This paper analyzes the joint long-run evolution of wealth and income inequality. We find that top wealth and income shares were cointegrated over the past century in France and the US. We rationalize this finding in two macroeconomic heterogeneous agent models featuring growth and incomplete markets, respectively. In both frameworks, the co-movement of top wealth and income shares is determined by the relative saving rate at the top, i.e. the ratio of the saving rate of rich individuals to the aggregate saving rate. Our empirical results suggest that relative saving rates at the top have been fairly stable over time, thus explaining the observed tight co-movement between top wealth and income shares over the past century.

We provide new evidence on the effect of monetary policy on investment in Australia using firm-level data. We find that contractionary monetary policy makes firms less likely to invest and lowers the amount they invest if they do so. The effects are similar for young and old firms, indicating that the decline in the number of young firms in Australia over time is unlikely to have weakened the effect of monetary policy. The effects are also broadly similar for smaller and larger firms. This suggests that evidence that some, particularly large, firms have sticky hurdle rates does not mean that they do not respond to monetary policy. It also suggests that overseas findings that expansionary monetary policy lessens competition by supporting the largest firms likely do not apply to Australia. We find evidence that financially constrained firms, and sectors that are more dependent on external finance, are more responsive to monetary policy, highlighting the important role of cash flow and financing constraints in the transmission of monetary policy. Finally, we find evidence that monetary policy affects firms' actual and expected investment contemporaneously, suggesting that expectations are reactive and will tend to lag over the cycle.

Using high-frequency identification, we investigate leverage of the firm and economy-wide leverage as determinants of the sensitivity of a firm's stock price to monetary policy announcements. We show that the effect of economy-wide leverage is substantially larger than the effect of the firm's own leverage. It is sufficient for the response of a firm's stock price to strengthen that other firms in the economy become more leveraged. We further show that economy-wide leverage fluctuations explain the time-varying effects of monetary policy on stock prices. Our results are robust controlling for a variety of common business cycle variables and household leverage.

This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks and that high leverage amplifies the effects, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Furthermore, this sectoral effect is longer lived. In line with the demand effects of the interest rate channel, we also provide evidence that sales growth of durables producing firms reacts stronger to a monetary policy shock.

This paper analyses the joint long-run evolution of wealth and income inequality. We show that top wealth and income shares were cointegrated over the past century in France and the US. We rationalise this finding using a two-agent version of the Solow growth model. In this framework, the co-movement of top wealth and income shares is determined by the relative saving rate at the top, i.e. the ratio of the saving rate of rich individuals to the aggregate saving rate. The cointegration finding suggests that relative saving rates at the top are fairly stable over time, thus explaining the tight co-movement between top wealth and income shares over the past century.

This study revisits business cycle duration dependence in G7 countries by controlling for foreign recessions, defined as the number of other G7 countries in a recession. Estimates from regime switching logit models show that the monthly likelihood of ending an expansion roughly doubles for every extra G7 country in recession, but the end of foreign recessions do not affect the ending of recessions. They also show that recessions are duration dependent in all G7 countries, but expansions only in the United States and Germany. The economic importance of foreign recessions and duration in driving business cycle phase changes vary across countries.

We set out to analyse the monetary policy transmission mechanism by documenting how the annual investment of more than one million firms in Germany, Spain, France and Italy responded to monetary policy shocks between 2000 and 2016. We show that euro area firms react differently depending on their age and the industry they operate in: young firms and those producing durable goods react more strongly than the average firm. This confirms that monetary policy is affecting firms’ investment through two different channels. On the one hand, the “interest rate channel” affects demand for durable goods more than demand for services, which in turn affects investment demand from the producers of those goods. On the other hand, as young firms are more likely to face financing constraints, their stronger than average reaction can be explained by the “balance sheet channel” of monetary policy transmission. JEL Classification: E22, E52

We provide evidence on the effect of elementary index choice on inflation measurement in the euro area. Using scanner data for 15,844 individual items from 42 product categories and 10 euro area countries, we compute product category level elementary price indexes using eight different elementary index formulas. Measured inflation outcomes of the different index formulas are compared with the Fisher ideal index to quantify elementary index bias. We have three main findings. First, elementary index bias is quite variable across product categories, countries and index formulas. Second, a comparison of elementary index formulas with and without expenditure weights shows that a shift from price only indexes to expenditure weighted indexes would entail at the product level multiple percentage points differences in measured price changes. And finally, we show that elementary index bias is quantitatively more important than upper level substitution bias.

The financial accounts of the household sector within the system of national accounts report the aggregate asset holdings and liabilities of all households within a country. In principle, when household wealth surveys are explicitly designed to be representative of all households, aggregating these micro data should correspond to the macro aggregates. In practice, however, differences are large. We first discuss conceptual and generic differences between those two sources of data. Thereafter we investigate missing top tail observation from wealth surveys as a source of discrepancy. By fitting a Pareto distribution to the upper tail, we provide an estimate of how much of the gap between the micro and macro data is caused by the underestimation of the top tail of the wealth distribution. Conceptual and generic differences as well as missing top tail observations explain part of the gap between financial accounts and survey aggregates.

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Intertemporal consumer preference shifts, although common in modern macro-economic models as drivers of demand shocks, have important but largely unexplored implications for price index theory and thus, for empirically measured price changes. The current practice of inflation measurement basically ignores taste changes and this study aims to fill this gap. We derive a cost-of-living index in the presence of intertemporal preference shifts and show that such taste changes tend to lower the cost-of-living. Using a large barcode level dataset that covers 331 product groups and ten countries, we then uncover the importance of taste changes in explaining consumer demand shifts across close substitutes. We also analyze how measured consumer price inflation alters after allowing for taste adjustment over time and under CES preferences. To do so, we estimate the elasticity of substitution between varieties of the same good and use those to calculate goods price indexes. Our results show that the median elasticity of substitution is around 4 and find that measured average annual goods price inflation is on average about 1.1 percent lower when taking into account consumer taste shifts compared to standard goods price indexes. Our results indicate that taste changes are an important hitherto ignored factor in the measurement of cost-of-living changes.

We analyze the aggregate markup of a small-open economy, Belgium, using a firm-level dataset that includes all non-financial, private firms. The dataset covers the period 1980-2016 and merges the annual firm accounts over three periods when firms faced different reporting thresholds for the key variables we use. After harmonizing the data, we find that for the median firm the revenue share of service intermediates doubles, to some extent at the expense of in-house employment. As this general patterns holds true for the vast majority of firms and all sectors of the economy, we need to control for it in the calculation of our firm-level markup estimates. We document increasing markups in the overall economy throughout the first fifteen years of our sample, 1980-1995, and a continued rise in manufacturing until the early 2000s. In the remaining years, the aggregate markup, although cyclical, remained relatively stable. These patterns are driven by the dynamics in the sales-to-expenditure ratio, with only a small role for changes in the technology parameters. Two decompositions illustrate that the aggregate pattern masks systematic dynamics at the sector and firm level. We find that in periods where the aggregate markup rises—for the full economy or for one of the major sectors—it is almost entirely due to the within component, i.e. firm-level markup growth. In periods where the aggregate markup is stable, the average hides a strong process of reallocation. Firms or sectors with high markups increase their market share, which raises the aggregate markup, but this is dominated by a negative correlation between changes in market share and markups, which depresses the aggregate.

We estimate the long- and short-run relationship between top income and wealth shares for France and the US since 1913. We find strong evidence for a long-run cointegration relationship governed by relative saving rates at the top. For both countries, we estimate a decline in the relative saving rates at the top - after 1968 in France and 1983 in the US, equivalent to a reduction of the long-run gap between wealth and income inequality compared to the period before. In the short-run, income inequality drives wealth inequality, while the converse link is weaker and slower. Using counterfactual simulations, we find that the recent rise in wealth inequality in the US is largely attributable to the contemporary increase in income inequality. Modest income concentration dynamics and a stronger decline in relative saving rates at the top than in the US contributed to a more subdued rise in wealth inequality in France.

We analyze the aggregate markup of a small-open economy, Belgium, using a firm-level dataset that includes all non-financial, private firms. The dataset covers the period 1980-2016 and merges the annual firm accounts over three periods when firms faced different reporting thresholds for the key variables we use. After harmonizing the data, we find that for the median firm the revenue share of service intermediates doubles, to some extent at the expense of in-house employment. As this general patterns holds true for the vast majority of firms and all sectors of the economy, we need to control for it in the calculation of our firm-level markup estimates. We document increasing markups in the overall economy throughout the first fifteen years of our sample, 1980-1995, and a continued rise in manufacturing until the early 2000s. In the remaining years, the aggregate markup, although cyclical, remained relatively stable. These patterns are driven by the dynamics in the sales-to-expenditure ratio, with only a small role for changes in the technology parameters. Two decompositions illustrate that the aggregate pattern masks systematic dynamics at the sector and firm level. We find that in periods where the aggregate markup rises—for the full economy or for one of the major sectors—it is almost entirely due to the within component, i.e. firm-level markup growth. In periods where the aggregate markup is stable, the average hides a strong process of reallocation. Firms or sectors with high markups increase their market share, which raises the aggregate markup, but this is dominated by a negative correlation between changes in market share and markups, which depresses the aggregate.

We provide empirical evidence on banks' responses to shocks in the wholesale funding market, using data of 181 euro area banks over the period from August 2007 to June 2013. Responses to funding liquidity shocks for both banks' lending volumes and loan rates, to households and corporates, are analysed in a panel VAR framework. We thereby distinguish banks by country, extent of Eurosystem borrowing, bank size and capitalization. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries of the periphery. The results also suggest that central bank liquidity has mitigated this effect on lending volumes. Lending to nonfinancial corporations is more sensitive to wholesale funding shocks than lending to households. Lending volumes of large banks that are typically more dependent on wholesale funding and banks with large exposure to sovereign bonds show stronger responses to wholesale funding shocks.

We provide new insights into the relationship between financial market tightness and real activity using a new database of corporate bonds issued in eight European countries. Bond spreads have a significant negative relationship with four real activity variables at horizons 1-8 quarters ahead. The relationship is robust to adding measures of monetary policy tightness and leading indicators, providing strong support for models previously only evaluated on US data. A sub-set of northern European countries have similar sensitivity of real GDP to bond spreads, but others have greater sensitivity to bond spreads, revealing diverse responses in Europe to financial market tightness. The global financial crisis that began in 2007 and the ensuing recession have spurred renewed interest in the relationship between tightness of financial markets and the business cycle. A number of studies have considered the effects of financial conditions on the real economy (Hatzius et al. 2010, Cardarelli et al. 2011, and others summarised in Kliesen et al. 2012). New models that develop the financial accelerator idea of Gertler and Gilchrist (1994) and Bernanke et al. (1999) incorporate “risk shocks” emanating from the financial sector that are then transmitted to real output (e.g. Gertler and Karadi, 2009; Jermann and Quadrini, 2012). A negative risk shock means that borrowers can finance less investment for a given net worth. Attention has focused on corporate bond markets, which have increased in significance since the financial crisis because of the reduced availability of bank finance (Kaya and Meyer, 2013; Kaya and Wang, 2014). The yield spread between corporate bonds and lowest-risk government bonds reflects investors’ willingness to lend to companies and incorporates two time-varying components: the default risk itself, and systematic risk associated with the fact that expected default loss is correlated with equity price movements (Elton et al. 2001).2 Even before the crisis (Gertler and Lown, 1999; Mody and Taylor, 2004; and King et al., 2007) had shown that high yield bond spreads have predictive power for output fluctuations in the United States. The most recent research on the relationship between bond yields and real activity has been conducted by Gilchrist et al. (2009a), Gilchrist and Zakrajšek (2012) and Faust et al. (2013) on US bond market data. They confirm that changes in bond spreads offer early warnings of a decline in real activity, so that they are powerful indicators of approaching 1 We thank the ESRC for funding under grant number ES/H003053/1. We benefitted greatly from comments of the editor, Morten Ravn, and three anonymous referees as well as seminar participants at the Bank of England; the Money, Macro and Finance conference, Dublin, Sept 2012; and Yonsei University, Seoul. We thank Robert Anderton, Gabe de Bondt, John Duca, John Gathergood, Simon Gilchrist, Christoph Görtz, Michael Joyce, Peter Karadi, Kevin Lee, Phil Molyneux, Simon Price, Peter Sinclair, Oreste Tristani, Philip Vermeulen, Mark Watson, Mike Wickens, Vladimir Yankov and Egon Zakrajšek for additional comments. Any remaining errors are our own. Corresponding Author: Paul Mizen, Professor of Monetary Economics, University of Nottingham, University Park, Nottingham, NG7 2RD, United Kingdom; Email: paul.mizen@nottingham.ac.uk. 2 As Elton et al. (2001), p. 267) put it, “[i]f corporate bond returns move systematically with other assets in the market whereas government bonds do not, then corporate bond expected returns would require a risk premium to compensate for the non-diversifiability of corporate bond risk, just like any other asset.” 1 recessions. Rather than use an off-the-shelf index, these latest contributions employ a bottomup approach that concentrates on the careful selection of bonds to create a bond spread index that is not distorted by embedded options or illiquidity. While these papers provide convincing evidence that bond spreads predict future changes in real activity in the United States, there is no corresponding analysis for the euro area and the United Kingdom, the second and third largest bond markets respectively, mainly because these bond markets are comparatively young, but also because of a lack of country-specific bond indices.3 We construct corporate bond indices for eight European countries, using the approach pioneered by Gilchrist et al. (2009a). This provides the first measures of corporate bond market tightness specific to each country, which can be used to explore hypotheses previously only tested on US data. Our paper makes several contributions to the literature with potentially important policy implications for European economies. The first main contribution is to show that bond spreads have significant predictive ability over macroeconomic variables for the largest European economies, providing a signal of incipient economic downturns in these countries. We evaluate the importance of the bond spread versus measures of domestic monetary policy tightness and leading indicators, as well as spillover effects from regionally or globally important economies such as the United States and Germany, and find that bond spreads offer a substantial contribution to the prediction of real activity. Our second main contribution exploits the cross-sectional dimension of our data to compare the responses to the bond spread measures in different countries across Europe. There is a high degree of consistency in the statistical significance of the bond spread measures at different horizons for each country, with a commonly signed negative coefficient in a regression explaining real GDP growth. But the scale of the response is not equal, reflecting heterogeneity in the sensitivity of different European countries to financial conditions, measured by corporate bond spreads. These may reflect the differences in the depth of capital markets among the countries in the sample. When we test for equality of the bond spread coefficients across all European countries (including the UK), we reject the null, and for euro area countries alone we also reject the null of equality. But for a subset of euro area countries with the largest corporate bond markets (Germany, France and Netherlands), we cannot reject the null that the coefficients on bond spreads are equal. In addition to the fact that bond spreads differ in magnitude across Europe, the sensitivity of the response of real GDP to these spreads is also greater for Austria, Belgium, Italy and Spain than it is for France, Germany and the Netherlands. A financial shock may raise spreads by larger amounts in some peripheral economies of Europe; our paper shows that the impact on real GDP in those economies is also greater due to higher sensitivity of activity to spreads. This implies that the impact of bond spreads on real activity measures differs across countries in Europe, despite a common monetary policy stance, and considerable real economic ties between countries. In addition to these contributions, we also decompose the spread by removing the influence of default risk and bond characteristics before testing the information content in the 3 European bond markets had $1933.3bn of outstanding corporate bonds in December 2013, of which $1229.2bn were issued in euro and $704.1bn in sterling. They are the second and third largest bond markets, respectively, after the United States, according to data from the Bank for International Settlements. 2 residual bond spreads (the “excess bond premium”).4 This confirms the predictive ability of the spread even after purging it of these potentially distorting factors. We find that bond spreads in the euro area are correlated with the tightness of credit supply as reported in ECB surveys of bank lending, and we show that a worsening of bank credit supply has a significant negative correlation with future real GDP growth, whereas a survey measure of credit demand does not.5 Our interpretation of these results is that tightness of credit supply from banks and bond markets occurs at the same time and has a similar degree of predictive ability over real activity. Finally, in an online appendix, we show that our model has superior out-of-sample forecast performance in forecasting real GDP growth relative to that of a model that omits bond spreads, and other basic alternatives such as a random walk model and an autoregressive model. Our findings are evaluated using our unique new panel of data from October 2001-May 2011 for Austria, Belgium, France, Germany, Italy, Netherlands, and Spain and from July 1994-May 2011 for the United Kingdom.6 This index is the first of its kind for Europe, where there are no benchmark indices for bond spreads over a comparable sample period, and data on European bonds has not been systematically constructed into a bond spread index. The paper is organised as follows. Section 1 discusses the recent literature. We then explain recent developments in European corporate bond markets and differences between countries, and the nature of our data in Section 2. In Section 3 we explain our methodology. Section 4 then provides results of the predictive ability of bond spreads on real economic activity and tests various hypotheses about cross country differences, out of sample forecast performance and the relationship to bank lending surveys. Section 5 concludes. 1. A Brief Review of the Literature In an early contribution Davis and Fagan (1997) tested for the predictive content of the bond quality spread (defined as the difference between private and government bond yields) for three European countries (Denmark, Germany and the UK). They found a significant relationship for bond spreads only in Germany for inflation and output growth, but their out-of-sample forecasting results were weak. De Bondt (2004) offered the first empirical examination of the balance sheet channel in the euro area since the introduction of the single curr

This paper uses the Household Finance and Consumption Survey to construct new estimates of top wealth shares in Germany, France, Spain, Italy, Belgium, Austria, Finland and The Netherlands. It provides a methodology to address simultaneously non-response and underreporting in wealth surveys.

We present a comparable set of results on the monetary transmission channels on firm investment for the four largest euro-area countries (Germany, France, Italy and Spain). With particularly rich micro datasets for each country containing over 215,000 observations from 1985 to 1999, we ex-plore what can be learned about the interest channel and the broad credit channel. For each of those countries, we estimate neo-classical investment relationships, explaining investment by its user cost, sales and cash flow. We find investment to be sensitive to user cost changes in all those four countries. This implies an operative interest channel in these euro-area countries. We also find in-vestment in all countries to be quite sensitive to cash flow movements. However, only in Italy do smaller firms react more to cash flow movements than large firms, implying that a broad credit channel might not be equally pervasive in all countries.

In the aftermath of the Great Recession, investment in the United States has recovered, whereas investment in the euro area has remained low following the sovereign debt crisis which temporarily halted the recovery in the euro area. Nevertheless, investment in the current cyclical phase is not unusual as such; rather, it is aggregate consumption that is growing more slowly than usual — a finding which highlights the importance of policies aimed at stimulating aggregate demand. JEL Classification: E22, E32

The Competitiveness Research Network (CompNet) was set up back in 2012 by the European System of Central Banks. Its initial objectives were to identify the determinants of European countries’ and firms’ competitive positions as well as their productivity and to set out the relationship between these different competitiveness factors and macroeconomic performance (exports or growth, for instance). It brought together more than a hundred research workers from fifty or so institutions (including central banks, the European Commission, international organisations, universities), leading to an in-depth study of the theme of competitiveness, as well as an analysis and better understanding of the development of global production chains. Particular effort has been devoted to establishing new competitiveness indicators. The objective of this article is to present the main findings of their work.