|
on European Economics |
|
Issue of 2024‒04‒22
nineteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Pablo A. Aguilar (Banco de España); Mario Alloza (Banco de España); James Costain (Banco de España); Samuel Hurtado (Banco de España); Jaime Martínez-Martín (Banco de España) |
| Abstract: | This paper empirically quantifies the effect on Spain’s public finances of the asset purchase programmes implemented in the euro area between 2015 and 2022. Specifically, it evaluates the impact of the ECB’s Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) on Spanish public revenue, expenditure, deficit and debt. The results suggest that these programmes have had a significant cumulative downward effect on the level of public debt. |
| Keywords: | quantitative easing, asset purchase programmes, unconventional monetary policy, term structure models, signaling and portfolio balance effects, expectations channel, fiscal effects, Spain |
| JEL: | E43 E44 E52 E63 E65 G18 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2409e&r=eec |
| By: | Luis E. Rojas (UAB, MOVE and Barcelona School Of Economics); Dominik Thaler (European Central Bank) |
| Abstract: | The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bonds (ESBies)). A central bank backstop (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated. |
| Keywords: | sovereign default, bailout, doom loop, self-fulfilling crises, transmission protection instrument, ESBies |
| JEL: | E44 E6 F34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2409&r=eec |
| By: | Heider, Florian; Schlegel, Jonas |
| Abstract: | This study analyses potential consequences of exiting the Targeted Long-Term Refinancing Operations (TLTRO) of the European Central Bank (ECB). Thanks to its asset purchase programs, the Eurosystem stillholds plenty of reserveseven with a full exit from the TLTROs. This explains why voluntary and mandatory repayments of TLTRO III borrowing went smoothly. Nevertheless, the more liquidity is drained from the banking system, the more important becomes interbank market borrowing and lending, ideally between euro area member states. Right now, the usual fault lines ofthe euro area show up. The German banking system has plenty of reserves while there are first signs of aggregate scarcity in the Italian banking system. This does not need to be a source of concern if the interbank market can be sufficiently reactivated. Moreover, the ECB has several tools to address possible future liquidity shortages. This document was provided/prepared by the Economic Governance and EMU scrutiny Unit at the request of the ECON Committee. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:287744&r=eec |
| By: | Steffen Murau (Global Climate Forum, Berlin; Freie Universität Berlin; Global Development Policy Center, Boston University); Alexandru-Stefan Goghie (Freie Universität Berlin); Matteo Giordano (Department of Economics, SOAS University of London) |
| Abstract: | Despite the paramount centrality of repurchase agreements (repos) in today’s market-based finance regime, both conceptual and empirical questions about European repo markets are insufficiently explored as contradictory legal and accounting treatments make their on-balance-sheet representation intricate. Drawing on the literature on monetary hierarchy, we make three connected conceptual arguments: First, we argue that the balance sheet mechanics of repos vary if the counterparties involved are on hierarchically different levels (“vertical repos†) or on the same hierarchical level (“horizontal repos†). While the vertical repo mechanism implies money creation, the horizontal repo mechanism only lends on pre-existing money. Second, we coherently represent the whereabouts of the security posted as repo collateral, which is held as an off-balance-sheet position of the repo lender, combined with a liability to repay it. Basel III regulations interpret this ambiguous status of the collateral as being “encumbered†and not leaving the repo borrower’s balance sheet. Third, we introduce an on-balance-sheet notation of the collateral framework as a means of the repo lender to alter the elasticity of the funding provided. Applying our methodology on two cases—vertical repos created by the Eurosystem for monetary policy implementation and horizontal repos used in the European interbank market—offers an innovative and consistent way to represent changes in the collateral frameworks that affect the elasticity space in the Euro area’s monetary architecture. Our analysis yields two main contributions: We offer a novel understanding of different mechanisms for repo creation based on monetary hierarchy, and we put forth a data-driven empirical analysis of repos in Europe aimed at supporting our conceptual elaborations. |
| Keywords: | repurchase agreements; collateral; market-based finance; Eurosystem; European Central Bank; Eurex clearing. |
| JEL: | G21 G23 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:soa:wpaper:262&r=eec |
| By: | Charalambakis, Evangelos; Teppa, Federica; Tsiortas, Athanasios |
| Abstract: | This paper analyses the consumer’s decision to apply for credit and the probability of the credit being accepted in the euro area during a period characterized by the unprecedented concomitance of events and changing borrowing conditions linked to the global COVID-19 pandemic and the Russian invasion of Ukraine. We use data between 2020Q1 and 2023Q2 from the ECB’s Consumer Expectations Survey. We find that the credit demand is highest when the first lockdown ends and drops when supportive monetary compensation schemes are implemented. There is evidence that constrained households are significantly less likely to apply for credit. Credit is more likely to be accepted under favourable borrowing conditions and after the approval of national recovery plans. We also find that demographic, economic factors, perceptions and expectations are associated with the demand for credit and the credit grant. JEL Classification: C23, D12, D14, G51 |
| Keywords: | consumer expectations survey, consumer finance, credit applications, liquidity constraints |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242922&r=eec |
| By: | Paula Bejarano Carbo |
| Abstract: | This paper leverages insights from data and economic theory in order to construct a narrative account of how the nature of inflation has evolved over time in the euro area, United Kingdom and United States since the onset of the Covid-19 pandemic. To this end, I decompose the recent 'inflationary surge episode' into four periods: The Covid shock period (2020 Q1 – 2020 Q2), characterised by joint a negative demand and supply shock; the economic reopening period (2020 Q3 – 2021 Q4), characterised by conflicting positive demand and negative supply shocks; the post-reopening period (2022 Q1 – 2023 Q1), also characterised by conflicting positive demand and negative supply shocks, where the latter is driven by an exogenous increase in energy prices; and the post-energy shock period (2023 Q2 – present), characterised by falling consumer price index (CPI) inflation alongside still-elevated and broad-based underlying inflationary pressures. Having established this 'inflation story', I conclude with some brief comments on the European Central Bank, Bank of England and Federal Reserve monetary policy responses during this time. |
| Keywords: | Inflation, Monetary Policy, Central Bank Policy, Comparative Analysis |
| JEL: | E31 E50 E58 E63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:554&r=eec |
| By: | Ricardo Barahona (Banco de España); María Rodríguez-Moreno (Banco de España) |
| Abstract: | This paper estimates the euro area overnight index swap yield curve, which is considered to be the risk-free yield curve in the euro area, using an affine term structure model. We expand the Adrian, Crump and Moench (2013) procedure with survey data to dissect rates into short-term expectations and term premia. This approach reveals the market expectations of short-term interest rates and monetary policy, and gauges the premium demanded by risk-averse investors in uncertain interest rate environments. As compared to the simpler model, the use of survey information in our estimation yields estimates more aligned with professional expectations data. Our approach enables us to obtain daily forecasts of short-term rates for up to 10 years ahead which are aligned with professional surveys on interest rates. Our estimation of real-time information on short-term rate expectations proves valuable as it complements the survey data, which are typically available at longer intervals. |
| Keywords: | affine term structure model, interest rates, survey expectations |
| JEL: | E43 E44 G12 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:2410e&r=eec |
| By: | Cappelletti, Giuseppe; Marqués-Ibáñez, David; Reghezza, Alessio; Salleo, Carmelo |
| Abstract: | How a historic drop in bank deposits shapes banks’ loan supply? We exploit the effects of a large, and unexpected, increase in monetary policy rates to estimate the deposit channel of monetary policy using an extensive credit register that includes all bank-firm lending relationships in all euro area countries. We find that banks experiencing large deposit outflows reduce credit, but not the interest rate they charge, to the same borrower relative to other lenders. This credit restriction is stronger for fixed rate and longer maturity loans, but not for riskier borrowers. The effect is mostly driven by banks coming into the hiking period with a larger unhedged duration gap that renders borrowers of those banks more vulnerable to credit restrictions due to the deposit outflows as interest rates surge. We resort to the deposit beta as an instrument variable and a matched estimator that bear out the thrust of our results. JEL Classification: E51, E58, G21 |
| Keywords: | bank deposits, banks, monetary policy |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242923&r=eec |
| By: | Meryem Gökten (The Vienna Institute for International Economic Studies, wiiw); Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw); Andreas Lichtenberger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | This paper analyses deviations from full employment in EU countries, compared with the US and the UK. We apply the Beveridge (full-employment-consistent) rate of unemployment (BECRU), derived from the unemployment-vacancies relationship. The BECRU is the level of unemployment that minimises the non-productive use of labour. Based on a novel dataset for the period 1970-2022, we find full employment episodes in selected EU countries (Germany, Sweden, Austria, Finland) during the 1970s. The European unemployment problem emerged in the 1980s and 1990s, as Beveridgean full employment gaps increased. In the run-up to the global financial crisis, full employment gaps declined, then increased during the Great Recession. Slack in labour markets increased initially during the pandemic. Labour markets became tighter when recovering from the COVID-19 crisis, but few countries hit full employment. Panel regressions highlight that hysteresis, labour market institutions, structural factors, macroeconomic factors and political factors contribute to explaining full employment gaps. |
| Keywords: | Full employment, unemployment, vacancies, EU, UK, US |
| JEL: | E24 E32 E6 J63 J64 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:245&r=eec |
| By: | Hoste, J.; Verboven, F. |
| Abstract: | We develop a new approach to measure the sources of cross-border goods market segmentation. Our cost-of-living approach uncovers the relative importance of price and product availability differences, while accounting for taste differences. We implement our methodology on regionally disaggregated consumer goods data in the EU and US. The analysis reveals that price, and especially, product availability differences are much larger between than within European countries, and are only marginally larger between than within US states. Our findings imply that US states are geographically integrated, whereas EU countries remain segmented, due to trade frictions that mainly relate to fixed costs. |
| Keywords: | Geographic Market Integration, LOP Deviations, Product Availability Differences |
| JEL: | D12 F15 R32 |
| Date: | 2024–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2408&r=eec |
| By: | Corentin Roussel |
| Abstract: | Differentiated treatment of green credit risk in banks’ capital requirements to favor green transition generates lot of debates among European prudential regulators. The aim of this paper is to examine whether the key Basel 3 finalization instrument - the Output Floor - should be applied to green credit risk in order to ensure stability of banking system and promote green finance. To do so, we assess macrofinancial and environmental benefits of such green policy for the Euro Area through the lens of a general equilibrium model. We get three main results. First, when banks get transitory ’environmental awareness’, an Output Floor (OF) applied to brown credits only (i.e. a brown OF) faces a trade-off between limiting environmental aftermaths and reaching OF objectives (i.e reducing volatility of banks’ capital adequacy ratio). Second, to mitigate the prudential cost of this trade-off, brown OF should be joined with additional green financial policies such as green Quantitative Easing. Third, pollutant emissions tax erodes brown OF efficiency along financial and economic cycles but limits the welfare cost implied by pollution in the long run. |
| Keywords: | Output Floor, Credit Risk, Green Finance, Climate Change, DSGE. |
| JEL: | Q54 G21 E44 E51 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-07&r=eec |
| By: | Camarero, Mariam (University Jaume I and INTECO, Department of Economics); Moliner, Sergi (University of Valencia and INTECO, Department of Economic); Tamarit, Cecilio (University of Valencia and INTECO, Department of Applied Economics II) |
| Abstract: | This paper analyzes how European monetary integration has affected US outward FDI. It finds that at a worldwide level, the Single Market had a larger impact on US FDI than the euro. However, the effect of the euro is also sizeable, ranging between 15% and 64%. |
| Keywords: | FDI determinants, US, European Union, BMA, PPML, G-PPML |
| JEL: | F21 F23 C11 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bda:wpsmep:wp2024/18&r=eec |
| By: | Cavallaro, Eleonora (University of Rome, Sapienza, Department of Economics and Law); Villani, Ilaria (Banking Supervision, European Central Bank) |
| Abstract: | This paper proposes an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. It finds that the risk sharing mechanism is more effective in more stable financial environments, whereas a larger fraction of shocks remains unsmoothed in the lower financial clusters, especially in the aftermath of the global financial crisis, when the credit channel is significantly downsized. |
| Keywords: | financial structure, financial heterogeneity, growth, volatility, risk sharing |
| JEL: | F15 F36 O16 E44 G1 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bda:wpsmep:wp2024/21&r=eec |
| By: | BORNUKOVA Kateryna (European Commission - JRC); HERNANDEZ MARTIN Adrian (European Commission - JRC); PICOS Fidel (European Commission - JRC) |
| Abstract: | The EU committed to meet the poverty reduction target set in the European Pillar of Social Rights Action Plan, which entails to reduce the number of children at risk of poverty or social exclusion by 5 million by 2030. The paper assesses the impact of child-contingent cash support in EU-27 in 2019-2022 on child poverty and inequality and sheds light on the role this kind of support plays, or could further play, when it comes to meeting the 2030 child poverty target. We use the microsimulation model EUROMOD to identify child-contingent cash support and find significant variation in average support per child across EU-27, ranging from 3.2% of GDP per capita in Ireland to 12% of GDP per capita in Austria. Correspondingly, the impact of child-contingent cash support on reducing child at-risk-of-poverty rates varies from 4 p.p. in Portugal to 16 p.p. in Slovakia. The inequality-reducing effect is highly correlated with poverty reduction. With rare exceptions, countries rely on child benefits as a primary source of child-contingent cash support, as opposed to tax-based support. Non-poor households receive over 50% of total child-contingent cash support in most EU countries. Means-tested benefits, while better targeted to impoverished households, do not always provide enough support to lift them above the poverty line. We do not observe correlation between child-contingent cash support, other benefits, and in-kind child support. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:taxref:202402&r=eec |
| By: | Dabrowski, Cara; Kuhls, Sonia |
| Abstract: | In this paper, we examine if and to what extent the Kaleckian theory of mark-up pricing can explain changes in functional income distribution in an environment of financialization. Following this approach, we expect financialization to influence the aggregate wage share through three channels: (1) sectoral recomposition, (2) financial overhead costs and rentiers' profits claims, and (3) bargaining power of trade unions and workers. We empirically analyze the long-term trends for each of the channels before and after the Great Financial Crisis and the Great Recession for Austria and Finland. Overall, we find evidence for all three re-distributional channels contributing to the changes in functional income distribution. The explanatory power of the individual channels, however, differs strongly due to the heterogeneity of the countries. |
| Keywords: | Finance-dominated capitalism, financialization, distribution, financial and economic crisis, Kaleckian theory of distribution |
| JEL: | D31 D33 D43 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:287769&r=eec |
| By: | Sastry, Parinitha; Verner, Emil; Marqués-Ibáñez, David |
| Abstract: | This paper studies the impact of voluntary climate commitments by banks on their lending activity. We use administrative data on the universe of bank lending from 19 European countries. There is strong selection into commitments, with increased participation by the largest banks and banks with the most pre-existing exposure to high-polluting industries. Setting a commitment leads to a boost in a lender’s ESG rating. Lenders reduce credit in sectors they have targeted as high priority for decarbonization. However, climate-aligned banks do not change their lending or loan pricing differentially compared to banks without climate commitments, suggesting they are not actively divesting. We can reject that climate-aligned lenders divest from firms in targeted sectors by more than 2.6%. Firm borrowers are no more likely to set climate targets after their lender sets a climate target, which casts doubt on active engagement by lenders. These results call into question the efficacy of voluntary commitments. JEL Classification: Q50, G21 |
| Keywords: | banks, green lending, voluntary targets |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242921&r=eec |
| By: | Gil-Hernández, Carlos J.; Salas Rojo, Pedro; Vidal-Lorda, Guillem; Villani, Davide |
| Abstract: | Wealth is a central determinant of life chances and intergenerational status persistence in modern societies. Yet, sociologists traditionally overlooked its role in class measurement and inequality, while most economists focused on the elites. This article reconciles sociological and economic perspectives on class analysis by examining the relationship between classes and wealth inequality versus income. Drawing from the Luxembourg Wealth Study (2002-2018) in five European countries, we test whether occupational classes, based on the entire division of labour, keep up with rising economic inequality trends. In contrast to bold claims on class death or decomposition, inequality of outcomes in wealth accumulation is firmly rooted across occupational classes in contemporary capitalism, potentially harming future equal opportunity and social mobility. Still, occupational classes better capture between-group income inequality and stratification than wealth, emphasising the importance of economic resources beyond labour market attachment that spark advances in social class theory and measurement. |
| Keywords: | wealth; income; social class; inequality; stratification |
| JEL: | N0 |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122125&r=eec |
| By: | Daniel Marcel te Kaat; Chang Ma; Alessandro Rebucci |
| Abstract: | In this paper, we show that cross-border portfolio flows around the peak of the European Crisis induced households to rebalance their portfolios toward housing. Estimating difference-in-differences regressions around Draghi's “Whatever It Take” speech in July 2012 with household data from the ECB's Household Finance and Consumption Survey, we find that portfolio inflows induce households with larger ex-ante bond and equity shares to rebalance more strongly toward housing. The effect is not driven by higher pre-treatment access to credit or higher credit growth during the treatment period and is stronger for wealthier and less risk-averse households. |
| JEL: | F3 G5 R0 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32210&r=eec |
| By: | Manduca, Robert; Hell, Maximilian; Adermon, Adrian; Blanden, Jo; Bratberg, Espen; C. Gielen, Anne; Van Kippersluis, Hans; Bok Lee, Keun; Machin, Stephen; D. Munk, Martin; Nybom, Martin; Ostrovsky, Yuri; Rahman, Sumaiya; Sirnio, Outi |
| Abstract: | We use linked parent-child administrative data for five countries in North America and Europe, and detailed survey data for two more, to investigate methodological challenges in the estimation of absolute income mobility. We show that the commonly used “copula and marginals” approximation methods perform well across countries in our sample, and the greatest challenges to their accuracy stem not from assumptions about relative mobility rates over time but from the use of non-representative marginal income distributions. We also provide a multi-country analysis of sensitivity to specification decisions related to age of income measurement, income concept, family structure, and price index. |
| Keywords: | Consolidator grant ERC-2013-CoG-617965 (Sirniö). Page 1 of 130; 724363 |
| JEL: | D31 J62 E24 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:122124&r=eec |