nep-eec New Economics Papers
on European Economics
Issue of 2006‒10‒07
twenty-one papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany By Sebastian Dullien; Ulrich Fritsche
  2. The Term Structure of Interest Rates in the European Union By Minoas Koukouritakis; Leo Michelis
  3. The Dynamics of European Inflation Dynamics By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  4. Sticky Information Phillips Curves: European Evidence By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  5. Does the ECB respond to the stock market? By Wouter Botzen, W.J.; Marey, Philip S.
  6. Does ECB Communication Help in Predicting its Interest Rate Decisions? By David-Jan Jansen; Jakob de Haan
  7. Reforming the Taxation of Multijurisdictional Enterprises in Europe, a Tentative Appraisal By Marcel Gérard
  8. The European Institutional Environment and SME Relationship Lending: Should We Care? By Hernandez-Canovas, Gines; Koeter-Kant, Johanna
  9. The Allocation of European Union Allowances: Lessons, Unifying Themes and General Principles By Barbara K. Buchner; Carlo Carraro; A. Denny Ellerman
  10. Has EMU had any Impact on the Degree of Wage Restraint? By Adam Posen; Daniel Popov Gould
  11. Current Account Imbalances and Real Exchange Rates in the Euro Area By Arghyrou, Michael G; Chortareas, Georgios
  12. Bank profitability and the business cycle By Ugo Albertazzi; Leonardo Gambacorta
  13. Efficiency and Equity of European Education and Training Policies By Ludger Woessmann
  14. Inequality and Mobility of Household Incomes in Europe. Evidence from the ECHP By Riener, Gerhard
  15. Welfare Dependency among Danish Immigrants. By Blume, Kræn; Verner, Mette
  16. Why do Low- and High-Skill Workers Migrate? Flow Evidence from France By Dominique M. Gross; Nicolas Schmitt
  17. The New Keynesian Model and the Long-run Vertical Phillips Curve: Does it hold for Germany? By Ulrich Fritsche; Jan Gottschalk
  18. Etude comparée des systèmes de régulation ferroviaire : Grande-Bretagne, France et Suède. Analyse des règles du jeu et de leur mise en œuvre, Enseignements pour la France By Dominique Bouf; Yves Crozet; Julien Lévêque; William Roy
  19. A further step into the ELGH and TLGH for Spain and Italy By Isabel Cortés_Jiménez; Manuela Pulina
  20. Monetary transmission mechanism in Central and Eastern Europe: Gliding on a wind of change By Coricelli, Fabrizio; Égert , Balázs; MacDonald, Ronald
  21. Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter? By Havrylchyk , Olena; Jurzyk, Emilia

  1. By: Sebastian Dullien (Financial Times Deutschland); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin)
    Abstract: This paper compares relative unit labour cost developments in the countries of the euro-area since the beginning of the European Monetary Union (EMU) both with historical developments and with intra-regional unit labour cost developments in the United States of America and Germany. To this end, unit labour cost indices for the US states and census regions from 1977 to 1997 as well as for the German Länder from 1970 to 2004 have been constructed. Against this benchmark, it is found that unit labour cost increases since 1999 in Portugal and to a lesser extent in Spain and Greece can be judged as excessive, pointing at labour market rigidities which might impair smooth working of EMU in the future.
    Keywords: Unit labor costs, divergence, convergence, Euro-zone, inflation
    JEL: F2 F4 N2
    Date: 2006–10
  2. By: Minoas Koukouritakis (Department of Economics, University of Crete); Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates among the original 15 EU countries. By decomposing each term structure into its transitory and permanent components, we also examine whether the short or the long rate is weakly exogenous and thus determine the long run behavior of each term structure. The empirical results support the expectations theory of the term structure of interest rates for all the EU-15 countries. They also indicate that the long term interest rates are weakly exogenous for almost all the countries in our sample. Further, we investigate if the expectation theory of the term structure of interest rates is affected by other exogenous variables such as nominal and real exchange rates, inflation rates, inflation variance, money growth and its variance. Our evidence suggests that the inclusion of the other exogenous variables does not affect the expectations hypothesis for most of the EU-15 countries.
    Keywords: Term Structure, European Union, Cointegration, Common Trends, Weak Exogeneity
    JEL: E43 F15 F42
    Date: 2006–05
  3. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
    Keywords: Inflation expectations, sticky information, inflation persistence
    JEL: D84 E31
    Date: 2006–07
  4. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We estimate the sticky information Phillips curve model ofMankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.
    Keywords: Inflation expectations, sticky information, Phillips curve, inflation persistence
    JEL: D84 E31
    Date: 2006–10
  5. By: Wouter Botzen, W.J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Marey, Philip S.
    Abstract: The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the impact of adding stock prices to the standard Taylor rule of the ECB. The GMM estimations of a standard Taylor rule and augmented Taylor rules for the Euro area indicate that the ECB considered stock price developments in setting interest rates. Monetary policy of the ECB stabilized asset prices by raising interest rates when the stock market index was above average and lowering rates when the index was below average. Stock prices are not only relevant as instruments but also as arguments in the ECB policy rule. The empirical plausibility of the Taylor rule improves when it allows for a reaction to the stock market. These results challenge previous studies.
    Keywords: Taylor rules; Asset prices; ECB monetary policy
    JEL: E4 E5
    Date: 2006
  6. By: David-Jan Jansen; Jakob de Haan
    Abstract: We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged.
    Keywords: ECB communication, interest rate decision, Taylor rule, ordered probit models
    JEL: E43 E52 E58
    Date: 2006
  7. By: Marcel Gérard
    Abstract: In 2001, the European Commission proposed replacing the current system of taxation of multinational companies by the taxation of a consolidated base, computed at the level of all the European entities of a multijurisdictional enterprise, and then distributed for taxation purposes between the various jurisdictions in which these entities operate, according to pre-established criteria. In this paper, we propose a tentative appraisal of that reform based on a case study and an analytical exercise. We especially focus on two related issues, the choice of the formula and the composition of the consolidating area – either the entire EU or some Member States within an Enhanced Cooperation Agreement –, and on their impact on the size and interjurisdictional distribution of tax revenue and social welfare, and on the intensity of tax competition. Our tentative policy conclusion is that this paper supports the reform provided that (1) the formula puts emphasis on criteria that the firm may not too easily manipulate, (2) the activities of the multijurisdictional enterprise are enough mobile, (3) the consolidation is made compulsory within the consolidating area, and (4) the consolidating area protects its capacity to actually levy tax by adopting a crediting system vis-à-vis the rest of the world.
    Keywords: multinational enterprises, multinational companies, multijurisdictional enterprises, European taxation, tax consolidation, tax competition
    JEL: H32 H73 H87
    Date: 2006
  8. By: Hernandez-Canovas, Gines (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Koeter-Kant, Johanna
    Abstract: This paper examines the impact of country specific determinants on multiple banking using a unique survey sample of 4959 SMEs from 19 European countries. Our data shows that (1) SMEs in countries with inefficient loan enforcement mechanisms are more likely to maintain multiple bank relationships, (2) the association between multiple banking and bank fragility is non-monotonous, being negative when the banking system is relatively stable and positive for high values of bank fragility, and (3) multiple banking is more likely for SMEs in countries with larger banking systems as well as smaller and less active securities markets. Overall, this evidence suggests that SMEs need multiple banking as a diversification mechanism to overcome expensive adverse selection that may arise within a country that suffers from an inefficient legal system and fragile banks, but also that movement towards a more market based financial system decreases the likelihood of multiple bank relationships for SMEs. These findings have important implications for policy makers in Europe when contemplating SME access to finance.
    Keywords: SMEs; Relationship Lending; Banks
    JEL: G21 G32
    Date: 2006
  9. By: Barbara K. Buchner (Fondazione Eni Enrico Mattei); Carlo Carraro (Fondazione Eni Enrico Mattei and University of Venice); A. Denny Ellerman (Senior Lecturer at MIT)
    Abstract: This paper is the concluding chapter of Rights, Rents and Fairness: Allocation in the European Emissions Trading Scheme, edited by the co-authors and forthcoming from Cambridge University Press. The main objective of this paper is to distill the lessons and general principles to be learnt from the allocation of allowances in the European Union Emission Trading Scheme (EU ETS), i.e. in the world’s first experience with allocating carbon allowances to sub-national entities. We discuss the lessons that emerge from this experience and make some comments on what seem to be more general principles informing the allocation process and on what are the global implications of the EU ETS. As has become obvious during the first allocation phase, the diversity of experience among the Member States is considerable, so that it must be understood that these lessons and unifying themes are drawn from the experience of most of the Member States, not necessarily from all. Lessons and unifying observations are grouped in three categories: those concerning the conditions encountered, the processes employed, and the actual choices.
    Keywords: Climate Change, Emission Trading, Allocation, Fairness, EU Policy
    JEL: C72 H23 Q25 Q28
    Date: 2006–09
  10. By: Adam Posen; Daniel Popov Gould
    Abstract: We find in cross-sectional investigations that wage restraint is either unchanged or increased following EMU in the vast majority of countries. This contradicts the predictions of a widely-cited family of models of labor market bargaining. In those, Germany would have been expected to display the greatest decline in wage restraint post-EMU, and we find no indication of such a decline. The time-series evidence on Italy shows a significant increase in wage restraint after eurozone entry. This pattern is consistent with the models that emphasise the gains from monetary credibility. The eurozone increase in wage restraint is matched by the increase seen in the UK and Sweden after adopting inflation targeting, another means to credibility.
    Keywords: EMU, wage bargaining, monetary credibility, productivity
    JEL: E25 E58 J58
    Date: 2006
  11. By: Arghyrou, Michael G (Cardiff Business School); Chortareas, Georgios
    Abstract: Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU. After controlling for the effects of income growth, we find the relationship between real exchange rates and the current account to be substantial in size and subject to non-linear effects. Overall, we argue that real exchange rates can offer further insights, beyond the effects of the income catch-up process, relevant to current account determination in the EMU.
    Keywords: current account; real exchange rate; EMU; nonlinearities
    JEL: C51 C52 F31 F32 F41
    Date: 2006–09
  12. By: Ugo Albertazzi (Bank of Italy - Economic Research Department); Leonardo Gambacorta (Bank of Italy - Economic Research Department)
    Abstract: An important element of the macro-prudential analysis is the study of the link between business cycle fluctuations and banking sector profitability and how this link is affected by institutional and structural characteristics. This work estimates a set of equations for net interest income, non-interest income, operating costs, provisions, and profit before taxes, for banks in the main industrialized countries and evaluates the effects on banking profitability of shocks to both macroeconomic and financial factors. Distinguishing mainly the euro area from Anglo-Saxon countries, the analysis also identifies differences in the resilience of the respective banking systems and relates them to the characteristics of their financial structure.
    Keywords: bank profitability, economic cycle, macro-prudential analysis
    JEL: C53 G21
    Date: 2006–09
  13. By: Ludger Woessmann
    Abstract: This paper reviews empirical evidence, especially from Europe, on how education and training policies can be designed to advance both efficiency and equity. Returns to educational investments tend to decrease over the life cycle. Moreover, they seem to be highest for children from disadvantaged families at early stages and for the well-off at late stages of the life cycle. This creates complementarities between efficiency and equity at early stages and trade-offs at late stages. The paper goes on to discuss specific policies for efficiency and equity at each educational stage, ranging from early childhood education and schools over vocational and higher education to training and lifelong learning. The available evidence suggests that both efficiency and equity can be enhanced by output-oriented reforms properly designed to each stage, where the state generally sets a regulatory framework that ensures accountability and funding and uses the forces of choice and competition to deliver best results. Designed this way, education and training systems can advance efficiency and equity at the same time.
    Keywords: education, training, Europe, efficiency, equity, life cycle, trade-off
    JEL: D60 H52 I28 J24
    Date: 2006
  14. By: Riener, Gerhard (Department of Economics, University of Essex, Essex, United Kingdom)
    Abstract: In this paper I want to shed light on two aspects of income mobility: relative total income mobility using the estimator by Fields and Ok [1999] and equalization of long-run incomes measured by the index of Fields [2004]. The cross country comparison shows a negative relationship between total relative mobility and long-run income equalization, this results is contrary to the intuition given by Shorrocks [1978a] who stated, that higher relative mobility will cause higher equalization of incomes when the accounting period is extended.
    Keywords: Income distribution, Economic mobility, Inequality
    JEL: J30 D63
    Date: 2006–09
  15. By: Blume, Kræn (AKF); Verner, Mette (Department of Economics, Aarhus School of Business)
    Abstract: In this paper, we investigate determinants of the welfare dependency among immigrants in an assimilation framework. The duration of stay is a major determinant of welfare dependency. Also, assimilation patterns vary substantially across immigrants from developed and less devel-oped countries, respectively. The late arriving immigrants are relatively more dependent on transfers, explaining part of the general increase in welfare dependency during the latest years. This is partly attributed to the large variation in qualifications across cohorts of immigrants. Fur-thermore, the business cycle effects of immigrants appear to be considerably larger than for na-tives.
    Keywords: Welfare dependency; transfers; immigrants; assimilation; two-limit tobit
    JEL: C23 C33 D31 I21
    Date: 2006–09–27
  16. By: Dominique M. Gross; Nicolas Schmitt
    Abstract: With a focus on the role of cultural clustering and income distribution, this paper investigates whether standard determinants influence international migration of workers to France with the same intensity across different skill levels and with or without free mobility. We find that low-skill migrants respond to most push and pull migration factors. High-skill migrants however respond only to financial incentives and cultural clustering does not matter. Migration policy is effective at controlling flows of low-skill migrants but free mobility has no impact on high-skill flows. Hence, France must rely on growing earnings and skill-premium to attract high-skill workers from high income countries.
    JEL: F22 J24 O24
    Date: 2006
  17. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jan Gottschalk (International Monetary Fund)
    Abstract: New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without.
    Keywords: Cointegration, Vector error Correction Model, Unemployment, Phillips Curve, Hysteresis
    JEL: B22 C32 E24
    Date: 2006–04
  18. By: Dominique Bouf (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Yves Crozet (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Julien Lévêque (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); William Roy (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat])
    Abstract: Ce rapport de recherche commandé par la direction de la stratégie de la SNCF compare les systèmes de régulation ferroviaire britannique et français. Il s'agit d'étudier les règles du jeu établies pour réguler un système ferroviaire verticalement dé-intégré avec un gestionnaire d'infrastructure et des entreprises ferroviaires. Après avoir rappelé les principes et l'évolution de la réforme ferroviaire britannique, la régulation ferroviaire est analysée en détail. Les activités régulées sont distinguées selon qu'elles concernent l'établissement de la grille horaire, la gestion opérationnelle du réseau ou les modifications de celui-ci. La régulation britanniques repose largement sur le consensus entre partenaires de l'industrie ferroviaire. Pour ce faire, un système de compensation des externalités a été établi, un régulateur indépendant a été institué et un dispositif de règlement des conflits propre à l'industrie a été mis en place. Mais ce système incitatif est pénalisé par des coûts de transaction très élevés. En France, la régulation est largement définie par la loi et repose sur l'antagonisme entre le gestionnaire d'infrastructure, RFF, et l'opérateur historique, SNCF, qui est aussi gestionnaire délégué de l'infrastructure. Il apparaît globalement que pour faire pression sur l'acteur dominant (la SNCF), les pouvoirs publics ont eu tendance à laisser à RFF une liberté d'action relativement importante au regard des contraintes que la régulation britannique fait porter sur Network Rail.
    Keywords: Etude comparée ; systèmes de régulation ferroviaire ; règlementation ferroviaire ; infrastructure ; dé-intégration
    Date: 2006–10–04
  19. By: Isabel Cortés_Jiménez (Universitat de Barcelona); Manuela Pulina (Università di Sassari)
    Abstract: Nowadays many developing countries focus on economic policies for promoting international tourism and exports expansion as a potential source of economic growth of the country. However, the understanding of the relationship between exports and economic growth is still ongoing. When treating the relationship between tourism and economic growth, considering tourism as a non-traditional export few studies have been published to date. This paper has the objective to assess if exports and tourism have really promoted growth by means of the export-led growth hypothesis (ELGH) and the tourism-led growth hypothesis (TLGH). The cases under analysis are Spain and Italy, two of the most important countries worldwide regarding the expansion of tourism. Cointegration techniques and the multivariate Granger causality test are applied. Results reveal that exports cause economic growth in the long-term for both countries, whilst only for Spain tourism appears as a factor which influences economic growth in the lon-run.
    Keywords: Economic Growth, Exports, Tourism, Cointegration, Multivariate Granger Causality, Spain, Italy
    JEL: L83 C32 O49
    Date: 2006–09
  20. By: Coricelli, Fabrizio (University of Siena, University of Ljubljana and CEPR); Égert , Balázs (Oesterreichische Nationalbank); MacDonald, Ronald (University of Glasgow and CESIfo)
    Abstract: This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized 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, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
    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: 2006–08–14
  21. By: Havrylchyk , Olena; Jurzyk, Emilia (K.U. Leuven, Belqium)
    Abstract: Using data for 265 banks in Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and for-eign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in CEECs also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing de-terminants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.
    Keywords: foreign banks; bank profits; multinational banking; transition economies
    JEL: F36 G15 G21
    Date: 2006–04–25

This nep-eec issue is ©2006 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.