nep-eec New Economics Papers
on European Economics
Issue of 2005‒11‒19
thirty-six papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Integration and Conditional Convergence in the Enlarged EU Area By Ville Kaitila
  2. European Stock Market Dynamics Before and After the Introduction of the Euro By Joseph Friedman; Yochanan Shachmurove
  3. Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it? By Domenico Giannone; Lucrezia Reichlin
  4. Exchange-rate pass-through to import prices in the euro area By Campa, Jose M.; Goldberg, Linda S.; Gonzalez-Minguez, Jose M.
  5. Underwriter competition and gross spreads in the eurobond market By Michael G. Kollo
  6. Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area By Roland Straub; Günter Coenen
  7. The natural real interest rate and the output gap in the euro area - a joint estimation By Julien Garnier; Bjørn-Roger Wilhelmsen
  8. Hub-and-Spoke or Else? Free Trade Agreements in the Enlarged EU - A Gravity Model Estimate By Luca De Benedictis; Roberta De Santis; Claudio Vicarelli
  9. Price Convergence in the European Car Market By Salvador Gil-Pareja; Simón Sosvilla-Rivero
  10. Bayesian Estimation of a DSGE Model with Financial Frictions for the U.S. and the Euro Area By Virginia Queijo
  11. European regional policy: new bases, new borders? (In French) By Claude LACOUR (IERSO, IFReDE-GRES); Stéphane VIROL (IERSO, IFReDE-GRES)
  12. Should we be surprised by the unreliability of real-time output gap estimates? Density estimates for the Euro area By James Mitchell
  13. An estimated open-economy model for the EURO area By Marco Ratto; Werner Roeger
  14. The Impact of Unemployment on Individual Well-Being in the EU By Namkee Ahn; Juan Ramón García; Juan Francisco Jimeno
  15. Convergence in Per-capita GDP Across European Regions: A Reappraisal By Valentina Meliciani; Franco Peracchi
  16. Estimating the potential output of the euro area with a semi-structural multivariate Hodrick-Prescott filter By Matthieu LEMOINE; Odile CHAGNY
  17. Diffusion of Scale Effects between European Regions By Juergen Antony
  18. Forecasting Aggregates by Disaggregates By Kirstin Hubrich; David F. Hendry
  19. Can Labour Market Institutions Explain Unemployment Rates in New EU Member States? By Sjef Ederveen; Laura Thissen
  20. European Union enlargement and equity markets in accession countries By Tomas Dvorak; Richard Podpiera
  21. Parallel Monies, Parallel Debt: Lessons from the EMU and Options for the New EU By Giorgio Basevi; Lorenzo Pecchi
  22. Speed of Convergence and Relocation - New EU Member Countries Catching up with the Old By Kari E.O.Alho; Ville Kaitila; Mika Widgrén
  23. A Tale of Parallel Integration Processes. A Gravity Analysis of EU Trade with Mediterranean and Central and Eastern European Countries By Anna Ferragina; Giorgia Giovannetti; Francesco Pastore
  24. The Effects of EU Shocks on the Macrovariables of the Newly Acceded Countries -A Sign Restriction Approach By Alina Barnett
  25. An Estimated DSGE Model for The German Economy By Ernest Pytlarczyk
  26. Bad for Euroland, Worse for Germany-The ECB's Record By Jorg Bibow
  27. Economic Effects of Free Trade between the EU and Russia By Pekka Sulamaa; Mika Widgrén
  28. Affordability of Medicines and Patients' Cost Reduction Behaviors: Empirical Evidence Based on SUR Estimates from Italy and the United Kingdom By Vincenzo Atella; Peter R. Noyce; Karen Hassell
  29. An Empirical Analysis of the 2000 Corporate Tax Reform in Germany: Effects on Ownership and Control in Listed Companies By Anke Weber
  30. Fiscal Implications of Pension Reforms in Italy By Agar Brugiavini; Franco Peracchi
  31. Preventing competition because of “solidarity”: Rhetoric and reality of airport investments in Spain By Germà Bel; Xavier Fageda
  32. Growth Effects of Age-related Productivity Differentials in an Ageing Society. A Simulation Study for Austria By Hofer, Helmut; Url, Thomas
  33. Real-time data for Norway: Output gap revisions and challenges for monetary policy By TOM BERNHARDSEN; ØYVIND EITRHEIM
  35. The Taxation of Multinationals: Firm Level Evidence for Belgium By Hylke Vandenbussche; Chang Tan
  36. A Projection of Spanish Pension System under Demographic Uncertainty By Namkee Ahn; Javier Alonso-Meseguer; Juan Ramón García

  1. By: Ville Kaitila (ETLA, the Research Institute of the Finnish Economy)
    Abstract: This working paper analyses conditional convergence in Europe and also tries to assess the impact that arises from integration. Using a pooled mean-group estimation method, we first analyse the conditional convergence of GDP per labour force in the area covering the 15 member states of the European Union (EU-15) in 1960-2002. Conditional convergence is well-documented for the EU-15. Higher investment, lower public consumption and lower inflation have contributed positively to GDP growth. Deeper European integration is shown to have accelerated growth when inflation is not included in the specification, but not otherwise. The evidence on the effect of integration on growth is therefore mixed. We then apply the same method to estimate the growth of GDP per labour force in the new EU member states – the eight Central and Eastern European countries (CEECs) – for the period 1993-2002. These countries are shown to have converged conditionally towards the average level of GDP per labour force in the EU-15. Higher investment and lower public consumption have also supported growth in the CEECs.
    Keywords: European Union, economic integration, economic growth, conditional convergence
    JEL: F15 F43
    Date: 2005–02
  2. By: Joseph Friedman (Department of Economics, Temple University); Yochanan Shachmurove (Department of Economics, University of Pennsylvania)
    Abstract: This paper addresses the following questions: Are the major European stock markets more integrated after the introduction of the Euro? How much of the change in the stock indices in different European countries can be attributed to innovations in other markets? How fast are events occurring in one European market transmitted to other markets? Vector Auto Regression models, impulses responses and variance decomposition are used to ascertain the stock market dynamics before and after the introduction of the Euro. The paper presents evidence of further integration of the European stock markets after the introduction of the Euro.
    Keywords: Euro, Vector Auto Regression Models, Co-movements of Stock Markets, Impulse Response, Variance Decomposition
    JEL: F G C1 C3 C5 E44
    Date: 2005–10–01
  3. By: Domenico Giannone (Universite' Libre de Bruxelles, ECARES); Lucrezia Reichlin (European Central Bank, CEPR)
    Abstract: Not so much and we should not, at least not yet.
    Keywords: International Business Cycles, Euro Area, Risk Sharing, European Integration, Income Insurance.
    JEL: E32 C33 C53 F2 F43
    Date: 2005–11–15
  4. By: Campa, Jose M. (IESE Business School); Goldberg, Linda S. (Federal Reserve Bank of New York); Gonzalez-Minguez, Jose M. (Banco de España)
    Abstract: This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass-through is higher and close to one. We find no strong statistical evidence that the introduction of the euro caused a structural change in this transmission. Although estimated point elasticities seem to have declined since the introduction of the euro, we find little evidence of a structural break in the transmission of exchange rate movements except in the case of some manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass-through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro-area countries.
    Keywords: Currency; invoicing; pass-through; exchange rate; producer currency pricing; local currency pricing;
    Date: 2005–09–18
  5. By: Michael G. Kollo (Financial Markets Group, London School of Economics, London, WC2A 2AE, United Kingdom)
    Abstract: We investigate the competitive landscape of underwriting services in the Eurobond market including the choice of underwriter and underwriter gross spread. We find a significant but declining association between the home market of the Eurobond’s currency of denomination and that of the lead underwriter. These bonds underwritten by underwriters ‘local’ to the currency also carry significantly lower underwriter gross spreads vis-à-vis other Eurobonds. The amalgamation of the European currencies into the Euro resulted in a significant shift in the competitive landscape for underwriting services. We find a significant portion of market shares shifted from the ‘local’ European underwriters to non-‘local’ U.S. underwriters with the introduction of the Euro. Moreover, the volume of new issues rose and the gross underwriter spread declined significantly. Our empirical results suggest that Eurozone underwriters responded to the increased entry of U.S. and other Eurozone underwriters with aggressive discounting of the underwriter gross spread.
    Keywords: Underwriter competition; Underwriter spreads; Eurobond market.
    JEL: G15 G24
    Date: 2005–11
  6. By: Roland Straub; Günter Coenen (IMF public)
    Abstract: In this paper, we revisit the effects of government spending shocks on private aggregate consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households and a relatively detailed fiscal policy set up. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of aggregate consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. As a practical matter, however, we find that there is only a fairly small chance that government spending shocks crowd in aggregate 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: fiscal policy, DSGE models, non-Ricardian households.
    JEL: E32 E62
    Date: 2005–11–11
  7. By: Julien Garnier (European University Institute and University of Parix X-Nanterre); Bjørn-Roger Wilhelmsen (Central Bank of Norway, Economics Department, Oslo, Norway)
    Abstract: The notion of a natural real rate of interest, due to Wicksell (1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output being at its potential and stationary inflation. This paper applies the method recently suggested by Laubach and Williams to jointly estimate the natural real interest rate and the output gap in the euro area over the past 40 years. Our results suggest that the natural rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and the 1990s.
    Keywords: Real interest rate gap; output gap; Kalman filter; euro area.
    JEL: C32 E43 E52 O40
    Date: 2005–11
  8. By: Luca De Benedictis (University of Macerata, Italy); Roberta De Santis (ISAE, Instituto di Studi e Analisi Economica); Claudio Vicarelli (ISAE, Instituto di Studi e Analisi Economica)
    Abstract: The aim of this paper is to estimate the effect of the EU’s eastern enlargement on the trade patterns of the Central and Eastern European countries (CEECs) that joined the Union in May 2004. In particular, the paper investigates whether and how the EU’s free trade agreements (FTAs) with the CEECs have affected centre-periphery and intra-periphery trade flows. It also evaluates whether the EU-membership factor has had the added positive effects on exports from the CEECs as anticipated. The analysis focuses on bilateral trade flows between eight CEECs and the EU-23, for which a gravity equation is estimated using a system GMM dynamic panel data approach. The results support the assumptions that gravity forces and ‘persistence effects’ do indeed matter. With respect to the effect of FTAs, evidence is found that FTAs between EU countries and CEECs matter. Yet there is also evidence that the presence of intra-periphery agreements have helped to expand intra-periphery trade and limit the emergence of a hub-and-spoke relationship between the EU and the CEECs. These results have important policy implications for the trade strategy of EU candidate countries in south-eastern Europe as well as in the southern Mediterranean. According to the empirical results, these countries should move towards a regional free trade area as exemplified by the Central European Free Trade Agreement and the Baltic Free Trade Agreement to avoid hub-and-spoke effects.
    Keywords: trade flows, regional integration, EU enlargement, gravity model, dynamic panel data
    JEL: F13 F15 C13 C23
    Date: 2005–06
  9. By: Salvador Gil-Pareja; Simón Sosvilla-Rivero
    Abstract: This paper examines price convergence in the European Union Car market over the period 1995-2005. The results indicate that there is a clear evidence of price convergence among the EU15 countries, but not before 1999. Moreover, countries of the Economic and Monetary Union started convergence previously to the EU15 as a whole. Finally, exchange rate changes has significantly contributed to price dispersion over time across countries
  10. By: Virginia Queijo
    Abstract: This paper aims to evaluate the importance of frictions in credit markets for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) and estimate it using Bayesian methods. The model is augmented with frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. My results indicate that financial frictions are relevant in both areas. Using the Bayes factor as criterion, the data favors the model with financial frictions both in the U.S. and the Euro area in five different specifications of the model. Moreover, the size of the financial frictions is larger in the Euro area
    Keywords: DSGE models; Bayesian estimation; financial accelerator
    JEL: E3 E4 E5
    Date: 2005–11–11
    Abstract: With the paddle of a new period of programming, the European regional policy must face the challenge of widening in the East like with that of the insertion of Europe in universalization. In this European space where exists a demographic, economic and policy concentration, in an omnipotent center, the regions become capital parts of the reorganization of the economic, social and space bond : the European regional policy is and will remain thus a central stake for the development of this space. This article tries to put forward the bases of this policy and to determine new spaces concerned.
    Keywords: Research, European integration, co-operation-coordination, polycentric concentration, structuring of space, regional integration of spaces
    JEL: R12 R14 R58
    Date: 2005
  12. By: James Mitchell (NIESR NIESR, London)
    Abstract: Recent work has found that, without the benefit of hindsight, it can prove difficult for policy-makers to pin down accurately the current position of the output gap; real-time estimates are unreliable. However, attention primarily has focused on output gap point estimates alone. But point forecasts are better seen as the central points of ranges of uncertainty; therefore some revision to real-time estimates may not be surprising. To capture uncertainty fully density forecasts should be used. This paper introduces, motivates and discusses the idea of evaluating the quality of real-time density estimates of the output gap. It also introduces density forecast combination as a practical means to overcome problems associated with uncertainty over the appropriate output gap estimator. An application to the Euro area illustrates the use of the techniques. Simulated out-of-sample experiments reveal that not only can real-time point estimates of the Euro area output gap be unreliable, but so can measures of uncertainty associated with them. The implications for policy-makers use of Taylor-type rules are discussed and illustrated. We find that Taylor-rules that exploit real-time output gap density estimates can provide reliable forecasts of the ECB's monetary policy stance only when alternative density forecasts are combined
    Keywords: Output gap; Real-Time; Density Forecasts; Density Forecast Combination; Taylor Rules
    JEL: E32 C53
    Date: 2005–11–11
  13. By: Marco Ratto; Werner Roeger
    Abstract: We estimate a small open economy DSGE model for the euro area. The household sector optimises an intertemporal utility function with habit persistence. Households decide about asset accumulation, consumption and sets wages in a monopolistically competitive labour market. Households trade bonds internationally and there is a risk premium determined by the degree of foreign indebtedness. Firms are owned by domestic households. Consistent with the household objective function they determine labour demand, capacity, investment and they set prices in a monopolistically competitive goods market by maximising the market value of the corporate sector. Apart from technological constraints, decisions are subject to convex adjustment costs. Monetary policy is modelled via a Taylor rule. A Bayesian estimation approach is applied, using the Dynare code, by Michel Juillard, via the log-linearisation of the model around the steady state, solution of the forward looking log-linear model and computation of the likelihood via Kalman filter. After estimating the posterior mode via standard optimisation routines, the posterior distribution of model parameters is estimated with a Metropolis Markov Chain Monte Carlo approach. Unobserved components are also derived, such as technology, target inflation, capital utilisation. A full Bayesian impulse response analysis is then performed, comprising a detailed sensitivity analysis of the main dynamical features of the model simulations versus changes in model parameters.
    JEL: C13 C15 E12 E17
    Date: 2005–11–11
  14. By: Namkee Ahn (FEDEA, Fundación de Estudios de Economía Aplicada); Juan Ramón García (FEDEA, Fundación de Estudios de Economía Aplicada); Juan Francisco Jimeno (FEDEA, Fundación de Estudios de Economía Aplicada)
    Abstract: Among the working-age population, one of the most damaging individual experiences is unemployment. Many previous studies have confirmed the devastating effects of unemployment on individual well-being, both pecuniary and non-pecuniary. Using the data from the European Community Household Panel survey, we examine the factors that affect unemployed workers’ well-being with respect to their situations in their main vocational activity, income, housing, leisure time and health in Europe. Unemployment substantially reduces an individual’s satisfaction levels with his or her main vocational activity and finance, while it greatly increases his or her satisfaction levels with leisure time. With respect to health, it has a small negative effect. Unemployment duration also has a small, negative impact on individual well-being, suggesting that unemployment has a lasting and aggravating effect throughout the spells of unemployment, contradicting the theory of adaptation. Three other results are worth mentioning. First, there are large cross-country differences in the consequences of unemployment on individual well-being. Fewer effects resulting from unemployment are observed in Denmark and the Netherlands than in other countries. Part of this difference seems to be the result of the differences in the regulations and functioning of the labour market. In these two countries, where the unemployment rate is lower, the spells are shorter and unemployment protection (unemployment benefits and active labour market policies) is greater. Second, with respect to methodology, there are small differences between the cross-section and panel estimates, suggesting a small bias as a result of unobserved fixed-effects in the cross-section estimation. Finally, among the unemployed, non-pecuniary factors – such as job prospects, health and social relations – show significant effects on individual well-being, along with household income.
    Keywords: satisfaction, health and unemployment
    Date: 2004–07
  15. By: Valentina Meliciani (University of Rome II); Franco Peracchi (University of Rome II - Centre for International Studies on Economic Growth (CEIS))
    Abstract: This paper studies convergence in per-capita GDP across European regions over the period 1980-2000. We use median unbiased estimators of the rate of convergence to the steady-state growth path, while allowing for unrestricted patterns of heterogeneity and spatial correlation across regions. By permitting the model parameters to be completely different across regions, not only we avoid imposing strong a priori assumptions but we are also able to analyze the spatial patterns in the estimated coefficients. Our results differ from those found using conventional estimators. The main differences are: i) the mean rate of convergence is much lower; ii) for most regions this rate is zero; iii) the number of regions for which we reject equality in trend growth rates is substantially lower. We also find significant evidence of correlation of growth rates across neighbor regions and across regions belonging to the same country.
    Keywords: Regional convergence, median unbiased estimation, heterogeneous panel models
    JEL: R11 C40 C49
    Date: 2004–10–11
  16. By: Matthieu LEMOINE; Odile CHAGNY
    Abstract: In this paper, we develop an analytical framework for the estimation of potential output and output gaps for the euro area combining multivariate filtering techniques with the production function approach. The advantage of this methodology lies in the fact that it combines a model based approach to explicit statistical assumptions concerning the estimation of the potential values of the components of the production function. We discuss the production function approach and the main issues raised by this approach. We then present the main empirical studies which have estimated production function based output gaps with multivariate filtering techniques. The production function approach will be implemented with Multivariate Hodrick-Prescott filters (HPMV). The advantage of the multivariate production function approach will also be assessed through using a variety of statistical criteria
    Keywords: potential output, output gap, production function, multivariate filters, unobserved components models.
    JEL: C32 E23 E32
    Date: 2005–11–11
  17. By: Juergen Antony (University of Augsburg, Department of Economics)
    Abstract: This paper develops a multi regional growth model of the second generation type with horizontal and vertical innovations. Technology goods are tradable between regions, creating a regional analogy of the weak scale effect introduced by Jones (2004). Per capita production in one region is a function of the weighted population sizes of trading partner regions. Thus the scale of partner regions diffuses between them. This result is empirically tested using data on the NUTS regions of the EU 15. A highly significant relationship is found between per capita GDP and an interregional scale variable, defined as a weighted sum of the populations of all EU 15 regions.
    Keywords: regional growth, scale effects, international trade
    JEL: R12 O33 O52
    Date: 2005–10
  18. By: Kirstin Hubrich; David F. Hendry (Research Department European Central Bank)
    Abstract: We explore whether forecasting an aggregate variable using information on its disaggregate components can improve the prediction mean squared error over forecasting the disaggregates and aggregating those forecasts, or using only aggregate information in forecasting the aggregate. An implication of a general theory of prediction is that the first should outperform the alternative methods to forecasting the aggregate in population. However, forecast models are based on sample information. The data generation process and the forecast model selected might differ. We show how changes in collinearity between regressors affect the bias-variance trade-off in model selection and how the criterion used to select variables in the forecasting model affects forecast accuracy. We investigate why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of Euro area inflation in some situations, but not in others.
    Keywords: Disaggregate information, predictability, forecast model selection, VAR, factor models
    JEL: C32 C53 E31
    Date: 2005–11–11
  19. By: Sjef Ederveen (CPB Netherlands Bureau for Economic Policy Analysis); Laura Thissen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This study poses the question about whether labour market institutions can explain unemployment rates in the ten new European Union member states. In five out of the ten new member states, unemployment rates lie above the average in the 15 member states of the European Union (EU-15) that comprised the EU prior to May 2004. The study finds that labour market institutions in the acceding countries are less rigid than in the EU-15. Moreover, labour market institutions explain only a minor part of unemployment in the new EU member states. This does not mean that these countries have no labour market problems. Just as in the EU-15, a great deal of heterogeneity exists among the acceding countries. In some of them, labour market reforms could prove a key issue in improving employment performance. The main worry is the poor labour market performance in Poland and the Slovak Republic, where unemployment has risen to almost 20%. The main reasons for this growth are i) postponed restructuring in combination with tight monetary policy; ii) poor governance; and iii) an increasing labour force.
    Keywords: labour market institutions, social security, wage bargaining, unemployment, transition economies, EU accession countries
    Date: 2004–06
  20. By: Tomas Dvorak (Union College, Schenectady, NY 12308, USA); Richard Podpiera (International Monetary Fund,Washington, D.C. 20431, USA)
    Abstract: The announcement of European Union enlargement coincided with a dramatic rise in stock prices in accession countries. This paper investigates the hypothesis that the rise in stock prices was a result of the repricing of systematic risk due to the integration of accession countries into the world market. We find that firm-level stock price changes are positively related to the difference between a firm’s local and world market betas. This result is robust to controlling for changes in expected earnings, country effects and other controls, although the magnitude of the effect is not very large. The differences between local and world betas explain nearly 22% of the stock price increase.
    Keywords: Asset pricing; international financial integration; EU enlargement.
    JEL: F36 G15 G12
    Date: 2005–11
  21. By: Giorgio Basevi (University of Bologna - Department of Economics); Lorenzo Pecchi (University of Rome II; University of Rome II)
    Abstract: In 1975 Niels Thygesen, together with eight other economists - one of us among them - published in The Economist a "manifesto" proposing a new common currency for Europe (Basevi et al., 1975). His co-operation on this subject was pursued within a smaller group, and resulted in the publication of two reports for the EU Commission (Optica Report '75, Optica Report 1976). The proposal in the "manifesto" was ironically re-titled, by The Economist, "The All Saints' day manifesto for European monetary union". In fact it had been published on 1st November, and the "Saints" should have been, according to The Economist, the European Governments if they had adopted and adhered to the proposal. This amounted to launching a new currency that should have circulated in parallel to the national ones, related to them by flexible exchange rates, due to the constraint that such new currency, the "Europa", had to be kept by an automatic formula at fixed purchasing power. In fact the Europa was to be indexed to the inflation rates in the participating countries, according to the weights of their national currencies in what at that time was called the European Unit of Account. As for the two other reports, Optica '75 proposed again a parallel currency, but less than fully inflation-proof, since its standing in terms of purchasing power would have been the same as that of the currency of the member country with the lowest inflation rate. In the Optica 1976 Report, while reiterating the proposal of a parallel currency along the lines of Optica '75, the focus was on designing a joint management of intra-European exchange rates on the basis of inflation differentials. The proposals contained in the three documents where premature, perhaps visionary. On 7 July 1978 the European Council met in Bremen and drew the lines of the European Monetary System, which started on 13 March 1979, on the basis, among other things, of a new quasi-currency - the European Currency Unit (ECU) - composed of a basket of national currencies. Since then, it took almost twenty years before the euro was introduced, replacing the ECU on 1st January 1999. Comparing the euro to such proposals, we note at least two differences. The euro (a) did not start as a parallel currency, but replaced with a pre-announced schedule the national currencies of the countries participating in the monetary union, and (b) it was not conceived as an automatically inflation-proof currency, but one issued by a Central Bank bound by a monetary policy aimed at price stability.
    Date: 2005–04–04
  22. By: Kari E.O.Alho (ETLA (the Research Institute of the Finnish Economy) and the University of Helsinki); Ville Kaitila (ETLA, the Research Institute of the Finnish Economy); Mika Widgrén (ETLA (the Research Institute of the Finnish Economy), Turku School of Economics, CEPR and CESifo)
    Abstract: Economic convergence of the EU’s new member countries (NMCs) towards the incumbent EU countries (EU-15) is of paramount importance for both partners, not only in terms of real income but also in nominal terms. In this study we build a dynamic, computable general equilibrium model, starting from the Balassa-Samuelson two-sector framework, then modify and enlarge it (with, among other things, endogenous capital formation, consumption behaviour and labour mobility) to address several other issues such as uncertainty, welfare and sustainability in terms of foreign indebtedness. At the same time we make flows of foreign direct investment (FDI) endogenous in order to evaluate the impact convergence has on the EU-15 and the interaction between the two regions through FDI. We find that in a general equilibrium setting, fears of adverse effects resulting from a relocation of EU-15 manufacturing to the NMCs are not well founded.
    Keywords: convergence, new member countries, EU-15
    JEL: F15 F21 F43
    Date: 2005–04
  23. By: Anna Ferragina (ISSM-CNR); Giorgia Giovannetti (University of Florence and Italian Foreign Trade Commission); Francesco Pastore (Seconda Università di Napoli and IZA Bonn)
    Abstract: Despite the EU emphasis on the 1995 Barcelona process, trade integration with the Mediterranean (MED) countries is still underdeveloped. To contrast the success of EU integration with MED countries and that with the new EU members, we compute the trade potential of these EU partners from 1995 to 2002 using an “out-of-sample” methodology. The coefficients are taken from different panel estimators of the gravity equation relative to intra- EU trade. Our analysis suggests the existence of sizeable, unexploited trade potential with both groups of partners, although the ratio of potential to actual trade with the MED countries is much larger (from 1.7 to 2.5 times), more dispersed and stable compared to that with the CEECs. Moreover, the potential tends to converge to actual trade in a much longer time in the case of MED countries.
    Keywords: MED agreements, EU eastward enlargement, gravity equation, trade potential
    JEL: C23 F15 F17 P45 P52
    Date: 2005–11
  24. By: Alina Barnett
    Abstract: This paper analyses the response of seven of the newly acceded countries (NACs)to EU supply and monetary shocks. A typical NAC perceives an EU technology disturbance as a positive supply shock and an EU monetary expansion as a negative demand shock. When we split the seven countries into two groups, results for group one which includes the Czech Republic, Hungary, Poland and Slovakia suggest that an EU supply shock feeds through as a demand shock, increasing both prices and output. This hints that trade acts as a strong channel of EU shock propagation. For both groups, monetary disturbances explain a large proportion of NAC’s output fluctuation while technology disturbances account for a significant part of export variations. EU shocks are identified as in Canova and De Nicol´o (2002) using sign restrictions of the cross-correlation function of the variables’ responses to orthogonal disturbances. These restrictions are derived from an SDGE model
    Keywords: structural VAR, sign restrictions, European Integration, business cycles
    JEL: C2 F42 E32
    Date: 2005–11–11
  25. By: Ernest Pytlarczyk
    Abstract: This paper presents an estimated DSGE model for the European Monetary Union. Our approach, contrary to the previous studies, accounts for heterogeneity within the euro area. In the estimation we utilize disaggregated information, employing single country data, along with the aggregated EMU by Fagan et. al (2001). We also contribute to the literature by proposing a strategy for consistent estimation of the currency union model, using information available prior to the adoption of the single currency and afterwards. This approach requires the determination of two separate data generating processes - here these are theoretical DSGE models - corresponding to both current and historical monetary regimes. We emphasize the use of regime-switching models in the DSGE framework (in our case the threshold is known exactly and the switch is permanent). The approach is illustrated by developing a simple two-region DSGE model, with a particular focus on analyzing the German economy within EMU, and its Bayesian estimation on the sample 1980:q1- 2003:q4. Moreover, the paper offers: (i) a robustness check of the estimation results with respect to the alternative data approaches and various restrictions imposed on the model's structure (ii) assesments of the relative importance of various shocks and frictions for explaining the model dynamics (iii) an evaluation of the model's empirical properties
    Keywords: Bayesian econometrics, DSGE models, Euro area
    JEL: E4 E5
    Date: 2005–11–11
  26. By: Jorg Bibow (The Levy Economics Institute)
    Abstract: This paper assesses the contribution of the European Central Bank (ECB) to Germany’s ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. It thereby acts as a brake on growth. This approach has worked for the Bundesbank in the past because other banks behaved differently. Exporting the Bundesbank “success story” to Euroland has undermined its working, however; given its sheer size, Euroland simply cannot freeload on external stimuli forever. While Euroland cannot do without proper demand management, the Maastricht regime and especially the ECB are firmly geared against it. The ECB’s monetary policies have been biased against growth and have thus proved bad for Euroland as a whole. Meanwhile, the German disease of protracted domestic demand weakness has spread across much of Euroland. Yet, by pursuing its peculiar traditions of wage restraint and procyclical public thrift, the ECB’s policies have had even worse results for Germany. Fragility and divergence undermine the euro’s long-term survival.
    Keywords: German unification, Bundesbank, policy inconsistency, stability culture, ECB, EMU
    JEL: E31 E42 E58 E61 E63 E65 E66 H62
    Date: 2005–11–17
  27. By: Pekka Sulamaa (ETLA, the Research Institute of the Finnish Economy); Mika Widgrén (ETLA, the Research Institute of the Finnish Economy)
    Abstract: This study simulates the economic effects of eastern enlargement of the EU and an EU-Russian free trade area. The main emphasis of the paper is on the effect this would have on the Russian economy. The simulations were carried out with a GTAP computable general equilibrium model, using the most recent GTAP database 6.0 beta, which takes the former Europe agreements between the EU-15 and the eight new Central and Eastern European member states into account. The results confirm the earlier findings that a free trade agreement with the EU is beneficial for Russia in terms of total output but not necessarily in terms of economic welfare when measured by equivalent variation. The main reason behind this is the deterioration that would occur in Russia’s terms of trade. Improved productivity in Russia would, however, make the free trade agreement with the EU advantageous.
    Keywords: EU, Russia, free trade, integration
    JEL: F15 F17
    Date: 2005–05
  28. By: Vincenzo Atella (University of Rome II - Faculty of Economics); Peter R. Noyce (University of Manchester - School of Pharmacy & Pharmaceutical Sciences; University of Manchester - School of Pharmacy & Pharmaceutical Sciences); Karen Hassell (University of Manchester - School of Pharmacy & Pharmaceutical Sciences)
    Abstract: The aim of the paper is to shed some light on consumers' attitudes to adopting strategies to contain the cost of medication. Using micro-data from an ad hoc survey conducted in Italy and the UK, several hypotheses are tested regarding patients' decision-making behavior and how it is influenced by health status, socio-demographic characteristics and the novel concept of a self-rated affordability measure. Results show that there is a discernable tendency for both UK and Italian patients to use cost reducing strategies and that these strategies are strongly influenced by income and drug affordability problems. These are important findings in two countries, where the National Health System (NHS) should provide health care services that are accessible to all citizens in need, and provide interesting insights for policy makers in other countries, such as USA, where patients have to pay a large share of their drugs out-of-pocket.
    Keywords: Health policy reform, health services demand, re-distributive impact, prescription charge, co-payment
    JEL: C35 C81 D12 I12
    Date: 2005–01–13
  29. By: Anke Weber
    Abstract: This paper is a first attempt to analyse the implications of the 2000 corporate tax reform on ownership concentration in Germany. The empirical results document a fall in ownership concentration and a decrease in the power of top institutional owners including the big banks. The description of German corporate governance as a bank-based system may hence no longer apply. However, contrary to what was expected by proponents of the reform, the corporate tax reform did not revolutionise German corporate governance. Ownership concentration in 2005 is still high compared to the Anglo-American economies and an active market for corporate control is not observed.
    Keywords: Voting-block statistics, blockholders, corporate control
    JEL: G30 G32 G38
    Date: 2005–11
  30. By: Agar Brugiavini (University of Venice - Department of Economics); Franco Peracchi (University of Rome II - Centre for International Studies on Economic Growth (CEIS))
    Abstract: A "good" pension reform should address a number of issues. One important aspect is the financial soundness of the system, particularly in the light of the legacy that we leave to future generations. Policy makers should also address economic efficiency at two levels: no waste of resources for a given contribution rate (or for a given benefit level), and no distortions of individual choices (or at least minimize distortions). The main distortions associated with a pension system or with its reform have to do with saving and labor supply behavior. Italy has seen a flurry of reforms during the 1990s, and economists and policy makers are still struggling to assess the results and the long-term effects of these reforms. Many analysts argue that the overall design of the recent Italian reforms is probably a good one, and yet more steps need to be taken to speed up the reform process and reap the benefits which, due the adverse demographic trends, could easily evaporate. In this paper, we contribute to the current debate on the Italian pension system by analyzing the impact of social security reforms, in terms of both budgetary implications and distributional effects. This is done by simulating the effects of three hypothetical reforms, plus the effects of the 1995-reform of the Italian pension system (the so-called Dini reform). Our approach relies on the use of a semi-structural econometric model to predict retirement probabilities under different policy scenarios, so as to properly take into account the behavioral effects of the reforms. On the basis of the estimated retirement model, we develop a complete accounting exercise which includes not only changes in gross future benefits due to policy changes, but also changes in social security contributions, income taxes and value added taxes. Thus, our results provide not only estimates of the workers' gains or losses, but also an exhaustive evaluation of the gains and losses for the government budget. We find that the reforms, particularly the Dini reform (once fully phased in), have a substantial impact on individuals' retirement decisions and their net social security wealth, as well as substantial gains for the government finances.
    Date: 2005–04–04
  31. By: Germà Bel (University of Barcelona); Xavier Fageda (University of Barcelona)
    Abstract: Spain is the only large European country in which airport management is strictly centralized and publicly owned. This peculiar institutional setting prevents competition among Spanish airports, and policy makers and bureaucrats in charge of the system regularly justify it on grounds of interterritorial solidarity. This paper tests whether allocation of investments in airports is effectively based on redistributive purposes, as claimed and looks at other factors to explain such allocation. Our empirical analysis suggests that neither a progressive redistribution target nor the scale economies criterion explain allocation decisions. Instead, we find that political factors have significant influence on the allocation decisions made by the government.
    Keywords: Public Enterprise, Legal monopolies, Air Transportation, Models with Panel Data
    JEL: L32 L43 L93 C23
    Date: 2005–11–16
  32. By: Hofer, Helmut (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Url, Thomas (Austrian Institute of Economic Research)
    Abstract: We integrate age specific productivity differentials into a long-run neoclassical growth model for the Austrian economy with a highly disaggregated labor supply structure. We assume two life time productivity profiles reflecting either small or large hump-shaped productivity differentials and compute an average labor productivity index using three different aggregation functions: linear, Cobb-Douglas, and a nested Constant Elasticity of Substitution (CES). Model simulations with age specific productivity differentials are compared to a base scenario with uniform productivity over age groups. Depending on the aggregation function, the simulation results show only negligible or small negative effects on output and other macroeconomic key variables.
    Keywords: Age specific productivity, Demographic change, Model simulation
    JEL: O41 J11 E17
    Date: 2005–11
  33. By: TOM BERNHARDSEN (Research Department Norges Bank (The Central Bank of Norway)); ØYVIND EITRHEIM
    Abstract: Monetary policy conducted in real time has to take into account the preliminary nature of recent national accounts data. Not only recent data, but also figures dating many years back are potentially subject to revisions. This means that there is a danger that an important part of the central bank's information set is flawed for a substantial period of time. In this paper we present results based on quarterly vintages of real-time data for Norway from 1993Q1 to 2003Q4. We describe the nature and causes of the data revisions and investigate whether the revisions are true martingale differences or whether they can be forecasted. In the spirit of Orphanides and van Norden (2002), we analyze how data revisions and model uncertainty affect the reliability of output gap estimates. We find that total revisions of output gap estimates are heavily influenced by uncertainty about the trend at the end of the sample and that data revisions are of less importance, i.e., they are of smaller magnitude and show less persistence than other sources of output gap revisions. Finally, we analyse the implications of output gap uncertainty for monetary policy using a small New Keynesian macroeconomic model
    Keywords: Monetary policy, output gap, real-time data, interest rate rules
    JEL: C53 E37 E52
    Date: 2005–11–11
  34. By: James Carroll; Siobhan McCarthy; Carol Newman (Department of Economics, Trinity College)
    Date: 2005–08
  35. By: Hylke Vandenbussche; Chang Tan
    Abstract: This paper provides empirical evidence of a more favorable tax treatment for foreign multinationals compared to similar domestic Firms in a small open economy. Using treatment effects to control for self-selection of foreign firms into low tax firms, we find that foreign multinationals have substantially lower effective tax rates compared to domestic firms. In our estimations we also control for firm size, sector membership and business-cycle effects. A simple theoretical framework is used to explain our empirical findings and rests on the notion that multinational firms are in a better position to bargain for lower taxes with governments as a result of their "footloose" nature and outside location options.
    Keywords: ¯rm level data, multinationals, corporate taxation, self-selection
    JEL: C51 E62 F23
  36. By: Namkee Ahn; Javier Alonso-Meseguer; Juan Ramón García
    Abstract: The objective of this paper is to carry out a projection of the pension expenditures under demographic uncertainty in Spain. In order to obtain a stochastic pension expenditure projection, as well as the number of pensioners and the number of contributors, we use a stochastic population projection. Demographic situation with respect to the pension system in Spain shows a dramatic change during the first half of this century. It will be relatively favorable during the first two decades due to the increasing participation and employment rates as well as due to the relatively small civil war generations occupying dependent old ages while the baby boom generations staying in working ages. Starting from around 2030, however, the situation is completely reversed as the baby-boomers start to retire from the labor market while the working age population consists mostly of much smaller baby bust generations. The financial situation of Spanish pension system appears to be affected significantly by the above mentioned demographic situation. During the first few decades it will enjoy a small surplus. Most importantly, the deficit during the subsequent decades will be large and increasing over time. In 2050, the deficit will be higher than 6% of GDP by the probability of 0.90, and will be higher than 15% by the 0.10 probability. In the same year, the range of the debt (accumulated deficit) will be between 77% and 260% of GDP by the 80% confidence interval.

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