggregate and sectoral levels. We decompose the changes in FCs into several factors including credit availability and costs, price of risk, policy stance, and funding constraints. Our results show that FCs loosened during the pandemic thanks to policy support but started to tighten significantly since mid-2021. Using the inverse probability weighting method over the sample period from 2000 to 2023, we find that a shift from a neutral to a tight FCI regime such as the ongoing episode for most European countries will on average lower output and inflation by 2.2 percent and 0.7 percentage points respectively and increase unemployment by 0.3 percentage points over a three-year horizon.
    Keywords: Financial condition index; partial least square; funding constraints; credit availability and costs; price of risk; policy stance; inverse probability weighting; financial conditions in Europe; FCI regime; IMF working paper 2023/209; FCI indicator; measure of financial conditions; Inflation; Asset prices; Monetary tightening; Credit; Financial cycles; Europe; Global
    Date: 2023–09–29
  10. By: Matthias Mertens; Bernardo Mottironi
    Abstract: Several models posit a positive cross-sectional correlation between markups and firm size, which characterizes misallocation, factor shares, and gains from trade. Accounting for labor market power in markup estimation, we find instead that larger firms have lower product markups but higher wage markdowns. The negative markup-size correlation turns positive when conditioning on markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias, non-neutral technology) and hold across 19 European countries. We discuss possible mechanisms and resulting implications, highlighting the importance of studying input and output market power in a unified framework.
    Keywords: markups, markdowns, market power, firm size
    Date: 2023–09–21
  11. By: Riccardo De Bonis; Danilo Liberati; John Muellbauer; Concetta Rondinelli
    Abstract: Most econometric policy models at central banks and elsewhere use an aggregate consumption function based on textbook theory. This assumes that the ‘representative household’ owns only an aggregate form of wealth, proxied by net worth, and never faces borrowing or liquidity constraints or transactions costs. This is inconsistent with the modern view of heterogeneous agent behaviour under uncertainty in incomplete markets. Based on data from 1980 to 2019, the conventional formulation for an aggregate consumption function for Italy is strongly rejected. The results show that the marginal propensities to consume out of household deposits and semi-liquid financial assets such as T-bills and mutual funds are greater than for less liquid assets. A significant positive effect from housing wealth is substantially offset by the negative effect of affordability measured by the house price-to-income ratio.
    Date: 2023–10–31
  12. By: Clodomiro Ferreira (Banco de España); Julio Gálvez (CUNEF Universidad/SHOF); Myroslav Pidkuyko (Banco de España)
    Abstract: The housing bust in Spain was characterized by a significant and rapid drop in home ownership among the younger cohorts, a relatively homogeneous but significant decrease in consumption, and significant movements in the rent-to-house price ratio. To uncover the causes of these movements, we solve and estimate an equilibrium life-cycle model with non-linear income dynamics, mortgages, housing, and rental markets and simulate a series of counterfactual policy changes and macroeconomic conditions observed in Spain during the period. The lion’s share of the observed drop in home ownership and consumption and the housing market dynamics can be explained by the tightening of credit conditions and the major shift in income dynamics observed in Spain between the boom and bust phases.
    Keywords: life-cycle models, mortgage debt, housing
    JEL: E21 E44
    Date: 2023–11
  13. By: Mesquita, José (Universidade Nova de Lisboa); Pereira dos Santos, João (Queen Mary University of London); Tavares, José (Universidade Nova de Lisboa)
    Abstract: This paper analyses the impact of European Union (EU) funds on the performance of private firms. In particular, we examine a quasi-natural experiment consisting of a redrawing of administrative areas that expanded regional eligibility and led to a sudden increase in accessibility to EU grants for firms located in 33 Portuguese municipalities. Using a comprehensive linked employer-employee administrative dataset that covers the universe of private firms between 2003 and 2010, our difference-in-differences estimates uncover a significant and positive causal effect of increased eligibility on firms' sales, labour productivity, and average wages, while employment is not significantly altered. While firms' sales in the non-tradable sectors are positively impacted, firms' sales in more competitive, tradable, sectors remain unaffected by increased access to EU funds.
    Keywords: grants, regional policy, private firm, municipalities, Portugal
    JEL: C21 R10
    Date: 2023–10
  14. By: Emmanuel Saez; Benjamin Schoefer; David G. Seim
    Abstract: We study the role of employment protection legislation (EPL) in boosting employment among older workers. Our analysis juxtaposes the quantitative employment gains with the qualitative “deadwood labor” problem that such gains entail. We do so by conducting a comprehensive analysis of the sharp and complete elimination of EPL that occurs at age 67 in Sweden, as well as reform-driven shifts in this age cutoff. First, focusing on direct separation effects, we find that 8% of jobs separate in response to the elimination of EPL. Effects stem from jobs with stronger initial EPL (long-tenure, firms subject to “last in, first out” rules), and those in the public sector. Separations appear involuntary to workers, with firms targeting plausibly unproductive (sick) workers. Second, we focus on effects of continuing jobs. While wages appear rigid to EPL, we uncover novel, sizable intensive-margin hours reductions among continuing jobs, and an 8% drop in earnings conditional on staying on the job. Third, we estimate total equilibrium effects at the cohort level, where separations fully pass through into employment to population rate effects, with no offsetting effect from hiring. On a per-capita basis, total earnings of older workers causally drop by 21.5% due to EPL elimination. We validate these local effects by leveraging a reform-driven shift in the age cutoff from 67 to 68.
    JEL: J0
    Date: 2023–10
  15. By: Laura Bisio; Angelo Cuzzola; Marco Grazzi; Daniele Moschella
    Abstract: We investigate the impact of investment in automation-related goods on adopting and non-adopting firms in the Italian economy during 2011-2019. We integrate datasets on trade activities, firms', and workers' characteristics for the population of Italian importing firms and estimate the effects on adopters' outcomes within a difference-in-differences design exploiting import lumpiness in product categories linked to automation and AI technologies. We find a positive average adoption effect on the adopters' employment and on the value-added and average wage, whereas sales and productivity increase after an initial drop with a net positive effect five years after adoption. Crucially, the employment effect is heterogeneous across firms: a positive scale effect is predominant among small firms, whereas a negative displacement effect is predominant among medium and large firms. We complete the framework with a 5-digit sector-level analysis showing that adopting automation technologies has an overall negative effect on aggregate employment.
    Keywords: Automation; Employment; Firm heterogeneity; Imports; Technology adoption.
    Date: 2023–10–26
  16. By: Ariela Caglio; Sebastien Laffitte; Donato Masciandaro; Gianmarco Ottaviano
    Abstract: In 2011 UEFA, the governing body of European football, introduced the Financial Fair Play Regulation (FFPR), consisting of a set of financial restraints to be met by clubs as a prerequisite for participation to its competitions. The aim of the FFPR was to introduce financial discipline into the clubs' decision-making processes, and ultimately protect the long-term viability of the European football industry. The reform was criticized because of possible unintended detrimental consequences. In particular, Peeters and Szymanski 2014 provided a model-based ex-ante simulation analysis showing that the reform would increase the profitability of clubs, but also tilt the competitive balance in favor of the top teams, thus reducing the interest of fans and investors as one of the main attractions in sports is precisely that the best team does not always win. Exploiting an original dataset between the seasons 2007-2008 and 2019-2020, we provide an ex-post econometric evaluation of the effects of the introduction of the FFPR revealing causal evidence that largely vindicates those ex-ante predictions.
    Keywords: accounting measurement, Financial Fair Play (FFP), financial sustainability, teama??s quality, competitive balance
    Date: 2023–10–11

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