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on European Economics |
| By: | Carlos Fonseca Marinheiro |
| Abstract: | Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP is being accused of being too rigid and of forcing pro-cyclicality in fiscal policy. We test the impact of the SGP rules on the cyclical properties of fiscal policy for a panel of 12 European countries. We conclude that contrary to what might have been expected the euro fiscal rules have reinforced the counter-cyclicality of fiscal policy. However, the results also show that the SGP is not being applied symmetrically over the cycle, leading to insufficient fiscal consolidation during economic upswings. This explains the recent difficulties of Portugal, Germany and France in complying with SGP requirements. Based on these conclusions we argue for the creation of independent national technical committees that would define an appropriate deficit target on an annual basis. |
| Keywords: | fiscal policy, stabilisation, EMU, Stability and Growth Pact reform |
| JEL: | E62 H62 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1411&r=eec |
| By: | Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith |
| Abstract: | This paper presents a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model. This global VAR is estimated for 26 countries, the euro area being treated as a single economy. This paper proposes two important extensions of previous research (see Pesaran, Schuermann and Weiner, 2004). First, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Also using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. Second, in addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables. Further to the US monetary policy shock, we also consider oil price, US equity and US real output shocks. |
| Keywords: | Global VAR (GVAR), global interdependencies, global macroeconomic modeling, impulse responses |
| JEL: | C32 E17 F47 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1425&r=eec |
| By: | Ansgar Belke; Daniel Gros |
| Abstract: | The belief that the ECB follows the US Federal Reserve in setting its policy is so entrenched with market participants and commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. We find that the ECB is indeed often influenced by the Fed, but the reverse is true at least as often if one considers longer sample periods. There is empirically little support for the proposition that there has been for a long time a systematic asymmetric leader-follower relationship between the ECB and the Fed. Only after September 2001 is there more evidence of such an asymmetry. We also find a clear-cut structural break between the pre-EMU and the EMU period in terms of the relationship between short term interest rates on both sides of the Atlantic. |
| Keywords: | co-movement of interest rates, European Central Bank, Federal Reserve, monetary policy, policy coordination |
| JEL: | E52 E58 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1428&r=eec |
| By: | Plutarchos Sakellaris; Focco W. Vijselaar |
| Abstract: | The euro area experienced a slowdown in output and Total Factor Productivity growth in the 1990s compared to the 1980s. We ask the following questions. Is the apparent slowdown in euro area output due to a lack of proper accounting for capital quality improvement? The answer is no. Did technological change really slow down in the euro area? The answer here is mixed. The part of the technological change that is embodied in capital goods and boosts output through investment in these goods in fact accelerated in the 1990s. In contrast, disembodied technological change, which boosts output through new consumer goods or new production processes, decelerated in the 1990s more sharply than the official figures portray. |
| JEL: | O30 O47 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1452&r=eec |
| By: | Bernd Hayo (Philipps-University Marburg); Boris Hofmann (ZEI, University of Bonn) |
| Abstract: | This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1- 2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion. |
| Keywords: | Taylor rule, monetary policy, ECB, Bundesbank |
| JEL: | E5 |
| Date: | 2005–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0504032&r=eec |
| By: | Britta Hamburg; Mathias Hoffmann; Joachim Keller |
| Abstract: | This paper studies the long-run relationship between consumption, asset wealth and income in Germany, based on data from 1980 to 2003. While earlier studies — mostly for the Anglo-Saxon economies — have generally documented that departures of these three variables from their common trend signal changes in asset prices, we find that for Germany they predict changes in income. Asset price changes are found to have virtually no effect on consumption — both in the short as well as in the long-run. We offer an explanation of this finding that emphasizes differences between the bank-based German financial system and the rather market-based Anglo-American system: stock ownership by private households is much less widespread in Germany than in the Anglo-Saxon economies and the share of publicly traded equity in household wealth is much smaller in Germany than in the U.S., the UK or Australia. |
| Keywords: | wealth effect on consumption, business cycles, monetary policy transmission, financial systems, asset price predictability, permanent income hypothesis |
| JEL: | E21 E32 E44 G12 G20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1443&r=eec |
| By: | Brian M Lucey; Suk-Joong Kim; Eliza Wu |
| Abstract: | In this paper, we use a set of complementary techniques to examine the time-varying level of integration of European government bond markets. We consider daily bond returns and prices over the 1998-2003 period. Strong contemporaneous and dynamic linkages are found between individual European Union (EU) markets and the German market. However, there is no such evidence for the three accession markets of the Czech Republic, Hungary and Poland. The UK’s market is also considered. In general, the degree of integration for the accession markets is weak and stable, with little evidence of further deepening despite the increased political integration. |
| Keywords: | Bond Indices, Cointegration, GARCH Models, Integration, Kalman Filter |
| Date: | 2005–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp025&r=eec |
| By: | Philip Lane; Patrick Honohan |
| Abstract: | In our recent Economic Policy article(Honohan and Lane, 2003), we argued that the strength of the US dollar 1999-2001 had an important impact on inflation divergence within the EMU and in particular the surge in Ireland’s inflation to over 7 per cent. This hypothesis has been subjected to a grueling out-of-sample test: would the dollar’s subsequent weakness contribute to inflation convergence and in particular to a fall in Irish inflation? Fortunately for us, the theory has passed the test with flying colours. Irish inflation stopped dead in its tracks: consumer prices were unchanged between May and November of 2003. Regression analysis on quarterly inflation data across EMU members 1999.1-2004.1 confirms the importance of the exchange rate channel, although pinning down the exact dynamic specification will require a further span of data. |
| Date: | 2005–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp031&r=eec |
| By: | Philipp Engler,Terhi Jokipii,Christian Merkl; Pablo Rovira Kaltwasser,Lúcio Vinhas de Souza |
| Abstract: | This paper investigates the existence of a bank lending and a bank capital channel in Austria by applying the dynamic Arellano-Bond GMM-estimator to a quarterly bank level dataset spanning from 1997 to 2003. While we do find evidence that the bank lending channel is in existence, with an important role active for capitalization, we are unable to confirm that the bank capital channel is in force in Austria. Our results indicate some counter-cyclicality in lending activity, a finding that is in line with the existing Austrian literature. Classification- |
| Date: | 2005–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp066&r=eec |
| By: | Eric A. Hanushek; Ludger Woessmann |
| Abstract: | Even though some countries track students into differing-ability schools by age 10, others keep their entire secondary-school system comprehensive. To estimate the effects of such institutional differences in the face of country heterogeneity, we employ an international differences-in-differences approach. We identify tracking effects by comparing differences in outcome between primary and secondary school across tracked and non-tracked systems. Six international student assessments provide eight pairs of achievement contrasts for between 18 and 26 cross-country comparisons. The results suggest that early tracking increases educational inequality. While less clear, there is also a tendency for early tracking to reduce mean performance. Therefore, there does not appear to be any equity-efficiency trade-off. |
| Keywords: | tracking, streaming, ability grouping, selectivity, comprehensive school system, educational performance, inequality, international student achievement test, TIMSS, PISA, PIRLS |
| JEL: | I20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1415&r=eec |
| By: | Isacsson, Gunnar (National Road and Transportations Research Institute) |
| Abstract: | This paper provides an empirical investigation of externalities from education in Sweden in an earnings equation framework. The empirical models are estimated on a large sample of matched employees and establishments. External effects of education are identified from the average educational attainment of workers outside the individual’s establishment. The paper also investigates the coherence of the evidence with respect to the idea that educational externalities arise through face-to-face interaction between individuals. A set of different specifications and fixed effects models is used to investigate the robustness of the basic cross-sectional model. The cross-sectional models suggest, in general, that externalities are positive and significantly different from zero. The cross-sectional evidence is also broadly coherent with the idea that externalities are declining in spatial transaction costs, such as the Euclidean distance between establishments. However, after accounting for individual fixed effects and dummy variables for the county in which the individual works the results indicate no statistically significant external effects of education on earnings in Sweden. |
| Keywords: | Education; earnings |
| JEL: | I20 |
| Date: | 2005–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ifauwp:2005_010&r=eec |
| By: | Colm Kearney; Frank Barry |
| Abstract: | We use mean-variance analysis to demonstrate the importance of a hitherto neglected benefit of enticing MNEs to locate in small and medium-sized countries. During the 25 years from 1974 to 1999, over 1000 foreign MNEs have located in Ireland, and they have raised their share of all manufacturing jobs in the country from one-third to one-half. The foreign MNEs tend to operate in high-technology sectors, and they grow faster with greater volatility than the traditional low-technology indigenous firms. Because they are imperfectly correlated with the indigenous sectors, however, the foreign MNEs have helped to create a more completely diversified manufacturing sector in the host country that can grow faster without a commensurate rise in volatility and risk. |
| Keywords: | FDI, MNEs, industrial structure, Ireland. |
| Date: | 2005–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp023&r=eec |