Euro Area GDP Research Articles

Nowcasting Euro area GDP with news sentiment: A tale of two crises

SummaryThis paper shows that newspaper articles contain signals that can materially improve real‐time nowcasts of real GDP growth for the Euro area. Using articles from 15 popular European newspapers, which are machine translated into English, we create sentiment metrics that update daily and assess their value for nowcasting, comparing with competitive and rigorous benchmarks. We find that newspaper text is especially helpful early in the quarter before other indicators are available. We also find that general‐purpose sentiment measures perform better than more economics‐focused ones in response to unanticipated events and nonlinear supervised models can help capture extreme movements in growth but require sufficient training data to be effective.

Evaluating the yield curve effects of central bank asset purchases under a forward-looking supply factor

The theoretical literature on term structure models emphasizes the importance of the expected absorption of duration risk during the residual life of term bonds in order to understand the yield curve effect of central banks’ government bond purchases. Motivated by this, we develop a forward-looking, long-horizon measure of euro area government bond supply net of Eurosystem holdings, and use it to estimate the impact of the ECB’s asset purchase programs in the context of a no-arbitrage affine term structure model. We find that an asset purchase shock equivalent to 10% of euro area GDP lowers the 10-year average yield of the euro area big-four by 59 basis points (bp) and the associated term premium by 50 bp. Applying the model to the risk-free (OIS) yield curve, the same shock lowers the 10-year rate and term premium by 35 and 26 bp, respectively.

Short Term Forecasting of Euro Area Gdp Using Common Factors

Short Term Forecasting of Euro Area Gdp Using Common Factors

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.

Effects of Covid-19 on Euro area GDP and inflation: demand vs. supply disturbances

This paper analyzes the macroeconomic effects of the Covid-19 epidemic on Euro Area (EA) GDP and inflation, using a stylized New Keynesian model. Covid is interpreted as a combination of aggregate demand and aggregate supply disturbances. Offsetting aggregate demand and supply changes are shown to account for the stability of EA inflation, in the face of Covid. The evidence presented here indicates that Covid-induced aggregate demand and supply shifts were persistent. An aggregate supply contraction is identified as the dominant force driving the sharp fall of EA GDP in 2020.

Nowcasting Monthly GDP with Big Data: A Model Averaging Approach

AbstractGross domestic product (GDP) is the most comprehensive and authoritative measure of economic activity. The macroeconomic literature has focused on nowcasting and forecasting this measure at the monthly frequency, using related high-frequency indicators. We address the issue of estimating monthly GDP using a large-dimensional set of monthly indicators, by pooling the disaggregate estimates arising from simple and feasible bivariate models that consider one indicator at a time in conjunction to GDP. Our base model handles mixed-frequency data and ragged-edge data structure with any pattern of missingness. Our methodology enables to distil the common component of the available economic indicators, so that the monthly GDP estimates arise from the projection of the quarterly figures on the space spanned by the common component. The weights used for the combination reflect the ability to nowcast quarterly GDP and are obtained as a function of the regularized estimator of the high-dimensional covariance matrix of the nowcasting errors. A recursive nowcasting and forecasting experiment with data on euro area GDP illustrates that the optimal weights adapt to the information set available in real time and vary according to the phase of the business cycle.

Combining Bayesian VARs with Survey Density Forecasts: Does it Pay Off?

This paper studies how to combine real-time forecasts from a broad range of Bayesian vector autoregression (BVAR) specifications and survey forecasts by optimally exploiting their properties. To do that, it compares the forecasting performance of optimal pooling and tilting techniques, including survey forecasts for predicting euro area inflation and GDP growth at medium-term forecast horizons using both univariate and multivariate forecasting metrics. Results show that the Survey of Professional Forecasters (SPF) provides good point forecast performance, but also that SPF forecasts perform poorly in terms of densities for all variables and horizons. Accordingly, when the model combination or the individual models are tilted to SPF's first moments, point accuracy and calibration improve, whereas they worsen when SPF's second moments are included. We conclude that judgement incorporated in survey forecasts can considerably increase model forecasts accuracy, however, the way and the extent to which it is incorporated matters.

Nowcasting Euro Area GDP with News Sentiment: A Tale of Two Crises

This paper shows that newspaper articles contain timely economic signals that can materially improve nowcasts of real GDP growth for the euro area. Our text data is drawn from fifteen popular European newspapers, that collectively represent the four largest Euro area economies, and are machine translated into English. Daily sentiment metrics are created from these news articles and we assess their value for nowcasting. By comparing to competitive and rigorous benchmarks, we find that newspaper text is helpful in nowcasting GDP growth especially in the first half of the quarter when other lower-frequency soft indicators are not available. The choice of the sentiment measure matters when tracking economic shocks such as the Great Recession and the Great Lockdown. Non-linear machine learning models can help capture extreme movements in growth, but require sufficient training data in order to be effective so become more useful later in our sample. JEL Classification: C43, C45, C55, C82, E37

Protectionism and the Effective Lower Bound in the Euro Area

This paper evaluates the macroeconomic impact on the euro area (EA) of the imposition of tariffs by simulating a multi-country New Keynesian model featuring the effective lower bound (ELB) on the EA monetary policy rate. The main results are as follows. First, the bilateral tariff dispute between the United States (US) and China (CH) has positive spillovers on the EA economy, because of favorable trade diversion effects. Second, simultaneous tariff increases between the US and CH and between the US and EA have negative effects on euro-area GDP and (ex-tariff) inflation. The effects are magnified if the ELB binds in the EA. Third, if the elasticity of substitution among tradables is low, the spillovers on euro-area GDP of US-CH trade tensions are negligible if the ELB is not binding, while they become negative if the ELB binds.

International confidence spillovers and business cycles in small open economies

The economic literature has for a long time been looking for explanations of a very strong international correlation of business cycles. This paper shows empirically that common fluctuations can to some degree be the effect of confidence shocks being transmitted internationally. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that euro area confidence fluctuations account for approximately 40–70% of business cycle fluctuations both in the euro area and in Poland. More importantly, their transmission happens not only via traditional channels (e.g., by confidence affecting euro area GDP and then Polish GDP via trade), but to a large extent occurs directly (e.g., by news spreading via media).

High-Frequency Monitoring of Growth-at-Risk

Monitoring changes in financial conditions provides valuable information on the contribution of financial risks to future economic growth. For that purpose, central banks need real-time indicators to adjust promptly the stance of their policy. We extend the quarterly Growth-at-Risk (GaR) approach of Adrian et al. (2019) by accounting for the high-frequency nature of financial conditions indicators. Specifically, we use Bayesian mixed data sampling (MIDAS) quantile regressions to exploit the information content of both a financial stress index and a financial conditions index leading to real-time high-frequency GaR measures for the euro area. We show that our daily GaR indicator (i) provides an early signal of GDP downturns and (ii) allows day-to-day assessment of the effects of monetary policies. During the first six months of the Covid-19 pandemic period, it has provided a timely measure of tail risks on euro area GDP.

The macroeconomic effects of quantitative easing in the euro area: Evidence from an estimated DSGE model

This paper estimates an open-economy dynamic stochastic general equilibrium (DSGE) model with Bayesian techniques to provide a structural empirical evaluation of the macroeconomic effects of the European Central Bank's (ECB's) quantitative easing (QE) programme. Allowing for cross-border holding of government debt and using data on government debt stocks and yields across maturities, we identify the parameters governing portfolio rebalancing in the private sector. We rely on a methodological extension that measures the non-linear contribution of QE in shock decompositions under an occasionally binding constraint (zero lower bound). Our results suggest an average contribution of ECB QE to annual Euro Area GDP growth and CPI inflation in 2015–18 of 0.3 and 0.5 percentage points, respectively, with a maximum impact in 2016.

A European Safe Asset to Complement National Government Bonds

This paper expands the growing literature on common safe assets in the context of the euro area financial system by employing credit risk simulation techniques to investigate the properties of different safe asset models and their impact on national bond markets. The paper explores in particular the E-bonds model, whereby a supranational institution would raise funds in the markets and provide bilateral senior loans to Member States corresponding to a fixed proportion of GDP, complementing the issuance of national government bonds, without risks of mutualisation. The main findings are that E-bonds could reach a volume of 15 to 30% of euro area GDP with a high degree of safety while becoming the reference safe asset for the banking sector, capital markets and monetary policy operations in the euro area. As regards the impact on remaining national bonds, such volumes would be consistent with Germany maintaining its top credit rating. The average funding costs of Member States would remain broadly stable, while marginal funding costs would tend to experience limited increases, which should enhance market discipline.

Money Neutrality, Monetary Aggregates and Machine Learning

The issue of whether or not money affects real economic activity (money neutrality) has attracted significant empirical attention over the last five decades. If money is neutral even in the short-run, then monetary policy is ineffective and its role limited. If money matters, it will be able to forecast real economic activity. In this study, we test the traditional simple sum monetary aggregates that are commonly used by central banks all over the world and also the theoretically correct Divisia monetary aggregates proposed by the Barnett Critique (Chrystal and MacDonald, 1994; Belongia and Ireland, 2014), both in three levels of aggregation: M1, M2, and M3. We use them to directionally forecast the Eurocoin index: A monthly index that measures the growth rate of the euro area GDP. The data span from January 2001 to June 2018. The forecasting methodology we employ is support vector machines (SVM) from the area of machine learning. The empirical results show that: (a) The Divisia monetary aggregates outperform the simple sum ones and (b) both monetary aggregates can directionally forecast the Eurocoin index reaching the highest accuracy of 82.05% providing evidence against money neutrality even in the short term.

When Are Google Data Useful to Nowcast Gdp? An Approach Via Pre-Selection and Shrinkage

Nowcasting GDP growth is extremely useful for policy-makers to assess macroeconomic conditions in real-time. In this paper, we aim at nowcasting euro area GDP with a large database of Google search data. Our objective is to check whether this specific type of information can be useful to increase GDP nowcasting accuracy, and when, once we control for official variables. In this respect, we estimate shrunk bridge regressions that integrate Google data optimally screened through a targeting method, and we empirically show that this approach provides some gain in pseudo-real-time nowcasting of euro area GDP quarterly growth. Especially, we get that Google data bring useful information for GDP nowcasting for the four first weeks of the quarter when macroeconomic information is lacking. However, as soon as official data become available, their relative nowcasting power vanishes. In addition, a true real-time analysis confirms that Google data constitute a reliable alternative when official data are lacking.

The Normalization of the European Central Bank’s Monetary Policy from an Austrian Perspective

After several years of historically low interest rates and quantitative easing, the European Central Bank (ECB) has finally started wind-ing down its ultra-accommodative monetary policy in late 2018. Among the first steps tapering its asset purchase programme (APP), which foresees monthly purchases of up to €30bn per month until September 2018 — «or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of infla-tion consistent with its inflation aim» (ECB, 2018a). By then, pur-chases of euro area fixed income securities on behalf of the ECB will have mounted to as much as €2,550bn or almost 90% of euro area GDP (€2,834bn in market prices in Q4 2017, the latest date for which data were available (ECB, 2018b)). Further, according to market esti-mates, the first hike of the main refinancing rate, which was slashed to 0% in March 2016, could emerge in Q1 2019, thereby following a tightening of the monetary policy the US Federal Reserve (FED) had already started in December 2015 (FED, 2015).

A General Equilibrium Appraisal of Capital Shortfall

We quantify the capital shortfall that results from a global financial crisis by using a macro-finance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.

A General Equilibrium Appraisal of Capital Shortfall

We quantify the capital shortfall that results from a global financial crisis by using a macrofinance dynamic stochastic general equilibrium model that captures the interactions between the financial and real sectors of the economy. We show that a crisis similar to that observed in 2008 generates a capital shortfall (or stressed expected loss, SEL) equal to 2.8% of euro-area GDP, which corresponds to approximately 250 billion euros. We also find that using a cycle-dependent capital ratio that combines concern for both credit growth and SEL has a positive effect on output growth while mitigating the excessive risk taking of the banking system. Finally, our estimates confirm that most of the variability of the macroeconomic and financial variables at business cycle frequencies is due to investment and risk shocks.

Nowcasting Real Economic Activity in the Euro Area: Assessing the Impact of Qualitative Surveys

This paper analyses the contribution of survey data, in particular various sentiment indicators, to nowcasts of quarterly euro area GDP. It uses a genuine real-time dataset that is constructed from original press releases in order to transform the actual dataflow into an interpretable flow of news. The latter is defined as the difference between the released values and the prediction of a mixed-frequency dynamic factor model. Our purpose is twofold. First, we aim to quantify the specific value added for nowcasting GDP from a set of heterogeneous data releases including not only sentiment indicators constructed by Eurostat, Markit, the National Bank of Belgium, IFO, ZEW, GfK or Sentix, but also hard data regarding industrial production or retail sales in the aggregate euro area and individually in some of the largest euro area countries. Second, our quantitative analysis is used to draw up an overall ranking of the indicators, on the basis of their average contribution to updates of the nowcast. Among the survey indicators, we find the strongest impact for the Markit Manufacturing PMI and the Business Climate Indicator in the euro area, and the IFO Business Climate and IFO Expectations in Germany. The widely monitored consumer confidence indicators, on the other hand, typically do not lead to significant revisions of the nowcast. In addition, even if euro area industrial production is a relevant predictor, hard data generally contribute less to the nowcasts: they may be more closely correlated with GDP but their relatively late availability implies that they can to a large extent be anticipated by nowcasting on the basis of survey data and, hence, their ‘news’ component is smaller. Finally, we also show that, in line with the previous literature, the NBB’s own business confidence indicator appears to be useful for predicting euro area GDP. The prevalence of survey data remains also under a counterfactual scenario in which hard data are released without any delay. This finding confirms that, in addition to being available in a more timely manner, survey data also contain relevant information that does not seem to be captured by hard data.

A Note on the Predictive Power of Survey Data in Nowcasting Euro Area GDP

This paper investigates the trade-off between timeliness and quality in nowcasting practices. This trade-off arises when the frequency of the variable to be nowcast, such as GDP, is quarterly, while that of the underlying panel data is monthly; and the latter contains both survey and macroeconomic data. These two categories of data have different properties regarding timeliness and quality: the survey data are timely available (but might possess less predictive power), while the macroeconomic data possess more predictive power (but are not timely available because of their publication lags). In our empirical analysis, we use a modified dynamic factor model which takes three refinements for the standard dynamic factor model of Stock and Watson (2002) into account, namely mixed frequency, pre-selections and co-integration among the economic variables. Our main finding from a historical nowcasting simulation based on euro area GDP is that the predictive power of the survey data depends on the economic circumstances, namely, that survey data are more useful in tranquil times, and less so in times of turmoil.