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on European Economics |
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Issue of 2006‒10‒28
twenty-one papers chosen by Giuseppe Marotta Universita di Modena e Reggio Emilia |
| By: | Griffith, Rachel Susan; Harrison, Rupert; Simpson, Helen |
| Abstract: | European Union countries have implemented widespread reforms to product markets in order to stimulate competition, innovation and economic growth. We provide empirical evidence that the reforms carried out under the EU Single Market Programme (SMP) were associated with increased product market competition, as measured by a reduction in average profitability, and with a subsequent increase in innovation intensity and productivity growth for manufacturing sectors. In our analysis we exploit exogenous variation in the expected impact of the SMP across countries and industries to identify the effects of reforms on average profitability, and the effects of profitability on innovation and productivity growth. |
| Keywords: | competition; innovation; productivity growth |
| JEL: | L1 O31 O47 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5849&r=eec |
| By: | Ramon Gomez-Salvador (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marc Stocker (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides a description and a discussion of some important aspects relating to recent productivity developments in the euro area. Following decades of stronger gains in the euro area than in the US, labour productivity growth has fallen behind that in the US in recent years. This reflects a decline in average labour productivity growth observed in the euro area since the mid-1990s, which stands in sharp contrast with opposite developments in the US. The decline in labour productivity growth experienced in the euro area since the mid-1990s resulted from both lower capital deepening and lower total factor productivity growth. From a sectoral perspective, industries not producing or using intensively information and communication technology (ICT) would appear mostly responsible for the decline in average labour productivity growth since the mid-1990s. These developments were broadly experienced by most euro area countries. A comparison with developments in the US suggests that the euro area economy seems to have benefited much less from increased production and use of ICT technologies, in particular in the services sector. Diverging trends in labour productivity growth between the euro area and the US in recent years mainly reflect developments in a number of specific ICT-using services such as retail, wholesale and some financial services where strong gains were registered in the US. The evidence presented in this paper suggests that, in order to support economic growth in the euro area, emphasis should be given to both policy measures that directly address the determinants of productivity and, given the interactions among the various factors of growth, to policies that raise labour utilisation. |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060053&r=eec |
| By: | Annette Bergemann (Free University Amsterdam, IFAU Uppsala and IZA Bonn); Gerard J. van den Berg (Free University Amsterdam, Princeton University, IFAU Uppsala, CEPR, IFS and IZA Bonn) |
| Abstract: | We survey the recent literature on the effects of active labor market policies on individual labor market outcomes like employment and income, for adult female individuals without work in European countries. We consider skill-training programs, monitoring and sanctions, job search assistance, and employment subsidies. The results are remarkably uniform across studies. We relate the results to the relevant level of female labor force participation. |
| Keywords: | job search, female labor supply, wages, unemployment, schooling, training, monitoring, participation |
| JEL: | J22 J16 J64 J68 J78 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2365&r=eec |
| By: | Artis, Michael J; Onorante, Luca |
| Abstract: | The paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each Eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the SGP in its old and reformed versions. The results suggest that fiscal policy has had in the past a limited smoothing effect on the cycle and therefore the cost of the old rules in the “corrective” arm of the Pact was also limited. As for the reform of the Pact the analysis is overall supportive of the new country-specific Medium term Objectives. The modified rules of the excessive deficit procedure are likely to give governments only a limited extra leeway to reduce the variability of the cycle. |
| Keywords: | European Monetary Union; fiscal-monetary interactions; Stability and Growth Pact |
| JEL: | E61 E62 E63 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5684&r=eec |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan |
| Abstract: | Announced in the autumn of 1998, the monetary policy strategy of the European Central Bank (ECB) quickly became controversial, arguably because the ECB provided neither an explicit representation of the inflation process nor an explanation for why it necessitated the adoption of a two-pillar framework. Several reduced-form empirical models that seek to do so have subsequently been presented in the literature. The hallmark of these models is the hypothesis that inflation can be decomposed into a 'trend', which is explained by a smoothed measure of past money growth, and a deviation from that trend, which is accounted for by the output gap. In this paper we survey this literature, discuss how it relates to the monetary transmission mechanism and extend the inflation equations by introducing cost-push shocks. We find that changes in import prices, oil prices and exchange rates are statistically significant in euro-area inflation equations but that they leave intact the earlier findings that money growth and the output gap matter. |
| Keywords: | frequency domain; Philipps curve; quantity theory; spatial regression |
| JEL: | C22 E3 E5 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5683&r=eec |
| By: | Del Gatto, Massimo; Mion, Giordano; Ottaviano, Gianmarco I P |
| Abstract: | In models with heterogeneous firms trade integration has a positive impact on aggregate productivity through the selection of the best firms as import competition drives the least productive ones out of the market. To quantify the impact of firm selection on productivity, we calibrate and simulate a multi-country multi-sector model with monopolistic competition and variable markups using firm-level data and aggregate trade figures on a panel of 11 EU countries. We find that EU trade has a sizeable impact on aggregate productivity. In 2000 the introduction of prohibitive trade barriers would have caused an average productivity loss of roughly 13 per cent, whereas a reduction of intra-EU trade costs by 5 per cent would have generated a productivity gain of roughly 2 per cent. Productivity losses and gains, however, vary a lot across countries and sectors depending on market accessibility and trade costs. We provide evidence that our results are robust to alternative distance and productivity measures. |
| Keywords: | European integration; firm selection; firm-level data; gains from trade; total factor productivity |
| JEL: | F12 R13 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5730&r=eec |
| By: | David J. EVANS |
| Abstract: | In relation to social project appraisal in EU countries, governments should try to agree on a single generally preferred method of discounting. Consistency of approach should result in the application of similar discount rates by countries. Before 2003, the use of different methods resulted in the application of widely divergent rates; for example, 8% in France, 3% in Germany and 6% in Britain. New appraisal guidance by the British Treasury in 2003 saw the official UK rate, now based solely on social time preference, reduced to just 3.5%. In 2005, France followed suit reducing its rate from 8% to 4%. This paper argues for a standard benchmark European discount rate of around 3%-4% based on social time preference (STPR).This rate is somewhat lower than the 5% rate suggested in the 2002 EC guide to cost-benefit analysis and, as such, its application should result in a more generous allocation of budget funds to longer-term projects. For estimation purposes, the most troublesome component of the STPR formula is the elasticity of marginal utility of consumption (e).This paper reviews recent evidence on e and argues for the application of more thoughtful approaches in order to establish a reliable interval estimate for EU countries |
| Keywords: | Cost-benefit analysis, social discount rate, European Union |
| JEL: | D61 H43 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2006-20&r=eec |
| By: | Brusoni, Stefano; Crespi, Gustavo; Francoz, Dominique; Gambardella, Alfonso; Garcia-Fontes, Walter; Geuna, Aldo; Giuri, Paola; Gonzales, Raul; Harhoff, Dietmar; Hoisl, Karin; LeBas, Christian; Luzzi, Alessandra; Magazzini, Laura; Mariani, Myriam; Nesta, Lionel; Nomaler, Önder; Palomeras, Neus; Patel, Parimel; Romanelli, Marzia |
| Abstract: | Based on a survey of the inventors of 9,017 European patented inventions, this paper provides new information about the characteristics of European inventors, the sources of their knowledge, the importance of formal and informal collaborations, the motivations to invent, and the actual use and economic value of the patents. |
| Keywords: | patent value; incentives; innovation; inventor; patent; patent system |
| JEL: | J24 O31 O34 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5752&r=eec |
| By: | Buti, Marco; Sapir, André |
| Abstract: | During the ‘Golden Age’ that lasted until the mid-1970s, Europe witnessed a "public finance" phase, when the three sides of Musgrave’s triangle - allocative efficiency, redistribution and cyclical stabilisation - seemed to reinforce one another. EMU's fiscal rules - embodied in the Maastricht Treaty and the Stability and Growth Pact - can be regarded as the attempt by European governments to overcome the subsequent "public choice" phase à la Buchanan which was characterised by increasing budget deficits and trade offs between allocative efficiency and redistribution. The original Stability Pact delivered only partly. A rigorous enforcement of the reformed Pact will depend on two conditions: the renewed ownership of the rules by key players and the relative weight of the perceived negative externalities of fiscal misbehaviour versus the political costs of attempting to limit the partner countries’ room for manoeuvre. |
| Keywords: | EMU; fiscal policy; Stability Pact |
| JEL: | E6 H3 H6 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5830&r=eec |
| By: | Conconi, Paola; Perroni, Carlo; Riezman, Raymond |
| Abstract: | We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization. Our analysis provides a rationale for the proposed creation of an Enhanced Cooperation Agreement on capital taxes within the European Union. |
| Keywords: | commitment; partial coordination; tax competition |
| JEL: | C73 F21 H21 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5761&r=eec |
| By: | Papaioannou, Elias; Portes, Richard; Siourounis, Gregorios |
| Abstract: | Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance-covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank’s desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency ('punching above its weight'). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. |
| Keywords: | currency optimizer; euro; foreign reserves; international currencies |
| JEL: | F02 F30 G11 G15 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5734&r=eec |
| By: | Galasso, Vincenzo |
| Abstract: | Conventional economic wisdom suggests because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals net social security wealth. |
| Keywords: | aging; political equilibria; postponing retirement |
| JEL: | D72 H5 H53 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5777&r=eec |
| By: | Bindseil, Ulrich (European Central Bank); Nyborg, Kjell G. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Strebulaev, Ilya A. (Graduate School of Business, Stanford University) |
| Abstract: | Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfill reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral. |
| Keywords: | Repo auctions; multiunit auctions; reserve requirements; loser’s nightmare; money markets; central bank; collateral; open market operations |
| JEL: | D44 E43 E50 G12 G21 |
| Date: | 2005–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2005_013&r=eec |
| By: | Ian Babetskii |
| Abstract: | A fixed exchange rate regime eliminates one degree of freedom in absorbing macroeconomic shocks. Therefore, there is a call for higher labor market flexibility in countries which are members of the monetary union or those which intend to join the monetary union. Focusing on the cross-country analysis of labor markets in the enlarged European Union, this paper aims to assess empirically the role of aggregate wages as a correction mechanism for dealing with economic disturbances. A comparable quarterly data-set is constructed covering 1995–2004 for four central European states (CE-4), four new EU members already participating in the Exchange Rate Mechanism-II (ERM-II participants), and three peripheral members of the euro area (EMU- 3). We apply classical time series/panel, Bayesian, and cointegration techniques to determine the extent to which aggregate wages can accommodate shocks in the economy. The macroeconomic data does not seem to support the argument that real wages are flexible in the CE-4, the ERM-II participants, and the EMU-3. |
| Keywords: | . ERM-II, euro adoption, labor market, wage flexibility. |
| JEL: | E24 E52 C22 C33 P20 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2006/1&r=eec |
| By: | Ammermüller, Andreas; Pischke, Jörn-Steffen |
| Abstract: | We estimate peer effects for fourth graders in six European countries. The identification relies on variation across classes within schools. We argue that classes within primary schools are formed roughly randomly with respect to family background. Similar to previous studies, we find sizeable estimates of peer effects in standard OLS specifications. The size of the estimate is much reduced within schools. This could be explained either by selection into schools or by measurement error in the peer background variable. When we correct for measurement error we find within school estimates close to the original OLS estimates. Our results suggest that the peer effect is modestly large, measurement error is important in our survey data, and selection plays little role in biasing peer effects estimates. We find no significant evidence of non-linear peer effects. |
| Keywords: | measurement error; peer effects |
| JEL: | I21 J24 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5660&r=eec |
| By: | Yolanda Rebollo Sanz (Department of Economics, Universidad Pablo de Olavide); José Ignacio García-Pérez (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | We develop a partial equilibrium job search model to analyse wage mobility and its relation to job mobility. The basic job search model is generalized by introducing wage renegotiation at the firm level and on-the-job search. Besides we model the value of leisure as a function of the previous wage. We present a semi-structural estimation using data on employment and wages for men 20 to 60 years old from the European Community Household Panel (Spain, Germany, France and Portugal). The estimated parameters from the model are then used to identify the sources of the wage loss associated with unemployment. German and Spanish workers tend to suffer larger wage penalties than their French and Portuguese counterparts. Wage losses in Germany are mainly related to better wage opportunities when employed. In Spain wage losses tend to remain longer since on the job wage growth is lower. We also evaluate the effect of the Unemployment Benefit system on wage changes after unemployment and find that a sole level for unemployment benefits (dependent on the national average wage level) reduces wage penalties for all workers with the exception of the highly educated. |
| Keywords: | Semi-structural estimation, wage mobility, job mobility, search models |
| JEL: | J60 J64 J31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:06.26&r=eec |
| By: | Arjan Lejour; Vladimir Solanic; Paul Tang |
| Abstract: | The dynamic effects from EU membership are crucial for the new member states to catch up with the average income level in the old member states. To gauge the dynamic effects, we follow a two-step procedure in which a gravity equation for bilateral trade shows the trade effect of EU membership and a growth regression yields the income effect of trade. Shared EU membership is found to increase trade between two of its member states with about 34%. EU membership may contribute to trade by inducing countries to improve the quality of their institutions. Trade increases by another 22% if institutions improve, yielding a total trade increase of 56%. Improved openness increases income by 37.5% according to our estimates. Adding a small direct effect of improved institutions on income, the total income effect of EU membership is 39% for the ten new members. This implies that EU membership, or its effect on trade and institutions, could lead to large economic gains for the new member states, but does not bring them economically on par with the old member states. |
| Keywords: | income and openness; EU accession; gravity equation |
| JEL: | F15 F43 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:72&r=eec |
| By: | Castellani, Davide; Disdier, Anne-Célia; Navaretti, Giorgio Barba |
| Abstract: | Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialisation of the European economies. However, several recent contributions have shown that the effects on home economies are rarely negative and often positive. Our paper contributes to this literature by examining how outward investments to cheap labour countries affect home activities of a sample of French and Italian firms that turn multinational in the period analysed. The effects of these investments are also compared to the effects of outward investments to developed economies. The analysis is carried out by using propensity score matching in order to build an appropriate counterfactual of national firms. This provides the hypothetical benchmark of what would have happened to domestic activities if firms had not invested abroad. We find no evidence of a negative effect of outward investments to cheap labour countries. In Italy they enhance the efficiency of home activities, with also positive long term effect on output and employment. For France we find a positive effect on the size of domestic activity. Investments to developed economies from both countries have essentially scale effects which eventually trickle down on employment and productivity at home. |
| Keywords: | multinational firms; productivity; propensity score matching |
| JEL: | C14 D21 F23 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5765&r=eec |
| By: | Alvaredo, Facundo; Saez, Emmanuel |
| Abstract: | This paper presents series on top shares of income and wealth in Spain over the 20th century using personal income and wealth tax return statistics, as well as employment income statistics. Top income shares are highest in the 1930s in spite of substantial individual income tax evasion biasing down our estimates. This suggests that income inequality was much higher in the pre-civil war period than it is today. Employment income concentration was moderate in the 1960s and 1970s and dropped sharply from 1975 to 1977 during the transition to democracy. Top income shares have increased significantly since the mid-1990s due to an increase in wage income concentration and a surge in realized capital gains. Financial wealth concentration has also increased in the 1990s but real estate prices have increased sharply as well. As real estate wealth is less concentrated than financial wealth, on net, top wealth shares have declined slightly during the period 1982-2002. The wealth tax exemption of stocks for owners-managers since 1994 has gradually eroded by almost 40% the taxable wealth at the top, creating a very serious loophole in the wealth tax as well as large efficiency costs. |
| Keywords: | income; wealth inequality |
| JEL: | D3 H3 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5836&r=eec |
| By: | Fernandez, Cristina (IESE Business School); Ortega, Carolina (FEDEA) |
| Abstract: | Spain has traditionally been known as a country of emigrants. However, in the last decade, Spain has experienced an unprecedented boom of immigration from three localized areas: Latin America, Africa and East Europe. In this paper, we study the behaviour of recent immigrants in the Spanish labour market identifying the major differences with the native population and tracking whether these differences fade away as their years of residence in Spain increase. With this objective, we focus on four labour market outcomes: labour supply, unemployment, incidence of overeducation and incidence of temporary contracts. Results show that, compared to natives, immigrants face initially higher participation rates, higher unemployment rates, higher incidence of overeducation and higher incidence of temporary contracts. However, five years after their arrival we could broadly say that participation rates start to converge to native rates, unemployment rates decrease to levels even lower than those of natives, and the incidence of temporary contracts and overeducation remains constant: no reduction of the gap with Spanish workers is observed. Therefore, we conclude that the Spanish labour market is managing to absorb the so called, 'immigration boom ', but at the expense of allocating immigrants in bad job-matches. |
| Keywords: | immigration; assimilation; labor force participation; unemployment; overeducation; temporary contracts; |
| JEL: | J11 J21 J61 |
| Date: | 2006–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0644&r=eec |
| By: | Giorgio Brunello (University of Padua); Beatrice d'Hombres (European Commission Joint Research Centre) |
| Abstract: | We use data from the European Community Household Panel to investigate the impact of body weight on wages in 9 European countries. When we pool the available data across countries and years, we find that a 10% increase in the average body mass index reduces the real earnings of males and females by 3.27% and 1.86% respectively. Since European culture, society and labour market are heterogeneous, we estimate separate regressions for Northern and Southern Europe and find that the negative impact of the body mass index on earnings is larger - and statistically significant - in the latter area. |
| Keywords: | wages, body mass index, Europe |
| JEL: | I12 J3 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0027&r=eec |