nep-eec New Economics Papers
on European Economics
Issue of 2006‒07‒15
twenty papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Fiscal Policy in an estimated open-economy model for the EURO area. By Ratto Marco; European Commission
  2. Sovereign Risk Premiums in the European Government Bond Market By Kerstin Bernoth; Jürgen von Hagen; Ludger Schuknecht
  3. Exploring the International Linkages of the Euro Area: a Global VAR Analysis By Stephane Dees; European Central Bank
  4. Regional Inflation Dynamics within and across Euro Area and a Comparison with the US By Guenter Beck; Kirstin Hubrich
  5. Innovation strategies for SMEs and clusters: the challenges of a globalised Europe By Massimo FLORIO; Emanuele OZZIMO
  6. The design of fiscal rules and forms of governance in European Union countries By Mark Hallerberg; Rolf Strauch; Jürgen von Hagen
  7. Financial Autonomy of the European Union after Enlargement By Maciej Cieslukowski; Rui Henrique Alves
  8. Business cycle transmission from the euro area to CEECs By Joerg Breitung; Sandra Eickmeier
  9. Euro area inflation persistence in an estimated nonlinear By Gianni Amisanoa
  10. Do european business cycles look like one ? By Maximo Camacho; Gabriel Perez-Quiros; Lorena Saiz
  11. Wage Dispersion, Markets and Institutions: The Effects of the Boom in Education on the Wage Structure By Erling Barth; Claudio Lucifora
  12. The “New” Stability and Growth Pact: More Flexible, Less Stupid? By Rui Henrique Alves; Óscar Afonso
  13. How the ECB and the US Fed Set Interest Rates By Ansgar Belke; Thorsten Polleit
  14. Nothing Ventured, Nothing Gained: The Long-run Fiscal Reward of Structural Reforms By Peter Hoeller; Claude Giorno
  15. Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model By Pau Rabanal
  16. What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU By Jürgen von Hagen; Guntram B. Wolff
  17. How Effective is European Merger Control? By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  18. Financial Deregulation and Industrial Development: Subsequent Impact on Economic Growth in the Czech Republic, Hungary and Poland By Patricia McGrath; ;
  19. Untangling the maze of European Union funds to Bulgaria By Vassileva, Iglika; Vincelette, Gallina Andronova
  20. Is Fertility Related to Religiosity? Evidence from Spain By Pablo Brañas-Garza; Shoshana Neuman

  1. By: Ratto Marco; European Commission
    Keywords: DSGE Models, Fiscal Policy
    JEL: E12 E62 C13
    Date: 2006–07–04
  2. By: Kerstin Bernoth (De Nederlandsche Bank (DNB), ZEI-University of Bonn.; Jürgen von Hagen (Institut für Internationale Wirtschaftspolitik, University of Bonn, CEPR, and Indiana University, Walter-Flex-Str. 3, 53113 Bonn, Germany, Tel: +49 228 73 9199,; Ludger Schuknecht (European Central Bank,
    Abstract: This paper provides a study of bond yield differentials among EU government bonds issued between 1993 and 2005 on the basis of a unique dataset of issue spreads in the US and DM (Euro) bond market. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer's relative bond market size. The start of the European Monetary Union has shifted market attention to debt service payments as the key measure of indebtedness and eliminated liquidity premiums in the euro area.
    Keywords: asset pricing, determination of interest rates, fiscal policy, government debt
    JEL: G12 E43 E62 H63
    Date: 2006–05
  3. By: Stephane Dees; European Central Bank
    Keywords: Global VAR (GVAR), Global interdependencies, global macroeconomic modeling, impulse responses
    JEL: C32 E17 F47
    Date: 2006–07–04
  4. By: Guenter Beck (Goethe University Frankfurt); Kirstin Hubrich
    Keywords: regional inflation dynamics, euro area and US, common factor models
    JEL: E31 E52
    Date: 2006–07–04
  5. By: Massimo FLORIO; Emanuele OZZIMO
    Abstract: In this paper we discuss the challenges for the European SMEs fac ing increased global competition, and how it is possible to desig n innovative strategies through the new Regional Competitiveness and Employment Objective. First, the paper offers an assessment o f the importance of SMEs in the EU context and particularly in th e regions concerned by the new objective. Second, the paper will discuss how globalisation poses a serious thread to this developm ent pattern. Third, we briefly explain why further labour market and product liberalisation policies probably have a limited poten tial. Fourth, there is a wide empirical literature, and a lot of practical experience, on innovation strategies for SMEs and clust ers in Europe. The paper will offer a critical assessment of thes e findings and will suggest how to make the best use of the limit ed, but critical, resources available under the new Regional Comp etitiveness Objective.
    Keywords: EU Structural funds, SMEs, Clusters, Innovation strategies
  6. By: Mark Hallerberg (Department of Political Science, Emory University, 1555 Dickey Drive Atlanta, GA 30322, USA); Rolf Strauch (b) European Central Bank, Kaiserstr. 29, 60311 Frankfurt a.M., Germany); Jürgen von Hagen (Institut für Internationale Wirtschaftspolitik, University of Bonn, CEPR, and Indiana University, Walter-Flex-Str. 3, 53113 Bonn, Germany, Tel: +49 228 73 9199,
    Abstract: This paper uses a new data set on budgetary institutions in Europe to examine the impact of fiscal rules and budget procedures in EU countries on public finances. It briefly describes the main pattern of budgetary institutions and their determinants across the EU 15 member states. Empirical evidence for the time period 1985-2004 suggests that the centralisation of budgeting procedures restrains public debt. In countries with one-party governments or coalition governments where parties are closely aligned and where political competition among them is low, this is achieved by the delegation of decision-making power to the minister of finance. Fiscal contracts that require countries to set multi-year targets and that reinforce those targets increase fiscal discipline in countries with ideologically dispersed coalitions and where parties regularly compete against each other.
    Keywords: public indebtedness, budgetary procedures, fiscal rules, European public finances
    JEL: H11 H61 H62
    Date: 2006–06
  7. By: Maciej Cieslukowski (Posznan University of Economics); Rui Henrique Alves (Faculdade de Economia do Porto, Universidade do Porto)
    Abstract: One of the most important and current problems in the European Union (EU) public finance concerns its system of own resources. Almost all economists involved in the subject agree that the present system needs a comprehensive reform, as it does efficiently allows to deal with the new reality of the enlarged European Union. However, there is quite a divergence on how to do the reform, the problem lying in its range and directions. In general some economists postulate to extend the EU tax base by the creation of one or more new EU taxes whereas others opt for simplifying the system by replacing traditional and VAT resources with the so called ”fourth resource”. These differences mainly result from dissimilar approaches of economists to the criterion of financial autonomy. The main aim of this paper is to evaluate the present system of EU own resources and the proposals of its reform owing to the criterion of financial autonomy.
    Keywords: EU budget, own resources, financial autonomy
    JEL: H77 H71 F36
    Date: 2006–07
  8. By: Joerg Breitung (Unviersity of Bonn); Sandra Eickmeier (Deutsche Bundesbank)
    Keywords: Dynamic factor models, international business cycles, EMU enlargement, sign restrictions
    JEL: F02 E32 C3
    Date: 2006–07–04
  9. By: Gianni Amisanoa
    Keywords: DSGE models, policy rules, inflation persistence, second order approximations,
    JEL: C11 E52
    Date: 2006–07–04
  10. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Prime Minister's economic bureau); Lorena Saiz (Bank of Spain)
    Date: 2006–07–04
  11. By: Erling Barth (Institute for Social Research, University of Oslo and IZA Bonn); Claudio Lucifora (Catholic University of Milan, ERMES and IZA Bonn)
    Abstract: In this paper, we investigate the effects of the boom in education on the wage structure in Europe. We use detailed information on the distribution of wages, estimated from microdata from 12 European countries from the beginning of the 1980’s to the present, to analyse the changes both between and within groups. We specify and estimate a model with supply and demand for different types of labour, as well as institutions affecting the bargained relative wage. Our results show that the boom in education closely matched the shifts in demand due to (skill biased) technological change, which in turn explains why the wage premia for education only rose moderately. We use the conditional wage spread within tertiary education, predicted from quantile log wage regressions, to investigate the hypothesis of skills erosion as a result of the large expansion in tertiary education. We find no evidence in favour of the hypothesis that the boom in higher education lead to an erosion of skills within the group of tertiary education, nor evidence of increasing “over-education” in Europe. Labour market institutions also matter: bargaining co-ordination and employment protection are shown to have a compressing effect on wages, but at different points of the wage distribution.
    Keywords: wage inequality, education, labour market institutions
    JEL: J3 J5 P5
    Date: 2006–06
  12. By: Rui Henrique Alves (Faculdade de Economia do Porto, Universidade do Porto); Óscar Afonso (CEMPRE, Faculdade de Economia do Porto, Universidade do Porto)
    Abstract: Since the beginning of the European single currency project, the adoption of fiscal binding rules, restraining the use of the single policy instrument left for national authorities, has been challenged by many authors and politicians. The discussion has been rekindled in recent years, following a period of economic recession or stagnation in several Member-Countries and some criticisms linking the Stability and Growth Pact (SGP) to the general economic situation. Some of the questions raised by those who criticised the initial framework for fiscal discipline may have been taken into account in the recent revision of the SGP (March 2005), which followed the suspension of the Pact for Germany and France and eventually made the SGP more flexible and “less stupid”. In this paper, we evaluate the changes contained in the “new” SGP, by taking account of the properties for ideal fiscal rules put forward by Kopits and Symansky (1998) and comparing with some recently published studies on the same topic. The main result of our analysis points towards a clear increase in flexibility together with the probable emergence of new enforcement problems. In this context, an insufficient output in terms of fiscal discipline could arise, leading to the need for new improvements within the European framework for the definition and implementation of national fiscal policies.
    Keywords: EMU, SGP, Fiscal Rules, Fiscal Discipline
    JEL: H62 H63 H77
    Date: 2006–07
  13. By: Ansgar Belke; Thorsten Polleit
    Date: 2006
  14. By: Peter Hoeller; Claude Giorno
    Abstract: The recent reform of the Stability and Growth Pact provides more leeway for EU governments to temporarily breach the 3% deficit limit if this facilitates the implementation of initially expensive reforms. But the implementation of this principle is not obvious as budgets would need to specify the initial and multi-annual budgetary cost and benefit profile of reforms. Budgets should also be explicit about the fiscal cost of inaction to allow a balanced judgment of countries? trade-offs between the various options available. This paper first assesses the information requirements to implement this new form of flexibility built into the Stability and Growth Pact. It then provides simulation exercises to highlight the positive budgetary effects of coordinated structural reforms in the euro area as well as the need for an adequate monetary policy response to make sure that demand adjusts to the improved supply conditions swiftly. The budgetary gains would still depend on the type of reform and their impact on employment and productivity. On the other hand, national policy initiatives by a single country may only have a limited impact, especially in the short term and in the case of a large country. Indeed, in monetary union, the strength of endogenous adjustment mechanisms appears to be weaker in larger countries. Finally, the experience of New Zealand and Australia has shown that the longer-term benefits of reforms both in terms of the budget and overall economic performance are significant. Even so, it is not easy to disentangle the various forces at play. Fundamentally, structural reform and the implementation of smart fiscal frameworks tend to go hand in hand ? indeed may be two sides of the same coin. <P>Qui ne risque n'a rien : Les bénéfices budgétaires à long terme des réformes structurelles <BR>La réforme récente du Pacte de stabilité et de croissance fournit davantage de marges aux gouvernements des pays de l'UE pour dépasser la limite de 3 % du déficit public si cela facilite la mise en oeuvre de réformes initialement coûteuses. L'application de ce principe n'est cependant pas évidente car les budgets devraient indiquer le profil des coûts et bénéfices budgétaires attendus de ces réformes, non seulement dans l'immédiat mais aussi dans une perspective pluriannuelle. Les budgets devraient aussi être explicites sur le coût budgétaire de l'inaction pour permettre une évaluation équilibrée des dilemmes auxquels doivent faire face les pays en fonction des diverses options disponibles. Cet article fournit d'abord une évaluation des besoins d'information pour mettre en oeuvre les nouveaux éléments de flexibilité inclus dans le Pacte de stabilité et de croissance. Il présente ensuite des exercices de simulation afin d'illustrer les effets budgétaires positifs de réformes structurelles coordonnées dans la zone euro ainsi que la nécessité d'une réponse de politique monétaire adéquate afin d'assurer que la demande s'ajuste rapidement à l'amélioration des conditions d'offre. Les gains budgétaires seraient alors variables selon le type de réformes réalisées et leur impact sur l'emploi et la productivité. D'un autre côté, des réformes menées dans un pays isolé pourraient n'avoir qu'un effet limité, notamment à court terme dans le cas d'un grand pays. En effet, dans l'union monétaire, la force des mécanismes d'ajustement endogènes semble plus faible dans les grands pays. Enfin, l'expérience de la Nouvelle Zélande et de l'Australie montre que les bénéfices à long terme des réformes sont importants à la fois sur le plan budgétaire et pour les performances économiques d'ensemble, même s'il n?est pas aisé de distinguer l'influence des différentes forces en jeu. Fondamentalement, la réforme structurelle et la mise en place d'un cadre budgétaire pertinent tendent à aller de pair - et semblent en effet être les deux faces d'une même pièce.
    Keywords: réforme structurelle, fiscal policy, politique budgétaire, structural reforms, monetary union, union monétaire
    JEL: E37 E62 E63 E65 H6 P52
    Date: 2006–06–30
  15. By: Pau Rabanal (IMF)
    Keywords: Real Exchange Rates, Bayesian Estimation, Model Comparison.
    JEL: F41 C11
    Date: 2006–07–04
  16. By: Jürgen von Hagen (Institut für Internationale Wirtschaftspolitik, University of Bonn, CEPR, and Indiana University, Walter-Flex-Str. 3, 53113 Bonn, Germany, Tel: +49 228 73 9199,; Guntram B. Wolff (Deutsche Bundesbank, ZEI-University of Bonn and UCIS-University of Pittsburgh, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany, Tel: +49 69 9566 3353,
    Abstract: Fiscal rules, such as the Excessive Deficit Procedure and the Stability and Growth Pact (SGP), aim at constraining government behavior. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this depends on the reputation cost for the government and the economic cost of sticking to the rule. We provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. The tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.
    Keywords: Fiscal rules, stock-flow adjustments, debt-deficit adjustments, stability and growth pact, excessive deficit procedure, ESA 95
    JEL: E62 H61 H62 H63 H70
    Date: 2006–01
  17. By: Tomaso Duso (Wissenschaftszentrum Berlin für Sozialforschung (WZB), Reichpietschufer 50, D10785 Berlin, Germany. Tel: +49 30 25491 403, Fax: +49 30 25491 444,; Klaus Gugler (University of Vienna,; Burcin Yurtoglu (University of Vienna,
    Abstract: This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
    Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
    JEL: L4 K21 G34 C2 L2
    Date: 2006–07
  18. By: Patricia McGrath; ;
    Abstract: The Czech Republic, Hungary and Poland all experienced an initial reduction in the number of industries and an increase in unemployment, once they moved to a market driven economy. Over time the unemployment problem reduced in significance though Poland still experiences high levels to date. Industries sprung up in the private sector in all three countries which counterbalanced the drop in state enterprises. Private sector industries all reported easy access to credit once the business set up while firms with head offices overseas tended to use the home country for borrowing purposes. For these companies, the most significant feature of financial deregulation in the Czech Republic, Hungary and Poland was that of freedom of capital movement, which increased both the level of business and investment opportunities. Results show that financial deregulation led to industrial development in all three countries. Tests to indicate the impact of industrial production on economic growth, show that for the three countries industrial production caused economic growth. This was a uni-directional causality.
    Keywords: Transition Economies, Industrial Development, Financial Deregulation, Economic Growth, Eastern Europe
    JEL: E E23 F43
    Date: 2006–02–01
  19. By: Vassileva, Iglika; Vincelette, Gallina Andronova
    Abstract: The paper presents a fiscal estimate of Bulgaria ' s perspective European Union (EU) membership. The projected EU funds have two distinct effects: first, there is the overall effect on the balance of payments of the country; and second, there is the pure effect on the national budget. The paper concludes that Bulgaria is likely to benefit from large net inflows of resources of an average of 3.7 percent of gross domestic product (GDP) in 2007-09. In contrast, its fiscal position is expected to deteriorate by 1.6 percent of GDP on average in 2007-09 if no expenditure restructuring of the fiscal framework is carried out. The expected deterioration of the public finances related to EU accession would be due to co-financing requirements, national contributions to the EU budget, and possible full pre-financing of the EU direct payments to Bulgarian farmers in the first year of accession. However, the above expenditures will be partly offset by the budgetary compensation allocated out of the EU budget, savings from agricultural subsidies, and shifting of certain public expenditures to Cohesion Fund-supported projects.
    Keywords: Economic Theory & Research,Technology Industry,Gender and Law,Markets and Market Access,Rural Development Knowledge & Information Systems
    Date: 2006–07–01
  20. By: Pablo Brañas-Garza (Universidad de Granada); Shoshana Neuman (Bar-Ilan University, CEPR and IZA Bonn)
    Abstract: The paper explores the relationship between religiosity and fertility among Catholics in Spain, thereby answering the question whether the two parallel trends of dramatic drops in fertility and in religiosity are inter-related. It looks at current religiosity as well as exposure to religiosity during childhood. A unique, rich, data set is employed. It includes various dimensions of religiosity: respondent’s religious affiliation; if he is Catholic- his current mass attendance (six levels) and his current prayer habits (eleven levels); spouse’s religious affiliation; parental (maternal and paternal) and respondent's mass attendance when the respondent was a child (nine levels); Catholic education during childhood (yes/no). The multifacet data on religiosity (rather than a single dichotomous variable) facilitates a sophisticated analysis with rigorous conclusions. The sample is restricted to married Catholic (female and male) respondents who were raised by Catholic parents, and are married to a Catholic spouse, in order to have a homogenous sample and to focus on the effect of the level (intensity) of religiosity (rather than religious affiliation) on fertility. Fertility is related to the various dimensions of religiosity- first using cross-tabulation and then using OLS regression. We find that fertility is not related to current intensity of religiosity. Exposure to religious activities during childhood has a significant effect on fertility of women (but not men): interestingly a father who was actively attending mass services has a positive effect on his daughter’s future fertility (increasing the number of kids by about 0.8) while the mother’s active mass participation has a reverse negative effect (leading to a decrease of one kid). Own participation in mass services during childhood has a positive effect on fertility- leading to an increase of 0.6 kids if the girl attended mass services intensively This study indicates the significance of childhood experience in shaping the 'taste for children'. It also suggests that there is no direct link between the fast secularization in Spain and the decline in birth rates.
    Keywords: fertility, religion, Catholic, church attendance, prayer, parental religiosity, taste for children, Spain
    JEL: Z12 J12 J13 D13
    Date: 2006–07

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