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on European Economics |
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Issue of 2019‒12‒02
twenty-one papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Johannes Bubeck; Angela Maddaloni; José-Luis Peydró |
| Abstract: | We exploit the ECB’s negative interest rate policy (NIRP) and administrative data from Italy, severely hit by the Eurozone crisis, to study the transmission of NIRP to the economy through the banking system. NIRP has expansionary effects on credit supply—and hence the real economy— through a portfolio rebalancing channel. By contrast, there is no evidence of a retail deposits channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downward, NIRP differs from rate cuts just above the ZLB. |
| Keywords: | Negative rates, non-standard monetary policy, reach-for-yield, securities, banks |
| JEL: | E43 E52 E58 G01 G21 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1678&r=all |
| By: | Francesco Spadafora (Bank of Italy and International Monetary Fund) |
| Abstract: | This paper reviews the debate on completing the institutional architecture of the European Economic and Monetary Union (EMU). In response to the sovereign debt crisis, reforms have resulted in significant progress towards greater integration, as best epitomized by the establishment of the European Stability Mechanism and the first two pillars of a Banking Union. In addition, the fiscal governance framework has been overhauled, with stricter rules and more powers at the supranational level to affect national budgetary policies. Because of these reforms, as well as of other policy measures at the national level, risks in the sovereign and banking sectors have been substantially reduced. The paper argues that major advances in risk reduction have not been matched by parallel progress in risk sharing: this asymmetry leaves the EMU vulnerable and may undermine its longer-term viability. Priority needs to be given to closing the gap between risk sharing and risk reduction as, at the current juncture, the former is in and of itself a conduit for the latter. |
| Keywords: | economic and monetary union, banking union, fiscal capacity, sovereign-bank nexus |
| JEL: | E58 E62 F42 F45 G28 H63 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_512_19&r=all |
| By: | Servaas Storm (Delft University of Technology, The Netherlands) |
| Abstract: | Using macroeconomic data for 1960-2018, this paper analyzes the origins of the crisis of the `post-Maastricht Treaty order of Italian capitalism`. After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform and real wage restraint and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy`s domestic demand and exports—and resulted not just in economic stagnation and a generalized productivity slowdown, but in relative and absolute decline in many major dimensions of economic activity. Italy`s chronic shortage of demand has clear sources: (a) perpetual fiscal austerity; (b) permanent real wage restraint; and (c) a lack of technological competitiveness which, in combination with an overvalued euro, weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization, reduce firm profitability and hurt investment, innovation and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy`s `technological competitiveness` and stop the structural divergence between the Italian economy and France/Germany. The issue is not just to revive demand in the short run (which is easy), but to create a self-reinforcing process of investment-led and innovation-driven process of long-run growth (which is difficult). |
| Keywords: | Italian macroeconomic performance; Eurozone; secular stagnation; demand; real wage restraint; fiscal austerity; export growth. |
| JEL: | E20 E60 F60 O10 O40 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:94&r=all |
| By: | Pietro Cova (Bank of Italy); Lisa Rodano (Bank of Italy) |
| Abstract: | We propose a novel metric to evaluate price developments within the euro area (EA), which involves the decomposition of the overall variability of cross country inflation rates into common and idiosyncratic labor cost and markup components. The analysis yields several interesting results. First, over the period 1978-2015, inflation variability in the EA reflects most of all idiosyncratic (country-specific) developments in unit labor costs (ULC). This sharply contrasts with what we find for the US states, where price dynamics to a much greater extent reflects common developments in costs and profits, consistently with the role played by the greater mobility of capital and labor. Second, when we apply our approach to data for two subgroups of countries, namely Core and Non-core countries, we find that they both display higher intra-group homogeneity, in that the role of the subgroup-specific common components in explaining inflation variability increases, while idiosyncratic developments in ULC become correspondingly less relevant. Third, over the more recent period (1999-2015) in the Core countries the idiosyncratic component due to price markups has become the dominant driver of the variability of inflation, a pattern similar to the one we detect for the US. Our analysis also sheds light on the adjustment mechanisms to asymmetric, or country specific, shocks. Using a panel VAR approach we find that price changes driven by diverging developments of ULC are reflected into trade balance adjustments that are costly from the point of view of the smooth functioning of the currency area. |
| Keywords: | euro area inflation and unit labor costs; EMU; optimum currency area; risk sharing; current account balance |
| JEL: | F02 F15 F33 F45 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1226_19&r=all |
| By: | George Alogoskoufis |
| Abstract: | This paper analyzes the process of destabilization, crisis and adjustment in the Greekeconomy since the accession of the country to the European Union and, subsequently, the euro area. It reviews four policy cycles of the past 40 years, the four acts of the Greektragedy, and discusses alternative ways forward, following the sudden stop and the great depression of the 2010s. It concludes that despite the significant constraints implied by continued participation in the euro area, namely a stark Mundellian conflict between internal and external balance, exiting the euro area risks further destabilizingthe economy and bringing about a return of the problems of the 1980s. The currentchallenge for Greece is to seek to remain and prosper in the euro area. This would require a policy mix based on supply side reforms which would allow for a sustained recovery without the reemergence of external imbalances. |
| Keywords: | Greece, Euro Area, fiscal policy, monetary policy, competitiveness, current account |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:136&r=all |
| By: | Antonio M. Conti (Bank of Italy); Andrea Nobili (Bank of Italy) |
| Abstract: | We investigate the structural relationship between wages dynamics and core inflation in the euro area using Bayesian VAR models. We find that the pass-through from wages to consumer prices net of food and energy is less than unity and depends on the nature of the shocks hitting the economy. A monetary policy shock implies a positive co-movement between these variables, which is similar in magnitude to that stemming from an aggregate demand shock. Financial shocks, as captured by credit spreads and indicators of systemic stress, are instead associated with a negative co-movement between wages and prices and generate firms’ countercyclical mark-ups, consistently with recent models featuring financial frictions and nominal rigidities. These findings may explain why the recent pick-up in wages is not associated with a sustained path of core inflation in the euro area. |
| Keywords: | wage-price pass-through, countercyclical mark-ups, financial shocks, Bayesian VAR |
| JEL: | E30 E32 E51 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_518_19&r=all |
| By: | Hintermaier, Thomas (University of Bonn); Koeniger, Winfried (University of St. Gallen) |
| Abstract: | This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area. |
| Keywords: | european household portfolios, consumption, monetary policy transmission, international comparative finance, housing |
| JEL: | D14 D31 E21 E43 G11 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12743&r=all |
| By: | Angela Capolongo (ECARES, Université Libre de Bruxelles); Claudia Pacella (Bank of Italy) |
| Abstract: | We construct a Bayesian vector autoregressive model with three layers of information: the key drivers of inflation, cross-country dynamic interactions, and country-specific variables. The model provides good forecasting accuracy with respect to the popular benchmarks used in the literature. We perform a step-by-step analysis to shed light on which layer of information is more crucial for accurately forecasting euro area inflation. Our empirical analysis reveals the importance of including the key drivers of inflation and taking into account the multi-country dimension of the euro area. The results show that the complete model performs better overall in forecasting inflation excluding energy and unprocessed food, while a model based only on aggregate euro area variables works better for headline inflation. |
| Keywords: | inflation, forecasting, euro area, Bayesian estimation |
| JEL: | C32 C53 E31 E37 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1224_19&r=all |
| By: | Gilles Dufrénot (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Carolina Ulloa Suarez (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper investigates the sustainability of public finances in the European countries since 2002. We provide evidence of heterogenous behaviors among the EU countries and show that, even if they had been forced to focus their fiscal efforts on correcting the deviations of debt from their ceiling -through a correcting mechanism such as the recent TSCG rule-, this would not necessarily have changed the likelihood that debt and deficits become more sustainable. Sources of deviations from stable debt and deficits are related to the macroeconomic environment: the interest-growth differential, momentum dynamics in the sovereign bond markets, how markets react to rising debt. |
| Keywords: | fiscal rules,euro area,quantile regression,stability |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02356400&r=all |
| By: | Helen Louri; Petros Migiakis |
| Abstract: | We examine the existence of a feedback loop between the resilience of the financial sector and Greek economic activity. A sequence of structural VARs is employed using data for bank credit, liquidity, capital, asset quality and private demand in 2001-2018in two data sets. One in monthly frequency with which we examine the determinants of credit provision by Greek banks, and another in quarterly frequency with which we examine the finance-growth nexus for the Greek economy. We find that (a) the deterioration in the quality of Greek banks’ balance sheets affected negatively the provision of credit to the economy, (b) central bank liquidity and recapitalisations of Greek banks provided only a partial remedy and (c) the decline in credit significantly weakened economic activity. Also, we find that there is a role for market financing of the economy but this cannot substitute for the predominantly bank-based financing. Therefore, as the Greek economy starts bouncing back Greek banks have an important role to play, irst by solving the high NPLs problem and providing the necessary credit and second by improving the efficiency of capital allocation towards a sustainable growth model. |
| Keywords: | Greek crisis; credit provision; finance-growth nexus; financial stability; NPLs |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:135&r=all |
| By: | Alan Roncoroni; Stefano Battiston; Marco D’Errico; Grzegorz Halaj; Christoffer Kok |
| Abstract: | How do banks' interconnections in the euro area contribute to the vulnerability of the banking system? We study both the direct interconnections (banks lend to each other) and the indirect interconnections (banks are exposed to similar sectors of the economy). These complex linkages make the banking system more vulnerable to contagion risks. We use a unique supervisory dataset of the European Central Bank with the 26 largest banks in the euro area. Introducing a new measure of indirect interconnections, we assess to what extent banks are significantly exposed to devaluation risk of commonly held assets. We find that for small shocks, banks that operate in multiple countries make the banking system more resilient. But for large shocks, international diversification makes the banking system less resilient. While contagion risk is usually ignored in supervisory stress tests, it can have significant impacts on banks' solvency and should influence how supervisors design regulations. However, we find there is no one-size-fits-all solution: the optimal financial architecture depends on the shocks considered and the international diversification. |
| Keywords: | Financial stability |
| JEL: | C63 G G1 G15 G2 G21 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-44&r=all |
| By: | Bajo Rubio, Oscar; Berke, Burcu; McMillan, David G. |
| Abstract: | The current economic crisis has witnessed a strong deceleration in the growth of international trade. This has been even greater in the cases of the European Union and the eurozone, where the rates of export growth have even reached negative figures. In this paper, the authors examine to which extent exchange rate volatility might account for the drop in the rate of growth of exports in the eurozone since the start of the crisis. To that end, the authors estimate export functions, augmented to include several measures of exchange rate volatility, for the four largest economies of the eurozone, i.e., France, Germany, Italy and Spain, for the period 1994:1-2014:4. In the empirical application, they make use of two alternative measures for exchange rate volatility, i.e., (i) the standard deviation and (ii) the conditional variance from the GARCH methodology, of the change in the logarithm of the exchange rate, for both nominal and real exchange rates, and in the latter case computed using as deflators both export prices and unit labour costs. The empirical results show no clear-cut evidence on the impact of exchange rate volatility on the exports of the countries analysed, suggesting that financial markets were developed enough so that exchange rate volatility does not hinder the evolution of exports. |
| Keywords: | exchange rate volatility,exports,eurozone |
| JEL: | F31 F41 F45 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201956&r=all |
| By: | Etienne Vaccaro-Grange (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The transmission of Quantitative Easing to aggregate macroeconomic variables through the yield curve is disentangled in two yield channels: the term premium channel, captured by a term premium series, and the signaling channel, that corresponds to the interest rate expectations counterpart. Both yield components are extracted from a term structure model and plugged into a Structural VAR with Euro Area macroeconomic variables in which shocks are identified using sign restrictions. With this set-up, I show how the central bank can use the term premium as a single monetary policy instrument to foster output and prices. However, I also show that there has been a cost channel in the transmission of QE to inflation between 2015 and 2017. This cost channel provides a new explanation as to why inflation has been so muted during this period, despite the easing monetary environment. Finally, a policy rule for the term premium is estimated. |
| Keywords: | quantitative easing,shadow-rate term structure model,BVAR,sign restrictions |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02359503&r=all |
| By: | Lorenzo Burlon (European Central Bank); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | We assess the effects of a fiscal devaluation on economic and labour market conditions in a Member State of the euro area by simulating a monetary union model featuring labour markets with search and matching frictions. The fiscal authority of the Member State enacts a discretionary reduction in the social contribution rate for employers so that the corresponding revenues decrease by 1per cent of the before-shock (steady-state) nominal GDP. The measure is ex ante revenue neutral, because it is financed by a simultaneous discretionary increase in the consumption tax rate that generates additional ex ante revenues equal to 1 per cent of the before-shock GDP. The main results are as follows. First, GDP increases by 0.5 per cent, sustained by the increase in investment and net exports, while consumption decreases. Second, the unemployment rate decreases by 0.3 percentage points. Third, the trade balance improvement is equal to 0.3 per cent of GDP (the improvement in real net exports is partially offset by the deterioration in term of trade). Fourth, the results are rather robust to changes in key parameters. |
| Keywords: | fiscal devaluation, labour market, trade deficit, dynamic general equilibrium modelling |
| JEL: | F32 F47 H20 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1241_19&r=all |
| By: | Şen, Hüseyin; Kaya, Ayşe |
| Abstract: | In this paper, we explore the output-volatility reducing role of automatic stabilizers in the nine EMU member states comprising Austria, Finland, France, Germany, Ireland, Italy, Portugal, the Netherlands, and Spain for the period 1995-2017. Overall, the empirical results obtained by using the Pooled Mean Group estimator proposed by Pesaran et al. (1999) suggest that automatic stabilizers deliver a significant counter-effect on output volatility measured by the real GDP per capita volatility in the short run. More specifically, output-volatility responses to automatic stabilizers by a reduction between -1.2 and -9.7 percentage points depending on the proxy measure used for automatic stabilizers. However, the output-volatility reducing effect of automatic stabilizers is statistically insignificant in the long run. The results support the view that automatic stabilizers are an important fiscal mechanism for the short-run output stabilization, but their output-volatility offsetting role is largely subject to what the proxy measures are used for automatic stabilizers. |
| Keywords: | Automatic stabilizers,Fiscal policy,PMG estimator,EMU member states |
| JEL: | E31 E32 E62 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:206687&r=all |
| By: | Crescenzi, Riccardo; Giua, Mara |
| Abstract: | To what extent do regions in different member states of the European Union benefit from Cohesion Policy? A spatial regression discontinuity design approach offers distinct but fully comparable estimates of regional impacts for each individual member state. Cohesion Policy has a positive European Union-wide impact on regional growth and employment. However, a large part of the growth bonus is concentrated in Germany, while impacts on employment are confined to the UK. The picture in Southern Europe is less rosy. In Italy, positive impacts on employment do not survive the Great Recession, while in Spain economic growth benefits are limited to the recovery period. |
| Keywords: | Cohesion policy; European Union; Regions; Growth; employment; ES/M010341/1; Centre for Economic Performance |
| JEL: | O18 R11 R58 |
| Date: | 2019–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101506&r=all |
| By: | Bergh, Andreas (Lund University); Gustafsson, Anders (Örebro University) |
| Abstract: | Recent micro-level studies have suggested that globalization – in particular, economic globalization – breeds political polarization and populism. This study examines if those results generalize by examining the country-level association between vote shares for European populist parties and economic globalization. Using data on vote share for 267 right-wing and left-wing populist parties in 33 European countries 1980–2016, and globalization data from the KOF-institute, we find no evidence of a positive association between economic globalization and populism. In many cases, the partial correlation is significantly negative. EU-membership is associated with 5 to 10 percentage units larger vote shares for right-wing populism in both random and fixed effects models. |
| Keywords: | Globalization; Populism; Trade |
| JEL: | P16 |
| Date: | 2019–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1304&r=all |
| By: | Silvia Magri (Bank of Italy); Valentina Michelangeli (Bank of Italy); Sabrina Pastorelli (Bank of Italy); Raffaella Pico (Bank of Italy) |
| Abstract: | Since 2015 consumer loans have been rising fast in France, Germany, Italy, and Spain. Credit demand, specifically for consumer durables, has played a crucial role; the easing of supply conditions has been relevant only in Italy and Spain, which experienced stronger credit tightening during the past crises. Risks stemming from the growth of consumer credit are mitigated by its lower incidence, compared with mortgages, on households’ total debt and income; exposure to interest rate risk is also decreasing due to the high share of fixed-rate contracts. There is wide risk heterogeneity across countries, with Italy and Spain having the highest share of delinquent households (even for less than 90 days). In Italy, however, debt is increasingly concentrated among more affluent households, which are better able to withstand negative economic shocks; this trend is sustaining the drop in the ratio of new non-performing consumer loans. |
| Keywords: | consumer loans, credit demand and supply, non-performing loans |
| JEL: | D12 D91 E32 G21 I32 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_500_19&r=all |
| By: | Amelie BARBIER-GAUCHARD; Kea BARET; Alexandru MINEA |
| Abstract: | Motivated by the fiscal imbalances in the EU countries in the recent period, this paper analyzes the effect of national fiscal rules adoption on fiscal discipline. Using a careful definition of national fiscal rules combined with a novel measure of fiscal discipline (the Global Financial Performance Index—GFPI), propensity score matching estimations that account for potential endogeneity reveal that fiscal rules significantly improve the GFPI. However, this favorable effect dramatically depends upon the type of fiscal rule and different structural factors. These two features, together with alternative measures of fiscal discipline, are found to be key ingredients that should be taken into account when assessing the effects of fiscal rules on fiscal discipline. |
| Keywords: | Fiscal Discipline; National Fiscal Rules; Propensity Score Matching. |
| JEL: | H11 H61 H62 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2019-40&r=all |
| By: | Bagattini, Giulio; Fecht, Falko; Weber, Patrick |
| Abstract: | We use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector. |
| Keywords: | fire sales,sovereign bonds,own account trading,bankaffiliated mutual funds,conflict of interest |
| JEL: | G01 G21 G23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:432019&r=all |
| By: | Guerino Ardizzi (Bank of Italy); Simone Emiliozzi (Bank of Italy); Juri Marcucci (Bank of Italy); Libero Monteforte (Bank of Italy and Parliamentary Budget Office) |
| Abstract: | We exploit a unique daily data set on debit card expenditures to study the reaction of consumers to daily news relating to Economic Policy Uncertainty (EPU). Payments with debit cards are a proxy for consumption in the quarterly national accounts. Using big data techniques we construct daily EPU indexes, using either articles from Bloomberg news-wire or tweets from Twitter. Our empirical analysis at high frequency required estimates of daily seasonal components, finding strong patterns both within the week and within the month. Using local projections we find that daily shocks to EPU temporarily reduce debit card purchases, especially during the recent crisis; the main results are confirmed using monthly data and controlling for financial uncertainty and macroeconomic surprises. Furthermore, economic policy uncertainty affects the ratio between ATM withdrawals and debit card purchases, signaling an increase in households' preference for cash. |
| Keywords: | consumption, payment system, policy uncertainty, big data, daily seasonality, local projections |
| JEL: | C11 C32 C43 C52 C55 E52 E58 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1233_19&r=all |