Euro Area Economies Research Articles

The Impact of Macroprudential Policy on Credit Growth in Nine Euro Area Economies

Abstract In this paper, we investigate the impact of macroprudential policy measures (bundled together into a macroprudential policy index, MPI) on the non-financial corporate sector credit and household credit growth using a one-step system GMM empirical research method. The goal of our paper is to test whether contractionary macroprudential policy stymies credit growth rate and whether expansionary macroprudential policy spurs credit growth rate in selected Euro Area economies (Austria, Belgium, Finland, Germany, Ireland, Italy, Netherlands, Slovenia, and Spain) over the period 2008Q4–2018Q4. We test two hypotheses: H1: The tightening of macroprudential policy measures reduces the non-financial corporate sector credit growth rate, and H2: The tightening of macroprudential policy measures reduces the growth rate of household credit. Based on our empirical results, we can confirm the first hypothesis. In contrast, the second hypothesis can be neither confirmed nor rejected since the explanatory variable of interest (MPI) is statistically insignificant in the second model.

The EURIBOR surge and bank deposit costs: an investigation of interest rate pass-through and deposit portfolio rebalancing

Against the backdrop of sharp monetary policy tightening, this article studies the links between bank deposit costs and the EURIBOR. In doing so the authors employ an SVAR multivariate model that jointly includes deposit rates and volumes, fitted on monthly data covering the period 2003-2019. Increases in the EURIBOR are found to pass through to bank deposit rates in Spain, pushing up interest rates on term deposits in particular. In turn, increases in the EURIBOR triggered shifts from sight to term deposits. Through both mechanisms, bank deposit costs increased. The article documents that in 2022 the pass-through from the EURIBOR to deposit rates is falling short, relative to what would be expected according to the historical pattern captured by model results; as a result, the increase in bank deposit costs has been weaker than expected. To draw insights into the reasons behind this pattern, the authors analyse several euro area economies. Correlation analyses suggest that the impact of the EURIBOR on deposit rates and costs was weaker in banking sectors with greater excess liquidity and higher market concentration.

Fiscal Limits and the Pricing of Eurobonds

This paper proposes a methodology to price bonds jointly issued by a group of countries—Eurobonds in the euro-area context. We consider two types of bonds; the first is backed by several and joint guarantees (SJGs), and the second features several but not joint guarantees (SNJGs). The pricing of SJG and SNJG bonds reflects different assumptions regarding the pooling of debtors’ fiscal resources. We estimate fiscal limits for the six largest euro-area economies over 2008–2021 and deduce counterfactual Eurobond prices. For the five-year maturity, SNJG bond yield spreads would have been about three times larger than SJG ones over the estimation sample. Hence, issuing SJG bonds could result in gains at the aggregate level. Notwithstanding, our model also predicts that gains may temporarily vanish in periods of acute fiscal stress. We finally envision postissuance redistribution schemes, whereby gains stemming from the issuance of SJG bonds could be shared among participating countries; we argue that these schemes may alleviate the reduction in market discipline resulting from common bonds issuance. This paper was accepted by David Sraer, finance. Funding: This work has benefited from financial support from the Swiss National Science Foundation [Grant 182293]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4740 .

The effects of shocks to interest rate expectations in the euro area: Estimates at the country level

AbstractWe estimate the effects of shocks to interest rate expectations on the four largest euro area economies. We identify these shocks in a Bayesian vector autoregressive (BVAR) model augmented by survey expectations. We separate the expectations shocks from standard monetary policy shocks by assuming that they do not affect the current policy rate. Our sign restrictions also ensure that these shocks do not contain central bank information shocks. We find that an expected decline in the future short‐term rate leads to an increase in output and prices. The increases do not become larger for changes to interest rate expectations further in the future, that is, we do not find evidence of a forward guidance puzzle. Using the multicountry structure of our model, we test for cross‐country differences in the shocks' effects and find output and price effects to be greatest in Germany. We also compare the effects of shocks to interest rate expectations to those of standard monetary policy shocks and show the first type to affect output and prices more strongly in Germany and France.

Global Models for a Global Pandemic: The Impact of COVID-19 on Small Euro Area Economies

Global Models for a Global Pandemic: The Impact of COVID-19 on Small Euro Area Economies

The crowding-out effect of shareholder value-based CEO compensation on R&D investment in the European context: a new interpretation

PurposeIn the present study, using a novel fractional logit model, the link between R&D (Research & Development) investment and shareholder value-based CEO (Chief Executive Officer) compensation has been examined within the non-financial sector in the Euro area economies using a firm-level dataset for 2002–2019.Design/methodology/approachThe fractional logit model is utilized to examine the effects of corporate payment on R&D investment. The fractional logit model can be considered the empirical approach that takes into account R&D non-performer firms to avoid reducing the sample size. The fractional logit model is superior to the censored or truncated models, like Tobit, since the fractional logit model is useful to address the econometric limitations that are found in the censored and truncated models in the non-linear models.FindingsThe findings obtained in this study showed a significant and negative effect of short-term aim-based CEO payment on R&D expenditures in the Euro area economies using firm-level data. These findings are robust to different robustness checks and modeling alternatives.Originality/valueTo the author's knowledge, there is no study that examines the effects of short-term shareholder value maximization-based CEO compensation on R&D in the European context in the literature.

Inhomogeneous Financial Markets in a Low Interest Rate Environment—A Cluster Analysis of Eurozone Economies

In the present paper, we investigate the financial homogeneity of the euro area economies by contrasting eurozone countries’ responses to monetary policy steps to the theoretical assumptions of the liquidity trap phenomenon. Our assumption is that the euro area economies are not completely homogeneous. Hence, in a zero-interest rate environment, the asset holding decisions of economic agents exhibit detectable differences across countries. We verify our assumptions using Eurostat data. We use the financial asset stocks of the euro area countries to cluster the countries concerned. Previous literature has not examined changes in the ratio of financial assets to GDP, nor differences in structural changes in the total stock of financial assets under the zero lower bound. The paper uses k-centers cluster analysis based on Euclidean distance for detecting changes in the portfolio holdings of eurozone economic actors owing to economic crises and monetary policy responses. The results confirm that euro area financial markets are fragmented. There are significant differences across asset markets of different Eurozone countries, both during and after the crisis. Despite some similarities in the portfolio rearrangement across countries, the ECB’s monetary policy does not have a uniform impact on euro area financial markets, and notable differences prevail in the financial asset structures of the economies concerned.

Greek Banking Sector Stock Reaction to ECB’s Monetary Policy Interventions

Reacting to extreme uncertainty conditions caused by the global financial crisis, the European Central Bank implemented countercyclical strategy, combining conventional and non-traditional monetary policy tools to stabilize financial markets and euro area economies. We study the impact of the euro area monetary authority policy interventions on equity returns of four systemic Greek banks for the period January 2007 to August 2018. In the first step, we collect and classify interventions to several categories. Then, an event study analysis is carried out to evaluate cumulative abnormal returns. In the second step, a panel regression analysis is performed to identify Cumulative Abnormal Return (CAR) determinants. Our results suggest that expansionary conventional monetary policy interventions significantly affect equity returns of Greek banking institutions, assisting the regional banking equity stability. On the other hand, the harmful consequences of Greek debt crisis limited the effectiveness of non-standard measures.

Public debt and state-dependent effects of fiscal policy in the euro area

We investigate public debt related state dependencies of fiscal policy shocks for fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. Macroeconomic variables, notably output and consumption, go up in response to a positive government spending shock in the high-debt cross-sectional state, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers both cross-sectional and time-serial high- and low-debt states we find that, for euro area economies, cross-sectional debt variation is more important than time-serial debt variation in driving differences in the responses of macroeconomic variables to government spending shocks.

Are fiscal consolidation episodes helpful for public sector efficiency?

ABSTRACT We assess the consequences of fiscal consolidation episodes on public sector efficiency (scores) for 35 OECD countries for the 2007–2020 period. We find that fiscal consolidations improve public sector efficiency and results are robust across efficiency models. Moreover, peripheral euro-area economies and economies with debt-to-GDP ratios between 60% and 90% are those whose public sector efficiency scores improve more when fiscal consolidation episodes occur. The evidence that fiscal consolidations enhance spending efficiency is an additional argument for fiscal consolidations, from a policy perspective.

Bank capital shortfall in the euro area

We quantify the bank capital shortfall that results from a financial crisis by estimating a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the euro-area economy. The introduction of both deposit and shadow banks captures several characteristics of the banking system and reveals a financial amplification mechanism. By using a combination of a large positive risk shock and a large negative investment shock, we show that a crisis similar to that observed in 2008 would generate a bank capital shortfall between 2.2% and 3% of euro-area GDP, which corresponds to approximately 207–282 billion euros.

The Eurostat business cycle clock and the pandemic: Some considerations

To face the increasing information need for measuring and monitoring economic and social phenomena, such as the impact of the pandemic, a number of dashboards have been published by national and international organisation. However, it can be hard to extract key signals from numerous indicators, and users could prefer concise messages. This was the aim for the development of the business cycle clock (BCC). This paper presents the BCC, the Eurostat online tool showing the recent cyclical situation of the economy, and how the BCC cyclical indicators have performed during the pandemic. We introduce some considerations about the impact of the COVID-19 pandemic first on the input variables and then on the BCC cyclical indicators, focusing on different challenges, such as values several standard deviations away from usual ones. Finally, we focus on the recent output of the BCC cyclical indicators during the pandemic. According to the indications of the BCC for the fourth quarter of 2021, the euro area economy remained in a ‘stable expansionary’ phase, although with decelerating growth. The euro area exited a recessionary phase in August 2020. The clock indicates that the risk of another slowdown or recession is very low at this stage in 2022.

Unveiling the black swan of the finance‐growth Nexus: Assumptions and preliminary evidence of virtuous and unvirtuous cycles

AbstractEmpirical evidence behind the nature of the finance‐growth nexus and mediating drivers behind this association is well documented in the literature. However, a framework that depicts the association between credit creation, financial innovation and endogenous creation of boom‐bust cycles is less evident and the gap between empirical research and theoretical development remains. Hence, this study represents a first attempt to provide a framework that could explain the switch of economic cycles from virtuous to unvirtuous and vice versa. We examine the role of financial innovation and identify its “hidden soul” defined as the rate of financial innovation (RoFIN). We study RoFIN together with other structural factors, such as monopolistic financial power concentration and financial deregulation in the creation of what we identify as the wealth trap, as a potential mediating factor behind the creation of virtuous and unvirtuous cycles. A cross‐country statistical exercise using the VUC indicator on the United States, United Kingdom, and Euro area economies shows the exponential effect of the rate of financial innovation over time and provides indicative evidence in support of our framework. Finally, we report that the indicator is better able to identify the unvirtuous cycle stages than the traditionally used Credit‐to‐GDP ratio.

Euro Area Policies: 2021 Article IV Consultation with Member Countries on Common Euro Area Policies-Press Release; Staff Report; and Statement by the Executive Director for Member Countries

Following a deep recession in 2020 and further contraction in 2021Q1, the euro area economy recovered rapidly in the second and third quarters thanks to high vaccination levels, increasing household and business adaptability to the virus, and continued forceful policy support. Looking ahead, while supply chain disruptions, elevated energy prices, and resurgences of Covid-19 cases—including those related to the Omicron variant—are likely to pose near-term headwinds to growth, the recovery is set to continue in 2022 as the impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease. Medium-term output losses relative to pre-crisis trends will vary significantly across countries and sectors as will the extent of labor market scarring. Price pressures are building up as production bottlenecks are set to persist for a while. However, inflation—despite increasing significantly in recent months due to transitory factors—is projected to moderate during 2022 and remain below the ECB’s inflation target over the medium term. Uncertainty surrounding the outlook remains high and largely related to pandemic dynamics and legacies, including induced behavioral and preference changes.

A Narrative Database of Labour Market Reforms in Euro Area Economies

A Narrative Database of Labour Market Reforms in Euro Area Economies

Regine-based Debt Sustainability Analysis: Evidence from Euro Area Economies

Regine-based Debt Sustainability Analysis: Evidence from Euro Area Economies

Comparison of the Approach of the Czech National Bank and the European Central Bank to the Effects of the Global Financial Crisis

The latest global crisis, which fully erupted in 2008, can have a significant impact on central banks credibility in the long run. During the last crisis, monetary authorities encountered zero interest rate levels and, as a result, started to use non-standard monetary policy instruments. The Czech National Bank decided to use a less standard instrument in November 2013, when it started to intervene on the foreign exchange market in order to keep the Czech currency at level 27 CZK / EUR. However, the European Central Bank also adopted a non-standard instrument, when chose a path of quantitative easing in 2015 in order to support the euro area economy by purchasing financial assets. The question remains whether the approach of Czech National Bank or the approach of European Central Bank in the crisis and post-crisis period was a more appropriate alternative. With the passage of time from the global financial crisis, it is already possible to compare the approaches of these two central banks and at least partially assess what approach was more appropriate under the given conditions. When comparing the central banks approaches to the crisis, the Czech National Bank was better, both in terms of the rate of interest rate cuts and the resulting inflation with regard to the choice of a non-standard monetary policy instrument. The recent financial crisis has revealed the application of moral hazard in practice, both on behalf of the European Central Bank and the Czech National Bank, which may have a significant impact on their credibility and independence in the coming years.

Firms’ expectations and monetary policy shocks in the euro area

We investigate the impact of monetary policy shocks on firms’ selling price and production expectations utilizing a proxy structural vector autoregressive (SVAR) model for ten euro-area economies during the period from 1999:1 to 2018:6. To identify monetary policy shocks, we utilize instruments such as a narrative measure of monetary policy. Our estimated impulse responses indicate that firms initially revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern consistent with firms’ learning over time. Following the initial surprise that leads firms to raise their production and selling price expectations after an unanticipated interest rate hike, firms gradually come to expect contractionary monetary policy shocks to decrease economic activity, consistent with initially imperfectly informed firms revising their expectations in accordance with a learning process about the economy.

The Euro Area credit crunch conundrum: Was it demand or supply driven?

This paper aims at studying the mechanisms through which credit markets convey financial shocks to the real economy. To accomplish this task, we perform a comprehensive assessment of the credit market dynamics in the Euro Area, from their drivers and evolution over time to the cross-country heterogeneity of their effects. We do so by employing a Bayesian TVP-FAVAR model which adopts a novel identification strategy exploiting data on 11 Euro Area economies (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain) between 2000:Q1 and 2018:Q4. We find that firms' financing displays higher sensitivity than households’ borrowing to credit demand and supply contractions and that, overall, credit aggregates reactions to such shocks display both time and cross-country heterogeneities. Policy-wise, this evidence highlights the need for structural interventions to better align the functioning of the banking and industrial systems in the Euro Area countries.

Assessing the euro area current account

This paper assesses the determinants of the evolution of the euro area current account against the benchmark provided by the empirical model in the Coutinho et al. (2018). The paper analyses what part of the current account can be explained by fundamental drivers (current account norms) for the euro area aggregate and for the largest five euro area economies. In addition, it attempts to make a step forward compared with traditional empirical current account specifications in two respects. First, in light of the growing stock imbalances across the euro area embodied by the net international investment position (NIIP), a different specification of current account norms is proposed for their computation, where the part of the NIIP that is explained by fundamental drivers is taken into account. Second, alternative specifications of the empirical model are estimated to better capture the impact of financial centres and corporate net savings, which have been playing an increasingly relevant role in shaping current account outturns in a number of euro area countries in recent decades. Results indicate that while the euro area current account has been in line with fundamentals until the great financial crisis, its post-crisis widening partly reflects private and public deleveraging. Accounting for NIIPs and corporate net savings contributes to moderately reduce the gap between the euro area current account and the norm.