|
on European Economics |
|
Issue of 2023‒08‒28
nineteen papers chosen by Giuseppe Marotta, Università degli Studi di Modena e Reggio Emilia |
| By: | Daniel P. Monteiro |
| Abstract: | This paper presents a novel, integrated framework for the financial assessment of different types of common sovereign debt instruments in a currency union such as the euro area and provides results for their key credit risk properties at Member State and euro area level. The options under assessment include instruments involving full and partial mutualisation of sovereign risk, as well as instruments based on the pooling and tranching of national government debt without mutualisation. The results show that full risk mutualisation can lower financing costs for all participating countries, and that “eurobonds” would have weathered well the European sovereign debt crisis, even if partial mutualisation remains the most attractive option for the more creditworthy countries. Options involving just the tranching and pooling of Member State debt simply reallocate sovereign risk across instruments, although the “E-bonds” proposal can approximate the characteristics of mutualised “blue bonds” under certain conditions. The analytical framework can also be applied to assess the strength of sovereign risk interlinkages, the evolution of sovereign debt capacity over time and its decomposition into systemic and idiosyncratic factors. |
| JEL: | C58 F36 G12 H63 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:194&r=eec |
| By: | Robert C. M. Beyer; Rupa Duttagupta; Alexandra Fotiou; Ms. Keiko Honjo; Mr. Mark A Horton; Zoltan Jakab; Vina Nguyen; Mr. Rafael A Portillo; Jesper Lindé; Mrs. Nujin Suphaphiphat; Mr. Li Zeng |
| Abstract: | This paper employs two established macroeconomic models to show that fiscal policy in the euro area can help monetary policy in reducing inflation. Specifically, a fiscal consolidation of 1 percent of GDP for two years and 0.5 percent in the third year across the euro area would ease the policy interest rate by 30-50 basis points relative to the baseline scenario, while lowering inflation. It would also put the public debt-to-GDP ratio on a downward path, with the output costs reversing after the second year. Additionally, a stronger fiscal contribution to the policy mix could mitigate financial fragmentation risks. In the current context of elevated inflation in all euro area economies, the findings suggest two key takeaways: first, synchronized fiscal and monetary policies offer gains even when monetary policy is unconstrained and, second, sharing the burden of lowering inflation through fiscal consolidation among euro area members is beneficial for union-wide inflation reduction, improving debt sustainability and inducing a lower policy rate path. |
| Keywords: | Policy mix; monetary policy; fiscal policy; policy coordination |
| Date: | 2023–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/149&r=eec |
| By: | Ferrando, Annalisa; Grazzini, Caterina Forti |
| Abstract: | We provide new evidence on how ECB’s monetary policy decisions affect firms’ bank loan expectations in the euro area. We use firm-level data derived from the ECB Survey on the Access to Finance of Enterprises for the period 2009 to 2022 and identify the impact of monetary policy by comparing the responses of firms interviewed shortly before and after monetary policy shocks. Our results are as follows. First, we find that firms’ bank loan expectations react to monetary policy, with a contractionary shock leading to a downward revision of expectations. Second, we show that firms’ response depends on the size and the sign of the shock, with only large and contractionary shocks having a significant negative effect on expectations. Third, we observe that the different components of central bank communication (i.e. the pure monetary policy shock and the central bank information shock) have different impacts on firms’ beliefs. Fourth, we find that conventional and unconventional QE shocks have opposite effects on expectations, with the impact of QE policies mainly being driven by the central bank information component of the related announcements. Finally, we document that the response to monetary policy differs along firms’ structural characteristics. JEL Classification: C83, D22, D84, E58 |
| Keywords: | firms’ expectations, monetary policy, survey data |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232838&r=eec |
| By: | Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen |
| Abstract: | We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank. |
| Keywords: | forbearance; evergreening; zombie lending; sovereign debt crisis; bank recapitalization; fiscal constraints; political economy |
| JEL: | E44 G21 G28 G32 G34 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_446&r=eec |
| By: | Lucian Briciu; Stefan Hohberger; Luca Onorante; Beatrice Pataracchia; Marco Ratto; Lukas Vogel |
| Abstract: | This paper investigates two important elements of the ECB’s 2021 monetary policy strategy review in an estimated structural open-economy macro model of the euro area: (a) explicit symmetry of the 2% inflation target, which can be expected to lower the risk of hitting the effective lower bound (ELB) on short-term interest rates by raising average inflation towards the target, and (b) commitment to forceful or persistent monetary accommodation in a low interest rate environment, here interpreted as low-for-longer response in the recovery from the ELB. We simulate the model with draws from the estimated distribution of shocks. Both elements increase average inflation and reduce the average output gap. Stabilisation gains are modest in quantitative terms, however, for the given illustrative policy rules, and they are more pronounced when the economy operates at the ELB. Important in the current context, the low-for-longer policy in the model does not jeopardise inflation stabilisation in the event of (inflationary) negative supply shocks at the exit from the ELB. With private sector ‘myopia’ instead of fully rational expectations, the low-for-longer rule still yields stabilisation gains at the ELB, but they shrink in quantitative terms. |
| JEL: | E30 E52 E58 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:193&r=eec |
| By: | Cars Hommes; Julien Pinter; Isabelle Salle |
| Abstract: | We conduct an information-provision experiment within a large-scale household survey on public finance in France, The Netherlands and Italy. We elicit prior opinions via open-ended questions and introduce a measure of macroeconomic policy literacy. A central bank (CB) educational blogpost explaining the mechanics of CB money preceded by a short video clip on public finance can persistently induce less support for monetary-financed proposals and more for fiscal discipline and CB independence, no matter the respondents’ level of policy literacy. However, prior beliefs matter and contradictory information may be polarizing. Additional analysis of our data shows that information affects the respondents’ views by shifting their inflation and tax expectations associated to these policies. |
| Keywords: | large-scale household survey, information-provision experiment, RCT, central bank communication, expectations |
| JEL: | E70 E60 E62 E58 G53 H31 C83 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10574&r=eec |
| By: | Orame, Andrea; Ramcharan, Rodney; Robatto, Roberto |
| Abstract: | We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks’ net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks’ balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms’ credit constraints through the bank lending channel. JEL Classification: G28, E52, M48 |
| Keywords: | bank lending channel, historical cost accounting, regulatory capital, sovereign default premia, unconventional monetary policy |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2023144&r=eec |
| By: | Botelho, Vasco; Foroni, Claudia; Renzetti, Andrea |
| Abstract: | We propose a Bayesian VAR model with stochastic volatility and time varying skewness to estimate the degree of labour at risk in the euro area and in the United States. We model the asymmetry of the shocks to changes in the unemployment rate as a function of real activity and financial risk factors. We find that the conditional distribution of the changes in the unemployment rate displays time-varying volatility and skewness, with peaks coinciding with the Global Financial Crisis and the COVID-19 pandemic. We take advantage of the multivariate nature of our parametric model to measure stagflation risk defined as the possible joint event of large increases in the unemployment rate and large annual rates of inflation. We find an increasing risk of stagflation for the euro area in 2022 while in the United States stagflation risk increased earlier in 2021 and started decreasing more recently. Notwithstanding the significantly high levels of inflation, stagflation risks have been contained by the resilient performance of the labour market in both areas. The degree of labour at risk is therefore important for the assessment of the inflation-unemployment trade-off. JEL Classification: C32, C53, E24, E27 |
| Keywords: | Bayesian econometrics, labour market, stagflation risk, unemployment risk |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232840&r=eec |
| By: | Roberta Cardani; Philipp Pfeiffer; Marco Ratto; Lukas Vogel |
| Abstract: | This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multiregion New Keynesian macroeconomic model. To capture quarterly dynamics from 2020 onwards, we introduce relevant extensions such as `forced' savings, extensive versus intensive employment margins, and trade in commodities as inputs to production and final demand. Transitory (`forced') savings are central to account for the behaviour of economic activity in both regions during the pandemic, which was strongly driven by private consumption, alongside shocks to domestic demand and foreign activity. The model highlights the importance of demand recovery and rising commodity prices for the inflation acceleration during 2021-22. EA inflation has a stronger supply component (including commodity prices) compared to a stronger demand component in the US. |
| JEL: | C11 E1 E20 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:191&r=eec |
| By: | Fabio Bacchini; Lorenzo Di Biagio; Giampiero M. Gallo; Vincenzo Spinelli |
| Abstract: | The main component of the NextGeneration EU (NGEU) program is the Recovery and Resilience Facility (RRF), spanning an implementation period between 2021 and 2026. The RRF also includes a monitoring system: every six months, each country is required to send an update on the progress of the plan against 14 common indicators, measured on specific quantitative scales. The aim of this paper is to present the first empirical evidence on this system, while, at the same time, emphasizing the potential of its integration with the sustainable development framework (SDGs). We propose to develop a first linkage between the 14 common indicators and the SDGs which allows us to produce a composite index (SDGs-RRF) for France, Germany, Italy, and Spain for the period 2014-2021. Over this time, widespread improvements in the composite index across the four countries led to a partial reduction of the divergence. The proposed approach represents a first step towards a wider use of the SDGs for the assessment of the RRF, in line with their use in the European Semester documents prepared by the European Commission. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2307.11039&r=eec |
| By: | Chavleishvili, Sulkhan; Kremer, Manfred; Lund-Thomsen, Frederik |
| Abstract: | We propose a novel empirical approach to inform monetary policymakers about the potential effects of policy action when facing trade-offs between financial and macroeconomic stability. We estimate a quantile vector autoregression (QVAR) for the euro area covering the real economy, monetary policy and measures of ex ante and ex post systemic risk representing financial stability. Policy implications are derived from scenario analyses where the associated costs and benefits are functions of the projected paths of the potentially asymmetric distributions of inflation and economic growth, allowing us to take a risk management perspective. One exercise considers the intertemporal financial stability trade-off in the context of the global financial crisis, where we find ex post evidence in favour of monetary policy leaning against the financial cycle. Another exercise considers the short-term financial stability trade-off when deciding the appropriate speed of monetary policy tightening to combat inflationary pressures in a fragile financial environment. JEL Classification: C32, E37, E44, E52, G01 |
| Keywords: | growth-at-risk, Policy trade-offs, quantile regression, systemic risk |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232833&r=eec |
| By: | Philipp Pfeiffer; Janos Varga; Jan in ‘t Veld |
| Abstract: | Supply-side policies take centre stage in the EU’s post-pandemic recovery plans. This paper employs a benchmarking approach to quantify the potential impact of structural reforms in the EU Member States. Based on a comprehensive collection of structural indicators and the QUEST-RD model, we evaluate reforms in five policy areas: (i) market competition and regulation; (ii) taxation; (iii) skills and education; (iv) labour markets; and (v) research and development. For each indicator and Member State, we simulate the closing of half of the gap with the EU’s best performers, implying ambitious reforms for countries with significant distance to the frontier. For these stylised reforms, we find significant potential gains in employment and output, raising EU GDP by around 2% and 8% after five and twenty years, respectively. In the long run, the policies can increase EU GDP by over 20%. The policies also reduce economic disparities between countries, given different scope for reform. For countries with sizable distance to the best performers, increases in potential GDP could exceed 40% when halving the gap across all indicators. Among the reforms considered here, human capital investment emerges as central for enhancing growth potential. In addition, we find synergies across reforms and countries and assess the sensitivity to alternative assumptions on technology dynamics in our model. |
| JEL: | E02 E24 E61 F43 O41 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:192&r=eec |
| By: | Attinasi, Maria Grazia; Boeckelmann, Lukas; Meunier, Baptiste |
| Abstract: | As countries and firms increasingly seek ways to strengthen the resilience of their supply chains, this paper studies the global economic costs of a decoupling of global supply chains along geopolitical lines as well as in strategic sectors. We explore not only the long-run effects, but also the short-run costs stemming from rigid wages and low substitutability across factors of production and input goods. We find that, in terms of welfare losses, the costs of decoupling are roughly five times higher in the short-run compared to the long-run, while country losses are heterogeneous. A reshaping of global supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade-intensive manufacturing sectors. Global supply chain decoupling entails also a reallocation of labour across skill levels. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production. JEL Classification: F12, F13, F14, F51, F62 |
| Keywords: | decoupling, global value chains, international trade, trade modelling |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232839&r=eec |
| By: | van Breemen, Vivian M.; Schwarz, Claudia; Vink, Dennis |
| Abstract: | We empirically investigated the impact of regulatory risk retention methods on credit ratings and pricing at issuance using a sample of European securitization tranches issued in the period 2011-2021. European regulation is based on the assumption that all risk retention methods homogenously align incentives and interests between originators and investors. We investigated the impact of these methods on the pricing of securitization tranches and found that investors adjust the risk premium at issuance for tranches based on different risk retention methods. We also found that credit ratings (discrepancy) differed depending on the risk retention method used. Finally, we gained a deeper insight into the risk retention methods chosen over time and concluded that originators take deal complexity and capital relief characteristics into consideration when selecting a specific method. JEL Classification: G12, G21, G24, G28 |
| Keywords: | credit ratings, primary issuance spread, risk retention rule |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232837&r=eec |
| By: | Mr. Kamil Dybczak; Shiqing Hua; Mariusz Jarmuzek; Ruifeng Zhang; Yipei Zhang |
| Abstract: | The paper looks into the puzzle of low household savings in three Southern European (SE3) countries – Cyprus, Greece, and Portugal. Building on the household saving drivers literature, we employ cross-country micro-level data and investigate the key saving patterns, examining their heterogeneity across households in SE3 countries relative to the EA average. The results confirm the prominent role of income, along with interest rate, inflation, fiscal balance, and debt in shaping household savings in SE3 countries. Quantile regressions employed to analyze saving behavior across the distribution of households suggest that households with lower savings tend to see their savings dip (or dissavings rise) more-than-proportionately with shocks to income, interest rate, inflation, and government balance. Our policy simulations across the distribution of households suggest that targeted rather than universal policy intervention could improve household savings, especially of the most vulnerable ones. |
| Keywords: | Household savings; distributional analysis; policy simulations |
| Date: | 2023–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/150&r=eec |
| By: | Brault, Julien |
| Abstract: | This working paper examines recent trends in EU corporate demography and the role of policy responses during the COVID crisis. It compares recent bankruptcy and business creation rates to past trends. Pre-crisis trends were showing declining business creations and rising bankruptcies. After COVID, bankruptcy rates dropped, but recently rose significantly. The crisis had significant negative effects on business creation rates and total EU corporate population. The paper also correlates Member States' fiscal policy responses to the evolution in corporate demography. These tended to limit bankruptcies rather than foster business creations. Major divergences occur between countries, sectors, and types of firms. The paper underlines the necessity of policy actions supporting business creations. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:eifwps:202390&r=eec |
| By: | Gergö Motyovszki |
| Abstract: | This paper looks at whether the recent sharp spike in inflation can be beneficial for public debt sustainability by eroding the real value of nominal debt. Simulations with the European Commission’s QUEST model suggest that if the source of inflation is an adverse terms-of-trade shock, then it leads to a rising public debt-to-GDP ratio. In this case, the debt-reducing effect of higher inflation is outweighed by the adverse effects of slower real growth, a declining primary budget balance, and higher interest rates as an active monetary policy tightens to fight inflationary pressures. The results are highly policy-dependent: shorter consolidated debt maturity (brought about by past QE programs) would speed up the rise in interest expenditures, while a more accommodative monetary policy would delay them, also supporting nominal growth. The reaction of the primary fiscal balance (via automatic stabilisers, inflation indexation and debt-stabilisation rules) also matters. However, the baseline result that the debt-to-GDP ratio rises in response to an adverse terms-oftrade shock is fairly robust across all but the most extreme alternative policy scenarios |
| JEL: | E52 E62 E63 F41 F44 H62 H63 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:190&r=eec |
| By: | Bournakis, Ioannis; Tsionas, Mike G. |
| Abstract: | We developed a non-parametric technique to measure Total Factor Productivity (TFP). Our paper has two major novelties in estimating the production function. First, we propose a productivity modelling with both idiosyncratic firm factors and aggregate shocks within the same framework. Second, we apply Bayesian Markov Chain Monte Carlo (MCMC) estimation techniques to overcome restrictions associated with monotonicity between productivity and variable inputs and moment conditions in identifying input parameters. We implemented our methodology in a group of 4286 manufacturing firms from France, Germany, Italy, and the United Kingdom (2001-2014). The results show that: (i) aggregate shocks matter for firm TFP evolution. The global financial crisis of 2008 caused severe adverse effects on TFP albeit short in duration; (ii) there is substantial heterogeneity across countries in the way firms react to changes in R&D and taxation. German and U.K. firms are more sensitive to fiscal changes than R\&D, while Italian firms are the opposite. R\&D and taxation effects are symmetrical for French firms; (iii) the U.K. productivity handicap continued for years after the financial crisis; (iv) industrial clusters promote knowledge diffusion among German and Italian firms. |
| Keywords: | Total Factor Productivity (TFP), Control Function, Non-parametric Bayesian Estimation, Markov Chain Monte Carlo(MCMC), Research and Development (R\&D), Taxation, European firms |
| JEL: | C11 D24 H21 H25 Q55 |
| Date: | 2023–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:118100&r=eec |
| By: | David G. Blanchflower; Alex Bryson |
| Abstract: | We show individuals’ reports of subjective well being in Europe did decline in the Great Recession and during the Covid pandemic on most measures and on four bordering countries to Ukraine after the Russian invasion in 2022. However, the movements are not large and are not apparent everywhere. We also used data from the European Commission's Business and Consumer Surveys on people’s expectations of life in general, their financial situation and the economic and employment situation in the country, all of which dropped markedly in the Great Recession and during Covid, but bounced back quickly, as did firms’ expectations of the economy and the labor market. Neither the UN’s Human Development Index (HDI) nor data used in the World Happiness Report from the Gallup World Poll shifted much in response to negative shocks. The HDI has been rising in the last decade or so reflecting overall improvements in economic and social wellbeing, captured in part by real earnings growth, although it fell slightly after 2020 as life expectancy dipped. This secular improvement is mirrored in life satisfaction which has been rising in the last decade. However, so too have negative affect in Europe and despair in the USA |
| JEL: | I31 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31497&r=eec |