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7 June 2024
OCCASIONAL PAPER SERIES - No. 350
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Abstract
The activities of multinational enterprises (MNEs) have become an increasingly important feature of the euro area economy, affecting output, trade and financial linkages. MNEs contribute to domestic output by maintaining large production facilities, offering high-paid jobs, bringing in new technologies and generating tax revenues. Following statistical changes implemented in 2015 to better capture the increasing importance of intangible investment, the economic impact of MNE activities has become much more evident in measures of intellectual property product (IPP) investment and external IPP trade flows. MNE activities, which often entail large and instantaneous transfers of IPP, are frequently highly volatile and can blur real-time assessment – and forecasting – of the business cycle, the current account and the capital stock in the euro area. Focusing on Ireland, given the strong prevalence of MNE activities in that economy and their importance for the euro area aggregate, this paper assesses the usefulness of the “modified” series for Irish non-construction investment and services imports. Using the modified series would provide a more accurate picture of the domestic dynamics of the Irish economy and enhance real-time assessment of the euro area business cycle, current account and capital stock. This paper brings insights into the unwinding of IPP shocks, which is a more straightforward exercise than seeking to anticipate the shocks themselves. The conclusions of this work underline the urgent need for more granular and internationally harmonised data on MNE activities to gain a clearer understanding of the dynamics of IPP operations and the implications for both short and long-term macroeconomic developments.
JEL Code
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
F23 : International Economics→International Factor Movements and International Business→Multinational Firms, International Business
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
18 March 2024
WORKING PAPER SERIES - No. 2918
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Abstract
This paper provides insights into the determinants of currency choice in cross-border bank lending, such as bilateral distance, financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The UK is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit. Offshore financial centres are pivotal for US dollars loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies. The empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of gravity models of trade, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar.
JEL Code
F31 : International Economics→International Finance→Foreign Exchange
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F34 : International Economics→International Finance→International Lending and Debt Problems
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
28 September 2023
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 6, 2023
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Abstract
In 2022, the euro area current account balance recorded a deficit of 0.8% of euro area GDP compared with a surplus of 2.8% of GDP in 2021. This deterioration of 3.6 percentage points is the biggest annual change in the euro area current account balance on record. This article reviews developments in the current account components. It shows that most of this deterioration is expected to be temporary as it was driven by a decline in the goods trade balance on the back of sharp increases in energy import prices. The euro area current account can therefore be expected to recover, driven by a partial rebound in the terms of trade, anticipated fiscal consolidation and largely unchanged demographic factors. However, as part of the increase in energy prices will probably persist over the medium term, the euro area current account balance is likely to stay somewhat below pre-pandemic levels.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
29 June 2023
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 4, 2023
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Abstract
This box provides an analysis of the retrenchment recorded in euro area external financial flows in 2022 – the largest since the global financial crisis – making use of new, more granular data published in the euro area balance of payments and international investment position statistics. The retrenchment was most pronounced in portfolio and foreign direct investment (FDI) flows. Euro area investors’ retrenchment in portfolio investment in 2022 was mainly driven by investment funds, while insurance corporations and pension funds offset the reversal in outflows to some extent. As regards foreign portfolio investment in the euro area in 2022, net purchases of euro area investment fund shares dried up almost completely, while foreign investors’ appetite for euro area debt securities started to return. The retrenchment in FDI mainly reflected “financialised” transactions by multinational enterprises vis-à-vis affiliated “other financial institutions” in euro area financial centres, while FDI flows to the non-financial corporate sector remained more stable.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
21 June 2023
THE INTERNATIONAL ROLE OF THE EURO - SPECIAL FEATURE
The international role of the euro 2023
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JEL Code
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19 May 2023
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 3, 2023
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Abstract
This box provides empirical evidence on the role of the recent energy price shock in affecting price competitiveness and euro area export performance. At the aggregate level, an analysis based on a structural vector autoregression (SVAR) shows that the chief drivers of export dynamics in the past two years have been shifts in global demand conditions and the effects of supply bottlenecks. The energy supply shock has played a relatively minor role in dampening overall export growth, lowering it by about one percentage point on average over the past year. However, the energy shock may have played a greater role in more exposed sectors, as euro area exports have decreased strongly in high energy-intensive sectors over the past year. Indicators based on relative prices point to a loss of competitiveness for the euro area during 2022. The medium-term outlook for euro area competitiveness may deteriorate further on account of structural changes in energy costs because of the diversification of gas sources and the energy transition, which may lead to higher input costs for euro area exporters compared with their foreign competitors.
JEL Code
F1 : International Economics→Trade
19 May 2023
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 3, 2023
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Abstract
Large-scale transfers of intellectual property products (IPP) conducted by multinational enterprises in Ireland are increasingly affecting euro area output, investment and trade measures. At the time of transfer, the within-quarter impact of these inflows tends to be neutral for euro area real GDP growth, as IPP transfers are often accompanied by services imports of equal size. However, in subsequent quarters these inflows typically have a positive effect on euro area GDP growth, as they boost both the capital stock and future export streams.
JEL Code
E01 : Macroeconomics and Monetary Economics→General→Measurement and Data on National Income and Product Accounts and Wealth, Environmental Accounts
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
F23 : International Economics→International Factor Movements and International Business→Multinational Firms, International Business
F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
10 November 2022
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 7, 2022
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Abstract
This box provides an analysis of recent developments in trade and financial linkages between the euro area and Russia as recorded in the euro area balance of payments. The euro area current account balance vis-à-vis Russia turned from a small surplus into a deficit of 0.5% of euro area GDP between the second quarter of 2021 and the second quarter of this year, thus contributing significantly to the reduction in the euro area’s current account surplus over the same period. The bilateral current account deficit vis-à-vis Russia increased on account of the rising value of nominal imports, largely of energy products, and lower exports driven by EU sanctions. Euro area financial exposures to Russia before Russia’s invasion of Ukraine were relatively limited, with foreign direct investment (FDI) being the most important component. Since the start of the war euro area holdings of Russian assets have declined, while liabilities vis-à-vis Russia have increased due to the impact of EU sanctions.
JEL Code
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
26 February 2018
WORKING PAPER SERIES - No. 2130
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Abstract
This paper examines the drivers of the retrenchment in cross-border banking in the European Union (EU) since the global financial crisis, which stands out in international comparison as banks located in the euro area and in the rest of the EU reduced their cross-border claims by around 25%. Particularly striking is the sharp and sustained reduction in intra-EU claims, especially in the form of deleveraging from cross-border interbank loans. Examining a wide range of possible determinants, we identify high non-performing loans as an important impediment to cross-border lending after the crisis, highlighting the spillovers from national banking sector conditions across the EU. We also find evidence that prudential policies can entail spillovers via cross-border banking in the EU, albeit with heterogeneity across instruments in terms of direction, magnitude and significance. Our results do not point to a major role of newly introduced bank levies in explaining cross-border banking developments.
JEL Code
F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements
F30 : International Economics→International Finance→General
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
G15 : Financial Economics→General Financial Markets→International Financial Markets
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation