nep-eec New Economics Papers
on European Economics
Issue of 2005‒10‒04
112 papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Early-warning tools to forecast general government deficit in the euro area: the role of intra-annual fiscal indicators By Javier J. Pérez
  2. Euro area inflation differentials By Ignazio Angeloni; Michael Ehrmann
  3. Equal size, equal role? Interest rate interdependence between the euro area and the United States. By Michael Ehrmann; Marcel Fratzscher
  4. Adopting the Euro in Central Europe: Challenges of the Next Step in European Integration By Schadler, Susan; Drummond, Paulo Flavio Nacif; Kuijs, Louis; Murgasova, Zuzana; van Elkan, Rachel
  5. Part-time work in EU countries - labour market mobility, entry and exit By Hielke Buddelmeyer; Gilles Mourre; Melanie Ward-Warmedinger
  6. Diversification in euro area stock markets: country versus industry By Gerard A. Moerman
  7. On the determinants of euro area FDI to the United States: the knowledge- capital- Tobin's Q framework By Roberto A. De Santis; Robert Anderton
  8. Real wages and local unemployment in the euro area By Anna Sanz de Galdeano; Jarkko Turunen
  9. Sovereign risk premia in the European government bond market By Kerstin Bernoth; Jürgen von Hagen; Ludger Schuknecht
  10. Output and inflation responses to credit shocks - are there threshold effects in the euro area? By Alessandro Calza; João Sousa
  11. Inflation persistence in the European Union, the euro area, and the United States By Gregory Gadzinski; Fabrice Orlandi
  12. Forecasting euro area inflation using dynamic factor measures of underlying inflation By Gonzalo Camba-Méndez; George Kapetanios
  13. Import prices and pricing-to-market effects in the euro area By Thomas Warmedinger
  14. Euro area sovereign yield dynamics - the role of order imbalance By Albert J. Menkveld; Yiu C. Cheung; Frank de Jong
  15. Insurance policies for monetary policy in the euro area By Keith Küster; Volker Wieland
  16. Estimates of the open economy New Keynesian Phillips curve for euro area countries By Fabio Rumler
  17. Price setting in the euro area: some stylized facts from individual consumer price data. By Emmanuel Dhyne; Luis J. Álvarez; Hervé Le Bihan; Giovanni Veronese; Daniel Dias; Johannes Hoffmann; Nicole Jonker; Patrick Lünnemann; Fabio Rumler; Jouko Vilmunen
  18. Monetary policy shocks in the euro area and global liquidity spillovers By João Sousa; Andrea Zaghini
  19. What are the spill-overs from fiscal shocks in Europe? An empirical analysis By Massimo Giuliodori; Roel Beetsma
  20. Exchange rates and fundamentals - new evidence from real-time data By Michael Ehrmann; Marcel Fratzscher
  21. Country and sector-specific spillover effects in the euro area, the United States and Japan By Bernd Kaltenhaeuser
  22. Regulated and services’ prices and inflation persistence By Patrick Lünnemann; Thomas Y. Mathä
  23. Stocks, bonds, money markets and exchange rates - measuring international financial transmission By Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
  24. Has euro-area inflation persistence changed over time? By Gerard O'Reilly; Karl Whelan
  25. The design of fiscal rules and forms of governance in European Union countries By Mark Hallerberg; Rolf Strauch; Jürgen von Hagen
  26. Monetary policy predictability in the euro area: an international comparison By Bjørn-Roger Wilhelmsen; Andrea Zaghini
  27. To aggregate or not to aggregate? Euro area inflation forecasting By Nicholai Benalal; Juan Luis Diaz del Hoyo; Bettina Landau; Moreno Roma; Frauke Skudelny
  28. The high-yield segment of the corporate bond market: a diffusion modelling approach for the United States, the United Kingdom and the euro area By Gabe de Bondt; David Marqués
  29. Optimal monetary policy rules for the euro area: an analysis using the area wide model By Alistair Dieppe; Keith Küster; Peter McAdam
  30. Explaining cross-border large-value payment flows - evidence from TARGET and EURO 1 data By Simonetta Rosati; Stefania Secola
  31. Developing statistical indicators of the integration of the euro area banking system By Michele Manna
  32. Did the pattern of aggregate employment growth change in the euro area in the late 1990s? By Gilles Mourre
  33. Trading European sovereign bonds - the microstructure of the MTS trading platforms By Yiu Chung Cheung; Frank de Jong; Barbara Rindi
  34. Term structure and the sluggishness of retail bank interest rates in euro area countries By Gabe de Bondt; Benoit Mojon; Natacha Valla
  35. The determinants of the overnight interest rate in the euro area By Julius Moschitz
  36. Technology shocks and robust sign restrictions in a euro area SVAR By Gert Peersman; Roland Straub
  37. The short-term impact of government budgets on prices: evidence from macroeconomic models By Jérôme Henry; Pablo Hernández de Cos; Sandro Momigliano
  38. Does government spending crowd in private consumption? Theory and empirical evidence for the euro area By Günter Coenen; Roland Straub
  39. The Effect of Financial Depth on Monetary Transmission By Danny Pitzel; Lenno Uusküla
  40. Modelling inflation in the euro area By Eilev S. Jansen
  41. Socio-economic development and fiscal policy - lessons from the cohesion countries for the new member states By Aaron N. Mehrotra; Tuomas A. Peltonen
  42. The demand for euro area currencies By Björn Fischer; Petra Köhler; Franz Seitz
  43. Similarities and convergence in G-7 cycles By Fabio Canova; Matteo Ciccarelli; Eva Ortega
  44. Measuring market and inflation risk premia in France and in Germany By Lorenzo Cappiello; Stéphane Guéné
  45. Technological capability of foreign and West German investors in East Germany By Jutta Günther
  46. How frequently do consumer prices change in Austria? Evidence from micro CPI data. By Josef Baumgartner; Ernst Glatzer; Fabio Rumler; Alfred Stiglbauer
  47. Option-implied asymmetries in bond market expectations around monetary policy actions of the ECB By Sami Vähämaa
  48. Fiscal policy events and interest rate swap spreads - evidence from the EU By António Afonso; Rolf Strauch
  49. Estimating and analysing currency options implied risk-neutral density functions for the largest new EU member states By Olli Castrén
  50. Gross job flows and institutions in Europe By Ramón Gómez-Salvador; Julián Messina; Giovanna Vallanti
  51. A mark-up model of inflation for the euro area By Christopher Bowdler; Eilev S. Jansen
  52. On prosperity and posterity: the need for fiscal discipline in a monetary union By Carsten Detken; Vítor Gaspar; Bernhard Winkler
  53. Capital quality improvement and the sources of growth in the euro area By Plutarchos Sakellaris; Focco W. Vijselaar
  54. Benefits and spillovers of greater competition in Europe: A macroeconomic assessment. By Tamim Bayoumi; Douglas Laxton; Paolo Pesenti
  55. Trade effects of the euro - evidence from sectoral data By Richard Baldwin; Frauke Skudelny; Daria Taglioni
  56. Investigating the Early Signals of Banking Sector Vulnerabilities in Central and East European Emerging Markets By Kadri Männasoo; David G Mayes
  57. Communication and decision-making by central bank committees - different strategies, same effectiveness? By Michael Ehrmann; Marcel Fratzscher
  58. What drives productivity growth in the new EU member states? The case of Poland By Marcin Kolasa
  59. The longer term refinancing operations of the ECB By Ulrich Bindseil; Tobias Linzert; Dieter Nautz
  60. How persistent is disaggregate inflation? An analysis across EU15 countries and HICP sub-indices By Patrick Lünnemann; Thomas Y. Mathä
  61. What determines fiscal balances? An empirical investigation in determinants of changes in OECD budget balances By Mika Tujula; Guido Wolswijk
  62. Implementing the stability and growth pact - enforcement and procedural flexibility By Roel M.W. J. Beetsma; Xavier Debrun
  63. An empirical analysis of price setting behaviour in the Netherlands in the period 1998-2003 using micro data By Nicole Jonker; Carsten Folkertsma; Harry Blijenberg
  64. Consumer price behaviour in Italy - evidence from micro CPI data By Giovanni Veronese; Silvia Fabiani; Roberto Sabbatini
  65. Calvo pricing and imperfect common knowledge: a forward looking model of rational inflation inertia By Rolf Strauch; Mark Hallerberg; Jürgen von Hagen
  66. Determinants of euro term structure of credit spreads By Astrid Van Landschoot
  67. Optimal allotment policy in the eurosystem’s main refinancing operations? By Christian Ewerhart; Nuno Cassola; Steen Ejerskov; Natacha Valla
  68. Endogeneities of optimum currency areas - what brings countries sharing a single currency closer together? By Paul De Grauwe; Francesco Paolo Mongelli
  69. A look at intraday frictions in the euro area overnight deposit market By Vincent Brousseau; Andrés Manzanares
  70. Government deficits, wealth effects and the price level in an optimizing model By Barbara Annicchiarico
  71. Price setting behaviour in Spain: stylised facts using consumer price micro data By Luis J. Álvarez; Ignacio Hernando
  72. Developing a euro area accounting matrix: issues and applications By Tjeerd Jellema; Steven Keuning; Peter McAdam; Reimund Mink
  73. The European Monetary Union as a commitment device for new EU member states By Federico Ravenna
  74. EU fiscal rules: issues and lessons from political economy By Ludger Schuknecht
  75. European women - why do(n’t) they work? By Véronique Genre; Ramón Gómez Salvador; Ana Lamo
  76. Does product market competition reduce inflation? Evidence from EU countries and sectors By Marcin Przybyla; Moreno Roma
  77. Price setting behaviour in Spain: evidence from micro PPI data. By Luis J. Álvarez; Pablo Burriel; Ignacio Hernando
  78. Turkish Delight for Some, Cold Turkey for Others?: The Effects of the EU-Turkey Customs Union By Antonis Adam; Thomas Moutos
  79. The French block of the ESCB multi-country model By Frédéric Boissay; Jean-Pierre Villetelle
  80. Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective. By Francisco Maeso-Fernandez; Chiara Osbat; Bernd Schnatz
  81. The price-setting behavior of Austrian firms - some survey evidence By Claudia Kwapil; Josef Baumgartner; Johann Scharler
  82. The performance and robustness of interest-rate rules in models of the euro area By Ramón Adalid; Günter Coenen; Peter McAdam; Stefano Siviero
  83. Inflation persistence in structural macroeconomic models (RG10). By Robert-Paul Berben; Ricardo Mestre; Julian Morgan; Theodoros Mitrakos; Nikolaos G. Zonzilos
  84. Break in the mean and persistence of inflation - a sectoral analysis of French CPI By Laurent Bilke
  85. Cross-country differences in monetary policy transmission By Robert-Paul Berben; Alberto Locarno; Julian Morgan; Javier Valles
  86. Price setting in France: new evidence from survey data By Claire Loupias; Roland Ricart
  87. Communication and exchange rate policy By Marcel Fratzscher
  88. Fiscal consolidations in the Central and Eastern European countries By António Afonso; Christiane Nickel; Philipp Rother
  89. Price rigidity. Evidence from the French CPI micro-data By Laurent Baudry; Hervé Le Bihan; Patrick Sevestre; Sylvie Tarrieu
  90. Forecasting with a Bayesian DSGE model - an application to the euro area By Frank Smets; Raf Wouters
  91. Quality of Service, Efficiency, and Scale in Network Industries: An Analysis of European Electricity Distribution By Christian Growitsch
  92. Settlement finality as a public good in large-value payment systems By Henri Pagès; David Humphrey
  93. The Short-Term Budgetary Implications of Structural Reforms. Evidence from a Panel of EU Countries By Deroose, Servaas; Turrini, Alessandro
  94. Comparing the Innovation Performance in Canadian, French and German Manufacturing Enterprises By Pierre Mohnen; Pierre Therrien
  95. Consumer inflation expectations in Poland By Tomasz Lyziak
  96. Stylised features of price setting behaviour in Portugal: 1992 - 2001 By Mónica Dias; Daniel Dias; Pedro D. Neves
  97. Structural filters for monetary analysis - the inflationary movements of money in the euro area By Annick Bruggeman; Gonzalo Camba-Méndez; Björn Fischer; João Sousa
  98. A structural common factor approach to core inflation estimation and forecasting By Claudio Morana
  99. How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI By Luc Aucremanne; Emmanuel Dhyne
  100. Current account dynamics in OECD and EU acceding countries - an intertemporal approach By Matthieu Bussière; Marcel Fratzscher; Author-Name: Gernot J. Müller
  101. Geographic versus industry diversification - constraints matter By Paul Ehling; Sofia Brito Ramos
  102. Price-setting behaviour in Belgium - what can be learned from an ad hoc survey? By Luc Aucremanne; Martine Druant
  103. Comparing shocks and frictions in US and euro area business cycles - a Bayesian DSGE approach By Frank Smets; Raf Wouters
  104. Time-dependent versus state-dependent pricing - a panel data approach to the determinants of Belgian consumer price changes By Luc Aucremanne; Emmanuel Dhyne
  105. Non-Keynesian effects of fiscal contraction in new member states. By Andrzej Rzonca; Piotr Cizkowicz
  106. The pricing behaviour of Italian firms: new survey evidence on price stickiness By Silvia Fabiani; Angela Gattulli; Roberto Sabbatini
  107. Excess reserves and the implementation of monetary policy of the ECB By Ulrich Bindseil; Gonzalo Camba-Mendez; Astrid Hirsch; Benedict Weller
  108. Implementing the stability and growth pact - enforcement and procedural flexibility By Yunus Aksoy; Miguel A. León-Ledesma
  109. Public good issues in TARGET - natural monopoly, scale economies, network effects and cost allocation By Wilko Bolt; David Humphrey
  110. Time or state dependent price setting rules? Evidence from Portuguese micro data By Daniel A. Dias; Carlos Robalo Marques; João M. C. Santos Silva
  111. Towards a strategy for pro-poor growth in South-Eastern Europe By Hermann Sautter
  112. Inflation persistence during periods of structural change - an assessment using Greek data By George Hondroyiannis; Sophia Lazaretou

  1. By: Javier J. Pérez (Centro de Estudios Andaluces (centrA), c/ Bailén 50, 41001 Seville, Spain)
    Abstract: In this paper I evaluate the usefulness of a set of fiscal indicators as early-warning-signal tools for annual General Government Net Lending developments for some EMU countries (Belgium, Germany, Spain, France, Italy, The Netherlands, Ireland, Austria, Finland) and an EMU aggregate. The indicators are mainly based on monthly and quarterly public accounts’ figures. I illustrate how the dynamics of the indicators show a remarkable performance when anticipating general government accounts’ movements, both in qualitative and in quantitative terms.
    Keywords: Leading indicators; Fiscal forecasting and monitoring; General Government Deficit; European Monetary Union.
    JEL: C53 E6 H6
    Date: 2005–06
  2. By: Ignazio Angeloni (Dipartimento del Tesoro, Mnistero dell'Economia e delle Finanze.); Michael Ehrmann (Directorate General Research, European Central Bank, Kaiserstrasse, 29, 60311, Frankfurt am Main, Germany.)
    Abstract: We build a stylised 12-country model of the euro area and use it to analyse why differences in national inflation and growth rates arise within the European monetary union. We find that inflation persistence is a key potential explanatory factor. Other more frequently mentioned reasons, like country-specific shocks or differences in the monetary transmission mechanism across countries, count less. We also look at how a monetary policy geared to area-wide average inflation affects these differentials. Our model suggests that area-wide inflation stability and low inflation differentials are complementary.
    Keywords: Currency union; inflation differentials; inflation persistence; euro area.
    JEL: E31 E32 E52 F42
    Date: 2004–09
  3. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates whether the degree of interdependence between the United States and the euro area economies has changed with the advent of EMU. It addresses this issue from the perspective of financial markets by analysing the effects of monetary policy and macroeconomic news on daily interest rates. First, the paper finds that the interdependence of money markets has increased strongly around EMU. Although spillover effects from the United States to the euro area remain stronger than in the opposite direction, US markets have started reacting to euro area developments since the onset of EMU. Second, certain US macroeconomic news affect euro area money markets, especially in recent years. Finally, we show that US macroeconomic news have become good leading indicators for economic developments in the euro area, indicating that the higher money market interdependence is at least partly explained by the increased real integration of the two economies.
    Keywords: interdependence; announcements; news; money markets; real-time data; United States; euro area.
    JEL: E43 E52 F42
    Date: 2004–04
  4. By: Schadler, Susan; Drummond, Paulo Flavio Nacif; Kuijs, Louis; Murgasova, Zuzana; van Elkan, Rachel
    Abstract: Upon entry into the European Union (EU), countries become members of the Economic and Monetary Union (EMU), with a derogation from adopting the euro as their currency (that is, each country joining the EU commits to replace its national currency with the euro, but can choose when to request permission to do so). For most of these countries, adopting the euro will entail major economic change. This paper examines likely economic developments and policy challenges for the five former transition countries in central Europe--the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia--that joined the EU in May 2004 and operate independent monetary policies but have not yet achieved policy convergence with the rest of the euro area.
    Date: 2005
  5. By: Hielke Buddelmeyer (Melbourne Institute of Applied Economic and Social Research); Gilles Mourre (Directorate-General for Economic and Financial Affairs (ECFIN), European Commission, Brussels, Belgium); Melanie Ward-Warmedinger (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This paper looks at the role of part-time work in labour mobility for 11 European countries. We find some evidence of part-time work being used as a stepping stone into full-time employment, but for a small proportion of individuals (less than 5%). Part-time jobs are also found to be more frequently taken up as a means to enter the labour market than to leave it. Multinomial logit regression of the determinants of parttime work reveals household composition, past labour market history and country of residence as very important for both men and women in their decision to work part time. Random effects regression controlling for individual heterogeneity, and the comparison of results for Europe and the US, reveals that a significantly higher proportion of female workers in Europe prefer inactivity and a significantly lower percentage prefer full-time, over part-time employment, than in the US, with considerable variation across EU countries.
    Keywords: Labour market mobility and flexibility; labour supply; full-time and part-time employment; unemployment; non-employment; gender; stepping stones; labour market entry and exit.
    JEL: J21 J22 J16 J60
    Date: 2005–03
  6. By: Gerard A. Moerman (Erasmus University Rotterdam, Department Financial Management, Burgemeester Oudlaan 50, 3000 DR Rotterdam, The Netherlands)
    Abstract: The harmonisation of fiscal and economic policy within the European Monetary Union (EMU) has had a considerable impact on the economies of member countries in the past decade. In particular, several studies indicate that the proceeding economic integration among euro area countries has important consequences for the factors driving asset returns in financial markets. This study concentrates on the implications of the changing structure of security returns for asset management. Using recent euro area stock markets data, we find clear evidence that diversification over industries yields more efficient portfolios than diversification over countries. We show that this result is robust with respect to the information technology-hype and different volatility regimes. This contrasts with e.g. Rouwenhorst (1999), who finds, based on a different methodology and a different sample period, that country diversification strategies are superior. We regard this paper as a robustness check challenging the existing strand of literature and show that Rouwenhorst’s (1999) conclusions seem to be outdated.
    Keywords: EMU; Euro area stock markets; Portfolio diversification; Industry factors; Country factors
    JEL: G11 G15
    Date: 2004–03
  7. By: Roberto A. De Santis (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Robert Anderton (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany)
    Abstract: The long-run determinants of euro area FDI to the United States during the period 1980-2001 are explained by employing the Tobin's Q-model of investment. By using the fixed effects panel estimator, stock market developments in the euro area countries including a measure adjusted for economic developments common to both the United States and the euro area - are found to influence euro area FDI to the United States. Moreover, the inclusion of the Tobin's Q enhances the traditional knowledge-capital framework specification. Overall, the empirical findings suggest that euro area patents (ownership advantage), various variables related to productivity in the United States (location advantage), the volume of bilateral telephone traffic to the United States relative to euro area GDP (ownership advantage), euro area stock market developments (Tobin's Q), and the real exchange rate are statistically significant determinants of euro area FDI to the United States.
    Keywords: Euro area; Foreign Direct Investment; Multinational firms; Tobin's Q.
    JEL: F21 F23
    Date: 2004–04
  8. By: Anna Sanz de Galdeano (CSEF, University of Salerno, 84084 Fisciano, Salerno, Italy); Jarkko Turunen (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany)
    Abstract: We present empirical evidence of the extent of wage rigidity in the euro area and European countries derived from longitudinal data on individuals. Wage rigidity is measured by the elasticity of individual real wages with respect to local unemployment. The results suggest that the elasticity is indeed negative, i.e. that real wages are lower in local labour markets with higher unemployment. The size of the elasticity for the euro area is similar to that found in previous studies for a number of countries, including the United States. Furthermore, there is some variation in the unemployment elasticity by worker groups and along the wage distribution. In particular, public sector wages are relatively rigid compared to wages in the private sector, contributing significantly to wage rigidity in the euro area. Country results show some heterogeneity in wage rigidity across European countries and suggest a tentative ranking of countries.
    Keywords: Real wages; local unemployment; wage curve; panel data.
    JEL: E24 J45 J64
    Date: 2005–04
  9. By: Kerstin Bernoth (Research Division, De Nederlandsche Bank); Jürgen von Hagen (Center for European Integration Studies); Ludger Schuknecht (DG Economics, European Central Bank)
    Abstract: This paper provides a study of bond yield differentials among EU eurobonds issued between 1991 and 2002. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premia which increase with the debt, deficit and debt-service ratio and depend positively on the issuer’s relative bond market size. Global investors’ attitude towards credit risk, measured as the yield spread between low grade US corporate bonds and government bonds, also affects bond yield spreads between EU countries and Germany/USA. The start of the European Monetary Union had significant effects on the bond pricing of the member states.
    Keywords: asset pricing, determination of interest rates, fiscal policy, government debt.
    JEL: G12 E43 E62 H63
    Date: 2004–06
  10. By: Alessandro Calza (European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany); João Sousa (Economic and Research Department, Banco de Portugal,Av. Almirante Reis nº 71, 1150-012 Lisbon, Portugal)
    Abstract: This paper investigates whether output and inflation respond asymmetrically to credit shocks in the euro area. The methodology, based on a non-linear VAR system, follows work by Balke (2000) for the US. The results reveal evidence of threshold effects related to credit conditions in the economy. Consistent with this finding, the impulse responses show some signs of asymmetric responses over the lending cycle.
    Keywords: Credit; euro area; asymmetric shocks; non-linearities.
    JEL: E51 C15 C32
    Date: 2005–04
  11. By: Gregory Gadzinski (GREQAM, Université de la Mediterraneé.); Fabrice Orlandi (Corresponding author: DG Economics, EU Countries Division, Forecasting and Monitoring Unit; European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: In this paper we report results on inflation persistence using 79 inflation series covering the EU countries, the euro area and the US for five different inflation variables. The picture that emerges is one of moderate inflation persistence across the board. In particular we find euro area inflation persistence to be broadly in line with US inflation persistence. The issue of allowing for intercept dummies in the underlying inflation models is found to be of paramount importance to avoid overestimation of the level of persistence. The use of alternative measures of persistence is found to be commendable on the grounds that they complement each other in practice.
    Keywords: Inflation dynamics; structural change; median unbiased estimates.
    JEL: E31 E52 C22 C12
    Date: 2004–11
  12. By: Gonzalo Camba-Méndez (Corresponding author. European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); George Kapetanios (Department of Economics, Queen Mary, University of London, Mile End Road, London E1 4N, United Kingdom.)
    Abstract: Standard measures of prices are often contaminated by transitory shocks. This has prompted economists to suggest the use of measures of underlying inflation to formulate monetary policy and assist in forecasting observed inflation. Recent work has concentrated on modelling large datasets using factor models. In this paper we estimate factors from datasets of disaggregated price indices for European countries. We then assess the forecasting ability of these factor estimates against other measures of underlying inflation built from more traditional methods. The power to forecast headline inflation over horizons of 12 to 18 months is adopted as a valid criterion to assess forecasting. Empirical results for the five largest euro area countries as well as for the euro area are presented.
    Keywords: Core Inflation; Dynamic Factor Models; Forecasting.
    JEL: E31 C13 C32
    Date: 2004–11
  13. By: Thomas Warmedinger (European Central Bank, Directorate General Research)
    Abstract: Pricing-to-market (PTM) behaviour implies that exporters adjust their prices to the prevailing prices in their export markets. For the importing country, PTM effects can be interpreted as a measure of the stability of domestic prices against foreign price and exchange rate developments. PTM behaviour can be attributed to the level of competitiveness and price stickiness in the importing country. This paper investigates PTM behaviour in the euro area from the importing country’s perspective, for both individual countries and the euro area as a whole. Analysis firstly involves the estimation of PTM effects in the five largest euro area countries. Secondly, PTM effects in the euro area as a whole are estimated to be slightly higher than one half. The results from illustrative simulations suggest that the increase in euro-area inflation during the first two years of monetary union can be largely attributed to oil price and exchange rate developments.
    Keywords: Printing-to-market, import prices, exchange-rate pass-through, euro area.
    JEL: C32 E31 F14 F47
    Date: 2004–01
  14. By: Albert J. Menkveld (Vrije Universiteit Amsterdam FEWEB); Yiu C. Cheung (University of Amsterdam - Faculty of Economics & Econometrics (FEE)); Frank de Jong (University of Amsterdam - Faculty of Economics & Econometrics (FEE))
    Abstract: We study sovereign yield dynamics and order flow in the largest euro-area treasury markets. We exploit unique transaction data to explain daily yield changes in the ten-year government bonds of Italy, France, Belgium, and Germany. We use a state space model to decompose these changes into (i) a “benchmark” yield innovation, (ii) a yield spread common factor innovation, (iii) country-specific innovations, and (iv) (transitory) noise. We relate changes in each of these factors to national order imbalance and find that Italian order imbalance impacts the common factor innovation, French and Belgian order imbalance impact country-specific innovations, and German order imbalance only changes yields temporarily. Order imbalance, however, does not have explanatory power for the most important factor: benchmark yield innovations.
    Keywords: Government bond, order imbalance, euro, international.
    JEL: G10 G15 G18
    Date: 2004–08
  15. By: Keith Küster (Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany)
    Abstract: In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context.
    Keywords: Model uncertainty; robustness; monetary policy rules; minimax; euro area.
    JEL: E52 E58 E61
    Date: 2005–04
  16. By: Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, Otto Wagner Platz 3,A-1090 Vienna, Austria;)
    Abstract: This paper extends the existing literature on the open economy New Keynesian Phillips Curve by incorporating three different factors of production, domestic labor and imported as well as domestically produced intermediate goods, into a general model which nests existing closed economy and open economy models as special cases. The model is then estimated for 9 euro area countries and the euro area aggregate. We find that structural price rigidity is systematically lower in the open economy specification of the model than in the closed economy specification indicating that when firms face more variable input costs they tend to adjust their prices more frequently. However, when the model is estimated in its general specification including also domestic intermediate inputs, price rigidity increases again compared to the open economy specification without domestic intermediate inputs.
    Keywords: New Keynesian Phillips Curve, Open Economy, GMM.
    JEL: E31 C22 E12
    Date: 2005–06
  17. By: Emmanuel Dhyne (Banque Nationale de Belgique, Berlaimont 14, B-1000 Bruxelles.); Luis J. Álvarez; Hervé Le Bihan; Giovanni Veronese; Daniel Dias; Johannes Hoffmann; Nicole Jonker; Patrick Lünnemann; Fabio Rumler; Jouko Vilmunen
    Abstract: This paper documents patterns of price setting at the retail level in the euro area, summarized in six stylized facts. First, the average euro area monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross product heterogeneity - prices of oil and unprocessed food products change very often, while price adjustments are less frequent for processed food, non energy industrial goods and services. Third, cross country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across retailers. Moreover, the frequency of price changes in the euro area is related to several factors, such as seasonality, outlet type, indirect taxation, pricing practices as well as aggregate or product specific inflation.
    Keywords: Pricesetting; consumer price; frequency of price change.
    JEL: E31 D40 C25
    Date: 2005–09
  18. By: João Sousa (Banco de Portugal,Av. Almirante Reis 71, P-1150-012 Lisbon, Portugal.); Andrea Zaghini (European Central Bank, Directorate Monetary Policy, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the international transmission of monetary shocks with a special focus on the effects of foreign money ("global liquidity") on the euro area. We estimate structural VAR models for the euro area and the global economy including a global liquidity aggregate. The impulse responses obtained show that a positive shock to extra-euro area liquidity leads to permanent increases in the euro area M3 aggregate and the price level, a temporary rise in real output and a temporary appreciation of the real effective exchange rate of the euro. Moreover, we find that innovations in global liquidity play an important role in explaining price and output fluctuations in the euro area and in the global economy.
    Keywords: Monetary policy; Structural VAR; International spillovers.
    JEL: E52 F01
    Date: 2004–02
  19. By: Massimo Giuliodori (Department of Economics, University of Amsterdam, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands); Roel Beetsma (Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands)
    Abstract: We use a Vector Auto Regression (VAR) analysis to explore the (spill-over) effects of fiscal policy shocks in Europe. To enhance comparability with the existing literature, we first analyse the effects of these shocks at the national level. Here, we employ identification based on Choleski decomposition and a structural VAR, both of which lead to the same results. Then, we turn to study the cross-border spill-overs of fiscal shocks via the trade channel. Fiscal expansions in Germany, France and Italy lead to significant increases in imports from a number of European countries. In order to mimic the case of monetary union, we also shut off the effects via the short-term interest rate and the nominal exchange rate and find a slight strengthening on average of the cross-country spill-overs from a fiscal expansion. These results suggest that it may be worthwhile to further investigate the possibility of enhanced fiscal coordination.
    Keywords: Fiscal shocks; Fiscal policy; Monetary policy; Spill-overs; impulse responses.
    JEL: E62 E63 F42
    Date: 2004–03
  20. By: Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank)
    Abstract: This paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real-time data. We find that such economic news in the United States, Germany and the euro area have indeed been a driving force behind daily US dollar – euro/DEM exchange rate developments in the period 1993-2003. The larger importance of US macroeconomic news is at least partly explained by their earlier release time compared to corresponding German and euro area news. The exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur. Overall, the model based on real-time data is capable of explaining about 75% of the monthly directional changes of the US dollar-euro exchange rate, although it does not explain well the magnitude of the exchange rate changes.
    Keywords: exchange rates; fundamentals; announcements; news; real-time data; United States; euro area; interdependence; US dollar euro; EMU.
    JEL: F31 F42 E52
    Date: 2004–05
  21. By: Bernd Kaltenhaeuser (Deutsche Bundesbank, Postfach 100602, D-60006 Frankfurt am Main, Germany.)
    Abstract: Within a two-step GARCH framework we explore the linkages between equity returns of ten sectors in the euro area, the United States and Japan, respectively. Our estimation framework allows a distinction to be made between spillover effects originating from one of the three currency areas and intra-sectoral spillover effects. We use daily data from the period between January 1986 and October 2002. We find that, during the late 1990s, the worldwide importance of European equity markets has increased considerably. More precisely, price innovations in European equities (both aggregate returns and sector returns) have doubled or tripled their impact on other stock markets. At the same time, there is evidence that sectors have become more heterogeneous in each of the three currency areas, ie the response to aggregate shocks has increasingly varied across sectors. Spillover effects of aggregate market innovations have generally outweighed intra-sectoral spillover effects. Overall, the process towards higher integration has been primarily a phenomenon of equity markets in the euro area and the United States.
    Keywords: Equity returns; spillover effects; country-specific; sector-specific; financial integration.
    JEL: F36 G15
    Date: 2003–11
  22. By: Patrick Lünnemann (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983, Luxembourg, Luxembourg); Thomas Y. Mathä (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983, Luxembourg, Luxembourg)
    Abstract: This paper analyses the degree of price rigidity and of inflation persistence across different product categories with particular focus on regulated prices and services for the individual EU15 countries, as well as for the EU15 and the euro area aggregates. We show that services and HICP sub-indices considered being subject to price regulation exhibit larger degrees of nominal price rigidities, with less frequent but larger price index changes as well as stronger asymmetries between price index increases and decreases. With regard to what extent services and regulated prices contribute to the degree of overall inflation persistence, we find that, for most of the EU15 countries as well as for the EU15 and the euro area aggregates, excluding services from the full HICP results in a reduction in the measured degree of inflation persistence; for regulated indices such an effect is also discernible, albeit to a lesser extent.
    Keywords: Price rigidity; inflation persistence; regulated prices; services.
    JEL: E31 C22 C23 C43
    Date: 2005–04
  23. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto Rigobon (Massachusetts Institute of Technology, Cambridge MA 02142-1347, USA.)
    Abstract: The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets - US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years - prior to EMU, the paper finds smaller international spillovers.
    Keywords: International financial markets; integration; transmission; financial market linkages; identification; heteroskedasticity; asset pricing; United States; euro area.
    JEL: E44 F3 C5
    Date: 2005–03
  24. By: Gerard O'Reilly (Central Bank and Financial Services Authority of Ireland); Karl Whelan (Central Bank and Financial Services Authority of Ireland)
    Abstract: This paper analyzes the stability over time of the econometric process for Euro-area inflation since 1970, focusing in particular on the behaviour of the so-called persistence parameter (the sum of the coefficients on the lagged dependent variables). Perhaps surprisingly, in light of the Lucas critique, our principal finding is that there appears to be relatively little instability in the parameters of the Euro-area inflation process. Full-sample estimates of the persistence parameter are generally close to one, and we fail to reject the hypothesis that this parameter has been stable over time. We discuss how these results provide some indirect evidence against rational expectations models with strong forward-looking elements, such as the New-Keynesian Phillips curve.
    Keywords: Inflation Persistence; Euro Area; Lucas Critique.
    JEL: E31 E52
    Date: 2004–04
  25. By: Mark Hallerberg (Emory University, ZEI.); Rolf Strauch (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Jürgen von Hagen (CEPR, University of Bonn, ZEI, Indiana University)
    Abstract: This paper examines the development of fiscal rules and budget procedures in EU countries, and their impact of public finances since the mid-1980s. It presents a new data set on institutional reforms and their impact in Europe. Empirical pattern confirm our prediction that more stringent fiscal rules exist under large coalition governments, while the centralisation of budgetary procedures is the main form of fiscal governance elsewhere. In addition, the centralisation of procedures does not restrain public debt in countries more prone to a rules-based approach, whereas more stringent fiscal rules seem to support fiscal discipline in almost all EU countries.
    Keywords: Public indebtedness; budgetary procedures; fiscal rules; European public finances.
    JEL: H11 H61 H62
    Date: 2004–12
  26. By: Bjørn-Roger Wilhelmsen (Norges Bank, Bankplassen 2, 0107 Oslo, Norway); Andrea Zaghini (Banca d’Italia, Servizio Studi, Via Nazionale 91, 00184 Roma, Italy)
    Abstract: The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for financial markets. Second, we find that the predictability of the ECB’s monetary policy is fully comparable (and sometimes slightly better) to that of the FED and the Bank of England. Finally, an econometric analysis of the ability of market participants to incorporate in the current money rates the expected changes in the key policy rate shows that in the euro area policy decisions are anticipated well in advance.
    Keywords: Monetary policy; Predictability; Money market rates.
    JEL: E4 E5 G1
    Date: 2005–07
  27. By: Nicholai Benalal (European Central Bank, Directorate General Economics); Juan Luis Diaz del Hoyo (European Central Bank, Directorate General Economics); Bettina Landau (European Central Bank, Directorate General Economics); Moreno Roma (European Central Bank, Directorate General Economics); Frauke Skudelny (European Central Bank, Directorate General Economics)
    Abstract: In this paper we investigate whether the forecast of the HICP components (indirect approach) improves upon the forecast of overall HICP (direct approach) and whether the aggregation of country forecasts improves upon the forecast of the euro-area as a whole, considering the four largest euro area countries. The direct approach provides clearly better results than the indirect approach for 12 and 18 steps ahead for the overall HICP, while for shorter horizons the results are mixed. For the euro area HICP excluding unprocessed food and energy (HICPX), the indirect forecast outperforms the direct whereas the differences are only marginal for the countries. The aggregation of country forecasts does not seem to improve upon the forecast of the euro area HICP and HICPX. This result has however to be taken with caution as differences appear to be rather small and due to the limited country coverage.
    Keywords: Forecasting short-term inflation, HICP sub-components/aggregation, Bayesian VARs, Model Selection
    JEL: C11 C32 C53 E31 E37
    Date: 2004–07
  28. By: Gabe de Bondt (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); David Marqués (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This study empirically examines the development of the high-yield segment of the corporate bond market in the United States, as a pioneer country, and the United Kingdom and the euro area, as later adopting countries. Estimated diffusion models show for the United States a significant pioneer influence factor and autonomous speed of diffusion. The latter is found to be higher in Europe than in the United States as also macroeconomic factors are considered. The high-yield bond diffusion pattern is significantly affected by financing need variables, e.g. leverage buy-outs, mergers and acquisitions, and industrial production growth, and return or financing cost variables, e.g. stock market return and the spread between the yield on speculative-grade and BBB-rated investment-grade bonds. These findings suggest that the diffusion of new financial products depends on the macroeconomic environment and can be quickly in case of the diffusion from a pioneer country to later adopting countries.
    Keywords: High-yield bond market; Financial innovation; Diffusion models
    JEL: G32 E44
    Date: 2004–02
  29. By: Alistair Dieppe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Keith Küster (Chair for Monetary Theory and Policy, Johann Wolfgang Goethe-University Postbox 94, D-60054 Frankfurt/Main.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we analyze optimal monetary policy rules in a model of the euro area, namely the ECB’s Area Wide Model, which embodies a high degree of intrinsic persistence and a limited role for forward-looking expectations. These features allow us, in large measure, to differentiate our results from many of those prevailing in New Keynesian paradigm models. Specifi- cally, our exercises involve analyzing the performance of various generalized Taylor rules both from the literature and optimized to the reference model. Given the features of our modelling framework, we find that optimal policy smoothing need only be relatively mild. Furthermore, there is substantial gain from implementing forecast-based as opposed to outcome-based policies with the optimal forecast horizon for inflation ranging between two and three years. Benchmarking against fully optimal policies, we further highlight that the gain of additional states in the rule may compensate for a reduction of communicability. Thus, the paper contributes to the debate on optimal monetary policy in the euro area, as well as to the conduct of monetary policy in face of substantial persistence in the transmission mechanism.
    Keywords: euro area; monetary policy rule; optimization.
    JEL: E4 E5
    Date: 2004–05
  30. By: Simonetta Rosati (Corresponding author: Directorate General Payment Systems and Market Infrastructure, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stefania Secola (Directorate General Payment Systems and Market Infrastructure, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyse the distribution of the TARGET cross-border interbank payment flows, from both a cross section and time series point of view, using average daily data for the period 1999-2002. We find out that first, “location matters”, in the sense that bilateral payment flows seem to reflect an organisation of interbank trading between countries whereby the size of the banking sectors, geographical proximity and cultural similarities play a significant role. This result is confirmed also by a model developed drawing on the gravity models literature. Second, we find that the payment traffic in TARGET is strongly affected by market technical deadlines. In addition, such traffic is positively related mainly to the liquidity conditions and to the turnover of the euro area money market, (particularly the unsecured overnight segment). Our model also provides a good explanation of the determinants of the interbank payments settled in the EURO 1 system.
    Keywords: Payment systems; TARGET; EURO 1; location; euro area interbank market.
    JEL: E58 G20 G21
    Date: 2005–02
  31. By: Michele Manna (Banca d’Italia)
    Abstract: This paper discusses a wide range of indicators of the degree of integration of the euro area banking system. It is concerned with volume data, a less developed field of research compared with studies on prices/rates. We first set out a methodological framework, a mixture of elementary and more sophisticated statistics which can also be used in other contexts and datasets. We then apply this framework to unconsolidated balance sheet data of banks, aggregated at the national level. The paper offers three main empirical conclusions. First, within the euro area the gap between the cross-border banking activity in wholesale and retail markets is widening. Second, at the same time, with the exception of the home bias, even in retail markets there is increasing neutrality towards the location of the counterparty. Third, following a moderate decline in the wake of EMU, London is once again gaining market shares.
    Keywords: banking system, balance sheet, integration, euro area.
    JEL: C43 D40 G21 L11
    Date: 2004–01
  32. By: Gilles Mourre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper examines whether the pattern of growth in euro area employment seen in the period 1997- 2001 differed from that recorded in the past and what could be the reasons for that. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment “inertia”, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997-2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment.
    Keywords: Euro area; Aggregate employment; Demand for labour; Labour market institutions; Active labour market policies.
    JEL: C2 E24 H50 J23
    Date: 2004–05
  33. By: Yiu Chung Cheung (Department of Financial Management, University of Amsterdam); Frank de Jong (Faculty of Economics and Econometrics, University of Amsterdam); Barbara Rindi (Department of Economics, Bocconi University)
    Abstract: We study the microstructure of the MTS Global Market bond trading system, which is the largest interdealer trading system for Eurozone government bonds. Using a unique new dataset we find that quoted and effective spreads are related to maturity and trading intensity. Securities can be traded on a domestic and EuroMTS platform. We show that despite the apparent fragmentation of trading, both platforms are closely connected in terms of liquidity. We also study the intraday price-order flow relation in the Euro bond market. We estimate the price impact of order flow and control for the intraday trading intensity and the announcement of macroeconomic news. The regression results show a larger impact of order flows during announcement days and a higher price impact of trading after a longer period of inactivity. We relate these findings to interdealer trading and to the structure of European bond markets.
    Keywords: Bonds markets, Microstructure, Order flow
    JEL: F31 C32
    Date: 2005–01
  34. By: Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Benoit Mojon (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Natacha Valla (Banque de France, B.P. 140-01, 75049 Paris Cedex 01, France.)
    Abstract: This paper analyses the pricing of bank loans and deposits in euro area countries. We show that retail bank interest rates adjust not only to changes in short-term interest rates but also to long-term interest rates. This result, which is arguably intuitive for long-term retail bank rates, is also confirmed for bank interest rates on short-term instruments. The transmission of changes in short-term market interest rates along the yield curve is found to be a key factor explaining the sluggishness of retail bank interest rates. We also show that in the cases where we cannot reject that the adjustment of retail rates has changed since the introduction of the euro, this adjustment has become faster.
    Keywords: Retail bank interest rates; market interest rates; euro area countries.
    JEL: E43 G21
    Date: 2005–09
  35. By: Julius Moschitz (Universitat Autònoma de Barcelona, Dept. d’Economia i d’Història Econòmica, 08193 Bellaterra, Barcelona, Spain.)
    Abstract: The overnight interest rate is the price paid for one day loans and defines the short end of the yield curve. It is the equilibrium outcome of supply and demand for bank reserves. This paper models the intertemporal decision problems in the reserve market for both central and commercial banks. All important institutional features of the euro area reserve market are included. The model is then estimated with euro area data. A permanent change in reserve supply of one billion euro moves the overnight rate by eight basis points into the opposite direction, hence, there is a substantial liquidity effect. Most of the predictable patterns for the mean and the volatility of the overnight rate are related to monetary policy implementation, but also some calendar day effects are present. Banks react sluggishly to new information. Implications for market efficiency, endogeneity of reserve supply and underbidding are studied.
    Keywords: Money markets; EONIA rate; Liquidity effect; Central bank operating procedures.
    JEL: E52 E58 E43
    Date: 2004–09
  36. By: Gert Peersman (Department of Financial economics, Ghent University); Roland Straub (European University Institute)
    Abstract: This paper provides evidence for the impact of technology, labor supply, monetary policy and aggregate spending shocks on hours worked in the Euro area. The evidence is based on a vector autoregression identified using sign restrictions that are consistent with both sticky price and real business cycle models. In contrast to most of the existing literature for the US, evidence of a positive response of hours to technology shocks is found, which is consistent with the conventional real business cycle interpretation and at odds with sticky price models. In addition, an important role for technology shocks in explaining business cycle fluctuations is found.
    Keywords: Technology shocks; Real business cycle models; Sticky price models; Vector autoregressions.
    JEL: E32 E24
    Date: 2004–07
  37. By: Jérôme Henry (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Pablo Hernández de Cos (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Sandro Momigliano (Banca d´Italia, Economic Research Department, Via Nazionale 91, 00184 Rome, Italy.)
    Abstract: This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers? social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.
    Keywords: Euro area; model simulations; fiscal policy; prices.
    JEL: E17 E31 E62
    Date: 2004–10
  38. By: Günter Coenen (Directorate General Research, European Central Bank); Roland Straub (Monetary and Financial Systems Department, International Monetary Fund)
    Abstract: In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks.
    Keywords: non-Ricardian households; fiscal policy; DSGE modelling; euro area.
    JEL: E32 E62
    Date: 2005–08
  39. By: Danny Pitzel; Lenno Uusküla
    Abstract: Several papers have looked at the relationship between country-specific factors and the strength of monetary transmission. Cecchetti (1999) concentrated on legal aspects, De Grauwe and Storti (2004) more on the financial structure of the economy. The objective of this paper is to measure how financial development variables influence the strength of monetary transmission in European countries. This paper employs a meta-analysis technique that has gained much popularity in recent years. According to the results, monetary transmission in Europe is strongly influenced by financial depth and structure.
    Keywords: monetary transmission, financial depth, meta-analysis
    JEL: E3 E4 E5 E6
  40. By: Eilev S. Jansen (Norges Bank, Norwegian University of Science and Technology)
    Abstract: The paper presents an incomplete competition model (ICM), where inflation is determined jointly with unit labour cost growth. The ICM is estimated on data for the Euro area and evaluated against existing models, i.e. the implicit inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry and Mestre (2001) - and estimated versions of the (single equation) P* model and a hybrid New Keynesian Phillips curve. The evidence from these comparisons does not invite decisive conclusions. There is, however, some support in favour of the (reduced form) AWM inflation equation. It is the only model that encompasses a general unrestricted model and it forecast encompasses the competitors when tested on 20 quarters of one step ahead forecasts.
    Keywords: Bayesian Analysis; DSGE Models; Model Misspecification.
    JEL: C32
    Date: 2004–03
  41. By: Aaron N. Mehrotra (Department of Economics, European University Institute, Via della Piazzuola 43, I-50133, Florence, Italy); Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This paper examines the link between socio-economic development and fiscal policy. We introduce an indicator for socio-economic development (SEDI) and investigate its relationship with different fiscal variables, using data for the cohesion countries, namely Greece, Portugal, Spain and Ireland for 1980-1999. We find that an improvement in the net lending position of the government, as well as a fall in the level of public debt, would be beneficial for socio-economic development in the medium term. Furthermore, fiscal consolidation is found to be more relevant for promoting socio-economic development in the cohesion countries than in the other EU-15 Member States. Our results provide support for incentives to curb spending, such as the fiscal criteria of the Maastricht Treaty or the Stability and Growth Pact.
    Keywords: Socio-economic development; fiscal consolidation; EU enlargement; Stability and Growth Pact.
    JEL: H6 H5 I0
    Date: 2005–04
  42. By: Björn Fischer (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Petra Köhler (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Franz Seitz (Fachhochscule Amberg-Weiden)
    Abstract: The present paper analyses currency in circulation in the euro area since the beginning of the 1980s. After a comprehensive literature review on this topic we present some stylised facts on currency holdings in the euro area countries as well as at an aggregate euro area level. The next chapter develops a theoretical model, which extends traditional money demand models to also incorporate arguments for the informal economy and foreign demand for specific currencies. In the empirical sections we first estimate the demand for euro legacy currencies in total and for small and large denominations within a cointegration framework. We find significant differences between the determinants of holdings of small and large denominations as well as overall currency demand. While small-value banknotes are mainly driven by domestic transactions, the demand for large-value banknotes depends on a short-term interest rate, the exchange rate of the euro as a proxy for foreign demand and inflation variability. Large-value banknotes seem to be therefore used to an important extent as a store of value domestically and abroad. As monetary policy is mainly interested in getting information on the demand for currency used for domestic transactions we also try several approaches in this direction. All the methods applied result in rather low levels of transaction balances used within the euro area of around 25% to 35% of total currency. After this we deal with possibly changing cost-benefit-considerations of the use of cash due to the introduction of euro notes and coins. Overall, there seems no evidence so far of a substantial decline of the demand for currency in the euro area. The analysis of currency in circulation and in particular estimates on the share of currency which is likely to be used for domestic transactions therefore help to explain monetary developments and are informative for monetary policy.
    Keywords: currency in circulation; Cointegration; Purposes of holding currency
    JEL: E41 E52 E58
    Date: 2004–04
  43. By: Fabio Canova (Universitat Pompeu Fabra, Department of Economics and Business, Jaume I building, Ramon Trias Fargas, 25-27 E-08005-Barcelona (Spain)); Matteo Ciccarelli (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Eva Ortega (Research Department, Bank of Canada, 234 Wellington, Ottawa, ON K1A 0G9, Canada.)
    Abstract: This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of an Euro area specific cycle or of its emergence in the 1990s..
    Keywords: Business cycle; Indicators; Panel Data; Bayesian methods
    JEL: C11 C33 E32
    Date: 2004–02
  44. By: Lorenzo Cappiello (European Central Bank); Stéphane Guéné (European Central Bank)
    Abstract: This paper studies the role of inflation in the determination of financial asset prices. We estimate an Intertemporal Capital Asset Pricing Model à la Merton (1973), with inflation as an independent source of risk, for France and Germany. Our study also allows us to evaluate how the different nature of the French and German monetary policies before 1999 as well as the convergence process towards the single currency might have affected the role of inflation in the pricing of financial assets. We find that inflation is a significant explanatory factor for the pricing of stocks and government bonds in the two countries. Moreover, while there seems to be no clear structural break in the impact of inflation on asset prices after Stage Three of Economic and Monetary Union, such an impact has been increasingly similar in the two countries after 1999.
    Keywords: Intertemporal CAPM, business cycles, GARCH-in-Mean
    JEL: C32 C61 E44 G12
    Date: 2005–02
  45. By: Jutta Günther
    Abstract: Foreign direct investment (FDI) plays an important role for countries or regions in the process of economic catching-up since it is assumed – among other things – that FDI brings in new production technology and knowledge. This paper gives an overview about the development of FDI in East Germany based on official data provided by the Federal Bank of Germany. The investigation also includes a comparison of FDI in East Germany to Central East European countries. But the main focus of the paper is an analysis of the technological capability comparing majority foreign and West German owned firms to majority East German owned firms. It shows that foreign and West German subsidiaries in East Germany are indeed characterized by superior technological capability with respect to all indicators looked at (product innovation, research & development, organizational changes etc.).
    Date: 2004–03
  46. By: Josef Baumgartner (Austrian Institute of Economic Research (WIFO), P.O. Box 91, 1103 Vienna, Austria.); Ernst Glatzer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Fabio Rumler (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Alfred Stiglbauer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.)
    Abstract: Based on individual price records collected for the computation of the Austrian CPI, average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria. Depending on the estimation method, prices are unchanged for 10 to 14 months on average. We find strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. The typical size of a price increase (decrease) is 11 (15) percent. The aggregate hazard function of prices is decreasing with time. Besides heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for unobserved heterogeneity in estimating the probability of a price change with a fixed-effects logit model, we find a positive effect of the duration of a price spell. During the Euro cash changeover the probability of price changes was higher.
    Keywords: Consumer prices; sticky prices; frequency and synchronization of price changes; duration of price spells.
    JEL: C41 D21 E31 L11
    Date: 2005–09
  47. By: Sami Vähämaa (University of Vaasa, Department of Accounting and Finance, P.O. Box 700, FIN-65101 Vaasa, Finland;)
    Abstract: This paper uses data on German government bond futures options to examine the behaviour of market expectations around monetary policy actions of the European Central Bank (ECB). In particular, this paper focuses on the asymmetries in bond market expectations, as measured by the skewness of option-implied probability distributions of future bond yields. The results show that market expectations are systematically asymmetric around monetary policy actions of the ECB. Around monetary policy tightening, option-implied yield distributions are positively skewed, indicating that market participants attach higher probabilities for sharp yield increases than for sharp decreases. Correspondingly, around loosening of the policy, implied yield distributions are negatively skewed, suggesting that markets assign higher probabilities for sharp yield decreases than for increases. Furthermore, the results indicate that market expectations are significantly altered around monetary policy actions, as asymmetries in market expectations tend to increase before changes in the monetary policy stance, and to decrease afterwards.
    Keywords: Market expectations; Asymmetries; Implied skewness; Monetary policy.
    JEL: E44 E52 G10 G13
    Date: 2004–03
  48. By: António Afonso (European Central Bank, Directorate General Economics); Rolf Strauch (European Central Bank, Directorate General Economics)
    Abstract: In this paper we assess the importance given in capital markets to the credibility of the European fiscal framework. We evaluate to which extent relevant fiscal policy events taking place in the course of 2002 produced a reaction in the long-term bond segment of the capital markets. Firstly, we identify the fiscal policy events and qualitatively assess the views of capital market participants. Secondly, we estimate the impact of these fiscal events on the interest rate swap spreads, which is our measure for the risk premium. According to our results the reaction of swap spreads, where it turned out to be significant, has been mostly around five basis points or less.
    Keywords: fiscal policy events; Stability and Growth Pact; interest rate swap spreads
    JEL: C22 G15 H30
    Date: 2004–02
  49. By: Olli Castrén (External Developments Division, DG-Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper uses data on currency options prices for the exchange rates of the three largest new EU member states Poland, Czech Republic and Hungary vis-à-vis the euro and the US dollar to estimate the risk-neutral density (RND) functions and the density interval bands. Analysing the RNDs, we find that only some of the implied moments on the Polish zloty exchange rate systematically move around policy events, while the implied moments on the RNDs on the Czech koruna and Hungarian forint show more systematic changes. Regarding the HUF/EUR currency pair, monetary policy news have a significant impact on all moments, while changes in implied standard deviation signal a higher probability of interest rate changes by the Hungarian central bank. The more marked results for HUF/EUR exchange rate could reflect the fixed exchange rate regime prevailing throughout the sample period.
    Keywords: Foreign exchange rate market sentiment; monetary policy news; currency options data.
    JEL: E52 F31 G15
    Date: 2005–02
  50. By: Ramón Gómez-Salvador (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Julián Messina (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Giovanna Vallanti (London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom)
    Abstract: We examine job flows in the 1990s for a sample of 13 European countries. By using a dataset of continuing firms that covers all sectors, we find firm characteristics to be important determinants of job flows, with smaller and younger firms within services typically having a larger degree of job turnover. Once controlled for firm and sectoral effects, the role of institutions in the dynamics of job creation and destruction is examined. As expected, employment protection is found to reduce job flows. Similarly, countries with higher unemployment benefits and more coordinated wage bargaining systems are characterised by lower job flows.
    Keywords: Gross Job Flows; Labour market institutions.
    JEL: J23 J60
    Date: 2004–03
  51. By: Christopher Bowdler (Nuffield College New Road Oxford OX1 1NF, United Kingdom); Eilev S. Jansen
    Abstract: Equilibrium correction models of the price level are often used to model inflation. Such models assume that the long-run markup of prices over costs is fixed, but this may not be true for the Euro area economy, which has undergone major structural reforms over the last 25 years. We allow for shifts in the markup factor through estimating an equation that includes a timevarying intercept. The model fits the data better than a linear alternative, and suggests that a reduction in the price-cost markup contributed to disinflation in the Euro area during the 1980s.
    Keywords: Inflation; Price-cost markup; Cointegration; Time-varying intercept; Dynamic modelling.
    JEL: C22 C32 E31
    Date: 2004–02
  52. By: Carsten Detken (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Vítor Gaspar (BANCO DE PORTUGAL, Avenida Almirante Reis, 71- 8º, 1150-012 LISBOA - PORTUGAL); Bernhard Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy.
    Keywords: Fiscal spillover effects; common pool; overlapping generations; bond market integration; fiscal discipline; fiscal rules; European Monetary Union.
    JEL: D62 E61 E63
    Date: 2004–12
  53. By: Plutarchos Sakellaris (Department of Economics, Athens University of Economics and Business); Focco W. Vijselaar (Monetary and Economic Policy Department, De Nederlandsche Bank N.V.)
    Abstract: Capital quality improvement is a general phenomenon. Therefore quality correction is needed in price indexes. There is substantial evidence of biases in the official price indexes of capital equipment. We apply to euro area statistics estimates of these biases based on US data thus deriving quality-adjusted price indexes. Adjusted for quality, productive capital stocks of equipment and software grow on average 3 percentage points faster annually - a doubling of their growth rates. Quality-adjusted output grows 0.46 percentage points faster annually - a 20 percent increase. In terms of growth accounting, quality adjustment subtracts 11 percentage points from the share of TFP in aggregate growth and adds them to the share of equipment stock. For the 1990s only the difference is even higher: 14 percentage points. When all is told, embodied technological change accounts for 46 percent of (quality-adjusted) output growth in the euro area over the period 1982 to 2000.
    Keywords: output growth, embodied technological change, equipment investment, investment price deflators, euro area.
    JEL: O3 O47 D24 E22
    Date: 2004–06
  54. By: Tamim Bayoumi (International Monetary Fund, NY, USA.); Douglas Laxton (International Monetary Fund, NY, USA.); Paolo Pesenti (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade.
    Keywords: Competition; Markups; Monetary Policy; Taylor Rule.
    JEL: C51 E31 E52
    Date: 2004–04
  55. By: Richard Baldwin (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.); Frauke Skudelny (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Daria Taglioni (University of Geneva - Graduate Institute of International Studies (HEI), CH-1202 Geneva, Switzerland.)
    Abstract: This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries.
    Keywords: Rose effect; exchange rate volatility; monetary union; sectoral trade; gravity.
    JEL: F12 C33 E0
    Date: 2005–02
  56. By: Kadri Männasoo; David G Mayes
    Abstract: This paper considers the joint role of macro-economic and bankspecific factors in explaining the occurrence of banking problems in the twenty-one Central and East European emerging markets over the recent decade. Using data at the individual bank level we show, using a logit model, that the macroeconomic factors play a central role in determining banking sector instability in the early stages of difficulty, while the bankspecific factors are more important in the later stages and gain more weight as the banking sector develops and the institutional framework becomes mature.
    Keywords: banking sector vulnerability, banking crises, early warning indicators, Central and Eastern Europe
    JEL: E44 G21
  57. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: The paper assesses the communication strategies of the Federal Reserve, the Bank of England and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decisionmaking process in the committee. The paper shows that the Federal Reserve has been pursuing a rather individualistic communication strategy amid a collegial approach to decision-making, while the Bank of England is using a collegial communication strategy and highly individualistic decision-making. The ECB has chosen a collegial approach both in its communication and in its decisionmaking. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication and decisionmaking strategy.
    Keywords: Communication; monetary policy; committee; effectiveness; strategies; Federal Reserve; Bank of England; European Central Bank.
    JEL: E43 E52 E58 G12
    Date: 2005–05
  58. By: Marcin Kolasa (National Bank of Poland, Warsaw, Poland)
    Abstract: This paper considers productivity developments in the new EU member states and provides evidence on factors driving productivity growth in these countries, focusing on a panel of Polish manufacturing industries. Companies in Poland seem to benefit significantly from transfer of technologies that have been accumulated in more developed economies. By contrast, no strong evidence is found on immediate technology transfer. Another result is a significant effect of domestic innovation activity. There are signs that market reforms also boosted efficiency, whereas the role of reallocation of production factors towards more productive activities was marginal. Bearing in mind all methodological and data-related caveats, as well as cross-country diversity, caution is required while interpreting the findings and extrapolating them to other new member states. However, the results obtained provide some policy implications and make the case for taking into account domestic innovation activity while constructing endogenous growth models for the EU catching-up economies.
    Keywords: Multi-factor productivity; innovation; convergence; new member states; manufacturing.
    JEL: C23 O31 O47
    Date: 2005–05
  59. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Tobias Linzert (Goethe University Frankfurt, Department of Economics, Mertonstr. 17-21, 60054 Frankfurt am Main, Germany.); Dieter Nautz (Goethe University Frankfurt, Department of Economics, Mertonstr. 17-21, 60054 Frankfurt am Main, Germany.)
    Abstract: This paper employs individual bidding data to analyze the empirical performance of the longer term refinancing operations (LTROs) of the European Central Bank (ECB). We investigate how banks’ bidding behavior is related to a series of exogenous variables such as collateral costs, interest rate expectations, market volatility and to individual bank characteristics like country of origin, size, and experience. Panel regressions reveal that a bank’s bidding depends on bank characteristics. Yet, different bidding behavior generally does not translate into differences concerning bidder success. In contrast to the ECB’s main refinancing operations, we find evidence for the winner’s curse effect in LTROs. Our results indicate that LTROs do neither lead to market distortions nor to unfair auction outcomes.
    Keywords: Monetary Policy Instruments of the ECB; Auctions; Winner’s Curse; Panel Analysis of Bidding Behavior.
    JEL: E52 D44
    Date: 2004–05
  60. By: Patrick Lünnemann (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.); Thomas Y. Mathä (Banque centrale du Luxembourg, Monetary, Economic & Statistics Department, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.)
    Abstract: This paper analyses the degree of inflation persistence in the EU15, the euro area and each of its member states using disaggregate price indices from the Harmonised Index of Consumer Prices. Our results reveal substantial heterogeneity across countries and indices. The overall results, based on both parametric and non-parametric persistence measures, suggest a very moderate degree of median and mean inflation persistence. For most price indices we are able to reject the unit root hypothesis, as well as the notion of disaggregate inflation exhibiting a high degree of persistence. Durable goods and services tend to be relatively less persistent than other indices. Aggregation effects, both across indices and countries, tend to be present. We find structural breaks both owing to the change in the monetary regime and to the modified treatment of sales in the official HICP series. The latter tends to reduce the measured degree of inflation persistence.
    Keywords: Inflation persistence; Mean reversion; Aggregation effect; Structural breaks.
    JEL: E31 C21 C22 C14
    Date: 2004–11
  61. By: Mika Tujula (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: Fiscal balances have deteriorated quickly in recent years, bringing back to the foreground the question what factors help explain such sharp changes. This paper takes a broad perspective at the issue regarding countries included, the range of explanatory variables tried, and the time-span. The empirical analysis shows that changes in budget balances are affected by debt growth, macroeconomic developments and political factors. In particular, we find that the run-up to EMU induced additional consolidation in Europe and that budget balances deteriorate markedly in election years. Asset prices also may affect budgets, but the impact remains limited in normal times.
    Keywords: Fiscal policy; asset prices; economic growth; budget balance; Stability and Growth Pact.
    JEL: E61 E62 H61 H62
    Date: 2004–12
  62. By: Roel M.W. J. Beetsma (Department of Economics, University of Amsterdam); Xavier Debrun (Fiscal Affairs Department, International Monetary Fund)
    Abstract: The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays.
    Keywords: Fiscal rules, Stability and Growth Pact, procedural flexibility, deficits, structural reforms.
    JEL: E62 H6
    Date: 2005–01
  63. By: Nicole Jonker (Corresponding author: De Nederlandsche Bank, Payments Policy Department , P.O. Box 98, 1000 AB Amsterdam,The Netherlands.); Carsten Folkertsma (De Nederlandsche Bank, Research Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Harry Blijenberg (Statistics Netherlands, P.O. Box 4000, 2270 JM Voorburg,The Netherlands.)
    Abstract: In this paper we examine pricing behaviour of retail firms in the Netherlands during 1998-2003 using a large database with monthly price quotes of 49 articles, representing different product types. We have conducted this study in order to gain in sight in the degree of nominal rigidity of consumer prices in the Netherlands. We find that prices of energy and unprocessed food are most flexible, whereas prices of services are stickiest. A multivariate analysis shows that firm size matters with prices being stickiest in small firms and most flexible in large firms and in retail firms consisting of the owners only. Furthermore, we investigate pass-through effects of VAT changes in prices. We find that VAT increases are almost completely passed on to consumers. Finally, there is some evidence indicating that pricing behaviour of retail firms was different during the introduction of the euro than in the period directly preceding it.
    Keywords: Nominal rigidity of prices; frequency of price change; Cox regression.
    JEL: E31 D49 C41
    Date: 2004–11
  64. By: Giovanni Veronese (Corresponding author: Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Silvia Fabiani (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Roberto Sabbatini (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.)
    Abstract: This paper investigates the behaviour of consumer prices in Italy by looking at micro data in the attempt to obtain a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, also with reference to different types of products and outlets. Prices tend to remain unchanged on average for around 10 months; duration is longer for nonenergy industrial goods and services and much shorter for energy products. Price changes are more frequent upward than downward, in larger stores than in traditional ones. When the geographical location of outlets is accounted for, price changes display considerable synchronisation, in particular in the service sector.
    Keywords: Consumer prices; nominal rigidity; frequency of price change.
    JEL: D21 D40 E31
    Date: 2005–03
  65. By: Rolf Strauch (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt/Main, Germany); Mark Hallerberg (Emory University, Department of Political Science, 201 Dowman Drive, Atlanta, GA 30322.); Jürgen von Hagen (ZEI Zentrum für Europäische Integrationsforschung /Center for European Integration Studies, Rheinische Friedrich-Wilhelms-Universität Bonn)
    Abstract: We analyse the performance of budgetary and growth forecasts of all stability and convergence programmes submitted by EU member states over the last decade. Differences emerge for the bias in budgetary projections across countries. As a second step we explore whether economic, political and institutional factors can explain this pattern. Our analysis indicates that the cyclical position and the form of fiscal governance are major determinants of forecast biases. Projected changes in the budgetary position are mainly affected by the cycle, the need of convergence before EMU and by electoral cycles.
    Keywords: Fiscal forecasting; Forecast evaluation; Budget processes; Stability and Growth Pact.
    JEL: C53 E17 H62
    Date: 2004–02
  66. By: Astrid Van Landschoot (National Bank of Belgium and Ghent University.)
    Abstract: In this paper, we investigate the determinants of the Euro term structure of credit spreads. More specifically, we analyze whether the sensitivity of credit spread changes to financial and macroeconomic variables depends on bond characteristics such as rating and maturity. According to the structural models and empirical evidence on credit spreads, we find that changes in the level and the slope of the default-free term structure, the market return, implied volatility, and liquidity risk significantly influence credit spread changes. The effect of these factors strongly depends on bond characteristics, especially the rating and to a lesser extent the maturity. Bonds with lower ratings are more affected by financial and macroeconomic news. Furthermore, we find that liquidity risk significantly increases credit spreads, especially on lower rated bonds.
    Keywords: Credit risk; Structural models; Nelson-Siegel.
    JEL: C22 E47 G15
    Date: 2004–10
  67. By: Christian Ewerhart (Institute for Empirical Research in Economics (IEW), University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland.); Nuno Cassola (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany); Steen Ejerskov (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany); Natacha Valla (Banque de France, Paris, France)
    Abstract: On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its “neutral” benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold.
    Keywords: euro; monetary policy instruments; operational framework; refinancing operations.
    JEL: E43 E52
    Date: 2003–12
  68. By: Paul De Grauwe (Kathoelike Universiteit Leuven, International Economics, aamsestraat 69, 3000 Leuven, Belgium); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany)
    Abstract: This paper brings together several strands of the literature on the endogenous effects of monetary integration, i.e., whether sharing a single currency may set in motion forces bringing countries closer together. The start of EMU has spurred a new interest in this debate. Four areas are analysed: the endogeneity of economic integration, in which we look primarily at evidence on prices and trade; the endogeneity of financial integration or equivalently of insurance schemes based on capital markets; the endogeneity of symmetry of shocks; and the endogeneity of product and labour market flexibility. We present diverse arguments and, where possible, explore the incipient empirical literature focussing on the euro area. Our preliminary conclusion is one of moderate optimism. The different endogeneities that exist in the dynamics towards optimum currency areas are at work. How strong these endogeneities are and how quickly they will do their work remains to be seen.
    Keywords: Optimum Currency Area; Economic and Monetary Integration; EMU.
    JEL: E42 F13 F33 F42
    Date: 2005–04
  69. By: Vincent Brousseau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Andrés Manzanares (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies frictions in the euro area interbank deposit overnight market, making use of high frequency individual quote and trade data. The aim of the analysis is to determine, in a quantitative way, how efficient this market is. Besides a comprehensive descriptive analysis, the approach used defines a measure of the friction arising for each single transaction, by which we understand an (small) initial loss accepted by a counterparty, and the corresponding gain made by the other counterparty. The evolution of total daily frictions is then put into perspective comparing it with the frictions arising if flows corresponded to the optimal solution of a “cash transportation problem”. The main conclusions of this exercise are that overall frictions, although small in absolute size, tend to increase strongly whenever the overnight rate becomes volatile. Some tentative explanations for this are given, relying on the introduced methodology.
    Keywords: Financial market microstructure; Money Market; Market friction; Network optimization problems.
    JEL: D4 E52 C61
    Date: 2005–02
  70. By: Barbara Annicchiarico (Ceis, Facoltà di Economia, Università di Roma “Tor Vergata”,Via Columbia 2, 00133 Rome, Italy.)
    Abstract: This paper investigates the inflationary effects of fiscal policy in an optimising general equilibrium monetary model with capital accumulation, flexible prices and wealth effects. The model is calibrated to Euro Area quarterly data. Simulation results show that government deficits, high debt level and slow fiscal adjustment adversely affect price stability in the presence of an independent monetary authority adopting a monetary targeting regime. The mechanism through which fiscal policy affects the dynamics of the price level presents monetarist properties, since the price level is determined in the monetary market. The effects produced by fiscal expansions on price dynamics are due to the behaviour of consumers, sharing the burden of fiscal adjustment with future generations. Fiscal variables are shown to influence the consumption plan of individuals and the demand for real money balances, thus affecting the equilibrium conditions in the money market where the price level is determined.
    Keywords: Price Stability; Fiscal Policy and Government Debt.
    JEL: E31 E62
    Date: 2003–11
  71. By: Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.)
    Abstract: This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies.
    Keywords: Price setting; consumer prices; frequency of price changes.
    JEL: E31 D40 C25
    Date: 2004–11
  72. By: Tjeerd Jellema (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Steven Keuning (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Reimund Mink (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: An important part of external or policy shocks is transmitted throughout the economy via various channels of transactions. To analyse such channels and to predict the impact of shocks, it is expedient to know who recently exchanged what with whom and for what purpose. The most appropriate format for presenting intersectoral linkages at the national level is in a National Accounting Matrix (NAM). A NAM is defined as the presentation of a sequence of integrated accounts and balancing items in a matrix that elaborates the linkages between a supply and use table and institutional sector accounts. This paper compiles the first pilot Euro Area Accounting Matrix (EAAM) and considers its usefulness for the euro area’s economic analysis. It also reports on the solution of a number of aggregation and consolidation issues that arise when constructing a multi-country accounting matrix.
    Keywords: National Accounts; National Accounting Matrix; Euro Area.
    JEL: E00 E19
    Date: 2004–05
  73. By: Federico Ravenna (Economics Department, 401 E2 Building, University of California, Santa Cruz, CA 95064, US)
    Abstract: This paper shows that the credibility gain from permanently committing to a fixed exchange rate by joining the European Monetary Union can outweigh the loss from giving up independent monetary policy. When the central bank enjoys only limited credibility a pegged exchange rate regime yields a lower loss compared to an inflation targeting policy, even if this policy ranking would be reversed in a fullcredibility environment. There exists an initial stock of credibility that must be achieved for a policy-maker to adopt inflation targeting over a strict exchange rate targeting regime. Full credibility is not a precondition, but exposure to foreign and financial shocks and high steady state inflation make joining the EMU relatively more attractive for a given level of credibility. The theoretical results are consistent with empirical evidence we provide on the relationship between credibility and monetary regimes using a Bank of England survey of 81 central banks.
    Keywords: Inflation targeting; Credibility; Open Economy; Exchange Rate. Regimes, Monetary Policy
    JEL: E52 E31 F02 F41
    Date: 2005–08
  74. By: Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.
    Keywords: Political economy; fiscal rules; Stability and Growth Pact; deficits; institutional reform.
    JEL: D7 H3 H6
    Date: 2004–12
  75. By: Véronique Genre; Ramón Gómez Salvador; Ana Lamo (Corresponding author: European Central Bank, Directorate General Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides an empirical study of the determinants of female participation decisions in the European Union. The analysis is performed by estimating participation equations for different age groups (i.e. young, prime-age and older females), using annual data for a panel of 12 EU-15 countries over the period 1980- 2000. Our findings show that the strictness of labour market institutions negatively affects the participation rate. Decisions linked to individual preferences with regards to education or fertility are also found relevant to participation of the youngest and prime-age females respectively. The inclusion of a proxy to capture cohort effects is crucial in order to explain the oldest females’ participation.
    Keywords: Labour force participation; labour market institutions.
    JEL: J21
    Date: 2005–03
  76. By: Marcin Przybyla (EU Countries Division, Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Moreno Roma (Corresponding author: European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we explore the link between the intensity of product market competition and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of competition we use the level of mark-up, profit margin, the profit rate and a survey based “intensity of competition” variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of competition used, our findings suggest that higher product market competition reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests.
    Keywords: Inflation; Competition; Estimation and Panel Data Analysis.
    JEL: C21 C23 E31
    Date: 2005–03
  77. By: Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Pablo Burriel (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.)
    Abstract: This paper identifies the basic features of price setting behaviour at the producer level in the Spanish economy using a large dataset containing the micro data underlying the construction of the PPI over the period 1991-1999. It explores how these general features are affected by some specific factors (cost structure, degree of competition, demand conditions, government intervention, level of inflation, seasonality, and the practice of using attractive prices) and presents a comparison of price setting practices at the producer and at the consumer level to ascertain whether the retail sector augments or mitigates price stickiness. We find that prices do not change often but do so by a large amount. The cost structure, proxied by the labour share and the relevance of raw materials, and the degree of competition, proxied by import penetration, affect price flexibility. We also find some evidence that producer prices are more flexible than consumer prices.
    Keywords: Price setting; producer prices; frequency of price changes.
    JEL: E31 D40
    Date: 2005–09
  78. By: Antonis Adam; Thomas Moutos
    Abstract: Following Turkey’s application for EU membership in 1987, a Customs Union (CU) between Turkey and the EU, mainly covering trade in manufacturing goods and processed agricultural products, came into effect in 1995. In addition to a large agricultural sector, Turkey also specializes in the production and exportation of relatively low-price, low-quality varieties of manufactured products. We use a theoretical framework in order to demonstrate that these features of the Turkish economy imply asymmetric changes in the trade volumes of the incumbent countries of the EU as a result of the EU-Turkey CU. By examining disaggregated trade data we find that the technologically sophisticated EU countries (e.g., mainly the Northern European countries) are also least similar to Turkey in terms of their export structure, whereas the degree of export similarity between the less technologically sophisticated EU members and Turkey is high. Our econometric results indicate that, in contrast to the “Northern” group’s exports to other EU15 countries (which have remained intact), the Southern countries’s exports to the other EU15 countries have declined as a result of the EU-Turkey CU. Moreover, the extra penetration of the Turkish market by EU countries has not been more favourable to the Southern group. These findings also imply that technologically sophisticated countries may see no significant further benefits from Turkey’s full accession to the EU (whereas the migration and political influence related costs for these countries may be large).
    Keywords: European Union, Turkey, customs union, exports, gravity, differentiated products
    JEL: F13 F15
    Date: 2005
  79. By: Frédéric Boissay (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Villetelle (Banque de France-General, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.)
    Abstract: This paper presents the French country block of the ESCB Multi-Country Model for the euro area, which has been built in collaboration by the ECB and the Banque de France. The theoretical structure of the model is in line with most current macroeconometric models, i.e. supply factors determine the long-run equilibrium, while in the short run aggregate demand determines aggregate output. The paper is structured as follows. We first present the theoretical background of the model. Then we review the long run relationships as well as the estimated short term dynamic equations. Finally, we simulate the effects of six exogenous shocks to the economy and discuss the dynamic properties of the model.
    Keywords: Macro-econometric Modelling; France.
    JEL: C3 C5 E1 E2
    Date: 2005–03
  80. By: Francisco Maeso-Fernandez (University of Murcia, Spain.); Chiara Osbat (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.); Bernd Schnatz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.)
    Abstract: This paper discusses methodological issues relating to the estimation of the long-run relationship between exchange rates and fundamentals for Central and Eastern European acceding countries. Given limited data availability and reliability and the rapid structural change acceding countries have been undergoing, we identify several pitfalls of standard econometric procedures. We analyse the merits of a two-step strategy that consists of estimating the relationship between exchange rates and fundamentals in a panel cointegration setting excluding acceding countries from the sample - and then “extrapolating” the estimated relationships. While focusing on the first step of such a strategy, the paper also discusses technical aspects underlying the “extrapolation” stage. As a result, the paper endows the reader with the methodological and empirical ingredients for computing equilibrium exchange rates for acceding countries, providing estimates for the long-run coefficients and a discussion of how to apply these results to acceding countries data.
    Keywords: Equilibrium exchange rates; Acceding Countries; Panel Cointegration; BEER.
    JEL: C23 F31
    Date: 2004–04
  81. By: Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria); Josef Baumgartner (Austrian Institute of Economic Research (WIFO), Arsenal Objekt 20, POB 91, 1103 Vienna, Austria); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria)
    Abstract: This paper explores the price-setting behavior of Austrian firms based on survey evidence. Our main result is that customer relationships are a major source of price stickiness in the Austrian economy. We also find that the majority of firms in our sample follows a timedependent pricing strategy. However, a substantial fraction of firms deviates from time-dependent pricing in the case of large shocks and switches to a state-dependent pricing strategy. In addition, we present evidence suggesting that the price response to various shocks is subject to asymmetries.
    Keywords: Price-setting behavior; Price rigidity.
    JEL: C25 E30
    Date: 2005–03
  82. By: Ramón Adalid (Directorate General Statistics, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Peter McAdam (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Stefano Siviero (Economic Research Department, Banca d’Italia, Rome, Italy)
    Abstract: In this paper, we examine the performance and robustness of optimised interest-rate rules in four models of the euro area which differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioural elements and adherence to micro-foundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with at most moderate inertia; rules that are optimised for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.
    Keywords: Macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area.
    JEL: E31 E52 E58 E61
    Date: 2005–04
  83. By: Robert-Paul Berben (Monetary and Economic Policy Department, Bank of the Netherlands,Westeinde 1, P.O. Box 98, 1017 ZN Amsterdam, NL.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Julian Morgan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Theodoros Mitrakos (Bank of Greece, 21 E.Venizelos Avenue, 10250 Athens, Greece.); Nikolaos G. Zonzilos (Bank of Greece, 21 E.Venizelos Avenue, 10250 Athens, Greece.)
    Abstract: This paper analyses the response of inflation in the euro area to five macroeconomic shocks through the use of results derived from Eurosystem large-scale macroeconomic models. The main finding is that only a fiscal shock, and to a lesser extent a TFP shock, generate marked inflation persistence. In contrast, an indirect tax and an oil price shock appear much less persistent and a social security shock generates less inflation persistence in the majority of the countries (although some weak persistence was observed at the euro area level). The paper also considers evidence on the sources of persistence, which indicates that it is crucially affected by the responsiveness of wages to employment, by the sluggishness in the adjustments of the demand components, and by the speed of adjustment of employment to output and wage changes.
    Keywords: Inflation persistence; large-scale macroeconomic models; impulse response function.
    JEL: C53 E31 E52
    Date: 2005–09
  84. By: Laurent Bilke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper uses disaggregated CPI time series to show that a break in the mean of French inflation occurred in the mid-eighties and that the 1983 monetary policy shift mostly accounted for it. CPI average yearly growth declined from nearly 11% before the break date (May 1985) to 2.1% after. No other break in the 1973-2004 sample period can be found. Controlling for this mean break, both aggregate and sectoral inflation persistence are stable and low, with the unit root lying far in the tail of the persistence estimates. However, persistence differs dramatically across sectors. Finally, the duration between two price changes (at the firm level) appears positively related with inflation persistence (at the aggregate level).
    Keywords: Multiple breaks test; inflation persistence; monetary policy; sectoral prices.
    JEL: E31 C12 C22
    Date: 2005–03
  85. By: Robert-Paul Berben (De Nederlandsche Bank, Monetary and Economic Policy Department, Westeinde 1, P.O. Box 98, 1017 ZN Amsterdam, Netherlands.); Alberto Locarno (Banca d´Italia,Via Nazionale 91, 00184 Rome, Italy.); Julian Morgan (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Javier Valles (Banco de España, Research Department, Alcalá 50, 28014 Madrid, Spain.)
    Abstract: This paper examines possible explanations for observed differences in the transmission of euro area monetary policy in central bank large-scale macroeconomic models. In particular it considers the extent to which these differences are due to differences in the underlying economies or (possibly unrelated) differences in the modelling strategies adopted for each country. It finds that, against most yardsticks, the cross-country variations in the results are found to be plausible in the sense that they correspond with other evidence or observed characteristics of the economies in question. Nevertheless, the role of differing modelling strategies may also play a role. Important features of the models - for instance in the treatment of expectations or wealth - can have a major bearing on the results that may not necessarily reflect differences in the underlying economies.
    Keywords: Monetary transmission; macroeconometric models; euro area differences.
    JEL: C53 E52 E37
    Date: 2004–10
  86. By: Claire Loupias (Corresponding author: Centre de Recherche, Banque de France, DGEI-DEER-CRECH, 41-1391, 31 rue Croix-des-Petits-Champs, 75 049 Paris Cedex 01, France); Roland Ricart (Service des Synthèses Conjoncturelles, Banque de France, DGEI-DEER-CRECH, 41-1391, 31 rue Croix-des-Petits-Champs, 75 049 Paris Cedex 01, France)
    Abstract: This paper reports the results of a survey conducted by the Banque de France during Winter 2003-2004 to investigate the price-setting behavior of French manufacturing companies. Prices are found to adjust infrequently; the median firm modifies its price only once a year. Price reviews are more frequent than price changes; the median firm reviews its price quarterly. Firms are found to follow either time-dependent, state-dependent or both pricing rules. Moreover, the chosen interval of price reviews depends on the probability that changes in the firms’ environment occur. Coordination failure and nominal contracts (either written or implicit) are the most important sources of price stickiness, while pricing thresholds and physical menu costs appear to be totally unimportant. Asymmetries in price stickiness are found to be different for cost shocks compared to demand shocks - prices are more rigid downward than upward for cost shocks, while the reverse is true for demand shocks.
    Keywords: Price rigidity; price-setting behavior; inflation persistence; survey data.
    JEL: E31 D40 L11
    Date: 2004–12
  87. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper deals with the very short-term influence of "oral interventions" on the exchange rate of major currencies. The paper finds that official communication, as reported by wire services, are effective in influencing the US dollar-euro and yen-US dollar exchange rates in the desired direction on intervention days. Oral interventions are found to be substantially more effective if they deviate from the prevalent policy "mantra". They also tend to reduce market volatility whereas actual interventions raise volatility. A key result of the paper is that oral interventions are effective independently from the stance and direction of monetary policy as well as the occurrence of actual interventions. This suggests that oral interventions might constitute, on a short-term basis, an effective and largely autonomous policy tool.
    Keywords: communication; exchange rate; intervention; policy; United States; euro area; Japan.
    JEL: E61 E58 F31
    Date: 2004–05
  88. By: António Afonso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and ISEG/UTL - Technical University of Lisbon; CISEP – Research Centre on the Portuguese Economy, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal); Christiane Nickel (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Philipp Rother (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany)
    Abstract: We study fiscal consolidations in the Central and Eastern European countries and what determines the probability of their success. We define consolidation events as substantive improvements in fiscal balances adjusting for the impact of cyclical effects. We use Logit models for the period 1991–2003 to assess the determinants of the success of a fiscal adjustment. The results seem to suggest that for these countries expenditure based consolidations have tended to be more successful. By contrast, revenue based consolidations have a tendency to be less successful.
    Keywords: Fiscal policy; fiscal episodes; Central and Eastern Europe; Logit models.
    JEL: C25 E62 H62
    Date: 2005–04
  89. By: Laurent Baudry (University of Lille I); Hervé Le Bihan (Banque de France); Patrick Sevestre (Université Paris XII); Sylvie Tarrieu (Banque de France - Centre de Recherche)
    Abstract: Based upon a large fraction of the price records used for computing the French CPI, we document consumer price rigidity in France. We first provide a methodological discussion of issues involved in estimating average price duration with micro-data. The average duration of prices in the sectors covered by the database (65% of CPI) is then found to be around 8 months. A strong heterogeneity across sectors both in the average duration of prices and in the pattern of price setting is reported. There is no clear evidence of downward nominal rigidity, since price cuts are almost as frequent as price rises. Moreover, the average size of a change in price is quite large in both cases. Overall, while our results do not entail a clear conclusion about the existence of menu costs, there is evidence of both time-dependent and state-dependent price setting behaviors by retailers.
    Keywords: Price stickiness, duration of prices, consumer price index, frequency of price change.
    JEL: E31 D43 L11
    Date: 2004–08
  90. By: Frank Smets (European Central Bank, CEPR and University of Ghent.); Raf Wouters (National Bank of Belgium.)
    Abstract: In monetary policy strategies geared towards maintaining price stability conditional and unconditional forecasts of inflation and output play an important role. This paper illustrates how modern sticky-price dynamic stochastic general equilibrium models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with a-theoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU.
    Keywords: Forecasting; DSGE models; monetary policy; euro area.
    JEL: E4 E5
    Date: 2004–09
  91. By: Christian Growitsch
    Abstract: Quality of service is of major economic significance in natural monopoly infrastructure industries and is increasingly addressed in regulatory schemes. However, this important aspect is generally not reflected in efficiency analysis of these industries. In this paper we present an efficiency analysis of electricity distribution networks using a sample of about 500 electricity distribution utilities from seven European countries. We apply the stochastic frontier analysis (SFA) method on multi-output translog input distance function models to estimate cost and scale efficiency with and without incorporating quality of service. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly. In contrast to previous research, smaller utilities seem to indicate lower technical efficiency when incorporating quality. We also show that incorporating quality of service does not alter scale economy measures. Our results emphasise that quality of service should be an integrated part of efficiency analysis and incentive regulation regimes, as well as in the economic review of market concentration in regulated natural monopolies.
    Date: 2005–07
  92. By: Henri Pagès (Banque de France – General DGEI 41-1430, 75049 Cedex 01 Paris, France); David Humphrey (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States)
    Abstract: Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs but not risks would be equalized between networks. Full collateralization on DNS networks equalizes both user costs and risks.
    Keywords: payments; settlement; public good.
    JEL: E58 G15 H23 H41
    Date: 2005–07
  93. By: Deroose, Servaas; Turrini, Alessandro
    Abstract: The EU fiscal framework has often been criticized for neglecting a possible trade-off between short-term budgetary objectives and the implementation of reforms that could improve public finances in the long term This concern was reflected in the recent reform of the Stability and Growth Pact, which acknowledges that under certain conditions structural reforms can be taken into account both in the preventive and in the corrective arm of the Pact. The aim of the paper is that of making a step forward on the understanding of the empirical relevance of the trade-off between structural reforms in EU countries. The analysis will focus on product and labour market reforms and pension reforms. The main issue investigated will be as follow: which impact do reforms have on budgets in the short term? Results show that, in the aftermath of reforms, budgets do not worsen significantly compared with cases where no reforms occur. However, when the short-term budgetary impact of reforms is evaluated controlling for the response of fiscal authorities to the cycle and debt developments via the estimation of “fiscal reaction functions”, there is evidence that product and market reforms and pension reforms are associated with a deterioration in budgets. The impact appears rather weak (a primary CAB reduced by few decimal GDP points depending on the specific reform considered) and not always statistically significant.
    Keywords: deficits; Stability and Growth Pact; structural reforms
    JEL: E62 H50 H55 H62 J58 L50
    Date: 2005–09
  94. By: Pierre Mohnen; Pierre Therrien
    Abstract: This paper compares pairwise the innovation performance of Canada with France and Germany, respectively. The comparison is based on two ordered probit models with sample selection, one where innovation is measured by the introduction of new-to-the firm products and one where it is measured by the introduction of new-to-the market products. The econometric analysis attempts to explain part of the country differences as the result of the sectoral composition of output, and the effects of size, environment conditions (proximity to basic research and competition) and innovation activities (internal R&D, the number of innovation activities, cooperation and government support). The Canadian firms benefit from being larger and more numerous in receiving government support, but suffer from a lack of competition and internal R&D. These structural effects combined, while informative, are not enough to explain a lot of the basic pattern of innovation revealed by the raw data. If we take the stronger measure of first-to-market innovation as a yardstick of innovation, the observed pairwise country differences are less strong, and our model explains a little bit more of the observed differences. <P>Cette étude compare les performances d’innovation entre le Canada et la France d’une part, et entre le Canada et l’Allemagne d’autre part. La comparaison repose sur deux modèles de probit ordonné avec sélection. Le premier mesure l’innovation par l’introduction sur le marché de produits nouveaux pour la firme, le second par l’introduction de produits nouveaux pour le marché. L’analyse économétrique essaye d’expliquer une partie des différences nationales d’innovation par la composition sectorielle de la production, l’effet taille, les conditions environnementales (proximité de la recherche de base et concurrence) et les activités d’innovation (R-D interne, nombre d’activités innovantes, coopération et support gouvernemental). Les firmes canadiennes tirent avantage de leur plus grande taille et sont plus nombreuses à recevoir du support gouvernemental. Par contre, elles souffrent du manque de concurrence et de R-D interne. Au total, la prise en compte de ces effets structurels est certes révélatrice, mais n’explique qu’une faible partie des différences bilatérales dans les processus d’innovation. La mesure plus forte d’innovation par l’introduction de produits nouveaux pour le marché réduit les différences observées et les explique un peu mieux.
    Keywords: innovation, international comparisons, innovation, comparaison internationale
    JEL: O31 O51 O52
    Date: 2005–09–01
  95. By: Tomasz Lyziak (National Bank of Poland, Bureau of Macroeconomic Research, ul. ?wi?tokrzyska 11/21, 00-919 Warsaw, Poland.)
    Abstract: Inflation expectations constitute a subject of particular contemporary interest to central banks, especially those pursuing a monetary policy based on a strategy of direct inflation targeting. Macroeconomic theory indicates that the transmission of monetary policy impulses and their impact on the real and nominal sectors of the economy bear a close relationship to properties of inflation expectations. Qualitative data on inflation expectations, as obtained from surveys, can be quantified with the use of probability or regression methods. This paper presents the results of two versions of the probability method, implemented in order to estimate numerical measures of Polish consumer inflation expectations, based on the monthly Ipsos-Demoskop survey. In addition, the unbiasedness and macroeconomic efficiency of Polish consumer inflation expectations are tested, as are the way in which these are formed. The pattern of responses to the survey question and quantified measures of Polish consumer inflation expectations are also compared with the respective findings for the euro area.
    Keywords: Inflation expectations; Surveys; Rationality; Poland; Euro Area.
    JEL: C42 D12 D84 E58
    Date: 2003–11
  96. By: Mónica Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Daniel Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Pedro D. Neves (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal; Universidade Católica Portuguesa, Lisbon.)
    Abstract: This paper identifies the empirical stylized features of price setting behaviour in Portugal using the micro-datasets underlying the consumer and the producer price indexes. The main conclusions are the following: 1 in every 4 prices change each month; there is a considerable degree of heterogeneity in price setting practices; consumer prices of goods change more often than consumer prices of services; producer prices of consumption goods vary more often than producer prices of intermediate goods; for comparable commodities, consumer prices change more often than producer prices; price reductions are common, as they account for around 40 per cent of total price changes; price changes are, in general, sizeable; finally, the price setting patterns at the consumer level seem to depend on the level of inflation as well as on the type of outlet.
    Keywords: Price setting; Consumer prices; Producer prices; Frequency of price changes.
    JEL: E31 E32 L11
    Date: 2004–04
  97. By: Annick Bruggeman (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium); Gonzalo Camba-Méndez (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Björn Fischer (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); João Sousa (Bank of Portugal, Rua Francisco Ribeiro 2, P-1100-150, Lisboa, Portugal)
    Abstract: The quantity theory of money predicts a positive relationship between monetary growth and inflation over long-run horizons. However, in the short-run, transitory shocks to either money or inflation can obscure the inflationary signal stemming from money. The spectral analysis of time series provides filtering tools for removing fluctuations associated with certain frequency movements. However, use of these techniques in isolation is often criticised as being an oversimplistic statistical exercise potentially void of economic content. The objective of this paper is to develop ‘structural’ filtering techniques that rely on the use of spectral analysis in combination with a structural economic model with well identified shocks. A ‘money augmented’ Phillips curve that links inflation to money tightness and demand shocks of medium to long-term persistence is presented. It is shown that medium to long-term movements in inflation are mostly associated with the estimated monetary indicators.
    Keywords: Inflation; Money.
    JEL: E31 E50 C32
    Date: 2005–04
  98. By: Claudio Morana (University of Piemonte Orientale, Faculty of Economics, Via Perrone 18, I-28100, Novara, Italy)
    Abstract: In the paper we propose a new methodological approach to core inflation estimation,based on a frequency domain principal components estimator, suited to estimate systems of fractionally cointegrated processes. The proposed core inflation measure is the scaled common persistent factor in inflation and excess nominal money growth and bears the interpretation of monetary inflation. The proposed measure is characterised by all the properties that an “ideal” core inflation process should show, providing also a superior forecasting performance relative to other available measures.
    Keywords: Long memory; Common factors; Fractional cointegration; Markov switching; Core inflation; Euro area.
    JEL: C22 E31 E52
    Date: 2004–02
  99. By: Luc Aucremanne (Banque Nationale de Belgique, Research Department, Boulevard de Berlaimont14, B-1000 Brussels, Belgium); Emmanuel Dhyne (Banque Nationale de Belgique, Research Department, Boulevard de Berlaimont14, B-1000 Brussels, Belgium)
    Abstract: This paper examines the degree of price rigidity in Belgian consumer prices, using a large database. As to the observed degree of rigidity, the results reveal a substantial amount of heterogeneity, not only across but also within product categories. While prices turn out to be perfectly flexible for some product categories, they tend to be very sticky for others. Each month, nearly 17 p.c. of the consumer prices change on average and the median duration of a price spell is close to 13 months. A substantial subset of our results is compatible with state-dependent pricing, while other results suggest that some timedependency exists as well. The majority of price changes are price increases, but price decreases are not uncommon, except for services. The size of price changes is important. Price changes do not seem to be highly synchronised across price-setters within relatively homogenous product categories.
    Keywords: Bayesian Analysis; DSGE Models; Model Misspecification.
    JEL: C32
    Date: 2004–04
  100. By: Matthieu Bussière (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstr. 29, D-60311 Frankfurt am Main, Germany); Author-Name: Gernot J. Müller (Department of Economics, European University Institute,Via della Piazzuola 43, I-50133 Florence)
    Abstract: The paper extends the standard intertemporal model of the current account to include two important stylised facts: (1) the persistence of current account positions and (2) the relevance of the fiscal balance. Specifically, the paper derives a closed form solution for consumption in the presence of habit persistence and liquidity constraints, which allows us to obtain a dynamic model for the current account where fiscal deficits have an effect. The model is estimated for a panel of 33 countries, including the ten EU acceding countries and structural current account positions are derived. A parsimonious specification including relative income, relative investment and the fiscal balance explains well past current account developments. A key finding of the paper is that, from an intertemporal perspective, current accounts in most acceding countries are currently broadly in line with their structural current account positions.
    Keywords: Current account; Habit persistence; Liquidity constraints; Panel regressions; Acceding countries.
    JEL: F32 F41
    Date: 2004–02
  101. By: Paul Ehling (Pennsylvania State University); Sofia Brito Ramos (CEMAF/ISCTE-Business School Lisbon)
    Abstract: This research addresses whether geographic diversification provides benefits over industry diversification. In the absence of constraints, no empirical evidence is found to support the argument that country diversification is superior. With short-selling constraints, however, the geographic tangency portfolio is not attainable by industry portfolios. Results with upper and lower constraints on portfolio weights as well as an out-of-sample analysis show that geographic diversification almost consistently outperforms industry portfolios, although we cannot establish statistical significance.
    Keywords: Diversification gains, EMU, geographic diversification, industry diversification, block-bootstrap tests
    JEL: G11 G15
    Date: 2005–01
  102. By: Luc Aucremanne (NBB, Research Department.); Martine Druant (NBB, Research Department.)
    Abstract: This paper reports the results of an ad hoc survey on price-setting behaviour conducted in February 2004 among 2,000 Belgian firms. The reported results clearly deviate from a situation of perfect competition and show that firms have some market power. Pricing-to-market is applied by a majority of industrial firms. Prices are rather sticky. The average duration between two consecutive price reviews is 10 months, whereas it amounts to 13 months between two consecutive price changes. Most firms adopt time-dependent price-reviewing under normal circumstances. However, when specific events occur, the majority will adopt a state-dependent behaviour. Evidence is found in favour of both nominal (mainly implicit and explicit contracts) and real rigidities (including flat marginal costs and counter-cyclical movements in desired mark-ups). The survey results point to a non-negligible degree of non-optimal price-setting.
    Keywords: Price-setting behaviour; price rigidity; nominal rigidity; real rigidity; survey; timedependent pricing; state-dependent pricing; pricing-to-market.
    JEL: D40 E31 L11
    Date: 2005–03
  103. By: Frank Smets (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Raf Wouters (National Bank of Belgium.)
    Abstract: This paper estimates a DSGE model with many types of shocks and frictions for both the US and the euro area economy over a common sample period (1974-2002). The structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies, differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments. Our main conclusion is that each of those characteristics is remarkably similar across both currency areas.
    Keywords: DSGE models; business cycle fluctuations.
    JEL: E1 E2 E3
    Date: 2004–09
  104. By: Luc Aucremanne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium); Emmanuel Dhyne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium and and UMH, Centre de Recherche Warocqué)
    Abstract: Using Logistic Normal regressions, we model the price-setting behaviour for a large sample of Belgian consumer prices over the January 1989 - January 2001 period. Our results indicate that time-dependent features are very important, particularly an infinite mixture of Calvo pricing rules and truncation at specific horizons. Truncation is mainly a characteristic of pricing in the service sector where it mostly takes the form of annual Taylor contracts typically renewed at the end of December. Several other variables, including some that can be considered as state variables, are also found to be statistically significant. This is particularly so for accumulated sectoral inflation since the last price change. Once heterogeneity and the role of accumulated inflation are acknowledged, hazard functions become mildly upward-sloping, even in a low inflation regime. The contribution of the state-dependent variables to the pseudo-R2 of our equations is, however, not particularly important.
    Keywords: Consumer prices; time-dependent pricing; state-dependent pricing; Calvo model; Truncated Calvo model; Taylor contracts.
    JEL: C23 C25 D40 E31
    Date: 2005–03
  105. By: Andrzej Rzonca (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.); Piotr Cizkowicz (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.)
    Abstract: Many economists are convinced that longer-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in output growth. However, more recent research suggests that curbing fiscal imbalances contributes to faster growth already in the short term. This paper is about such non-Keynesian effects. Section two systematizes theoretical explanations. Section three reviews previous empirical research. Section four uses panel estimation techniques to examine the consequences of fiscal consolidation in New Member States. This analysis provides evidence that in those countries fiscal consolidation contributed substantially to the acceleration of output growth even in the short term. However, the exact channels through which non- Keynesian effects occurred could not be unambiguously identified in the paper. Section five takes the new step of a qualitative analysis of the outcomes of strong fiscal adjustments in the countries under consideration. That analysis shows that their experiences were quite similar to those of developed countries.
    Keywords: Fiscal consolidation; non-Keynesian effects; new member states.
    JEL: E62 E65 C33
    Date: 2005–09
  106. By: Silvia Fabiani (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Angela Gattulli (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Roberto Sabbatini (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy)
    Abstract: This study examines price setting behaviour of Italian firms on the basis of the results of a survey conducted by Banca d’Italia in early 2003 on a sample of around 350 firms belonging to all economic sectors. Prices are mostly fixed following standard mark-up rules, although customer-specific characteristics have a role, in particular in manufacturing and services where price discrimination across customers matters. Rival prices mostly affect pricesetting strategies in industrial firms. In reviewing their prices, firms follow either state-dependent rules or a combination of time and state-dependent ones. Concerning the frequency of price adjustments, a considerable degree of stickiness emerges both at the stage in which firms evaluate their pricing strategies and the stage in which they actually implement the price change. In 2002 most firms changed their price only once. Three alternative explanations of nominal rigidity are ranked highest by the firms interviewed: explicit contracts, tacit collusive behaviour and the perception of the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the adjustment (positive vs negative) and the source of the shock (demand vs supply). Real rigidities – captured by the degree of market competition, customers’ search costs, the sensitivity of profits to changes in demand – play an important role in determining this asymmetry. Moreover, whereas cost shocks impact more when prices have to be raised than when they have to be reduced, demand decreases are more likely to induce a price change than demand increases.
    Keywords: Nominal rigidity; real rigidity; Price-setting; Inflation persistence; Survey data.
    JEL: E30 D40
    Date: 2004–04
  107. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gonzalo Camba-Mendez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Benedict Weller (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explains to what extent excess reserves are and should be relevant today in the implementation of monetary policy, focusing on the specific case of the operational framework of the Eurosystem. In particular, this paper studies the impact that changes to the operational framework for monetary policy implementation have on the level and volatility of excess reserves. A ‘transaction costs’ model that replicates the rather specific intra-reserve maintenance period pattern of excess reserves in the euro area is developed. Simulation results presented not only show that excess reserves may increase considerably under some changes to the operational framework, but also that their volatility and hence unpredictability could.
    Keywords: excess reserves; monetary policy implementation; liquidity management.
    JEL: E52 E58
    Date: 2004–05
  108. By: Yunus Aksoy (Birkbeck, University of London); Miguel A. León-Ledesma (Department of Economics, University of Kent)
    Abstract: In this paper we argue that both statistics and economic theory-based evidence largely indicate the absence of long run relationships between the real output and the most relevant monetary indicator for the U.K. and the U.S, short term interest rates. These findings are not only a full sample result, but also valid in most of the sub-samples throughout the second half of the 20th century and are robust to the inclusion of possible omitted real variables.
    Keywords: information value, long term relationship, cointegration, bounds tests
    JEL: E3 E4 E5
    Date: 2005–01
  109. By: Wilko Bolt (Corresponding author: Research Division, De Nederlandsche Bank, Amsterdam,The Netherlands); David Humphrey (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States)
    Abstract: This paper discusses various theoretic concepts which play a role in assessing the public benefits of Target, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the ‘most efficient scale’ or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing. Based on empirical results for the Federal Reserve’s payment system (Fedwire), it is further argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs.
    Keywords: public good; natural monopoly; most efficient scale; partial subsidy.
    JEL: G20 H41 L10
    Date: 2005–07
  110. By: Daniel A. Dias (Banco de Portugal); Carlos Robalo Marques (Banco de Portugal); João M. C. Santos Silva (ISEG/Universidade Técnica de Lisboa)
    Abstract: In this paper we analyse the ability of time and state dependent price setting rules to explain durations of price spells or the probability of changing prices. Our results suggest that simple time dependent models cannot be seen as providing a reasonable approximation to the data and that state dependent models are required to fully characterise the price setting behaviour of Portuguese firms. Inflation, the level of economic activity and the magnitude of the last price change emerge as relevant variables affecting the probability of changing prices. Moreover, it is seen that the impact differs for negative and positive values of these covariates.
    Keywords: CPI data; Hazard functions; Inflation.
    JEL: C41 D40 E31
    Date: 2005–08
  111. By: Hermann Sautter
    Abstract: In order to qualify economic growth as “pro-poor”, at least per capita income-growth rates of the poor should be larger than the corresponding growth-rates of the non-poor resulting in a lower degree of distributional inequality. Measured in this sense, economic growth in South- Eastern Europe during the last 10-15 years was not pro-poor but pro-rich. Future growth can be changed towards the “pro-poor”-goal through a strategy with two “legs”: Stimulation of overall growth and specific programs to make economic growth “pro-poor”. Overall growth can be stimulated by good governance, macro-economic stability and the establishment of competitive markets. Specific programs should be focussed on sectors the poor work in (mainly agriculture), on regions the poor live in (mainly rural areas) and on the demand for factors the poor possess or are able to possess (labour). The paper discusses some elements of rural development, the possibilities of stimulating the demand for labour, and the necessary steps to improve the access of the poor to education and health-services. In addition to that, the problems of “pockets of poverty” are being discussed. A consistent strategy like this requires political decisiveness and administrative competence. It is hard to imagine that it can be materialized without giving the poor “voice” to influence the institutions and policies that affect their lives.
    Date: 2005–07–14
  112. By: George Hondroyiannis (Economic Research Department, Bank of Greece); Sophia Lazaretou (Economic Research Department, Bank of Greece)
    Abstract: The paper estimates inflation persistence in Greece from 1975 to 2003, a period of high variation in inflation and changes in policy regimes. Two empirical methodologies, univariate autoregressive (AR) modelling and second-generation random coefficient (RC) modelling, are employed to estimate inflation persistence. The empirical results from all the procedures suggest that inflation persistence was high during the inflationary period and the first six years of the disinflationary period, while it started to decline after 1997, when inflationary expectations seem to have been stabilised, and thus, monetary policy was effective at reducing inflation. Empirical findings also detect a sluggish response of inflation to changes in monetary policy. This observed delay seems to have changed little over time.
    Keywords: CPI inflation, persistence, structural change.
    JEL: E31 E37
    Date: 2004–06

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