Working papers

In-depth studies for experts

Our Working Paper Series (WPS) disseminates economic research relevant to the various tasks and functions of the ECB, and provides a conceptual and empirical basis for policy-making. The Working Papers constitute “work in progress”. They are published to stimulate discussion and contribute to the advancement of our knowledge of economic matters. They are addressed to experts, so readers should be knowledgeable in economics.

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No. 2112
16 November 2017
Common factors of commodity prices

Abstract

JEL Classification

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

Q02 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→General→Global Commodity Markets

Abstract

In this paper we extract latent factors from a large cross-section of commodity prices, including fuel and non-fuel commodities. We decompose each commodity price series into a global (or common) component, block-specific components and a purely idiosyncratic shock. We find that the bulk of the fluctuations in commodity prices is well summarised by a single global factor. This global factor is closely related to fluctuations in global economic activity and its importance in explaining commodity price variations has increased since the 2000s, especially for oil prices.

No. 2111
14 November 2017
Structural reform waves and economic growth

Abstract

JEL Classification

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

At a time of slow growth in several advanced and emerging countries, calls for more structural reforms are multiplying. However, estimations of the short- and medium-term impact of these reforms on GDP growth remain methodologically problematic and still highly controversial. We contribute to this literature by making a novel use of the non-parametric Synthetic Control Method to estimate the impact of 23 wide-reaching structural reform packages (including both real and financial sector measures) rolled out in 22 countries between 1961 and 2000. Our results suggest that, on average, reforms started having a significant positive effect on GDP per capita only after five years. Ten years after the beginning of a reform wave, GDP per capita was roughly 6 percentage points higher than the synthetic counterfactual scenario. However, average point estimates mask a large heterogeneity of outcomes. Benefits tended to materialise earlier, but overall to be more limited, in advanced economies than in emerging markets. These results are confirmed when we use a parametric dynamic panel fixed effect model to control for the rich dynamics of GDP, and are robust to a variety of alternative specifications, placebo and falsification tests, and to different indicators of reform.

No. 2110
13 November 2017
A structural model to study the bail-out process in a bank and its macro-prudential policy implications

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

H81 : Public Economics→Miscellaneous Issues→Governmental Loans, Loan Guarantees, Credits, Grants, Bailouts

Abstract

In this paper, we construct a structural model to determine the costs of a bank rescue considering bail-outs and bail-ins. In our model, a government assumes the equity stake under unlimited liability upon abandonment of the original equity holders. The model determines an abandonment trigger such that if total income drops below this trigger, private shareholders abandon the bank. Given this trigger, the model also determines the bank rescue costs, the expected time to the bank rescue and the bank rescue probabilities. A static analysis of our model produces several empirically testable hypotheses. The model was explored in a sample of southern European countries considering alternative assumptions regarding parameter estimates and the behavior of operational costs. The model results regarding the rescue costs are reasonable, but the model also predicts bank rescues, estimates equity values, performs welfare analyses and estimates the impact of different macro- and micro-prudential policies. The empirical exercise we present, highlights the importance of the assumptions made regarding the behavior of the operational costs by showing dramatic differences in results in a sample of countries that otherwise appear to share important cultural and geographical proximities.

No. 2109
13 November 2017
The international bank lending channel of unconventional monetary policy

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G01 : Financial Economics→General→Financial Crises

Abstract

We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound.

No. 2108
7 November 2017
Real exchange rate misalignments in the euro area

Abstract

JEL Classification

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

F00 : International Economics→General→General

Abstract

Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.

No. 2107
7 November 2017
On collateral: implications for financial stability and monetary policy
Discussion papers

Abstract

JEL Classification

E59 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Other

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

This paper examines the role of collateral in the financial system, with special emphasis on the implications for financial stability and the conduct of monetary policy. First, we review what drives the demand and supply for both real and financial collateral assets. Then we examine financial stability issues and the case for regulating the use of collateral. We discuss the role and design of market infrastructures such as central clearing counterparties (CCPs). Finally, we examine the interaction of standard and non-standard monetary policy and the functioning of private collateralised markets. We show that the use of collateral is neither a sufficient nor a necessary condition for financial stability. To ensure the stability of collateralised markets a mix of micro- and macro-prudential regulation, as well as a sufficient supply of safe public assets that can be used as collateral, are needed.

No. 2106
30 October 2017
Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB’s Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach.

No. 2105
12 October 2017
Monetary policy and bank profitability in a low interest rate environment

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk.

No. 2104
11 October 2017
Do we want these two to tango? On zombie firms and stressed banks in Europe

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

We show that the speed and type of corporate deleveraging depends on the interaction between corporate and financial sector health. Based on granular bank-firm data pertaining to small and medium-sized enterprises (SME) from five stressed and two non-stressed euro area economies, we show that “zombie” firms generally continued to lever up during the 2010–2014 period. Whereas relationships with stressed banks reduce SME leverage on average, we also show that zombie firms that are tied to weak banks in euro area periphery countries increase their indebtedness even further. Sustainable economic recovery therefore requires both: deleveraging of banks and firms.

No. 2103
11 October 2017
Asymmetric wage adjustment and employment in European firms

Abstract

JEL Classification

J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

Abstract

We explore the impact of wage adjustment on employment with a focus on the role of downward nominal wage rigidities. We use a harmonised survey dataset, which covers 25 European countries in the period 2010-2013. These data are particularly useful for this paper given the firm-level information on the change in economic conditions and collective pay agreements. Our findings confirm the presence of wage rigidities in Europe: first, collective pay agreements reduce the probability of downward wage adjustment; second, the rise in the probability of downward base wage responses following a decrease in demand is significantly smaller than the rise in the probability of an upward wage response associated with an increase in demand. Estimation results point to a negative effect of downward wage rigidities on employment at the firm level.

No. 2102
10 October 2017
Price rigidities and the granular origins of aggregate fluctuations
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General

Abstract

We study the aggregate implications of sectoral shocks in a multi-sector New Keynesian model featuring sectoral heterogeneity in price stickiness, sector size, and input-output linkages. We calibrate a 341 sector version of the model to the United States. Both theoretically and empirically, sectoral heterogeneity in price rigidity (i) generates sizable GDP volatility from sectoral shocks, (ii) amplifies both the “granular” and the “network” effects, (iii) alters the identity and relative contributions of the most important sectors for aggregate fluctuations, (iv) can change the sign of fluctuations, (v) invalidates the Hulten (1978) Theorem, and (vi) generates a “frictional” origin of aggregate fluctuations.

No. 2101
12 September 2017
Corporate debt and investment: a firm level analysis for stressed euro area countries

Abstract

JEL Classification

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

F34 : International Economics→International Finance→International Lending and Debt Problems

G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

Abstract

This paper investigates the link between corporate debt and investment for a group of five peripheral euro area countries. Using firm-level data from 2005-2014, we postulate a non-linear corporate leverage-investment relationship and derive thresholds beyond which leverage has a negative and significant impact on investment. The investment sensitivity of debt increased after 2008 when financial distress intensified and firms had a lower capacity to finance investment from internal sources of funds. Our results also suggest that even moderate levels of debt can exert a negative influence on investment for smaller firms or when profitability is low.

No. 2100
12 September 2017
More than a feeling: confidence, uncertainty and macroeconomic fluctuations

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E71 : Macroeconomics and Monetary Economics

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

G15 : Financial Economics→General Financial Markets→International Financial Markets

G41 : Financial Economics

Abstract

Economists, observers and policy-makers often emphasize the role of sentiment as a potential driver of the business cycle. In this paper we provide three contributions to this debate. First, we give a concise overview of the recent literature on sentiment (considering both confidence and uncertainty) and economic activity. Second, we review existing empirical measures of sentiment, in particular consumer confidence, stock market volatility (SMV) and Economic Policy Uncertainty (EPU), on monthly data for 27 countries, 1985-2016. Third, we identify some new stylized facts based on international evidence. While different measures are surprisingly lowly correlated on average in each country, they are typically highly positively correlated across countries, suggesting the existence of a global factor. Consumer confidence has the closest co-movement with economic and financial variables, and most of the correlations are contemporaneous or forward-looking, consistent with the view that economic sentiment is indeed a driver of activity.

No. 2099
11 September 2017
Household spending out of a tax rebate: Italian “€80 tax bonus”

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

Abstract

We estimate the consumption response of Italian households to the “€80 tax bonus” introduced in 2014, using the panel component on the Survey of Household Income and Wealth. We find that households that received the tax rebate increased their monthly consumption of food and means of transportation by about €20 and €30, respectively, about 50-60 per cent of the total bonus. There was a larger increase for households with low liquid wealth or low income. Our estimates are quite robust to different model specifications and are broadly in line with the evidence available from similar tax rebates in other countries but, due to the small sample size, are not always statistically significant. To understand the mechanism behind our results we then simulate an overlapping generations model of household consumption: the marginal propensity to consume generated by the structural model is in line with our empirical estimates.

No. 2098
8 September 2017
Do negative interest rates make banks less safe?

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

We study the impact of increasingly negative central bank policy rates on banks’ propensity to become undercapitalized in a financial crisis (‘SRisk’). We find that the risk impact of negative rates is moderate, and depends on banks’ business models: Banks with diversified income streams are perceived by the market as less risky, while banks that rely predominantly on deposit funding are perceived as more risky. Policy rate cuts below zero trigger different SRisk responses than an earlier cut to zero.

No. 2097
8 September 2017
Firm heterogeneity and aggregate business services exports: micro evidence from Belgium, France, Germany and Spain

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

Abstract

This paper uses detailed micro data on service exports at the firm-destination-service level to analyse the role of firm heterogeneity in shaping aggregate service exports in Belgium, France, Germany and Spain from 2003 to 2007. We decompose the level and the growth of aggregate service exports into different trade margins paying special attention to firm heterogeneity within countries. We find that the weak export growth of France is at least partly due to poor performance by small exporters. By contrast, small exporters are the most dynamic contributors to the aggregate exports of Belgium, Germany and Spain. Our results highlight the importance of firm heterogeneity in understanding aggregate export growth.

No. 2096
25 August 2017
Home, safe home: cross-country monitoring framework for vulnerabilities in the residential real estate sector

Abstract

Abstract

This paper proposes a framework for monitoring vulnerabilities related to the residential real estate sector in a cross-country context. The framework might be useful for complementing or cross-checking signals available from existing approaches. It takes into account three dimensions of real estate sector vulnerabilities (i.e. valuation, household indebtedness and the bank credit cycle) and enables monitoring across countries in a simple and informative way. Indicators are derived from the early warning literature and policy publications. They are aggregated in a modelfree way to a vulnerability measure, explicitly capturing the level and the dynamics of vulnerabilities. The measure proves to be a significant predictor of historical real estate crises, with a better forecasting performance than the majority of advantageously in-sample calibrated model-based estimates. The monitoring framework allows for a simple and transparent analysis across different dimensions, provides a cross-check of consistency of signals from several indicators, and accounts for the developments in terms of the levels and dynamics. In view of its good forecasting performance, it is a useful complement of model-based toolkits for analysing vulnerabilities in the residential real estate sector.

No. 2095
23 August 2017
Spillovers from the ECB's non-standard monetary policy measures on south-eastern Europe

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

This paper is the first to comprehensively assess the impact of the euro area’s non-standard monetary policy measures on south-eastern Europe. By employing bilateral BVAR models, I am able to estimate the response of output and prices for each country, as well as to shed more light on potential shock transmission channels. The results suggest that the ECB’s non-standard monetary policy measures have had pronounced price effects on all south-eastern European countries, and output effects on approximately half of them. While I also find exports to be a relevant transmission channel in most cases, the interbank market rate responds significantly only in a few cases as the region was subject to significant cross-border bank deleveraging after the crisis. Furthermore, the results suggest that the exchange rate regime does not play a role in determining the sign and magnitude of price level and output responses. This is in line with the absence of distinct exchange rate responses in the model output, suggesting that exchange rates did not act as buffers for spillovers of euro area non-standard monetary policy measures on south-eastern Europe.

No. 2094
23 August 2017
Subsidising car purchases in the euro area: any spill-over on production?

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H25 : Public Economics→Taxation, Subsidies, and Revenue→Business Taxes and Subsidies

Abstract

Due to input-output linkages, an industry level shock can widely transmit to the rest of the economy. We identify government policies on the automobile industry, which change final prices and estimate their effect on sales and production. An example could be the scrappage schemes that many European governments introduced at the start of the Great Recession. In line with previous studies, we confirm that the effect on car sales is positive. More interestingly, we extend the literature that explores the effects of these policies on domestic and foreign production to disentangle the potential spill-overs.

No. 2093
7 August 2017
Why should the world care? Analysis, mechanisms and spillovers of the destination based border adjusted tax

Abstract

JEL Classification

C68 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computable General Equilibrium Models

E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts

O41 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→One, Two, and Multisector Growth Models

Abstract

Members of the US House of Representatives have proposed a major overhaul of the US corporate tax system, the so-called “destination-based border-adjusted cash-flow tax” (DBCFT). The literature on the economic implications and spillovers of such a DBCFT is scarce. This paper aims to provide a comprehensive analysis of the mechanics of such a tax, its macroeconomic implications as well as its global spillovers using a fully structural global multi-country model. Our results suggest that the short term macroeconomic impact of the reform would depend primarily on how permanent agents perceive the policy to be. Robustness scenarios show that the magnitude of the short term impact will also depend on the extent to which exporters are reimbursed by their domestic costs; what categories of goods are excluded from the reform; how the government uses the revenues generated by the border adjusted tax; and the pricing system used by exporters. Moreover, global spillovers will depend on how easy it is to replace imported goods by domestic production; whether US trading partners retaliate, and how financial markets in emerging economies react. If there is disequilibrium in relative prices in the short term, global economic activity spillovers could be strongly negative and world trade could decline substantially.

No. 2092
4 August 2017
Sources of the small firm financing premium: evidence from euro area banks

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

Abstract

The post-2008 period in the euro area was characterised by sharp dispersion in borrowing costs faced by firms, across both countries and firm types. This dispersion was an important manifestation of the “financial fragmentation” which hampered the smooth transmission of accommodative monetary policy. Using bank level data from 2007 to 2015, we directly measure the borrowing cost dispersion across firm types by calculating the difference in the interest rate charged by the same bank in the same month for loans to small and large firms (the “Small Firm Financing Premium”, SFFP). We assess the role played by both bank and macroeconomic factors in explaining the variation in the SFFP across countries and through time. We provide evidence that bank market power, sovereign bond holdings and balance sheet weaknesses led to disproportionate borrowing cost increases for small firms, and exacerbated the impact of a weak macroeconomy during this period.

No. 2091
4 August 2017
The political economy of fiscal transparency and independent fiscal councils

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H6 : Public Economics→National Budget, Deficit, and Debt

Abstract

The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs’ role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are “partisan” and “opportunistic.” If voters only care about policymakers’ competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers’ competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.

No. 2090
31 July 2017
What drives export market shares? It depends! An empirical analysis using Bayesian Model Averaging

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?

F14 : International Economics→Trade→Empirical Studies of Trade

O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe

Abstract

What drives external performance of countries? This is a recurring question in academia and policy. The factors underlying export growth are receiving great attention, as countries struggle to grow out of the crisis by increasing exports and as protectionist discourses take foot again. Despite decades of debates, it is still unclear what the drivers of external performance are and, importantly, which ones policy makers can influence. We use Bayesian Model Averaging in a panel setting to investigate the drivers of export market shares of 25 EU countries, considering a wide range of traditional indicators along with novel ones developed within the CompNet Competitiveness Research Network. We find that export market share growth is linked to different factors in the old and in the new Member States, with one exception: for both groups, competitive pressures from China have strongly affected export performance since the early 2000s. In the case of old EU Member States, investment, quality of institutions and available liquidity to firms also appear to play a role. For the new EU Member States, labour and total factor productivity are particularly important, while inward FDI matters rather than domestic investment. Price competitiveness does not seem to play a very important role in either set of countries: relative export prices do show correlation with export performance for the new Member States, but only when they are adjusted for quality. Our results point to the importance of considering the “exporting stage” of a country when discussing export-enhancing policies.

No. 2089
28 July 2017
Multiple lending, credit lines and financial contagion

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage.

No. 2088
26 July 2017
On secular stagnation and low interest rates: demography matters

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

Abstract

Nominal and real interest rates in advanced economies have been decreasing since the mid-1980s and reached historical low levels in the aftermath of the global financial crisis. Understanding why interest rates have fallen is essential for both monetary policy and financial stability. This paper focuses on one of the factors that have been put forward in the literature within the secular stagnation view: adverse demographic developments. The main conclusion that we draw from our empirical, panel equation system-based assessment is that these developments have exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade. Moreover, building on the European Commission projections for dependency ratios until 2025, we illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future.

No. 2087
12 July 2017
Housing and the tax system: how large are the distortions in the euro area?

Abstract

JEL Classification

H24 : Public Economics→Taxation, Subsidies, and Revenue→Personal Income and Other Nonbusiness Taxes and Subsidies

H31 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Household

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

Abstract

This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable.

No. 2086
12 July 2017
Credit market competition and the gender gap: evidence from local labor markets

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

J16 : Labor and Demographic Economics→Demographic Economics→Economics of Gender, Non-labor Discrimination

J22 : Labor and Demographic Economics→Demand and Supply of Labor→Time Allocation and Labor Supply

Abstract

We exploit the exogenous variation in regional credit market contestability brought on by banking deregulation in the United States to study the narrowing of the gender gap in local labor markets. We find that deregulation reduced the gender gap in labor force participation, as the subsequent increase in the demand for labor induced non-working women to enter the labor force. Deregulation also reduced wage inequality as women became more likely to work in the private sector, to enter high-paid "male" jobs, and to acquire higher education. Tests of contiguous MSAs sharing a state border corroborate a genuine deregulation effect.

No. 2085
4 July 2017
Between hawks and doves: measuring central bank communication

Abstract

JEL Classification

C02 : Mathematical and Quantitative Methods→General→Mathematical Methods

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

We propose a Hawkish-Dovish (HD) indicator that measures the degree of ‘hawkishness’ or ‘dovishness’ of the media’s perception of the ECB’s tone at each press conference. We compare two methods to calculate the indicator: semantic orientation and Support Vector Machines text classification. We show that the latter method tends to provide more stable and accurate measurements of perception on a labelled test set. Furthermore, we demonstrate the potential use of this indicator with several applications: we perform a correlation analysis with a set of interest rates, use Latent Dirichlet Allocation to detect the dominant topics in the news articles, and estimate a set of Taylor rules. The findings provide decisive evidence in favour of using an advanced text mining classification model to measure the medias perception and the Taylor rule application confirms that communication plays a significant role in enhancing the accuracy when trying to estimate the bank’s reaction function.

No. 2084
29 June 2017
Bank business models at zero interest rates

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

Abstract

We propose a novel observation-driven finite mixture model for the study of banking data. The model accommodates time-varying component means and covariance matrices, normal and Student’s t distributed mixtures, and economic determinants of time-varying parameters. Monte Carlo experiments suggest that units of interest can be classified reliably into distinct components in a variety of settings. In an empirical study of 208 European banks between 2008Q1–2015Q4, we identify six business model components and discuss how their properties evolve over time. Changes in the yield curve predict changes in average business model characteristics.

No. 2083
29 June 2017
Active labour market policies and short-time work arrangements: evidence from a survey of Luxembourg firms

Abstract

JEL Classification

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

J63 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Turnover, Vacancies, Layoffs

J68 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Public Policy

Abstract

We analyse the use of active labour market policy (ALMP) measures and short-time work arrangements (STWAs) by Luxembourg firms during the years of economic and financial crisis (2008-09) and the subsequent European sovereign debt crisis (2010-13). About 34% of Luxembourg firms used ALMPs between 2008 and 2013. Economy-wide, use of ALMPs increased along both the extensive margin (more firms) and the intensive margin (more measures per firm). The likelihood that a firm hired with recourse to ALMPs is greater for large, domestically oriented, multiple establishment firms, firms facing strong demand, with concerns about labour cost pressures and unavailability of skilled labour. The crisis saw a surge in firms using STWAs. The likelihood of applying for STWAs increases with demand volatility, the share of workers with permanent contracts, export orientation and the inability to shift workers between establishments. Firms reported that 20-25% of jobs in STWAs were saved by this measure.

No. 2082
23 June 2017
Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks

Abstract

JEL Classification

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

C50 : Mathematical and Quantitative Methods→Econometric Modeling→General

Abstract

Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach.

No. 2081
21 June 2017
Destabilizing effects of bank overleveraging on real activity - an analysis based on a threshold MCS-GVAR

Abstract

JEL Classification

E2 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy

E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

G6 : Financial Economics

Abstract

We investigate the consequences of overleveraging and the potential for destabilizing effects from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and indicate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by Brunnermeier and Sannikov (2014) and Stein (2012), we empirically measure the deviation-from-optimal-leverage for 40 large EU banks. We then use this measure to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: A Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR) model. The regime-switching component of the model aims to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. When leverage is standing above its equilibrium level, the effect of a deleveraging shocks on credit supply and economic activity are visibly more detrimental than at times of underleveraging.

No. 2080
21 June 2017
Communication of monetary policy in unconventional times
Discussion papers

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

Monetary policy communication is particularly important during unconventional times because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme.

No. 2079
20 June 2017
The leverage ratio, risk-taking and bank stability

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

This paper addresses the tradeoff between additional loss-absorbing capacity and potentially higher bank risk-taking associated with the introduction of the Basel III Leverage Ratio. This is addressed in both a theoretical and empirical setting. Using a theoretical micro model, we show that a leverage ratio requirement can incentivise banks that are bound by it to increase their risk-taking. This increase in risk-taking however, should be more than outweighed by the benefits of higher capital and therefore increased lossabsorbing capacity, thereby leading to more stable banks. These theoretical predictions are tested and confirmed in an empirical analysis on a large sample of EU banks. Our baseline empirical model suggests that a leverage ratio requirement would lead to a significant decline in the distress probability of highly leveraged banks.

No. 2078
20 June 2017
When do countries implement structural reforms?

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

D70 : Microeconomics→Analysis of Collective Decision-Making→General

D72 : Microeconomics→Analysis of Collective Decision-Making→Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

P11 : Economic Systems→Capitalist Systems→Planning, Coordination, and Reform

P16 : Economic Systems→Capitalist Systems→Political Economy

Abstract

The objective of this paper is to investigate which factors macroeconomic, policy‐related or institutional ‐ foster the implementation of structural reforms. To this objective, we look at episodes of structural reforms over three decades across 40 OECD and EU countries and link them to such factors. Our results suggest that structural reforms implementation is more likely during deep recessions and when unemployment rates are high. Moreover, the further distant from best practices, the more likely a country implements reforms. External pressures, such as being subject to a financial assistance programme, or being part of the EU Single Market facilitated pro‐competitive reforms. If at all, low interest rates tend to promote rather than discourage structural reforms, while there seems no clear link between fiscal policy and reforms. Moreover, reforms in product markets tend to increase the likelihood of labour market reforms following suit. Many robustness checks have been carried out which confirm our main results.

No. 2077
19 June 2017
Estimating the impact of shocks to bank capital in the euro area

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

Abstract

We contribute to the empirical literature on the impact of shocks to bank capital in the euro area by estimating a Bayesian VAR model identied with sign restrictions. The variables included in the VAR are those typically used in monetary policy analysis, extended to include aggregate banking sector variables. We estimate two shocks affecting the euro area economy, namely a demand shock and a shock to bank capital. The main findings of the paper are as follows: i) Impulse-response analysis shows that in response to a shock to bank capital, banks boost capital ratios by reducing their relative exposure to riskier assets and by adjusting lending to a larger extent than they increase the level of capital and reserves per se; ii) Historical shock decomposition analysis shows that bank capital shocks have contributed to increasing capital ratios since the crisis, impairing bank lending growth and contributing to widen bank lending spreads; and iii) counterfactual analysis shows that higher capital ratios pre-crisis would have helped dampening the euro area credit and business cycle. This suggests that going forward the use of capital-based macroprudential policy instruments may be helpful to avoid a repetition of the events seen since the start of the global financial crisis.

No. 2076
19 June 2017
Structural asymmetries and financial imbalances in the eurozone

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F20 : International Economics→International Factor Movements and International Business→General

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

Abstract

Almost two decades after the introduction of the common currency differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions.

No. 2075
13 June 2017
The macroeconomic impact of the ECB's expanded asset purchase programme (APP)

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel.

No. 2074
12 June 2017
Reducing large net foreign liabilities

Abstract

JEL Classification

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F34 : International Economics→International Finance→International Lending and Debt Problems

Abstract

In light of persistently large net foreign liability NFL) positions in several euro area countries, we analyse 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylised facts on the channels through which NFLs were reduced and estimate factors which make episodes ‘stable’, i.e. sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e. current account surpluses), in particular in advanced economies. Considering the different components of a country’s external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programmes and sovereign debt restructurings also contribute to longer term stability.

No. 2073
12 June 2017
House prices and monetary policy in the euro area: evidence from structural VARs

Abstract

JEL Classification

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

We use a Bayesian stochastic search variable selection structural VAR model to investigate the heterogeneous impact of housing demand shocks on the macroeconomy and the role of house prices in the monetary policy transmission, across euro area countries. A novel set of identification restrictions, which combines zero and sign restrictions, is proposed. By exploiting the cross-sectional dimension of our data, we explore the differences in the propagation channels of house prices and monetary policy and the challenges they pose in the process of real and nominal convergence in the Eurozone. Among the main results, we find a comparatively stronger housing wealth effect on consumption in Ireland and Spain. We provide new evidence in support of the financial accelerator hypothesis, showing that house prices play an important role in the availability of loans. A significant and highly heterogeneous effect of monetary policy on house price dynamics is also documented.

No. 2072
9 June 2017
Monetary-fiscal interactions and the euro area's malaise

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

Abstract

When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB’s objective.

No. 2071
9 June 2017
Lobbying in Europe: new firm-level evidence

Abstract

JEL Classification

D72 : Microeconomics→Analysis of Collective Decision-Making→Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

D78 : Microeconomics→Analysis of Collective Decision-Making→Positive Analysis of Policy Formulation and Implementation

O38 : Economic Development, Technological Change, and Growth→Technological Change, Research and Development, Intellectual Property Rights→Government Policy

Abstract

Lobbying can provide policy makers with important sector-specific information and thereby facilitating informed decisions. If going far beyond this, in particular if successfully influencing policy makers to unnecessarily tighten regulation or not opening already excessively regulated markets, it could potentially reduce overall economic welfare. We create a unique firm-level database on EU lobby activity and firm characteristics. We tend to find that firms in more protected sector, e.g. firms from non-tradable or higher regulated sectors tend to spend more for lobby activities. Also such firms tend to have higher profit margins and lower productivity, as often the case in sheltered sectors.

No. 2070
26 May 2017
Business models of the banks in the euro area

Abstract

JEL Classification

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

L21 : Industrial Organization→Firm Objectives, Organization, and Behavior→Business Objectives of the Firm

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

Abstract

The paper identifies the business models followed by banks in the euro area utilising a proprietary dataset collected in the context of the supervisory reporting of the Single Supervisory Mechanism. The concept of a ‘business model’ has been neglected by economic theory and is defined here with respect to the set of activities performed by banks. We adopt a clustering methodology to provide evidence for the existence of distinct business models. Clustering is combined with dimensionality reduction optimally, given the nature of our dataset which features a large number of dimensions for each bank (‘fat’ data). The method produces a level and a contrast factor which are intuitive in the economic sense. Four business models are identified alongside a set of ‘outlier’ banks that follow unique business models. The risk and performance indicators of each cluster are examined and evidence is provided that they follow distinct statistical distributions.

No. 2069
24 May 2017
Culture and household saving

Abstract

JEL Classification

Z1 : Other Special Topics→Cultural Economics, Economic Sociology, Economic Anthropology

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving

Abstract

This paper examines the role of culture in households saving decisions. Exploiting the historical language borders within Switzerland, I isolate the effect of households’ exposure to certain language groups from economic, institutional, demographic and geographic factors for a homogeneous and representative sample of households. The analysis uses the Swiss Household Panel which I complement with geographic and socio-economic data. I show that low- and middle-income households located in the German-speaking part are more than 11 percentage points more likely to save than similar households in the French-speaking part. In line with the existing literature, I show that these differences across language regions are consistent with different distributions of time preferences. By contrast, I do not find clear evidence for risk sharing during times of financial distress.

No. 2068
24 May 2017
Knightian uncertainty and credit cycles

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The Great Recession has been characterised by the two stylized facts: the buildup of leverage in the household sector in the period preceding the recession and a protracted economic recovery that followed. We attempt to explain these two facts as an information friction, whereby agents are uncertain about a new state of the economy following a financial innovation. To this end, we extend Boz and Mendoza (2014) by explicitly modelling the credit markets and by modifying the learning to an adaptive set-up. In our model the build-up of leverage and the collateral price cycles takes longer than in a stylized DSGE model with financial frictions. The boom-bust cycles occur as rare events, with two systemic crises per century. Financial stability is achieved with an LTV-cap regulation which smooths the leverage cycles through quantity (higher equity participation requirement) and price (lower collateral value) effects, as well as by providing an anchor in the learning process of agents.

No. 2067
22 May 2017
Government guarantees and the two-way feedback between banking and sovereign debt crises

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

This paper studies the effects of government guarantees on the interconnection between banking and sovereign debt crises in a framework where both the banks and the government are fragile and the credibility and feasibility of the guarantees are determined endogenously. The analysis delivers some new results on the role of guarantees in the bank-sovereign nexus. First, guarantees emerge as a key channel linking banks’and sovereign stability, even in the absence of banks’holdings of sovereign bonds. Second, depending on the specific characteristics of the economy and the nature of banking crises, an increase in the size of guarantees may be beneficial for the bank-sovereign nexus, in that it enhances …financial stability without undermining sovereign solvency.

No. 2066
19 May 2017
Determinants of FDI inflows in advanced economies: Does the quality of economic structures matter?

Abstract

JEL Classification

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

F23 : International Economics→International Factor Movements and International Business→Multinational Firms, International Business

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

O43 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Institutions and Growth

Abstract

This paper investigates the role of economic structures as determinants of FDI inows. We expand on the existing literature by focusing on advanced economies, using a newly available measure of FDI which cleans the data from statistical artefacts, such as financial round tripping, and by relying on a wide variety of measures that proxy the quality of a country’s economic structures. Our results show that there is an empirical relation from the quality of a host country’s economic structures to FDI inflows. These results are robust to various economic specifications and are confirmed when restricting our sample to euro area countries only.

No. 2065
19 May 2017
The importance of being special: repo markets during the crisis

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

G01 : Financial Economics→General→Financial Crises

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

Abstract

Specialness - the premium of procuring a specific security in the repo market - increased in the second half of 2011 for Italian government bonds. We assess the impact on specialness of the outright purchase program of the Eurosystem during the same period. Bonds bought by the Eurosystem had higher specialness. The impact was economically significant and persistent. Short-selling traders had to pay a net premium to close their positions and therefore may have decided to fail on their delivery. Indeed bonds that were bought under the program were more likely to be underlying a fail-to-deliver transaction.

No. 2064
17 May 2017
Sectoral interlinkages in global value chains: spillovers and network effects

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts

Abstract

This paper studies the role of global input-output linkages in transmitting economic disturbances in the international economy. Our empirical results suggest that these sectoral spillovers are both statistically significant and of economic importance. We also provide evidence that it is not the interlinkages per se that matter for the international transmission but rather the presence of global hub sectors that are either large suppliers or purchasers of other sectors' inputs. When the links between these sectors and the rest of the global value chain are severed, the spillovers diminish strongly and eventually become statistically insignificant. This highlights the importance of the structure of the network for enabling spillovers and the prominent role played by hub sectors in the global economy.

No. 2063
17 May 2017
Does employment protection legislation affect credit access? Evidence from Europe

Abstract

JEL Classification

D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill

J41 : Labor and Demographic Economics→Particular Labor Markets→Labor Contracts

Abstract

We investigate the impact of employment protection on firms credit access by looking at both credit obtained from banks and firms’ decision to apply for a loan. We find that greater flexibility in structuring the employees’ working hours and in dismissing employees increases the probability that firms obtain credit and that greater flexibility in dismissing employees decreases the probability that firms are discouraged from applying for credit. However, our findings also reveal that firms perceive regulations providing flexibility with regard to the employees’ working hours differently from banks, leading to a situation in which firms are more likely to be discouraged from applying for a loan, even though the probability to obtain a loan increases. Our results are robust to confounding, endogeneity, selection bias as well as to alternative specifications.

No. 2062
16 May 2017
The great Irish (de)leveraging 2005-14

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

D31 : Microeconomics→Distribution→Personal Income, Wealth, and Their Distributions

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

Abstract

Drawing on the 2013 Household Finance and Consumption Survey (HFCS) and complementary administrative data sources, we simulate household balance sheets at the micro level for the 2005-14 period. We use this dataset to tell the story of household leveraging and deleveraging over a tumultuous period for the Irish economy. We show that deleveraging has proceeded at a signficantly faster pace for older households, when compared with younger age groups. In contrast, we find that a higher-incidence o f tracker mortgages amongst younger borrowers – which passed through the historically low ECB policy rates since 2009 – relative to older borrowers has played a major role in easing the debt repayment burden in the presence of large income shocks. Notwithstanding historically low interest rates, we show that income shocks are the main factor contributing to mortgage repayment problems. However, there is also a role for equity factors.

No. 2061
15 May 2017
Capital requirements, risk shifting and the mortgage market
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found.

No. 2060
12 May 2017
Reading the Footprints: how foreign investors shape countries' participation in global value chains

Abstract

JEL Classification

F14 : International Economics→Trade→Empirical Studies of Trade

F15 : International Economics→Trade→Economic Integration

F21 : International Economics→International Factor Movements and International Business→International Investment, Long-Term Capital Movements

L22 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Organization and Market Structure

Abstract

We show that traditional gravity variables play a significant role in explaining trade flows related to global value chain participation We find evidence that cooperation costs – measured by linguistic and geographical proximity – are more relevant for trade that reflects cross-border production sharing. Applying an augmented gravity model framework to a newly-constructed dataset we find a positive association between bilateral FDI stock and both gross bilateral trade and the bilateral import-content of exports. We confirm this finding using an empirical case study on central and eastern European countries, which from a global perspective stand out both in terms of degree of global value chain-participation and size of inward FDI stock. Overall, we show that foreign investors play an active role in shaping host economies' export structure and their participation in international production networks. Policies that attract foreign direct investment would therefore constitute an indirect way to deepen a GVC-participation.

No. 2059
12 May 2017
Does marketing widen borders? Cross-country price dispersion in the European car market

Abstract

JEL Classification

F15 : International Economics→Trade→Economic Integration

F31 : International Economics→International Finance→Foreign Exchange

L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms

L62 : Industrial Organization→Industry Studies: Manufacturing→Automobiles, Other Transportation Equipment

D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis

Abstract

We study cross-country price differences in the European market for new passenger cars based on detailed pricing and technical data. Car prices in Europe converged until the year 2003, but not thereafter. Within the EU 15 countries the price range of the median model in 2004 was close to 20 percent. We document a source of international price differentiation, which is not related to distribution and border costs, but instead systematically linked to product features. Price dispersion increases with the market segment and varies significantly across models. Marketing appears to position identical goods differently in each country, for example by feature bundles tailored to local consumer preferences. Both the convergence before the actual reduction of barriers to arbitrage and the systematic international price differentiation by product feature point to active pricing-to-market strategies that treat countries as marketing regions.

No. 2058
10 May 2017
On the sources of business cycles: implications for DSGE models

Abstract

JEL Classification

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

Abstract

What are the drivers of business cycle fluctuations? And how many are there? By documenting strong and predictable co-movement of real variables during the business cycle in a sample of advanced economies, we argue that most business cycle fluctuations are driven by one major factor. The positive co-movement of real output and inflation convincingly argues for a demand story. This feature—robust across time and space—provides a simple smell test for structural macroeconomic models. We propose a simple statistic that can compare data and models. Based on this statistic, we show that the recent vintage of structural economic models has difficulties replicating the stylized facts we document.

No. 2057
8 May 2017
How to predict financial stress? An assessment of Markov switching models

Abstract

JEL Classification

C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling

G01 : Financial Economics→General→Financial Crises

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

This paper predicts phases of the financial cycle by combining a continuous financial stress measure in a Markov switching framework. The debt service ratio and property market variables signal a transition to a high financial stress regime, while economic sentiment indicators provide signals for a transition to a tranquil state. Whereas the in-sample analysis suggests that these indicators can provide an early warning signal up to several quarters prior to the respective regime change, the out-of-sample findings indicate that most of this performance is due to the data gathered during the global financial crisis. Comparing the prediction performance with a standard binary early warning model reveals that the MS model is outperforming in the vast majority of model specifications for a horizon up to three quarters prior to the onset of financial stress.

No. 2056
8 May 2017
Bid-to-cover and yield changes around public debt auctions in the euro area

Abstract

JEL Classification

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

Earlier research has shown that euro area primary public debt markets affect secondary markets. We find that more successful auctions of euro area public debt, as captured by higher bid-to-cover ratios, lead to lower secondary-market yields following the auctions. This effect is stronger when market volatility is higher. We rationalize both findings using a simple theoretical model of primary dealer behavior, in which the primary dealers receive a signal about the value of the asset auctioned.

No. 2055
5 May 2017
Spillovers among sovereign debt markets: identification by absolute magnitude restrictions

Abstract

JEL Classification

C3 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables

G2 : Financial Economics→Financial Institutions and Services

Abstract

This paper studies spillovers among US and European sovereign yields. We provide a new method based on absolute magnitude restrictions of the impact matrix to identify the countries that were the main sources of spillovers. Despite the large size of shocks from euro area stressed countries, connectedness among sovereign yields declined between 2008 and 2012 due to financial fragmentation, particularly between countries with more divergent business and fiscal cycles. We show that none of the sovereign yields are insulated from foreign shocks and that shocks to the Greek bond market in 2010 explained 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy (not Spain) was the source of systemic risk.

No. 2054
5 May 2017
Do stress tests matter? Evidence from the 2014 and 2016 stress tests

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

Stress tests have been increasingly used in recent years by regulators to foster confidence in the banking sector by not only increasing its resilience via mandatory capital increases but also by enhancing transparency to allow investors to better discriminate between banks. In this study, using an event study approach, we explore how market participants reacted to the 2014 Comprehensive Assessment and the 2016 EBA EU-wide stress test. The results show that stress test disclosures revealed new information that was priced by the markets. We also provide evidence that the publication of stress test results enhanced price discrimination as the impact on bank CDS spreads and equity prices tended to be stronger for the weaker performing banks in the stress test. Finally, we provide some evidence that also sovereign funding costs were affected in the aftermath of the stress test publications. The results provide insights into the effects and usefulness of stress test-related disclosures.

No. 2053
4 May 2017
Learning from prices: amplication and business fluctuations

Abstract

JEL Classification

D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design

D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

We provide a new theory of expectationsdriven business cycles in which consumers’ learning from prices dramatically alters the effects of aggregate shocks. Learning from prices causes changes in aggregate productivity to shift aggregate beliefs, generating positive price-quantity comovement. The feedback of beliefs into prices can be so strong that even arbitrarily small productivity shocks lead to substantial fluctuations. Augmented with a public signal, the model can generate a rich mix of supply- and demand-driven fluctuations even though productivity is the only source of aggregate randomness. Our results imply that many standard identification assumptions used to disentangle supply and demand shocks may not be valid in environments in which agents learn from prices.

No. 2052
4 May 2017
Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

Abstract

We estimate the response of euro area sovereign bond yields to purchase operations under the ECBs Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily ineligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme.

No. 2051
3 May 2017
Wage bargaining regimes and firms' adjustments to the Great Recession

Abstract

JEL Classification

J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General

J50 : Labor and Demographic Economics→Labor?Management Relations, Trade Unions, and Collective Bargaining→General

D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis

D61 : Microeconomics→Welfare Economics→Allocative Efficiency, Cost?Benefit Analysis

Abstract

The paper aims at investigating to what extent wage negotiation setups have shaped up firms’ response to the Great Recession, taking a firm-level cross-country perspective. We contribute to the literature by building a new micro-distributed database which merges data related to wage bargaining institutions (Wage Dynamic Network, WDN) with data on firm productivity and other relevant firm characteristics (CompNet). We use the database to study how firms reacted to the Great Recession in terms of variation in profits, wages, and employment. The paper shows that, in line with the theoretical predictions, centralized bargaining systems – as opposed to decentralized/firm level based ones – were accompanied by stronger downward wage rigidity, as well as cuts in employment and profits.

No. 2050
2 May 2017
If the Fed sneezes, who catches a cold?

Abstract

JEL Classification

F3 : International Economics→International Finance

F4 : International Economics→Macroeconomic Aspects of International Trade and Finance

Abstract

This paper studies the international spillovers of US monetary policy shocks on a number of macroeconomic and financial variables in 36 advanced and emerging economies. In most countries, a surprise US monetary tightening leads to depreciation against the dollar; industrial production and real GDP fall, unemployment rises. Inflation declines especially in advanced economies. At the same time, there is significant heterogeneity across countries in the response of asset prices, and portfolio and banking cross-border flows. However, no clear-cut systematic relation emerges between country responses and likely relevant country characteristics, such as their income level, dollar exchange rate flexibility, financial openness, trade openness vs. the US, dollar exposure in foreign assets and liabilities, and incidence of commodity exports.

No. 2049
28 April 2017
Internal devaluation in currency unions: the role of trade costs and taxes

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

Abstract

This paper studies export adjustment to negative shocks in currency unions. I consider the hitherto ignored role of trade costs and taxes in internal devaluations, which have been brought to the fore of international policy during the recent euro periphery crisis. Trade costs can limit the pass-through of internal devaluation on export prices. Using data on export prices ”on the dock”, I document that higher trade costs are associated with a lower reduction of export prices relative to domestic prices in the euro periphery. Furthermore, VAT (in theory trade neutral, but in practice much higher on tradables) hikes prevent the required shift of resources towards tradables. I show that the real exchange rate (RER) adjustment was heavily affected by indirect tax hikes, by comparing headline RER and tax-adjusted RER. I then build a standard New Keynesian small open economy model with sticky wages and prices, incorporating trade costs and indirect taxes (allowing for VAT imperfections), and show that both these frictions, but especially trade costs, can be quantitatively crucial in affecting export growth, more so than either product markups or wage rigidity. I apply the model to data for Greece, the least successful of the euro periphery fiscal devaluation programs, and show that it can account for the most salient features of the data; trade costs explain the failure to substantially raise exports, and taxes the initial small fall in exports.

No. 2048
21 April 2017
Firm growth in Europe: an overview based on the CompNet labour module

Abstract

JEL Classification

J23 : Labor and Demographic Economics→Demand and Supply of Labor→Labor Demand

L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms

L25 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Performance: Size, Diversification, and Scope

Abstract

This paper illustrates the main features of the Labour Module of the CompNet dataset which provides indicators of firm growth over the period 1995-2012 across 17 EU (13 euro area) countries and 9 macro-sectors. It also includes information on a large set of micro-aggregated characteristics of firms growing at different speed such as their financial position and labour and total factor productivity. The paper shows that during the Great Recession the share of shrinking firms sharply increased in countries under stress, while firm growth slowed down in non-stressed countries. In the former, the construction sector suffered the most, while in the latter manufacturing and services related to transportation and storage were mainly affected, possibly as a result of the trade collapse. While we find that, all else equal, more productive firms had a higher probability of growing, the process of productivity-enhancing reallocation was muted during the Great Recession.

No. 2047
19 April 2017
Necessity as the mother of invention: monetary policy after the crisis

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

We ask whether recent changes in monetary policy due to the financial crisis will be temporary or permanent. We present evidence from two surveys—one of central bank governors, the other of academic specialists. We find that central banks in crisis countries are more likely to have resorted to new policies, to have had discussions about mandates, and to have communicated more. But the thinking has changed more broadly—for instance, central banks in non-crisis countries also report having implemented macro-prudential measures. Overall, we expect central banks in the future to have broader mandates, use macro-prudential tools more widely, and communicate more actively than before the crisis. While there is no consensus yet about the usefulness of unconventional monetary policies, we expect most of them will remain in central banks’ toolkits, as governors who gain experience with a particular tool are more likely to assess that tool positively.

No. 2046
18 April 2017
Home sweet home: the home bias in trade in the European Union

Abstract

JEL Classification

F02 : International Economics→General→International Economic Order

F15 : International Economics→Trade→Economic Integration

F14 : International Economics→Trade→Empirical Studies of Trade

Abstract

This study examines the home bias in trade in goods and services within the European Union. Using the newest release of the World Input Output database, available for the years 2000-2014, the effect is estimated using gravity regressions. The trade-reducing effect of borders is found to be sizeable. It is greater for trade in services than for goods, though the former declined more markedly throughout the period. The paper extends current literature by demonstrating and analysing the variation in the bias across Europe. The border effect is larger in Central and Eastern Europe than in other parts of the continent. The differences in the effect can be largely explained by the depth of a country’s integration with the European Union. The number of years passed since a country joined the EU has a significant impact on the bias. The longer a country has been in the EU, the lower its home bias, with the first years of membership having the largest (in absolute terms) effect.

No. 2045
18 April 2017
ECB-Global: introducing ECB's global macroeconomic model for spillover analysis

Abstract

JEL Classification

C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

E50 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→General

Abstract

In a highly interlinked global economy a key question for policy makers is how foreign shocks and policies transmit to the domestic economy. We develop a semi-structural multi-country model with rich real and financial channels of international shock propagation for the euro area, the US, Japan, the UK, China, oil-exporting economies and the rest of the world: ECB-Global. We illustrate the usefulness of ECB-Global for policy analysis by presenting its predictions regarding the global spillovers from a US monetary policy tightening, a drop in oil prices and a growth slowdown in China. The impulse responses implied by ECB-Global are well in line with those generated by other global models, with international spillovers in ECB-Global generally on the high side given its rich real and financial spillover structure.

No. 2044
12 April 2017
Volatility spillovers of Federal Reserve and ECB balance sheet expansions to emerging market economies

Abstract

JEL Classification

F3 : International Economics→International Finance

F4 : International Economics→Macroeconomic Aspects of International Trade and Finance

F16 : International Economics→Trade→Trade and Labor Market Interactions

G1 : Financial Economics→General Financial Markets

Abstract

This paper examines volatility spillovers from changes in the size of the balance sheets of the Federal Reserve FED) and European Central Bank (ECB) to emerging market economies (EMEs) from 2003 to 2014. We find that EME bond markets are most susceptible to positive volatility spillovers from both the FED and ECB in terms of magnitude. Positive volatility spillovers to EME currency markets are higher in the case of FED balance sheet expansions than those of the ECB by a factor of about ten. By contrast, we find that EME stock markets are subject to negative volatility spillovers. Moreover, we find only limited evidence of volatility transmission to the real economy of EMEs following the monetary policy actions of the FED and ECB. Finally, we show that the proportion of the volatility in EMEs that is accounted for by changes in FED and ECB balance sheets shifts over time.

No. 2043
3 April 2017
Did the crisis permanently scar the Portuguese labour market? Evidence from a Markov-switching Beveridge curve analysis

Abstract

JEL Classification

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C24 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Truncated and Censored Models, Switching Regression Models

J63 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Turnover, Vacancies, Layoffs

J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search

J65 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment Insurance, Severance Pay, Plant Closings

Abstract

In this paper we analyse to what extent the outward shift in the Portuguese Beveridge curve

since 2007 has been due to structural or cyclical factors and how likely the outward shift will

persist.

We do this by empirically estimating the Beveridge curve in a Markov-switching panel setting

with time-varying transition probabilities for the US, Portugal and Spain using monthly data for

the period 1986m1-2014m12. These time-varying transition probabilities are in turn determined

by a set of structural indicators which could affect the matching efficiency in the labour market.

The results show that the sharp outward shift in the Portuguese Beveridge curve was to a

large extent driven by cyclical factors. However, it was compounded by some structural factors,

namely, the relatively high level of employment protection together with the relatively high

minimum wage ratio and the relatively generous unemployment benefit system.

No. 2042
3 April 2017
Threshold effects of financial stress on monetary policy rules: a panel data analysis

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C24 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Truncated and Censored Models, Switching Regression Models

Abstract

This study tests for the state-dependent response of monetary policy to increases in

overall financial stress and financial sector-specific stress across a panel of advanced

and emerging economy central banks. We use a factor-augmented dynamic panel

threshold regression model with (estimated) common components to deal with crosssectional

dependence. We find strong evidence of state-dependence in the response

of monetary policy to financial sector-specific stress for advanced economy central

banks, as they pursue aggressive monetary policy loosening in response to stock

market and banking stress only in times of high financial market volatility. By

comparison, evidence of threshold effects of financial stress is generally weak for

emerging market central banks.

No. 2041
29 March 2017
How does risk flow in the credit default swap market?

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G15 : Financial Economics→General Financial Markets→International Financial Markets

Abstract

We develop a framework to analyse the Credit Default Swaps (CDS) market as a network of risk transfers among counterparties. From a theoretical perspective, we introduce the notion of flow-of-risk and provide sufficient conditions for a bow-tie network architecture to endogenously emerge as a result of intermediation. This architecture shows three distinct sets of counterparties: i) Ultimate Risk Sellers (URS), ii) Dealers (indirectly connected to each other), iii) Ultimate Risk Buyers (URB). We show that the probability of widespread distress due to counterparty risk is higher in a bow-tie architecture than in more fragmented network structures. Empirically, we analyse a

unique global dataset of bilateral CDS exposures on major sovereign and financial reference entities in 2011 - 2014. We find the presence of a bow-tie network architecture consistently across both reference entities and time, and that the flow-of-risk originates from a large number of URSs (e.g. hedge funds) and ends up in a few leading URBs, most of which are non-banks (in particular asset managers). Finally, the analysis of the CDS portfolio composition of the URBs shows a high level of concentration: in particular, the top URBs often show large exposures to potentially correlated reference entities.

No. 2040
29 March 2017
Fiscal spillovers in the euro area a model-based analysis

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

Abstract

The fiscal consolidation measures adopted in many euro area countries over 2010

No. 2039
17 March 2017
Macroeconomic effects of secondary market trading
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

Abstract

This paper develops a theory of the credit cycle to account for recent evidence that capital

is increasingly allocated to inefficiently risky projects over the course of the boom. The model

features lenders who sell risk exposure to non-lender investors in order to relax borrowing constraints,

but are tempted to produce and sell off bad assets when asset prices are sufficiently

high. Asset prices gradually increase during the boom because non-lender wealth grows as

their risk-taking pays off, triggering a fall in asset quality and precipitating an eventual crisis.

I study the initial conditions that give rise to the credit cycle and consider policy implications.

No. 2038
15 March 2017
Stagnation traps
ECB Lamfalussy Fellowship Programme

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

O42 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Monetary Growth Models

Abstract

We provide a Keynesian growth theory in which pessimistic expectations can lead to very

persistent, or even permanent, slumps characterized by unemployment and weak growth. We

refer to these episodes as stagnation traps, because they consist in the joint occurrence of a

liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full

employment because weak growth depresses aggregate demand and pushes the interest rate

against the zero lower bound, while growth is weak because low aggregate demand results in low

profits, limiting firms' investment in innovation. Policies aiming at restoring growth can

successfully lead the economy out of a stagnation trap, thus rationalizing the notion of job

creating growth.

No. 2037
15 March 2017
The time dimension of the links between loss given default and the macroeconomy

Abstract

JEL Classification

C02 : Mathematical and Quantitative Methods→General→Mathematical Methods

G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing

G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation

Abstract

Most studies focusing on the determinants of loss given default (LGD) have largely ignored possible lagged effects of the macroeconomy on LGD. We fill this gap by employing a wide set of macroeconomic covariates on a retail portfolio that represents 15% of the Czech consumer credit market over the period 2002

No. 2036
14 March 2017
Fiscal reaction function and fiscal fatigue: evidence for the euro area

Abstract

JEL Classification

H60 : Public Economics→National Budget, Deficit, and Debt→General

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

Abstract

This paper estimates a fiscal reaction function (FRF) framework for euro area countries and derives a novel approach to measure fiscal fatigue. As in previous studies, we find evidence that euro area sovereigns abide, on average, by (weak) sustainability constraints. The primary balance improves by about 0.03–0.05 for every 1 percentage point increase in the debt-to-GDP ratio after controlling for other relevant factors. The positive reaction of primary surpluses to higher debt strengthened over the crisis. Based on this framework, we propose a simple, practical measure of fiscal fatigue that can be used to assess the capacity of sovereigns to maintain primary surpluses over extended periods of time. This measure can be derived by comparing simulated primary balance paths in the context of debt sustainability analyses with countries’ track-record, adjusted for the change in debt with the estimated fiscal reaction coefficient. The evidence of fiscal fatigue in non-linear FRF specifications is weaker for our euro area sample.

No. 2035
14 March 2017
Safe assets: a review

Abstract

JEL Classification

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

Abstract

We survey the emerging literature on safe assets. The recent evidence on a time-varying safety premium suggests a demand for safety quite distinct from liquidity and classic money demand, offering insight on a strong segmentation between safe savings and speculative investment markets. A related theoretical literature studies the private creation of (quasi) safe assets by intermediaries, shedding new light on bank intermediation and financial stability. Novel concepts such as maturity races, information sensitivity, risk-intolerant debt and induced runs reinforce the liquidity risk externality associated with banking, and have significant implications for research on credit cycles as well as for prudential policy.

No. 2034
13 March 2017
The implications of global and domestic credit cycles for emerging market economies: measures of finance-adjusted output gaps

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

Abstract

We present estimates of finance-adjusted output gaps which incorporate the information on the domestic and global credit cycles for a sample of emerging market economies (EMEs). Following recent BIS research, we use a state-space representation of an HP filter augmented with a measure of the credit gap to estimate finance-adjusted output gaps. We measure the domestic and global credit gaps as the deviation of private-sector real credit growth and net capital flows to EMEs from long-term trends, using the asymmetric Band-Pass filter. Overall, we find that financial cycle information is associated with cyclical movements in output. In the current circumstances, the estimates suggest that if financing and credit conditions were to tighten, it would be associated with a moderation in activity in some EMEs.

No. 2033
13 March 2017
The inflation risk premium in the post-Lehman period

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

Abstract

In this paper we construct model-free and model-based indicators for the inflation risk premium in the US and the euro area. We study the impact of market liquidity, surprises from inflation data releases, inflation volatility and deflation fears on the inflation risk premium. For our analysis, we construct a special dataset with a broad range of indicators. The dataset is carefully constructed to ensure that at every point in time the series are aligned with the information set available to traders. Furthermore, we adopt a Bayesian variable selection procedure to deal with the strong multicollinearity in the variables that potentially can explain the movements in the inflation risk premium. We find that the inflation risk premium turned negative, on both sides of the Atlantic, during the post-Lehman period. This confirms the recent finding by Campbell et al. (2016) that nominal bonds are no longer "inflation bet" but have turned into "deflation hedges". We also find, and contrary to common beliefs, that indicators of inflation uncertainty alone cannot explain the movements in the inflation risk premium in the post-Lehman period. The decline in the inflation risk premium seems mostly related to increased deflation fears and the belief that inflation will stay far away from the monetary policy target rather than declining inflation uncertainty. This in turn would suggest that central banks should not be complacent with low or even negative inflation risk premia.

No. 2032
28 February 2017
Government guarantees and financial stability

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Banks are intrinsically fragile because of their role as liquidity providers. This results in underprovision of liquidity. We analyze the effect of government guarantees on the interconnection between

banks' liquidity creation and likelihood of runs in a model of global games, where banks' and depositors'

behavior are endogenous and affected by the amount and form of guarantee. The main insight of our

analysis is that guarantees are welfare improving because they induce banks to improve liquidity provision

although in a way that sometimes increases the likelihood of runs or creates distortions in banks' behavior.

No. 2031
28 February 2017
How robust is the result that the cost of "leaning against the wind" exceeds the benefit?

Abstract

JEL Classification

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

G01 : Financial Economics→General→Financial Crises

Abstract

The main result in Svensson (2017) and its previous versions is that, given current knowledge and

empirical estimates, the cost of using monetary policy to "lean against the wind" for nancialstability

purposes exceeds the benefit by a substantial margin. Adrian and Liang (2016a) conduct

a sensitivity analysis of this result, state that "the result that costs exceed benefits rely critically

on assumptions about the change in unemployment in a recession or crisis, the crisis probability,

and the elasticity of crisis probability with respect to the interest rate," and provide alternative

assumptions that they assert would overturn the result. This paper shows that Adrian and Liang's

alternative assumptions are hardly realistic: they exceed existing empirical estimates by more

than 11, 13, and 40 standard errors. Adrian and Liang furthermore do not comment on the

extensive sensitivity analysis already done in previous versions of Svensson (2017), which supports

the robustness of my result.

No. 2030
28 February 2017
Financial transaction taxes, market composition, and liquidity

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

H32 : Public Economics→Fiscal Policies and Behavior of Economic Agents→Firm

Abstract

We use the introduction of a financial transaction tax (FTT) in France in 2012 to test

competing theories on its impact. We find no support for the idea that an FTT improves

market quality by affecting the composition of trading volume. Instead, our results are in

line with the hypothesis that a lower trading volume reduces liquidity, and thereby

market quality. Consistent with theories of asset pricing under transaction costs, we

document a shift in security holdings from short-term to long-term investors. Finally, our

findings show that moderate aggregate effects on market quality can mask large

adjustments made by individual agents.

No. 2029
27 February 2017
Macro stress testing euro area banks' fees and commissions

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G17 : Financial Economics→General Financial Markets→Financial Forecasting and Simulation

G01 : Financial Economics→General→Financial Crises

Abstract

This paper uses panel econometric techniques to estimate a macro- nancial model for fee and commission income over total assets for a broad sample of euro area banks. Using the estimated parameters, it conducts a scenario analysis projecting the fee and commission income ratio over a three years horizon conditional on the baseline and adverse macro-economic scenarios used in the 2016 EU-wide stress test.The results indicate that the fee and commission income ratio is varying in particular with changes in its own lag, the short-term interest rate, stock market returns and real GDP growth. They also show that the fee and commission income ratio projections are more conservative under the adverse scenario than under the baseline scenario. These findings suggest that stress tests assuming scenario-independent fee and commission income projections are likely to be flawed.

No. 2028
27 February 2017
A stochastic forward-looking model to assess the profitability and solvency of European insurers

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G22 : Financial Economics→Financial Institutions and Services→Insurance, Insurance Companies, Actuarial Studies

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

Abstract

In this paper, we develop an analytical framework for conducting forward-looking assessments of profitability and solvency of the main euro area insurance sectors. We model the balance sheet of an insurance company encompassing both life and non-life business and we calibrate it using country level data to make it representative of the major euro area insurance markets. Then, we project this representative balance sheet forward under stochastic capital markets, stochastic mortality developments and stochastic claims. The model highlights the potential threats to insurers solvency and profitability stemming from a sustained period of low interest rates particularly in those markets which are largely exposed to reinvestment risks due to the relatively high guarantees and generous profit participation schemes. The model also proves how the resilience of insurers to adverse financial developments heavily depends on the diversification of their business mix. Finally, the model identifies potential negative spillovers between life and non-life business through the redistribution of capital within groups.

No. 2027
24 February 2017
Economic crises and the eligiblity for the lender of last resort: evidence from 19th century France

Abstract

JEL Classification

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

N14 : Economic History→Macroeconomics and Monetary Economics, Industrial Structure, Growth, Fluctuations→Europe: 1913?

N54 : Economic History→Agriculture, Natural Resources, Environment, and Extractive Industries→Europe: 1913?

Abstract

This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the central bank would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.

No. 2026
24 February 2017
A panel VAR analysis of macro-financial imbalances in the EU

Abstract

JEL Classification

F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements

F31 : International Economics→International Finance→Foreign Exchange

C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models

Abstract

We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

No. 2025
23 February 2017
Optimizing policymakers' loss functions in crisis prediction: before, within or after?

Abstract

JEL Classification

C35 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

G01 : Financial Economics→General→Financial Crises

Abstract

Early-warning models most commonly optimize signaling thresholds on crisis probabilities. The ex-post threshold optimization is based upon a loss function accounting for preferences between forecast errors, but comes with two crucial drawbacks: unstable thresholds in recursive estimations and an in-sample overfit at the expense of out-of-sample performance. We propose two alternatives for threshold setting: (i) including preferences in the estimation itself and (ii) setting thresholds ex-ante according to preferences only. Given probabilistic model output, it is intuitive that a decision rule is independent of the data or model specification, as thresholds on probabilities represent a willingness to issue a false alarm vis-

No. 2024
23 February 2017
Global inflation: the role of food, housing and energy prices

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

This paper studies the role of global factors in causing common movements in consumer price inflation, with particular focus on the food, housing and energy sub-indices. It uses a comprehensive dataset of 223 countries and territories collected from national and international sources. Global factors explain a large share of the variance of national inflation rates for advanced countries

No. 2023
22 February 2017
Starting from a blank page? Semantic similarity in central bank communication and market volatility

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

Press releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Due to their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement, and update the earlier text at the margin. This makes it straightforward to compare statements and see how the central bank

No. 2022
22 February 2017
The role of counterparty risk and asymmetric information in the interbank market

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models

C24 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Truncated and Censored Models, Switching Regression Models

Abstract

We study the effect of counterparty risk on the ability of Italian banks to access the foreign unsecured interbank market during the sovereign debt crisis in the second half of 2011. With the onset of the crisis, interest rates in the Italian interbank market soared and foreign lending decreased significantly. To isolate the effect of the rise in counterparty risk, we compare the funding of Italian banks with that of foreign banks’ branches and subsidiaries in Italy, which were presumably unaffected by the sovereign crisis insofar as they could count on the actual or potential support of their parent bank. We find that the rise in counterparty risk substantially decreased the probability of obtaining funds from foreign banks. When the analysis is restricted to Italian and foreign banks with relatively comparable asset compositions, the result holds. In addition, where safer banks or more stable lending relationships are involved the effect is attenuated.

No. 2021
21 February 2017
The effect of public investment in Europe: a model-based assessment

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

C30 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→General

Abstract

We consider the effect of an increase in public investments on output in Europe against the background of a sharp drop of public investments in a number of EU countries during the crisis and subsequent policy discussions on the need to stimulate public investments. We start with a brief overview of recent developments in public investments, including some methodological issues, and provide a literature overview of the effect of public investments on growth. On the basis of updated estimates of the public capital stock, we estimate the output response to a public capital impulse, using VAR models. In addition, using a structural model, we investigate the sensitivity of the macroeconomic impact of an increase in public investments to alternative assumptions about economic structures and policy implementations.

No. 2020
10 February 2017
High frequency trading and fragility

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

Abstract

We show that limited dealer participation in the market, coupled with an informational friction resulting from high frequency trading, can induce demand for liquidity to be upward sloping and strategic complementarities in traders' liquidity consumption decisions: traders demand more liquidity when the market becomes less liquid, which in turn makes the market more illiquid, fostering the initial demand hike. This can generate market instability, where an initial dearth of liquidity degenerates into a liquidity rout (as in a flash crash). While in a transparent market, liquidity is increasing in the proportion of high frequency traders, in an opaque market strategic complementarities can make liquidity U-shaped in this proportion as well as in the degree of transparency.

No. 2019
10 February 2017
The impact of constrained monetary policy on fiscal multipliers on output and inflation

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

Abstract

This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary policy, taking into account alternative agents’ expectations about future monetary policy. We illustrate that those expectations are even more important for the size of the fiscal multipliers than the difference between exogenously versus endogenously modelled constraints. We confirm the well-known finding that fiscal multipliers exhibit an over-proportional reaction when monetary policy is constrained. The novelty of our results is that this over-proportionality is stronger for the fiscal multiplier on inflation than on output. We relate this finding to the structural parameters of the models by means of a Global Sensitivity Analysis.

No. 2018
10 February 2017
Exchange rate prediction redux: new models, new data, new currencies

Abstract

JEL Classification

F31 : International Economics→International Finance→Foreign Exchange

F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications

Abstract

Previous assessments of nominal exchange rate determination, following Meese and Rogoff (1983) have focused upon a narrow set of models. Cheung et al. (2005) augmented the usual suspects with productivity based models, and "behavioral equilibrium exchange rate" models, and assessed performance at horizons of up to 5 years. In this paper, we further expand the set of models to include Taylor rule fundamentals, yield curve factors, and incorporate shadow rates and risk and liquidity factors. The performance of these models is compared against the random walk benchmark. The models are estimated in error correction and first-difference specifications. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the

No. 2017
10 February 2017
Inside asset purchase programs: the effects of unconventional policy on banking competition

Abstract

JEL Classification

C30 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→General

C78 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Bargaining Theory, Matching Theory

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

Abstract

We test if unconventional monetary policy instruments influence the competitive conduct of banks. Between q2:2010 and q1:2012, the ECB absorbed

No. 2016
7 February 2017
Interactions between fiscal multipliers and sovereign risk premium during fiscal consolidation: model based assessment for the euro area

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

F45 : International Economics→Macroeconomic Aspects of International Trade and Finance

Abstract

The paper presents a model-based assessment of fiscal multipliers operating in the euro area during the period 2011-2014. The assessment is conditional on two distinct reactions of the sovereign risk premium (either responding endogenously to fiscal shocks or being an exogenous process) and two types of monetary policy (accommodative and non-accommodative). Applying those multipliers to the amount of austerity measures implemented in years 2011-14, the paper evaluates their possible fallouts and shows that the output effects of the recent fiscal consolidations were largely determined by two key factors: financial markets

No. 2015
6 February 2017
Forecasting euro area inflation using targeted predictors: is money coming back?

Abstract

JEL Classification

C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E41 : Macroeconomics and Monetary Economics→Money and Interest Rates→Demand for Money

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper sheds new light on the information content of monetary and credit aggregates for future price developments in the euro area. Overall, we find strong variation in the information content of these variables over time. We show that monetary and credit aggregates are very often selected among the top predictors of inflation, with their predictive power relative to other predictors generally improving in the post-2012 period. An out-of-sample forecasting exercise indicates that, when monetary and credit aggregates are loaded directly in the forecasting equation, the additional gains over the benchmark model are generally high and significant across horizons and HICP components only in the most recent period. When the forecasts are computed using factor-augmented regressions based on the best predictors, we confirm the importance of monetary and credit variables in forecasting inflation, even if their information content is diluted in a much broader pool of variables.

No. 2014
6 February 2017
The drivers of revenue productivity: a new decomposition analysis with firm-level data

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity

Abstract

This paper aims to derive a methodology to decompose aggregate revenue TFP changes over time into four different components

No. 2013
3 February 2017
Regular versus lump-sum payments in union contracts and household consumption

Abstract

JEL Classification

D12 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Empirical Analysis

E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth

J51 : Labor and Demographic Economics→Labor?Management Relations, Trade Unions, and Collective Bargaining→Trade Unions: Objectives, Structure, and Effects

Abstract

We use information on monthly wage increases set by collective agreements in Italy and exploit their variation across sectors and over time in order to examine how household consumption responds to different types of positive income shocks (regular tranches versus lump-sum payments). Focusing on single-earner households, we find evidence of consumption smoothing in accordance with the Permanent-Income Hypothesis, since total and food consumption do not exhibit excess sensitivity to anticipated regular payments. Consumption does not respond at the date of the announcement of income increases either, as these are known to compensate workers for the overall loss in their wages' purchasing power. However, consumption responds, albeit a little, to transitory and less anticipated one-off payments, as the expenditures on clothing & shoes increase upon the receipt of the lump-sum payments. This behaviour is consistent with bounded rationality as consumers do not consider the lump-sum as part of the overall wage inflation adjustment.

No. 2012
3 February 2017
Modeling euro area bond yields using a time-varying factor model

Abstract

JEL Classification

C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General

G01 : Financial Economics→General→Financial Crises

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

In this paper, we study the dynamics and drivers of sovereign bond yields in euro area countries using a factor model with time-varying loading coefficients and stochastic volatility, which allows for capturing changes in the pricing mechanism of bond yields. Our key contribution is exploring both the global and the local dimensions of bond yield determinants in individual euro area countries using a time-varying model. Using the reduced form results, we show decoupling of periphery euro area bond yields from the core countries yields following the financial crisis and the scope of their subsequent re-integration. In addition, by means of the structural analysis based on identification via sign restrictions, we present time varying impulse responses of bond yields to EA and US monetary policy shocks and to confidence shocks.

No. 2011
2 February 2017
Understanding sovereign rating movements in euro area countries

Abstract

JEL Classification

C25 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Discrete Regression and Qualitative Choice Models, Discrete Regressors, Proportions

G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt

Abstract

This paper investigates the link between sovereign ratings and macroeconomic fundamentals for a group of euro area countries which recorded rating downgrades amid the euro area sovereign debt crisis. We apply an elaborated econometric estimation technique, based on a Bayesian ordered probit model, to understand how the decisions of rating agencies can be explained by economic developments. The estimated model re-produces historical ratings by using a small number of economic and institutional variables, which seem to effectively summarize the large number of criteria used by Moody

No. 2010
2 February 2017
The systemic implications of bail-in: a multi-layered network approach

Abstract

JEL Classification

G01 : Financial Economics→General→Financial Crises

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling

Abstract

We present a tractable framework to assess the systemic implications of bail-in. To this end, we construct a multi-layered network model where each layer represents the securities cross holdings of a specific seniority among the largest euro area banking groups. On this basis, the bail-in of a bank can be simulated to identify the direct contagion risk to the other banks in the network. We find that there is no direct contagion to creditor banks. Spill-overs also tend to be small due to low levels of securities cross-holdings in the interbank network. We also quantify the impact of a bail-in on the different liability holders. In the baseline scenario, shareholders and subordinated creditors are always affected by the bail-in, senior unsecured creditors in 75% of the cases. Finally, we compute the effect of the bail-in on the network topology in each layer. We find that a bail-in significantly reshapes interbank linkages within specific seniority layers.

No. 2009
1 February 2017
Securitization and credit quality

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Banks are usually better informed on the loans they originate than other financial intermediaries. As a result, securitized loans might be of lower credit quality than otherwise similar non-securitized loans. We assess the effect of securitization activity on loans

No. 2008
1 February 2017
Banks credit and productivity growth

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G31 : Financial Economics→Corporate Finance and Governance→Capital Budgeting, Fixed Investment and Inventory Studies, Capacity

D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing

O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance

Abstract

Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.

No. 2007
31 January 2017
The rational inattention filter

Abstract

JEL Classification

D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

Abstract

Dynamic rational inattention problems used to be difficult to solve. This paper provides simple, analytical results for dynamic rational inattention problems. We start from the benchmark rational inattention problem. An agent tracks a variable of interest that follows a Gaussian process. The agent chooses how to pay attention to this variable. The agent aims to minimize, say, the mean squared error subject to a constraint on information flow, as in Sims (2003). We prove that if the variable of interest follows an ARMA(p,q) process, the optimal signal is about a linear combination of {Xt,…,Xt-p+1} and {εt,…, εt-q+1}, where Xt denotes the variable of interest and εt denotes its period t innovation. The optimal signal weights can be computed from a simple extension of the Kalman filter: the usual Kalman filter equations in combination with first-order conditions for the optimal signal weights. We provide several analytical results regarding those signal weights. We also prove the equivalence of several different formulations of the information flow constraint. We conclude with general equilibrium applications from Macroeconomics.

No. 2006
25 January 2017
Demographics and inflation
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

J11 : Labor and Demographic Economics→Demographic Economics→Demographic Trends, Macroeconomic Effects, and Forecasts

C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes

Abstract

Most euro area countries have entered an unprecedented ageing process: life expectancy continues to rise and fertility rates have declined, while retirement age in the last twenty to thirty years hardly increased. This implies an ever smaller fraction of the working age population in total population, leading to changes in consumption and saving behaviours and having an important impact on the macroeconomy. In this paper we focus on the relationship between demographic change and inflation. We find that based on a cointegrated VAR model there is a positive long-run relationship between inflation and the growth rate of working-age population as a share in total population in the euro area countries as a whole, but also in the US and Germany. We also find that this relation is mitigated by the effect of monetary policy, which we account for by including the short-term interest rate in our analysis. One caveat of the analysis could be that the empirical relationship as found does not sufficiently take into account changes in policy settings following the high inflation experiences in the 1970s. Our findings support the view that demographic trends are among the forces that shape the economic environment in which monetary policy operates. This is particularly relevant for countries, like many in Europe, that face an ageing process.

No. 2005
25 January 2017
Low inflation and monetary policy in the euro area
Task force on low inflation (LIFT)

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

Inflation in the euro area has been falling since mid-2013, turned negative at the end of 2014 and remained below target thereafter. This paper employs a Bayesian VAR to quantify the contribution of a set of structural shocks, identified by means of sign restrictions, to inflation and economic activity. Shocks to oil supply do not tell the full story about the disinflation that started in 2013, as both aggregate demand and monetary policy shocks also played an important role. The lower bound to policy rates turned the European Central Bank (ECB) conventional monetary policy de facto contractionary. A country analysis confirms that the negative effects of oil supply and monetary policy shocks on inflation was widespread, albeit with different intensity across countries. The ECB unconventional measures since 2014 contributed to raising inflation and economic activity in all the countries. All in all, our analysis confirms the appropriateness of the ECB asset purchase programme.

No. 2004
25 January 2017
Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

We develop a theoretical model that features a business cycle-dependent relation between out- put, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem (1997)). The theoretical model motivates our empirical assessment for the euro area, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a pronounced convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. The regime switching VAR reveals the business cycle dependence of macroeconomic responses to monetary policy shocks: Expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy such as the Expanded Asset Purchase Programme (EAPP) of the ECB, during times of deep recession.

No. 2003
25 January 2017
Exchange rate pass-through in the euro area
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

F3 : International Economics→International Finance

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identi?cation based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer in?ation in the euro area.

No. 2002
25 January 2017
Changing prices... changing times: evidence for Italy
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

D21 : Microeconomics→Production and Organizations→Firm Behavior: Theory

D40 : Microeconomics→Market Structure and Pricing→General

L11 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Production, Pricing, and Market Structure, Size Distribution of Firms

Abstract

This paper examines the process of adjustment of prices in Italy to determine whether nominal flexibility, measured by the frequency of price changes, has increased in the recent years of protracted stagnation and double-dip recession. The analysis is based on a large micro-level dataset of individual prices collected monthly by Istat from 2006 to 2013 for the Consumer Price Index. We find that both the percentage of prices adjusted monthly and the average size of the adjustment have risen significantly since the 1996-2001 period, in particular for downward changes. This greater flexibility is related in part to the spread of modern distribution structures. Our estimates further indicate that the recession has affected the price adjustment mechanism: for manufactures, price cuts have become larger and more frequent, while increases are more moderate; for services, both the frequency and the size of price increases have diminished.

No. 2001
25 January 2017
Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

The response of US inflation to the high levels of spare capacity during the Great Recession of 2007-09 was rather muted. At the same time, it has been argued that the short-term unemployment gap has a more prominent role in determining inflation, and either the closing of this gap or non-linearities in the Phillips curve could lead to a sudden pick-up in inflation. We revisit these issues by estimating Phillips curves over 1992Q1 to 2015Q1. Our main findings suggest that a Phillips curve model that takes into account inflation persistence, inflation expectations, supply shocks and labour market slack as determinants explains rather well the behaviour of inflation after the Great Recession, with little evidence of a "missing deflation puzzle". More important than the choice of the slack measure is the consideration of time-variation in the slope. In fact, we find that Phillips curve models with time-varying slope coefficients are able to outperform significantly the constant-slope model as well as other non-linear models over 2008Q1-2015Q1.

No. 2000
25 January 2017
Missing disinflation and missing inflation: the puzzles that aren't
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

Abstract

In the immediate wake of the Great Recession we didn't see the disinflation that most models predicted and, subsequently, we didn't see the inflation they predicted. We show that these puzzles disappear in a Vector Autoregressive model that properly accounts for domestic and global factors. Such a model reveals, among others, that domestic factors explain much of the inflation dynamics in the 2012-2014 euro area missing inflation episode. Consequently, economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks during this episode.

No. 1999
25 January 2017
The long-term distribution of expected inflation in the euro area: what has changed since the great recession?
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

Abstract

This paper analyses the distribution of long-term inflation expectations in the euro area using individual density forecasts from the ECB Survey of Professional Forecasters. We exploit the panel dimension in this dataset to examine whether this distribution became less stable following the Great Recession, subsequent sovereign debt crisis and period when the lower bound on nominal interest rates became binding. Our results suggest that the distribution did change along several dimensions. We document a small downward shift in mean long-run expectations toward the end of our sample although they remain aligned with the ECB definition of price stability. More notably, however, we identify a trend toward a more uncertain and negatively skewed distribution with higher tail risk. Another main finding is that key features of the distribution are influenced by macroeconomic news, including the ex post historical track record of the central bank.

No. 1998
25 January 2017
Inflation anchoring in the euro area
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

Abstract

Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates

No. 1997
25 January 2017
Tail co-movement in inflation expectations as an indicator of anchoring
Task force on low inflation (LIFT)

Abstract

JEL Classification

C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General

C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing

Abstract

We analyze the degree of anchoring of inflation expectations in the euro area during the post-crisis period, with a focus on the time span from 2014 onwards when long-term beliefs have substantially drifted away from the policy target. Using a new estimation technique, we look at tail co-movements between short- and long-term distributions of inflation expectations, estimated from daily quotes of inflation derivatives. We find that, during 2014, average correlations between short- and long-term inflation expectations rose sharply; moreover, negative tail events impacting short-term beliefs have been increasingly channeled to long-term views, triggering both downward revisions in expectations and upward changes in uncertainty. Overall, our results signal a risk of downside de-anchoring of long-term inflation expectations.

No. 1996
25 January 2017
A new indicator of inflation expectations anchoring
Task force on low inflation (LIFT)

Abstract

JEL Classification

C14 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Semiparametric and Nonparametric Methods: General

C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing

Abstract

We compare the degree of anchoring of inflation expectations in the euro area, the United States and the United Kingdom, focusing on the post-crisis period. First of all, we estimate a set of measures of average and tail correlation using inflation swaps and options, following Natoli and Sigalotti (2016). To quantify the degree of anchoring, we also propose a new indicator based on the results of a logistic regression, measuring the odds that strong negative shocks to short-term expectations are channelled to large declines in long-term expectations. The results reveal, for the euro area, an increase in the de-anchoring risk during the last quarter of 2014; while showing a significant reduction after the peak, our de-anchoring indicator remains high and volatile in 2015 and 2016. Expectations in the US and UK are instead found to be firmly anchored.

No. 1995
25 January 2017
Unconventional monetary policy and the anchoring of inflation expectations
Task force on low inflation (LIFT)

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

C52 : Mathematical and Quantitative Methods→Econometric Modeling→Model Evaluation, Validation, and Selection

C55 : Mathematical and Quantitative Methods→Econometric Modeling→Modeling with Large Data Sets?

Abstract

The effects of the unconventional monetary policy (UMP) measures undertaken by the U.S. Federal Reserve (and other major central banks) remain a crucial topic for research. This paper investigates their effects on the anchoring of long-term inflation expectations, a key dimension of UMP that has been largely overlooked. Our analysis provides two key insights. First, the anchoring of inflation expectations deteriorated significantly since late 2008. Second, the expansion of the Fed

No. 1994
25 January 2017
Trust, but verify. De-anchoring of inflation expectations under learning and heterogeneity
Task force on low inflation (LIFT)

Abstract

JEL Classification

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

D83 : Microeconomics→Information, Knowledge, and Uncertainty→Search, Learning, Information and Knowledge, Communication, Belief

Abstract

The paper studies how a prolonged period of subdued price developments may induce a de-anchoring of inflation expectations from the central bank's objective. This is shown within a framework where agents form expectations using adaptive learning, choosing among a set of alternative forecasting models. The analysis is accompanied by empirical evidence on the properties of inflation expectations in the euro area. Our results also suggest that monetary policy may lose effectiveness if delayed too much, as expectations are allowed to drift away from target for too long.

No. 1993
24 January 2017
Trade, finance or policies: what drives the cross-border spill-over of business cycles?

Abstract

JEL Classification

F1 : International Economics→Trade

F3 : International Economics→International Finance

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles

Abstract

In this paper we investigate how income growth rates in one country are affected by growth rates in partner countries, testing for the importance of pairwise country links as well as characteristics of the receiving country (trade and financial openness, exchange rate regime, fiscal variables). We find that trade integration fosters the spill-over of business cycles, both bilaterally and as a country characteristic (trade openness). Results for financial integration are mixed; financial links as pairwise country characteristic are either insignificant or negatively signed (indicating a dampening of cross country spill-overs), but financial openness as characteristic of the receiving country amplifies spill-overs. We find no evidence for a role of the exchange rate regime. Finally, we find that higher government spending and debt reduces countries

No. 1992
24 January 2017
Pricing of bonds and equity when the zero lower bound is relevant

Abstract

JEL Classification

C13 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Estimation: General

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

Abstract

This paper investigates the joint dynamics of nominal bond yields, real bond yields and dividend yields from the 80s up to the aftermath of the financial crisis by mapping them on a set of macro factors. It builds on an existing discrete time affine Gaussian model of the term structure model of nominal bonds, real bonds and equity and extends it by three important innovations. Firstly, allowing for structural shifts in inflation expectations. Secondly, accounting for the relevance of the zero lower bound in the period after 2008 by modelling a so-called shadow rate and deriving asset prices by explicitly considering the zero lower bound. Finally, calculating the standard errors to correctly capture the multi-step nature of the estimation process, which results in substantially larger standard errors than previously reported for the model. We achieve statistically signicant risk premia by imposing restrictions on the matrix of risk premia. Taken together, these modifications allow to better model asset prices also during the financial crisis and the ensuing economic environment of sluggish growth, low inflation rates, interest rates close to zero and quantitative easing.

No. 1991
23 January 2017
Below the zero lower bound: a shadow-rate term structure model for the euro area

Abstract

JEL Classification

C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

We propose a shadow-rate term structure model for the euro area yield curve from 1999 to mid-2015, when bond yields had turned negative at various maturities. Yields in the model are constrained by a lower bound, but - as a special feature of our specification - the bound is allowed to change over time. We estimate that it has first ranged marginally above zero, but has decreased to -11 bps in September 2014. We derive the impact of a changing lower bound on the yield curve and interpret the impact of the September 2014 ECB rate cut from this perspective. Our model matches survey forecasts of short rates and the decline in yield volatility during the low-rate period better than a benchmark affine model. We estimate that since mid-2012 the horizon when short rates are expected to exceed 25 bps again has ranged between 18 and 62 months.

No. 1990
20 January 2017
Financial inclusion: what’s it worth?

Abstract

JEL Classification

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

D14 : Microeconomics→Household Behavior and Family Economics→Household Saving; Personal Finance

Abstract

This paper studies the determinants of being unbanked in the euro area and the United States as well as the effects of being unbanked on wealth accumulation. Based on household-level data from the euro area Household Finance and Consumption Survey and the U.S. Survey of Consumer Finance, it first documents that there are, respectively, 3.6% and 7.5% of unbanked households in the two economies. Low-income households, unemployed households and those with a poor education are the most likely to be affected, and remarkably more so in the United States than in the euro area. At the same time, there is a role for government policies in fostering financial inclusion. Using a propensity score matching approach to estimate the effects of being unbanked, it is found that banked households report substantially higher net wealth than their unbanked counterparts, with a gap of around

No. 1989
20 January 2017
Revenue elasticities in euro area countries
Koester, Gerrit, Priesmeier, Christoph

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

H68 : Public Economics→National Budget, Deficit, and Debt→Forecasts of Budgets, Deficits, and Debt

Abstract

Revenue elasticities play a key role in forecasting, monitoring and analysing public finances under the European fiscal framework, which largely builds on cyclically adjusted indicators. This paper investigates whether there is evidence for dynamic

Disclaimer: Please keep in mind that the papers are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.