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on European Economics |
| By: | Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The monetary integration of the acceding countries will proceed in several distinct steps, starting with membership in the European Union (EU), followed by participation in the so-called Exchange Rate Mechanism (ERM) II and ultimately entry into the euro area. This paper addresses the question of whether a reduction of public deficits, such as imposed by the Maastricht fiscal criteria, is a necessary or useful step on the road to the adoption of the euro. The question is addressed by examining the interaction of monetary, fiscal and wage policies and their effects on prices in a monetary union hit by economic shocks. The theoretical model shows that fiscal activism is related with both entry in monetary union and with structural differences in the national labour markets, and analyses in detail the effect of both factors. As for acceding countries, the conclusion is that the process of deficit reduction should be completed before entry, as suggested by the Maastricht criteria. The chapter also suggests that fiscal constraints on government deficits appear essential in a monetary union when the wage formation is taken into due consideration. JEL Classification: E61, E62, H30. |
| Keywords: | Fiscal policy, monetary policy, European Monetary Union, fiscal rules. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060664&r=eec |
| By: | Claus Brand (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Daniel Buncic (School of Economics, University of New South Wales, Sydney Australia.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We analyse high-frequency changes in the euro area money market yield curve on dates when the ECB regularly sets and communicates decisions on policy interest rates to construct different indicators of monetary policy news relating to policy decisions and to central bank communication. The indicators show that ECB communication during the press conference may result in significant changes in market expectations of the path of monetary policy. Furthermore, our results suggest that these changes have a significant and sizeable impact on medium to long-term interest rates. JEL Classification: E43, E58. |
| Keywords: | Money market rates, yield curve, ECB, central bank communication. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060657&r=eec |
| By: | Maria Eleftheriou (European University Institute, Economics Department.); Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Despite the great importance and final success of the convergence process that led to the establishment of the European Monetary Union, there is no clear agreement regarding the monetary policy pursued in the member countries during the convergence process. This paper contributes to the literature with an empirical analysis of the period from 1993 to 1998 that encompasses eleven EMU countries. In particular, Taylor-type interest rate rules are estimated with monthly national data to find that, despite certain similarities and exceptions, the rule followed by each country is distinct and differs substantially from the standard Taylor rule. However, for most countries, the parameter estimates reflect the principles proclaimed by the monetary policy authorities and, in addition, it is shown that in most cases the estimated rules reproduce the policy setting quite closely. JEL Classification: E58, F41. |
| Keywords: | Taylor rule, ERM, output gap, monetary policy. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060659&r=eec |
| By: | Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jukka Vesala (Financial Supervision Authority of Finland (Fin-FSA), Snellmaninkatu 6, P.O. Box 159, FIN-00101 Helsinki, Finland.) |
| Abstract: | This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification. JEL Classification: G21, F36, G15. |
| Keywords: | Banking, Contagion, Distance to default, Multinomial logit model. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060662&r=eec |
| By: | Lutz C. Kaiser |
| Abstract: | Using micro panel data, labor market transitions are analyzed for the EU-member states by cumulative year-by-year transition probabilities. As female (non-)employment patterns changed more dramatically than male employment in past decades, the analyses mainly refer to female labor supply. In search for important determinants of these transitions, six EU-countries with different labor market-regimes are selected as examples (Denmark, Germany, Netherlands, Portugal, Ireland, UK). Within these countries, women's determinants of labor market transitions are compared by means of pooled multinominal logit-regressions. The outcomes hint at both, the importance of socio-economic determinants, like the life cycle or human capital, but also address gender related differences in the paths of labor market transitions. Clearly, the observed cross-national differences are driven by specific national institutional settings. Among others, one of the most crucial features is the day-care infrastructure concerning children, which either fosters or restricts a sustainable risk management between family and work in the respective countries. |
| Keywords: | labor supply, labor market transitions, socio-economic determinants, institutional settings, risk management, cross-national comparison |
| JEL: | J21 J22 J78 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp606&r=eec |
| By: | Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rozália Pál (European University Viadrina Frankfurt (Oder), Grosse Scharrnstr. 59, D-15230 Frankfurt (Oder) 15230, Germany.) |
| Abstract: | This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classiffication based on micro data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Contrary to previous evidence based mainly on US firms, our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing onditions, the internal cash flow is used in a systematic pattern for the inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms. JEL Classification: D92; G3; G32. |
| Keywords: | financing conditions; cash policy decisions. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060642&r=eec |
| By: | Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Elena Angelini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frédéric Boissay (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper presents the Dutch country block of the ESCB Multi-Country Model(MCM) for the euro area. We show how a theoretical model is translated into an econometric specification and how this specification is in turn estimated and used in the projection exercises of the E(S)CB. The dynamic properties of the model are analyzed and the effects of six exogenous shocks to the economy discussed. The long run simulations performed deliver responses of the baseline economy in line with both macroeconomic theory and practice, from a quantitative and a qualitative point of view. JEL Classification: C3; C5; E1; E2. |
| Keywords: | Multi-country model; forecast; simulation; Netherlands. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060646&r=eec |
| By: | Johannes Hoffmann (Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Straße 14, D-60431 Frankfurt am Main, Germany.); Jeong-Ryeol Kurz-Kim (Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Straße 14, D-60431 Frankfurt am Main, Germany.) |
| Abstract: | We analyse the adjustment of retail and services prices in a period of low inflation, using a set of individual price data from the German Consumer Price Index that covers the years 1998 to 2003. We strong find evidence of time- and statedependent price adjustment. Most importantly, the differences in “unconditional” sectoral price flexibility are found to be linked to input price volatility. JEL Classification: E31, D43, L11. |
| Keywords: | Price rigidity, price flexibility, Consumer Price Index, Germany. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060652&r=eec |
| By: | Paolo Paesani (University of Rome – Tor Vergata – Department of Economics and Institutions, Via Columbia n. 2, 00133 Rome, Italy.); Rolf Strauch (European Central Bank, Monetary Policy Strategy Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Manfred Kremer (European Central Bank, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The debate on the sustainability of public finances is closely related to the analysis of the financial and macroeconomic consequences of government debt accumulation. Focusing on the USA, Germany and Italy over the 1983?2003 period, the central issue addressed in this paper is how the accumulation of government debt affects long-term interest rates, both nationally and across borders. The analysis is based on a small, multivariate econometric model, which allows us to disentangle the more permanent and transitory components of interest rate developments. Empirical evidence shows that in all cases a more sustained debt accumulation leads at least temporarily to higher long-term interest rates. This transitory impact also spills-over into other countries, mainly from the US to the two European countries. JEL Classification: E6, H63. |
| Keywords: | Public debt, Long-Term Interest Rates, Cointegration, Common Trends. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060656&r=eec |
| By: | Stefan Napel (Department of Economics, University of Hamburg); Mika Widgrén (Department of Economics, Turku School of Economics) |
| Abstract: | The paper analyzes the appointment of the European Commission as a strategic game between members of the European Parliament and the Council. The focal equilibrium results in Commissioners that duplicate policy preferences of national Council representatives. Different internal decision rules still prevent the Commission from being a Council clone in aggregate. Rather, it is predicted a priori that Commission policies are on average more in accord with the aggregate position of the Parliament. Empirical analysis suggests that the Council is, in fact, significantly more conservative than Parliament and Commission; the latter two are significantly closer to each other than Council and Commission. |
| Keywords: | European Commission, investiture procedure, voting rules, Council of Ministers, European Parliament |
| JEL: | C70 D71 H77 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp6&r=eec |
| By: | Francisco de Castro (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.); Pablo Hernández de Cos (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates the effects of exogenous fiscal policy shocks in Spain in a VAR framework. Government expenditure expansionary shocks are found to have positive effects on output in the short-term at the cost of higher inflation and public deficits and lower output in the medium and long term. Tax increases are found to drag economic activity in the medium term while entailing an only temporary improvement of the public budget balance. The application of these results to the analysis of fiscal policy in Spain since the mid-nineties points to the conclusion that the consolidation process does not seem to have involved costs in terms of output growth. Moreover, the stance of fiscal policy has become more counter-cyclical in that period. JEL Classification: E62; H30. |
| Keywords: | VAR; fiscal shocks; fiscal multipliers. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060647&r=eec |
| By: | Heikki Kauppi (Department of Economics, University of Helsinki); Mika Widgrén (Department of Economics, Turku School of Economics) |
| Abstract: | EU declares to provide support for the rural and poor regions of its member states. However, recent research shows that past EU budget allocations (in EU-15) can be attributed to measures of the distribution of voting power in the Council of Ministers deciding on the bulk of EU spending. A standard power measure alone can explain about 85% of the variance of the past EU budget shares, while, if stable coalition patterns among member countries are taken into account, power can explain at least 95% of the budget allocation. In this paper we use such estimates to predict EU budget shares after the eastern enlargement. According to our estimates eastern enlargement has large effects on the budget receipts of the incumbent member states. Moreover, whether the voting rules are based on the Nice Treaty (NT) or the Constitutional Treaty (CT) makes a difference for most member states. Many member states would be worse off under CT than under NT. |
| Keywords: | EU budget, voting power, Constitutional Treaty, Treaty of Nice |
| JEL: | C71 D70 D72 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp2&r=eec |
| By: | Elena Angelini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Antonello D‘Agostino (Central Bank and Financial Services Authority of Ireland, P.O. Box 559/Dame Street, Dublin 2, Ireland.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper documents the structure, estimation and simulation properties of the Italian block of the ESCB-multi-country model (MCM). The model is used regularly as an input into Eurosystem projection exercises and, to a lesser extent, in simulation analysis. The specification of the Italian model follows closely that of the Area-Wide Model (AWM) and indeed the other MCM country blocks (in terms of specification and accounting framework). The MCM is a quarterly estimated structural macroeconomic model that treats the economy in a relatively closed manner. It has a long-run classical equilibrium with a vertical Phillips curve but with some short-run frictions in price/wage setting and factor demands. Consequently, activity is demand-determined in the short-run but supply-determined in the longer run with employment having converged to a level consistent with an exogenously given level of equilibrium unemployment. The precise properties of the model are illustrated using a number of standard variant simulations. JEL Classification: C3, C5, E1, E2. |
| Keywords: | Macro-econometric Modelling, Italy. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060660&r=eec |
| By: | Igor Vetlov (Bank of Lithuania, Totoriu 4, LT-01121 Vilnius, Lithuania.); Thomas Warmedinger (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper presents the German block of the ESCB multi-country model. It builds on previous modelling work on the Area Wide Model and other country blocks of the ESCB multicountry-model. Whilst being analogous to these models in following a common modelling approach and the same theoretical framework, the German model has also some unique features for instance with regard to the modelling of the investment components, imports and employment. The paper provides a brief overview of the theoretical framework of the model, its estimation results, and a discussion of the dynamic model properties. The model is primarily used for preparing quarterly projections for the German economy as well as for policy analysis. JEL Classification: C3, C5, E1, E2. |
| Keywords: | Macro-econometric Modelling, Germany. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060654&r=eec |