How US policy uncertainty is quietly dragging down European growth

"The post, co-authored by Anastasia Allayioti, an economist in the ECB's Monetary Policy Strategy Division, Caterina Mendicino, an advisor in the ECB's Monetary Analysis Division, and several colleagues, used euro-area data going back to 2003 and a statistical model that tracks how shocks spread through the economy. They found that a rise in US policy uncertainty reduces euro-area loan growth by around 0.5 percentage points within two years. The effect is even stronger when financial markets are volatile, adding another 0.3 percentage points to the slowdown."

"Looking at bank-level data since 2007, the study shows that lenders with less liquidity or more bad loans cut back more aggressively - shrinking credit growth by about 1 percentage point more than healthier banks. Institutions with greater exposure to the US dollar also raised interest rates and shortened loan maturities. The drag is also clear at the company level. Using firm data since 2013, the authors find that when US policy uncertainty is high, the impact of an ECB rate cut on business investment falls by about 20%."

Using euro-area data since 2003 and a shock-transmission model, analysis shows rising US policy uncertainty slows lending and investment across the euro area. A rise in US uncertainty reduces euro-area loan growth by roughly 0.5 percentage points within two years, with financial-market volatility adding about 0.3 percentage points to the slowdown. Bank-level data since 2007 show lenders with less liquidity or more bad loans cut credit growth about 1 percentage point more than healthier banks, while institutions with greater US dollar exposure raise rates and shorten maturities. Firm-level data since 2013 show ECB rate cuts are about 20% less effective at stimulating investment during episodes of high US policy uncertainty, especially for investment-intensive and US-linked firms.

Read at Business Insider