Bank of Estonia

Abstract This paper studies how the Covid-19 pandemic affected firm productivity. The focus is on the reallocation channel measured by the responsiveness of firm employment growth to productivity. The analysis leverages high-quality firm-level data covering 11 euro area countries over 2 decades, from the early 2000s to 2020 in most sample countries. The results show that: (1) Productivity-enhancing reallocation has weakened over time, with its contribution to aggregate productivity declining in the majority of the sample countries. (2) The strength of this reallocation process varies largely across countries, accounting for 0.7–5.2 log points of aggregate yearly productivity growth. (3) Various estimation approaches and productivity proxies suggest that productivity-enhancing reallocation was weaker in more countries during the pandemic than in the Great Recession.

Abstract The paper studies the effects of foreign (the US, the UK and the Chinese) and domestic economic policy uncertainty (EPU) shocks on unemployment in Germany, France, Italy and Spain. The analysis is run separately for the rates of adult and youth unemployment. Impulse responses derived from vector autoregressive models show that the magnitudes of the responses of the adult and youth segments of the labour market are quite different. Following an uncertainty shock, the youth unemployment rate increases significantly more than the adult unemployment rate. This is the case for France, Italy and Spain. The German labour market seems to be resistant to foreign (except Chinese) and domestic EPU shocks, while the remaining labour markets, foremost the Spanish and Italian ones, are susceptible to uncertainty shocks, especially to the US EPU shocks.

In this chapter, we use high frequency multidimensional textual news data and propose an index of inflation news. We utilize the power of text mining and its ability to convert large collections of text from unstructured to structured form for in-depth quantitative analysis of online news data. The significant relationship between the household’s inflation expectations and news topics is documented and the forecasting performance of news-based indices is evaluated for different horizons and model variations. Results suggest that with optimal number of topics a machine learning model is able to forecast the inflation expectations with greater accuracy than the simple autoregressive models. Additional results from forecasting headline inflation indicate that the overall forecasting accuracy is at a good level. Findings in this chapter support the view in the literature that the news is good indicators of inflation and are able to capture inflation expectations well.

In this paper we aim to analyse the degree of mean reversion of public expenditure, revenue and the difference between them, over GDP for 27 European Union (EU) countries. To gain flexibility in the analysis of the order of integration of the variables we apply fractional integration techniques. In general, we find evidence of mean reversion in all countries.

This article assesses the importance of capital flows as measured by the current account balance for the growth dynamics of the EU countries from Central and Eastern Europe. Economic growth in these countries was on average relatively high before the global financial crisis but markedly lower after the crisis. Panel data econometrics using annual data for 1997–2015 point to the contemporaneous current account balance having a sizeable negative effect on annual GDP growth. Estimations using many control variables and instrumental variables suggest that the negative effect is mainly demand driven. Counterfactual simulations show that growth rates in all CEE countries would have been lower in the absence of capital flows, and this applies particularly to the countries with the most disadvantageous starting points.

PurposeThe paper aims to investigate the impact of financial liabilities on households’ holdings of financial assets. The debt-to-income ratio of the household sector increased from 75 per cent in 2000 to 99 per cent in 2010 in the euro area on average, and the rapid accumulation of household debt has induced the need to study how indebtedness affects the behaviour of households beyond their borrowing decisions.Design/methodology/approachThe paper uses the first wave of the Household Finance and Consumption Survey from 2009-2010 covering euro area countries. The paper estimates a system of equations for households’ financial liabilities and assets, taking account of endogeneity and selection bias.FindingsThe results indicate that higher household liabilities are related to lower holdings of financial assets. The results are confirmed by a large number of robustness tests. The findings support the hypothesis that credit availability reduces precautionary savings as income shocks can be smoothed by borrowing, meaning fewer assets are held for self-insurance against consumption risk.Practical implicationsThe results are obtained from a recession period when households faced aggregate shocks, whereas credit constraints were tighter than during good times. The implications of lower incentives to keep financial assets by indebted households is that they are actually more vulnerable to aggregate shocks, as they have fewer resources available when they are hit by a negative shock.Originality/valueThis is the first paper to investigate the effect of liabilities on financial assets using household level data. The paper takes a holistic view and models financial assets and liabilities jointly while controlling for endogeneity and selection bias.