nep-eec New Economics Papers
on European Economics
Issue of 2006‒08‒05
35 papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Sticky prices in the euro area: a summary of new micro evidence By Álvarez, Luís; Dhyne, Emmanuel; Hoeberichts, Marco; Kwapil, Claudia; Le Bihan, Hervé; Lünnemann, Patrick; Martins, Fernando; Sabbatini, Roberto; Stahl, Harald; Vermeulen, Philip; Vilmunen, Juoko
  2. Common stationary and non-stationary factors in the euro area analyzed in a large-scale factor model By Eickmeier, Sandra
  3. The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread By Nautz, Dieter; Offermanns, Christian J.
  4. Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework By Anthony Annett
  5. Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries By Silika Prohl; Friedrich G. Schneider
  6. Innovation and Productivity in European Industries By Mario Pianta; Andrea Vaona
  7. Do monetary indicators (still) By Hofmann, Boris
  8. The Introduction of the Euro and its Effects on Investment Decisions By Haselmann, Rainer; Helmut, Herwartz
  9. The Impact of ECB Communication on Financial Market Expectations By Michael Lamla; Sarah M. Rupprecht
  10. The Lender of Last Resort in the European Single Financial Market By Pedro Gustavo Teixeira; Garry J. Schinasi
  11. European inflation expectations dynamics By Döpke, Jörg; Dovern, Jonas; Fritsche, Ulrich; Slacalek, Jirka
  12. Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market By Alessandro Beber; Michael W. Brandt; Kenneth A. Kavajecz
  13. Idiosyncratic and Systemic Risk in the European Corporate Sector: A CDO Perspective By Yinqiu Lu; Jorge A. Chan-Lau
  14. Firm size and Innovation in European Manufacturing By Mario Pianta; Andrea Vaona
  15. Monetary disequilibria and the Euro/Dollar exchange rate By Nautz, Dieter; Ruth, Karsten
  16. Inflation and relative price variability in the euro area: evidence from a panel threshold model By Nautz, Dieter; Scharff, Juliane
  17. Mind the gap! International comparisons of productivity in services and goods production By Robert Inklaar; Marcel P. Timmer; Bart van Ark
  18. The Fischler's Proposals for the Common Agricultural Policy: Paving the Way for the Future? By Hervé Guyomard; Katell Le Bris
  19. How Effective is European Merger Control? By Tomaso Duso; Klaus Gugler; Burçin Yurtoglu
  20. Determinants of current account developments in the central and east European EU member states – consequences for the enlargement of the euro area By Herrmann, Sabine; Jochem, Axel
  21. How synchronized are central and east European economies with the euro area? : Evidence from a structural factor model By Eickmeier, Sandra; Breitung, Jörg
  22. The different extent of privatisation proceeds in EU countries: A preliminary explanation using a public choice approach By Ansgar Belke; Frank Baumgärtner; Friedrich G. Schneider; Ralph Setzer
  23. Trade balances of the central and east European EU member states and the role of foreign direct investment By Herrmann, Sabine; Jochem, Axel
  24. Transmission Mechanism in Transition Economies: Surveying the Surveyable By Balázs Égert; Ronald MacDonald
  25. Vertical intra-industry trade between EU and Accession Countries By Hubert Gabrisch
  26. Capital, labour and productivity: What role do they play in the potential GPD weakness of France, Germany and Italy? By Bassanetti, Antonio; Döpke, Jörg; Torrini, Roberto; Zizza, Roberta
  27. Catching-up, Inflation Differentials and Credit Booms in a Heterogeneous Monetary Union: Some Implications for EMU and new EU Member States By Ronald MacDonald; Cezary Wójcik
  28. Has the impact of key determinants of German exports changed? Results from estimations of Germany’s intra euro-area and extra euro-area exports By Stahn, Kerstin
  29. How would formula apportionment in the EU affect the distribution and the size of the corporate tax base? An analysis based on German multinationals By Fuest, Clemens; Hemmelgarn, Thomas; Ramb, Fred
  30. Labor Standards and Economic Integration in the European Union: An Empirical Analysis By Vivek Dehejia; Yiagadeesen Samy
  31. The German Labor Market: Still Adjusting Badly? By Werner Eichhorst; Lutz C. Kaiser
  32. Consumption, wealth and business cycles : why is Germany different? By Hamburg, Britta; Hoffmann, Mathias; Keller, Joachim
  33. Improving Labour Market Performance in France By Stéphanie Jamet
  34. The Bologna process in France. Origin, objectives and implementation By François Orivel
  35. Price Impacts of Non-Adoption of the Euro for Small European Countries By Sibel Yelten; Harald Anderson

  1. By: Álvarez, Luís; Dhyne, Emmanuel; Hoeberichts, Marco; Kwapil, Claudia; Le Bihan, Hervé; Lünnemann, Patrick; Martins, Fernando; Sabbatini, Roberto; Stahl, Harald; Vermeulen, Philip; Vilmunen, Juoko
    Abstract: This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms.
    Keywords: Price setting, Price stickiness, Consumer prices, Producer prices, survey data
    JEL: C25 D40 E31
    Date: 2006
  2. By: Eickmeier, Sandra
    Abstract: In this paper we rely on techniques recently developed by Bai and Ng (2004a) to estimate common euro-area stationary and non-stationary factors using a large-scale dynamic factor model. We find that euro-area economies share four non-stationary factors or trends and one stationary factor. By means of rotation techniques, we estimate a euro-area business cycle which is a fairly good match to EuroCOIN, the euro-area coincident business cycle indicator published by the CEPR. Fluctuations of common euro-area factors mainly reflect variations of German and French real economic activity as well as of producer prices and financial prices (long-term interest rates and/or real effective exchange rates) in various countries. As concerns the transmission channels, macroeconomic shocks seem to proliferate in the euro area more strongly through trade, exchange rates and long-term interest rates than through stock prices. Among the external driving forces, shocks to US economic activity seem to be more strongly linked to shocks to the euro-area factors than oil price shocks. We finally find evidence of mild overall convergence; results for individual countries are mixed.
    Keywords: Dynamic factor models, factor rotation, common trends, international business cycles, international transmission channels
    JEL: C32 C50 F02 F40
    Date: 2005
  3. By: Nautz, Dieter; Offermanns, Christian J.
    Abstract: This paper investigates how the dynamic adjustment of the European overnight rate Eonia to the term spread and the ECB’s policy rate has been affected by rate expectations and the operational framework of the ECB. In line with recent evidence found for the US and Japan, the reaction of the Eonia to the term spread is non-symmetric. Moreover, the response of the Eonia to the policy rate depends on both, the repo auction format and the position of the Eonia in the ECB’s interest rate corridor.
    Keywords: Monetary Policy Impleme ion, Term Structure of Interest Rates, Nonli Cointegration
    JEL: E43 E52
    Date: 2006
  4. By: Anthony Annett
    Abstract: The Stability and Growth Pact has been a success in numerous EU countries, especially in guiding them toward underlying fiscal balance ahead of population aging. These countries tend to be smaller, subject to greater macroeconomic volatility, and reliant on a form of fiscal governance that emphasizes targets and contracts. Most of the new members share these characteristics. For the countries less compatible with the Pact, domestic governance reforms that increase the reputational costs for noncompliance can be useful complements to the fiscal framework.
    Keywords: Fiscal policy , Europe , European Union , Political economy , Budget deficits ,
    Date: 2006–05–12
  5. By: Silika Prohl (University of St. Gallen, SIAW-HSG); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: In this study, we analyse the sustainability of fiscal policy of EU member countries within the panel cointegration and error-correction frameworks. Unlike the previous empirical papers in this area, we apply the test for panel cointegration between the primary budget deficit and the public debt defined in GDP ratios. Based on the cointegration test results, we conclude that the fiscal policy is consistent with the intertemporal budget constraint, i.e., it is sustainable in the panel of fifteen EU member countries over the period from 1970 to 2004. Hence, we show that the fiscal balance exhibits a significant structural change in the year 1992, when we apply the Banerjee and Carrion-i-Silvestre (2006) test for a structural break in the panel cointegration relationship. In a next step, we search for the politico-economic factors which explain the variation in the sustainable fiscal balance among the European countries. We evidence that the European fiscal rules have a significant positive effect on the improvement of the fiscal position of the governments of the EU member countries.
    Keywords: Sustainability; Budget Deficit; Panel Cointegration; Structural Breaks; Panel error-correction method
    JEL: H62 H63 C32
    Date: 2006–07
  6. By: Mario Pianta; Andrea Vaona
    Abstract: The labour productivity impact of innovation is investigated in this paper combining neo-Schumpeterian insights on the variety of innovation, with the importance of industrial structures and firm size; two models are proposed for explaining productivity and export success in European manufacturing industries and firm size classes. The empirical estimates are based on data from the European innovation survey (CIS 2), covering Austria, France, Italy, the Netherlands and the UK, broken down by 22 sectors and for large, medium and small firms. The econometric results, obtained adopting cross-sectional estimation methodologies able to account for unobserved industrial characteristics, show that productivity in Europe relies on product and process innovation, with the support of the efficiency gains provided by a grouped business structures. Conversely, in Italy the introduction of new machinery linked to innovation appears as the key mechanism supporting domestic productivity. When export success is considered, all countries have to rely on an innovation-based model of competitiveness.
    Keywords: Innovation, productivity, export performance, industries
    JEL: O31 O33 O41
    Date: 2006–07
  7. By: Hofmann, Boris
    Abstract: This paper assesses the performance of monetary indicators in predicting euro area HICP inflation out-of-sample over the period since the start of EMU considering a wide range of forecasting models, including standard bivariate forecasting models, factor models, simple combination forecasts as well as trivariate two-pillar Phillips Curve type forecasting models. The results suggest that monetary indicators are still useful indicators for inflation in the euro area, but that a thorough and broad based monetary analysis is needed to extract the information content of monetary developments for future inflation.
    Keywords: euro area, inflation, leading indicators, money
    JEL: C32 E31 E40
    Date: 2006
  8. By: Haselmann, Rainer; Helmut, Herwartz
    Abstract: In this paper we examine changes on investment decisions induced by the introduction of the Euro. There are two potential sources of portfolio reallocation. First, the introduction of the Euro diminished exchange rate risks within the EMU region, which relieved European investors from currency risk associated with intra-EMU investments. Second, monetary policy has been bundled within one single institution, which increased the correlation of different national stock and bond market returns. We test for structural breaks in the portfolio holdings of German investors and estimate a market model in the latter in order to account for the two described effects. We observe a significant decrease in national and an significant increase in intra-EMU as well as US investments. Therefore, the establishment of the EMU led to a decrease of investment home bias.
    Keywords: investment home bias, realized volatility, Euro introduction
    JEL: F21 F33 F36 G15
    Date: 2005
  9. By: Michael Lamla (Department of Management, Technology and Economics, ETH Zurich (Swiss Federal Institute of Technology), Switzerland); Sarah M. Rupprecht (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents.
    Keywords: Central Bank Communication, Expectations, Term Structure of Interest Rates, Yield Curve, ECB.
    JEL: E43 E44 E58
    Date: 2006–04
  10. By: Pedro Gustavo Teixeira; Garry J. Schinasi
    Abstract: This paper examines challenges in effectively implementing the lender-of-last-resort function in the EU single financial market. Briefly highlighted are features of the EU financial landscape that could increase EU systemic financial risk. Briefly described are the complexities of the EU's financialstability architecture for preventing and resolving financial problems, including lender-of-last-resort operations. The paper examines how the lender-of-last-resort function might materialize during a systemic financial disturbance affecting more than one EU member state. The paper identifies challenges and possible ways of enhancing the effectiveness of the existing architecture.
    Date: 2006–05–31
  11. By: Döpke, Jörg; Dovern, Jonas; Fritsche, Ulrich; Slacalek, Jirka
    Abstract: This paper investigates the relevance of the sticky information model of Mankiw and Reis (2002) and Carroll (2003) for four major European economies (France, Germany, Italy and the United Kingdom). As opposed to the benchmark rational expectation models, households in the sticky information environment update their expectations sporadically rather than instantaneously owing to the costs of acquiring and processing information. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Using survey data on households’ and experts’ inflation expectations, we find that the model adequately captures the dynamics of household inflation expectations. Both parametrizations imply comparable speeds of information updating for the European households as was previously found in the US, on average roughly once a year.
    Keywords: Inflation, expectations, sticky information, inflation persistence
    JEL: E31
    Date: 2005
  12. By: Alessandro Beber; Michael W. Brandt; Kenneth A. Kavajecz
    Abstract: Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a non-trivial role especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
    JEL: G0 G12
    Date: 2006–07
  13. By: Yinqiu Lu; Jorge A. Chan-Lau
    Abstract: Systemic risk remains a major concern to policymakers since widespread defaults in the corporate and financial sectors could pose substantial costs to society. Forward-looking measures and/or indicators of systemic default risk are thus needed to identify potential buildups of vulnerability in advance. In this paper, we explain how to construct idiosyncratic and systemic default risk indicators using the information embedded in single-tranche standardized collateralized debt obligations (STCDOs) referencing credit derivatives indices. As an illustration, both risk indicators are constructed for the European corporate sector using midprice quotes for STCDOs referencing the iTraxx Europe index.
    Keywords: Financial risk , Europe , Credit risk , Risk management , Financial sector , Debt , Credit tranches , Asset prices , International capital markets ,
    Date: 2006–05–10
  14. By: Mario Pianta; Andrea Vaona
    Abstract: The paper investigates the differences between small, medium-sized and large firms regarding their performance in the introduction of new products and processes. After a review of the relevant literature, two models are proposed and tested in search for different business strategies and innovation inputs connected to product and process innovations. The empirical analysis uses innovation survey (CIS 2) data at the industry level for 22 manufacturing sectors, broken down in three firm size classes, for eight European countries. Special attention is devoted to tackling the issues of possible endogeneity of the regressors and of unobserved sectoral heterogeneity. The results - strengthening the findings of previous studies - show that product and process innovations, though having some complementarities, are associated to different innovative inputs and strategies pursued by firms. Systematic differences also emerge between the behaviour of large firms and SMEs.
    Keywords: Product innovation; Process innovation; Firm size; Determinants of innovation; European industries
    JEL: L11 O31 O33
    Date: 2006–07
  15. By: Nautz, Dieter; Ruth, Karsten
    Abstract: Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the Euro/Dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on U.S. and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account.
    Keywords: Euro/Dollar Exchange Rate, Monetary Model, Money Demand Functions
    JEL: E41 F31
    Date: 2005
  16. By: Nautz, Dieter; Scharff, Juliane
    Abstract: In recent macroeconomic theory, relative price variability (RPV) generates the central distortions of inflation. This paper provides first evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. We find that expected inflation significantly increases RPV if inflation is either very low (below -1.38% p.a.) or very high (above 5.94% p.a.). In the intermediate regime, however, expected inflation has no distorting effects which supports price stability as an outcome of optimal monetary policy.
    Keywords: Inflation, Relative Price Variability, Panel Threshold Models
    JEL: C23 E31
    Date: 2006
  17. By: Robert Inklaar; Marcel P. Timmer; Bart van Ark
    Abstract: In this paper, we make a comparison of industry output, inputs and productivity growth and levels between seven advanced economies (Australia, Canada, France, Germany, Netherlands, UK and U.S.). Our industry-level growth accounts go up to 2003, and make use of input data on labour quantity (hours) and quality (schooling levels), and distinguish between six different types of capital assets (including three ICT assets). The comparison of levels relies on multilateral, industry-specific purchasing power parities (PPPs) for output and inputs, within a consistent input-output framework for the year 1997. Our results show that differences in productivity growth and levels can mainly be traced to market services, not to goods-producing industries. Some of the strong productivity growth in market services in Anglo-Saxon countries may be related to relatively low productivity levels compared to the U.S. In contrast, services productivity levels in continental European countries were on par with the U.S. in 1997, but growth in Europe was much weaker since then. In terms of factor input use, the U.S. is very different from all other countries, mostly because of its more intensive use of ICT capital.
    Date: 2006–07
  18. By: Hervé Guyomard (Unité d'économie et de sociologie rurales - [INRA]); Katell Le Bris (Unité d'économie et de sociologie rurales - [INRA])
    Abstract: The Mid-Term Review proposals presented by the European Commission in July 2002 and January 2003 correspond no doubt to the most radical CAP reform since the latter was established in the early 1960's. This is not because these proposals include firm commitments on market access and export competition dossiers in the perspective of WTO talks. The proposals are silent on these points. This is because they finally achieve the shift from product to producer support by replacing all existing or newly introduced direct income payments, with a few exceptions, by a single decoupled payment per farm, based on historical references and conditional upon cross-compliance to environmental, animal welfare as well as food security and quality criteria. In addition, they expand the scope of rural development instruments to promote food quality, meet higher standards and foster animal welfare and they increase amounts available for rural development by transferring funds from the first to the second pillar via the introduction of an EU-wide system of degression and modulation. This paper discusses these proposals from both an external and internal point of view. We analyse to what extent the MTR proposals could facilitate the EU negotiation position in the WTO. From a domestic point of view, these proposals correspond to appropriate changes in the right direction with however some important qualifications. We analyse these qualifications. We also discuss to what extent the MTR proposals should be considered as the ultimate reform of the CAP or as the third step, after 1992 and 1999, in the long-term process where public intervention would be mainly reserved for correcting market failures, notably the promotion of positive externalities and public goods as well as the reduction in risk and instability faced by agricultural producers.
    Keywords: Common Agricultural Policy (CAP), decoupling, cross-compliance, modulation, World<br />Trade Organisation (WTO)
    Date: 2006–07–27
  19. By: Tomaso Duso; Klaus Gugler; Burçin Yurtoglu
    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. <br> <br> <i>ZUSAMMENFASSUNG - (Wie wirksam ist die Europäische Fusionskontrolle?) <br> In diesem Beitrag wenden wir eine neue Methodologie auf einen einzigartigen Datensatz von großen Unternehmenskonzentrationen während der Jahre 1990- 2002 an, um die Wirksamkeit der Fusionskontrolle zu untersuchen. Wir benutzen Daten, welche von unterschiedlichen Quellen erfasst worden sind und setzen unterschiedliche Auswertungsmethoden ein, um die ökonomischen Effekte der Fusionskontrollentscheidungen der Europäischen Kommission zu analysieren. Wir unterscheiden zwischen Untersagungen, Genehmigung mit Auflagen (entweder Verhaltensauflagen oder strukturelle) und sofortige Genehmigung. Wir verwenden eine "event study" - Methodologie und untersuchen, wie die Aktienpreise sowohl der fusionierenden Unternehmen als auch der Wettbewerber auf die Ankündigung einer Fusion oder einer besonderen wettbewerbspolitischen Entscheidung reagieren, um die Rentabilitätseffekte von Fusionen und von Fusionskontrollentscheidungen quantitativ zu bestimmen. Wir stützen unsere Resultate und Methodologie, indem wir alternative Maße für die Rentabilitätseffekte der Fusion verwenden, die auf Bilanzdaten basieren und erreichen gleich bleibende Resultate. Unsere Analyse ergibt, dass sofortige Untersagungen das von der Fusion verursachte Wettbewerbsproblem lösen können. Dagegen sind Auflagen nicht immer wirkungsvoll - mindestens nicht im Durchschnitt - um die durch die Fusion erzeugte Markmacht zu begrenzen. Dennoch helfen strukturelle Auflagen wie Abstoßungen von Kapitalvermögen und Verhaltensauflagen, einen "effektiven" Wettbewerb wieder herzustellen, wenn sie richtig auf wettbewerbswidrige Fusionen während der ersten Untersuchungsphase des Fusionskontrollverfahren angewendet werden. Jedoch sind sie im Durchschnitt erfolglos - wenn nicht sogar schädlich - wenn sie nach der zweiten Untersuchungsphase angewendet werden. Schließlich scheinen Abhilfemaßnahmen - besonders Verhaltensauflagen -, ein Rententransfer von den fusionierenden Unternehmen auf ihre Rivalen zu sein, wenn sie irrtümlich Wettbewerb steigernden Fusionen auferlegt werden.</i>
    Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Ex-post Evaluation
    JEL: L4 K21 G34 C2 L2
    Date: 2006–07
  20. By: Herrmann, Sabine; Jochem, Axel
    Abstract: The current accounts of most EU member states in central and eastern Europe have been showing growing deficits in recent years. According to panel estimates the deficits can be attributed primarily to factors characteristic for the stage of development, ie the relative income level and high capital building. The positive impact of a closing income gap, however, is largely compensated by real appreciation. The net effect of government budget deficits is rather small, since they are mostly financed by private saving. Further integration of the financial sector is likely to improve the current accounts. Although the current account positions do not require fundamental policy reversals, there are clear risks of exchange rate adjustments that should be reduced before entering the euro area.
    Keywords: current account, new EU member countries, catching-up process
    JEL: F15 F32
    Date: 2005
  21. By: Eickmeier, Sandra; Breitung, Jörg
    Abstract: A high degree of cyclical synchronization between central and east European countries (CEECs) and the euro area is generally seen as a prerequisite for successful EMU enlargement. This paper investigates comovements between CEECs and the euro area. We first establish stylized facts on economic linkages using dynamic correlation and cohesion measures. By means of a large-scale dynamic factor model, we then identify the main structural common euro-area shocks and investigate their transmission to the CEECs in comparison to the current EMU members. We finally carry out a counterfactual experiment which allows us to assess the costs and benefits of accession to EMU for individual CEECs in terms of economic volatilities and the implications of enlargement for synchronization. Overall, our results are mixed. Dynamic business cycle and inflation correlations between CEECs and the euro area are, on average, lower than between individual EMU members and the euro area, but they are higher than for some small peripheral EMU countries. This is confirmed by our other measure, variance shares of output and inflation explained by common euro-area factors. The proliferation of euro-area shocks to the CEECs does not differ significantly from the propagation to EMU countries in most cases. Based on our counterfactual experiment, we do not find significant stabilizing or destabilizing effects through a common monetary policy and fixed exchange rates. We also find that business cycle synchronization between CEECs and between most CEECs and the euro area will increase. There seems to be considerable heterogeneity across CEECs, implying that for some countries, accession to EMU would be more costly than for others. According to our analysis and based on our measures, Poland, Slovenia, Hungary and Estonia are more suitable EMU candidates than other countries.
    Keywords: Dynamic factor models, international business cycles, EMU e gement, counterfactual experiment
    JEL: C32 C50 E5 F02 F41 F42 F47
    Date: 2005
  22. By: Ansgar Belke (University of Hohenheim, Department of Economics, Stuttgart, Germany); Frank Baumgärtner (University of Hohenheim, Department of Economics, Stuttgart, Germany); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria); Ralph Setzer (Deutsche Bundesbank, Department of Economics, Frankfurt, Germany)
    Abstract: This paper empirically investigates the differences in the motives of raising privatisation proceeds for a panel of EU countries from 1990 to 2000. More specifically, we test whether privatisations can be mainly interpreted (a) as ingredients of a larger reform package of economic liberalisation in formerly overregulated economies, (b) as a reaction to an increasing macroeconomic problem pressure and (c) as a means to foster growth and increase tax income and relax the fiscal stance with an eye on the demands by integration of economic and financial markets. Whereas we are able to corroborate claim (a) only partly, we gain consistent evidence in favour of claims (b) and (c).
    Keywords: European Union; panel analysis; partisan theory; privatisation proceeds; state-owned enterprises
    JEL: H42 E62 L33
    Date: 2006–07
  23. By: Herrmann, Sabine; Jochem, Axel
    Abstract: Given the large trade and current account deficits in some of the new EU member states the development of their external economic situation plays a role in assessing their aptitude to enter the European Monetary Union. The empirical analysis with aggregated data indicates that in the eight central and east European EU member states FDI and trade are complementary. This result is confirmed by an FDI enhanced gravity model which makes use of sectoral data provided by the Bundesbank’s micro database direct investment (MIDI). The net effect of FDI on the trade balance is ambiguous, but FDI in high-tech industries clearly stimulates exports more than imports. Technological spill-over and the conglomeration of human capital seem to be important factors for the export performance. Against this background the prospects for the Czech Republic, Hungary, Slovenia and the Slovak Republic look more favourable compared to the Baltic states.
    Keywords: foreign direct investment, trade balance, gravity model
    JEL: F14 F15 F21
    Date: 2005
  24. By: Balázs Égert; Ronald MacDonald
    Abstract: This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels.
    Keywords: monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006
  25. By: Hubert Gabrisch
    Abstract: The paper analyses vertical intra-industry trade between EU and Accession countries, and concentrates on two country-specific determinants: Differences in personal income distribution and in technology. Both determinants have a strong link to national policies and to cross-border investment flows. In contrast to most other studies, income distribution is not seen as time-invariant variable, but as changing over time. What is new is also that differences in technology are tested in comparison with cost advantages from capital/labour ratios. The study applies panel estimation techniques with GLS. Results show country-pair fixed effects to be of high relevance for explaining vertical intraindustry trade. In addition, bilateral differences in personal income distribution and their changes are positive related to vertical intra-industry trade in this special regional integration framework; hence, distributional effects of policies matter. Also, technology differences turn out to be positively correlated with vertical intra-industry trade. However, the cost variable (here: relative GDP per capita) shows no clear picture, particularly not in combination with the technology variable.
    Keywords: Intra-industry trade, transition countries
    JEL: F14 F15
    Date: 2006–07
  26. By: Bassanetti, Antonio; Döpke, Jörg; Torrini, Roberto; Zizza, Roberta
    Abstract: The paper analyses the recent supply side developments in France, Germany, and Italy by employing a non-parametric approach to estimate potential GDP. The analysis reveals marked heterogeneity among the three countries with regard to the contribution made by labour input. Where similarities can be found, however, are in the slowdown of accumulation activity and in the pronounced worsening of total factor productivity. The paper is rounded out by estimates of some measures of wage pressures and of profitability in order to assess the role played by the movements of relative input prices in the intensity of use of primary factors in the production process.
    Keywords: Potential output, growth accounting, productivity, NAIRU, factor shares
    JEL: E32 O47 O52
    Date: 2006
  27. By: Ronald MacDonald; Cezary Wójcik
    Abstract: In this paper we propose an alternative explanation for the nature, sources and consequences of inflation rate differentials in a monetary union, such as EMU. To achieve this, we build on the new neoclassical synthesis (NNS) framework, recently advanced by Goodfriend (2002) and Goodfriend and King (2000). Based on the NNS setup, we discuss the inflationary consequences of the catching-up process in a heterogeneous monetary union. In particular, we explore the interaction between catching-up and inflation differentials and offer an interpretation of the nature of this interaction. Our discussion is in stark contrast to the conventional Balassa-Samuelson (BS) interpretation. In particular, we demonstrate that divergent inflation rates between Member States do not necessarily have to be an equilibrium phenomenon, even if the original shock comes from the supply-side of the economy. Second, we show how a centralized monetary policy may produce such divergence of individual country’s inflation rates when countries differ in size and in trend productivity growth. Against this background, we additionally show how the catching may potentially lead to unsustainable credit booms in a catching-up member country. Finally, we indicate some important deficiencies of the BS model as a guide to short- and medium-run policy making analysis.
    Keywords: inflation differentials, credit booms, new neoclassical synthesis, monetary union, EMU, Balassa-Samuelson model
    JEL: F30
    Date: 2006
  28. By: Stahn, Kerstin
    Abstract: The question as to whether changes in the external environment may have caused the importance of key determinants of German exports to shift since the 1990s is addressed by estimating Germany’s exports to EMU partner countries (intra exports) and to countries outside the euro area (extra exports). Analytically, this is done first by estimating single-equation error correction models across different samples. Second, an estimation applying the Saikkonen (1991) approach is carried out to test whether the long-run export behaviour of intra and extra exports has changed since the 1990s. Finally, simulations are conducted by means of error-correction models in order to reconstruct the adjustment process of both intra and extra exports following demand and price shocks.
    Keywords: intra and extra euro-area exports, export demand, price competitiveness, error correction model
    JEL: C22 F41
    Date: 2006
  29. By: Fuest, Clemens; Hemmelgarn, Thomas; Ramb, Fred
    Abstract: This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank’s Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change.
    Keywords: EU Tax Base, Formula Apportionment, Multinational Companies
    JEL: F23 H25
    Date: 2006
  30. By: Vivek Dehejia; Yiagadeesen Samy
    Abstract: This study is motivated by frequent calls to harmonize labor standards across countries, which result from the fear that economic integration (and the accompanying liberalization of trade flows) will lead to an erosion of working conditions, as countries deliberately try to reduce labor standards in order to maintain competitiveness. We examine the linkages between labor standards and economic integration in the European Union (EU) and, in particular, investigate the following questions. First, whether the conventional wisdom that labor standards are important determinants of trade performance holds, and second whether there has been a “race to the bottom” of standards across countries with deeper integration. We follow a neoclassical factor-proportions framework to conduct our empirical investigation, and unlike previous studies, which rely mostly on cross-sectional data, we use a fully-fledged panel data set to explore the relationship between labor standards and export performance. Our estimates based on data for the period 1980-2001 for EU-15 countries provides mixed evidence regarding the conventional wisdom, and we find that trade performance is largely based on factor endowments. We also find mixed evidence for “ó-convergence” in labor standards.
    Keywords: economic integration, labor standards, comparative advantage, ó-convergence
    JEL: J80
    Date: 2006
  31. By: Werner Eichhorst (IZA Bonn); Lutz C. Kaiser (IZA Bonn, DIW Berlin and EPAG)
    Abstract: In the late nineties, Germany was often seen as a laggard with respect to labor market and welfare state reforms with institutional inertia being reflected in notoriously sluggish employment growth and rising unemployment. Recent years, however, saw a complex sequence of reforms with regard to labor market-related institutions such as labor market regulation, social benefits, active and activating labor market policies and attempts to reduce the burden of payroll taxes and - last but not least - a series of changes in collective bargaining. The paper shows if and to what extent labor-market related reforms in Germany have in fact contributed to overcoming structural weaknesses of a Continental European ‘welfare state without work’ and creating an institutional setup more conducive to strong employment growth and lower unemployment. We provide a detailed institutional analysis of the most relevant reforms in both public policies and collective bargaining and evaluate their effects on labor market structures and dynamics that can be identified so far. In particular we focus on the development of different types of employment and raise the question whether these upcoming non-standard forms of employment may be sustainable with respect to the future of the German labor market.
    Keywords: Germany, labor market policy, labor market reforms
    JEL: J32 J68
    Date: 2006–07
  32. By: Hamburg, Britta; Hoffmann, Mathias; Keller, Joachim
    Abstract: This paper studies the long-run relationship between consumption, asset wealth and income — the consumption-wealth ratio — in Germany, based on data from 1980 to 2003. Earlier papers for the Anglo-Saxon economies have documented that departures of these three variables from their common trend signal future changes in asset prices. We find that for Germany they predict changes in income — the consumption wealth ratio predicts business cycles, not stock market cycles. Asset price changes are found to have virtually no effect on German consumption, both in the short as well as in the long-run. Conversely, German asset prices are predictable from the U.S. consumption-wealth ratio. We offer an explanation of these findings that emphasizes structural differences between the bank-based German financial system and the rather market-based Anglo-American system: stock ownership by private households is much less widespread in Germany than in the Anglo-Saxon economies and the share of publicly traded equity in household wealth is much smaller in Germany than in the U.S., the UK or Australia.
    Keywords: Wealth Effect on Consumption, Business Cycles, Monetary Policy Transmission, Financial Systems, Asset Price Predictability
    JEL: E21 E32 E44 G12 G20
    Date: 2005
  33. By: Stéphanie Jamet
    Abstract: With high unemployment, low participation of specific groups such as the low-skilled and those nearing retirement age, and relatively low average hours worked, France is far from using its full labour potential. Improving the labour market situation would not only increase living standards and growth potential but also reduce social exclusion and ease pressures on public spending. This paper analyses various characteristics of the French labour market that may explain the low utilisation of labour potential. It puts forward the need for a comprehensive reform of the labour market aiming at: i) shifting the burden of social protection in the labour market away from employers towards the state by reducing and streamlining employment protection legislation; ii) removing incentives that lead to early withdrawal from the labour market; iii) allowing employers and employees more freedom to negotiate working hours; and iv) improving efficiency in job placement services.
    Keywords: employment protection legislation, France, labour costs
    JEL: J30 J50 J65 J8 K31
    Date: 2006–07–24
  34. By: François Orivel (IREDU - Institut de recherche sur l'éducation : Sociologie et Economie de l'Education - [CNRS : FRE5211] - [Université de Bourgogne])
    Abstract: In this paper, we will try to show why the evolution of the French higher education system has led to a deadlock and a deteriorating ranking on the world scene, how the new scheme has been effectively and rapidly adopted, but unfortunately, why this adoption has failed to achieve the initial objectives of transforming the French system into a more competitive one.
    Keywords: Bologna Process ; Higher education
    Date: 2006–07–19
  35. By: Sibel Yelten; Harald Anderson
    Abstract: Debates surrounding the adoption of a common currency have focused on its benefits weighed against the long-term costs of losing monetary independence. These debates have assumed that the penalty for not adopting a common currency is the maintenance of the status quo. This paper uses the Sjaastad model to analyze the price-making power of major currencies with regard to the prices of traded goods in small countries that have not adopted the euro and uses the Bayoumi-Eichengreen OCA index methodology to shed further light on changes in Europe. The empirical evidence suggests that small countries that have not adopted the euro have increasingly seen a change in the determinants of their traded goods prices. This seems to contrast with the experience of small countries that adopted the euro. The results need to be interpreted carefully, given the short time series.
    Date: 2006–06–26

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