nep-eec New Economics Papers
on European Economics
Issue of 2006‒11‒04
twenty-two papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Regional inflation dynamics within and across euro area countries and a comparison with the US By Günter W. Beck; Kirstin Hubrich; Massimiliano Marcellino
  2. Price setting behaviour and price setting regulations at the euro changeover By Thomas A. Eife
  3. European Regional Convergence in a Human Capital Augmented Solow Model By Hans-Friedrich Eckey; Christian Dreger; Matthias Türck
  4. What drives EU banks’ stock returns? Bank-level evidence using the dynamic dividend-discount model By Olli Castrén; Trevor Fitzpatrick; Matthias Sydow
  5. Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures. By Moïse Sidiropoulos; Eleftherios Spyromitros
  6. Modeling the Duration of Patent Examination at the European Patent Office By Dietmar Harhoff; Stefan Wagner
  7. The Keins Database on Academic Inventors: Methodology and Contents By Francesco Lissoni; Bulat Sanditov; Gianluca Tarasconi
  8. Money at Low Frequencies By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  9. Monetary policy in the media By Helge Berger; Michael Ehrmann; Marcel Fratzscher
  10. Trade Effects of the Europe Agreements By Julia Spies; Helena Marques
  11. Cross-border labour mobility within an enlarged EU By Frigyes Ferdinand Heinz; Melanie Ward-Warmedinger
  12. The Parental Leave Benefit Reform in Germany : Costs and Labour Market Outcomes of Moving towards the Scandinavian Model By C. Katharina Spieß; Katharina Wrohlich
  13. Where Do Firms Incorporate? By Becht, Marco; Mayer, Colin; Wagner, Hannes
  15. A castle built on sand: The effects of mass privatization on stock market creation in transition economies By Fungácová , Zuzana; Hanousek, Jan
  16. Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity? By Dutordoir, M.; Gucht, L. van de
  17. Wage Differentials and Temporary Jobs in Italy By Matteo, PICCHIO
  18. Wealth Effects on Consumption: Microeconometric Estimates from a New Survey of Household Finances By Bover, Olympia
  19. Intergenerational family ties and the diffusion of cohabitation in Italy By Paola Di Giulio; Alessandro Rosina
  20. Explaining the Occupational Structure of Dutch Sectors of Industry, 1988-2003 By Cörvers Frank; Dupuy Arnaud
  21. Tax cuts and employment: Evidence from Finnish linked employer-employee data By HANNU PIEKKOLA
  22. Swedish Labour Market Training and the Duration of Unemployment By Richardson, Katarina; van den Berg, Gerard J

  1. By: Günter W. Beck (Goethe University Frankfurt and CFS. Contact: Faculty of Economics and Business Administration, Goethe University Frankfurt, Mertonstrasse 17, 60325 Frankfurt, Germany.); Kirstin Hubrich (Corresponding author: Research Department, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (IEP-Bocconi University, IGIER and CEPR. Contact: Bocconi University, IGIER, Via Salasco, 5, Milano 20136, Italy.)
    Abstract: We investigate co-movements and heterogeneity in inflation dynamics of different regions within and across euro area countries using a novel disaggregate dataset to improve the understanding of inflation differentials in the European Monetary Union. We employ a model where regional inflation dynamics are explained by common euro area and country specific factors as well as an idiosyncratic regional component. Our findings indicate a substantial common area wide component, that can be related to the common monetary policy in the euro area and to external developments, in particular exchange rate movements and changes in oil prices. The effects of the area wide factors differ across regions, however. We relate these differences to structural economic characteristics of the various regions. We also find a substantial national component. Our findings do not differ substantially before and after the formal introduction of the euro in 1999, suggesting that convergence has largely taken place before the mid 90s. Analysing US regional inflation developments yields similar results regarding the relevance of common US factors. Finally, we find that disaggregate regional inflation information, as summarised by the area wide factors, is important in explaining aggregate euro area and US inflation rates, even after conditioning on macroeconomic variables. Therefore, monitoring regional inflation rates within euro area countries can enhance the monetary policy maker’s understanding of aggregate area wide inflation dynamics. JEL Classification: E31, E52, E58, C33.
    Keywords: Regional inflation dynamics, euro area and US, common factor models.
    Date: 2006–10
  2. By: Thomas A. Eife
    Abstract: This paper documents that the impact of the euro changeover in January 2002 on prices was not uniform across the 12 participating countries. There are countries where prices increased significantly, but there are also countries where price-setting behaviour during the changeover does not appear to be very different from other points in time. This paper argues that the above difference can be explained by looking at the way countries regulated price setting during the changeover, and that any impact of the changeover could have been avoided with appropriate regulations. The gap between the actual and the perceived impact is addressed and policy recommendations for future changeovers are provided
    Keywords: currency changeover, euro, economic policy, prices, perceived inflation
    JEL: E31 E60 L11
    Date: 2006–10–10
  3. By: Hans-Friedrich Eckey; Christian Dreger; Matthias Türck
    Abstract: In this paper, the process of productivity convergence is investigated for the enlarged European Union using regional (NUTS-2) data. The Solow model extended by human capital is employed as a workhorse. Alternative strategies are proposed to control for spatial effects. All specifications confirm the presence of convergence with an annual speed between 3 and 3.5 percent towards regional steady states. Furthermore, a geographically weighted regression approach indicates a wide variation in the speed of convergence across the regions, where a higher speed is striking in particular in France and the UK. Clusters of convergence can be identified, where regions with high convergence also have high initial income levels.
    Keywords: Solow model, regional convergence, spatial lags, spatial filtering
    JEL: C21 O47 R11 R15
    Date: 2006
  4. By: Olli Castrén (Corresponding address: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Trevor Fitzpatrick; Matthias Sydow
    Abstract: We combine the dynamic dividend-discount model with an accounting-based vector autoregression framework that allows for a decomposition of EU banks'stock returns to cash-flow and expected return news components. The main findings are that while the bulk of the variability of EU banks'stock returns is due to cash-flow shocks, the expected return shocks are relatively more important for larger than for smaller banks. Moroever, variables used in the literature as cash-flow proxies explain a higher share of the cash-flow component of the total excess returns for smaller than for larger EU banks. This suggests that large banks could be more prone to market wide news and events - that in the literature are associated with the expected return news component - as opposed to the bank-specific news, typically assumed to be incorporated in the cash-flow component. JEL Classification: C33, G12, G21.
    Keywords: Bank stock return predictability, return decomposition, panel VAR estimation, cash-flow news.
    Date: 2006–09
  5. By: Moïse Sidiropoulos; Eleftherios Spyromitros
    Abstract: This paper examines the welfare and stabilisation implications of alterna- tive fiscal decision rules in a monetary union with a common monetary policy, such as the European Monetary Union (EMU). We develop a two-country model under monetary union in presnece of asymmetries. Fiscal policies are assumed alternatively non-cooperative (decentralised) and cooperative (centralised) and labour markets are characterised by decentralised and centralised wage setting. The central issue of the paper is the design of the appropriate fiscal policy rule by comparing and evaluating the performance of alternative arrangements to distribute the power over fiscal authorities between the centre of the union and the individual members of the union. The main result of this paper reveals that a decentralized fiscal policy rule, where the member states conduct independent fiscal policies, with centralised wage setting in labour markets of monetary union members is the appropriate institutional design. This institutional arrangement would improve the social welfare and stabilize better than others the idiosyncratic shocks hitting the economies of the monetary union members.
    Keywords: Policy-mix, EMU, labor market institutions.
    JEL: E58 E52 E63
    Date: 2006
  6. By: Dietmar Harhoff (Munich School of Management, LMU München); Stefan Wagner (Centre for Economic Policy Research (CEPR), London)
    Abstract: We analyze the duration of the patent examination process at the European Patent Office (EPO). Our data contain information related to the patent’s economic and technical relevance, EPO capacity and workload as well as novel citation measures which are derived from the EPO’s search reports. In our multivariate analysis we estimate competing risk specifications in order to characterize differences in the processes leading to a withdrawal of the application by the applicant, a refusal of the patent grant by the examiner or an actual patent grant. Highly cited applications are approved faster by the EPO than less important ones, but they are also withdrawn less quickly by the applicant. The process duration increases for all outcomes with the application’s complexity, originality, number of references (backward citations) in the search report and with the EPO’s workload at the filing date. Endogenous applicant behavior becomes apparent in other results: more controversial claims lead to slower grants, but faster withdrawals, while relatively well-documented applications (identified by a high share of applicant references appearing in the search report) are approved faster and take longer to be withdrawn.
    Keywords: patents, patent examination, survival analysis, patent citations, European Patent Office
    JEL: C15 C41 D73 O34
    Date: 2006–10
  7. By: Francesco Lissoni (University of Brescia and CESPRI-Bocconi University,Italy.); Bulat Sanditov (CESPRI-Bocconi University, Italy and MERIT-Maastricht University, The Netherlands.); Gianluca Tarasconi (CESPRI-Bocconi University, Milan, Italy.)
    Abstract: The paper describes the methodogy used to build a database on academic inventors from France, Italy, and Sweden (1978-2004), which was delivered to the European Commission as part of the KEINS project (Knowledge-Based Entrepreneurship: Innovation, Networks and Systems), and will provide the basis for future publications. It provides an overview of the database contents, as well as information on access rules and on related datasets by CESPRI-Università Bocconi. The database is the result of joint efforts by CESPRI-Università Bocconi (Milan, IT), BETA – Universitè “Louis Pasteur” (Strasbourg, FR), IMIT-Chalmers University (Gotheborg, SE), Umea Universitet (SE), and Università degli studi di Brescia (IT).
    Keywords: University patents, European universities, Patent database.
    JEL: C81 I23 O34
    Date: 2006–09
  8. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: Many central banks have abandoned monetary targeting because the link between money growth and inflation seemed to disappear in the 1980s. Using spectral regression techniques, we show that for the euro area, Japan, the UK and the US there is a unit relationship between money growth and inflation at low frequencies when the impact of interest rate changes on money demand is accounted for. We estimate Phillips-curve equations in which the low-frequency information from money growth is combined with high-frequency information from the output gap to explain movements in inflation.
    Keywords: frequency domain; Phillips curve; Quantity theory; spectral regression
    JEL: C22 E3
    Date: 2006–10
  9. By: Helge Berger (Free University Berlin, Department of Economics, Boltzmannstr. 20, 14195 Berlin, Germany & CESifo.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Media coverage of monetary policy actions is a central channel of a central bank’s communication with the wider public, and thus an important factor for its credibility and policy effectiveness. This paper analyses the coverage which ECB monetary policy decisions receive in the print media, and the determinants of its extent and of its favorableness. We find that that the press critically discusses the ECB’s policy decisions in the context of prior market expectations and of the inflation environment, and that the media’s coverage of decisions is generally highly responsive to ECB communication – in particular its Press Conference on meeting days. However, the paper also finds clear limitations in this regard, thus underlining the critical monitoring role assumed by the media. JEL Classification: E52, E58.
    Keywords: Monetary policy, ECB, communication, media, press, coverage, transparency, accountability.
    Date: 2006–09
  10. By: Julia Spies; Helena Marques
    Abstract: The eastern enlargement of the European Union (EU) brought and will bring full membership to countries whose trade barriers with the EU had to a large extent already been removed under Free Trade Agreements (FTAs) during the 1990s. We employ a theory-based new version of a gravity equation, whose specification allows for an assessment of the impact of the arrangements on extra- and intra-group imports. We find robust evidence that the agreements have substantially increased intra-group trade, in the case of the Czech and Slovak Republic at the expense of the Rest of the World (ROW).
    Keywords: Free Trade Agreements; Gravity equation; Central and Eastern Europe; Panel data
    JEL: F15 C23
    Date: 2006
  11. By: Frigyes Ferdinand Heinz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Ward-Warmedinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper examines the potential for increased cross-border labour mobility within the EU-25 and considers the costs and benefits of any increase in labour mobility to both sending and receiving countries in the medium to long run. Evidence from previous EU enlargement experiences, academic studies, the existence of barriers to mobility within the EU and the economic determinants of migration all indicate a moderate potential for increased migrant flows. The magnitude of cross-border labour flow in the medium to long run will most likely be largely a function of the demand for migrants and the speed at which the EU-8 catches up economically with the EU-15. If broad-based economic growth and social development continues in the EU-8, labour migration will most likely decrease. In addition, faster population ageing in the EU-8 tends towards dampening migration flow from the new Member States in the medium term. In terms of costs and benefits, for the EU-8 countries labour migration, especially in the short run, may present a number of challenges. Emigration may tend to weigh disproportionally on the pool of young and educated workers, aggravating labour market bottlenecks in a number of EU-8 countries. For the EU-25 as a whole, cross-border labour mobility is likely to offer a number of advantages, by allowing a more efficient matching of workers‘ skills with job vacancies and facilitating the general upskilling of European workforces. The current restrictions on labour mobility from the EU-8 countries to the other EU member countries stand in contrast with one of the central principles of the EU – the free movement of labour. Furthermore, these restrictions may decrease the efficient use of labour resources in the face of demographic change and globalisation and hamper an important adjustment mechanism within EMU. Delaying the removal of these barriers may be costly for the EU-25 at a time when leaders are concerned about Europe‘s international competitiveness and may increase illegal work in a number of countries. Finally, it would not be beneficial for Europe to loose a significant part of the most agile and talented individuals from the new Member States to more traditional migration centres such as the US and Canada.
    Date: 2006–10
  12. By: C. Katharina Spieß; Katharina Wrohlich
    Abstract: Germany is known to have one of the lowest fertility rates among Western European countries and also relatively low employment rates of mothers with young children. Although these trends have been observed during the last decades, the German public has only recently begun discussing these issues. In order to reverse these trends, the German government recently passed a reform of the parental leave benefit system in line with the Scandinavian model. The core piece of the reform is the replacement of the existing means-tested parental leave benefit by a wage-dependent benefit for the period of one year. In this paper we simulate fiscal costs and expected labour market outcomes of this reform. Based on a micro-simulation model for Germany we calculate first-round effects, which assume no behavioural changes and second-round effects, where we take labour supply changes into account. Our results show that on average all income groups, couples and single households, benefit from the reform. The calculation of overall costs of the reform shows that the additional costs are moderate. As far as the labour market behaviour of parents is concerned, we find no significant changes of labour market outcomes in the first year after birth. However, in the second year, mothers increase their working hours and labour market participation significantly. Our results suggest that the reform will achieve one of its aims, namely the increase in the labour market participation of mothers with young children.
    Keywords: female labour supply, parental leave, micro simulation study
    Date: 2006
  13. By: Becht, Marco; Mayer, Colin; Wagner, Hannes
    Abstract: Over the last few years, a series of rulings by the European Court of Justice (ECJ) has opened up the European Union to cross-border mobility in incorporation. In this paper we explore how deregulation and the costs of regulation have affected the location decisions of firms. Using a newly constructed dataset of companies from around the world incorporating in the U.K. between 1997 and 2005 we find a large increase in new incorporations of limited liability firms from E.U. Member States following the ECJ rulings. We find that incorporation costs, in particular minimum capital requirements, and delays in incorporation are significant influences on firms’ location decisions. Our results confirm the relevance of price to firms’ choice of legal systems. We also report that cross-border incorporation has prompted regulatory competition between E.U. Member States to provide low-cost corporate law to limited liability companies.
    Keywords: entrepreneurship; financial regulation; incorporation; regulatory competition
    JEL: G38 K22
    Date: 2006–10
  14. By: Rachel Levy; Pascale Roux; Sandrine Wolff
    Abstract: This paper analyses the modalities according to which a large European university collaborates with firms by exploring its relational portfolio. We address this issue by exploiting a database listing more than 1000 firms having collaborated with the University Louis Pasteur between 1990 and 2002. First, using multi-correspondence analysis, we derive a four-classes typology of collaborative behaviours, each of them presenting a strong internal coherence. We obtain four distinct collaboration patterms, for which the frequency of interactions and the exclusive vs. open character of the relationships are discriminating features. Second, using a multinomial logit estimation, we show how this diversity is connected to some individual attributes of the firms: size, legal status, industrial sector and geographic distance from the public partner.
    Keywords: Science-industry collaborations; Typology; Industrial collaboration patterns.
    JEL: L21 L31 O32
    Date: 2006
  15. By: Fungácová , Zuzana (BOFIT); Hanousek, Jan (BOFIT)
    Abstract: This paper deals with the relationship between mass privatization and stock market development in transition economies. The link is investigated empirically using a panel of data that includes most transition countries. Our results confirm the hypothesis that mass privatization exerted a negative influence on stock market functioning over the short and medium term. Further, it appears that stock markets in countries with mass privatization were initially perceived as mere byproducts of the privatization process. Such stock markets typically not only failed in their core mission of providing capital for the corporate sector, but generated negative investor sentiment and did little to catalyze economic growth.
    Keywords: privatization; mass privatization; emerging stock markets; stock market
    JEL: G15 G28 P34
    Date: 2006–10–26
  16. By: Dutordoir, M.; Gucht, L. van de (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt- and equity-related financing costs. Therefore, it is a puzzle why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model incorporating convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is also reflected in the highly debt-like design of most European convertible issues. In addition, we show that economy-wide and country-specific factors have a significant incremental impact on the convertible debt choice.
    Keywords: Convertible Debt;Security Choice;Security Design;Western Europe;
    Date: 2006–10–30
  17. By: Matteo, PICCHIO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: The focus of this paper is to analyse the wage effects of temporary jobs using the 2000 and 2002 waves of the Survey of Italian Households’ Income and Wealth (SHIW). Exploiting the short longitudinal dimension of the survey and taking into account of individual-and job-specific unobservable components result in an estimated wage penalty for temporary workers of around 12-13%. Furthermore, there is evidence of higher wage returns to seniority for temporary workers, generating a reduction in the wage gap by about 2.3 percentage points after one year of tenure.
    Keywords: Temporary employment, fixed-term, contracts, wage differential, returns to seniority, individual effects, firm effects
    JEL: C23 J31 M51
    Date: 2006–07–10
  18. By: Bover, Olympia
    Abstract: This paper presents estimates of wealth effects on consumer spending using the first wave of a new survey of household finances (EFF 2002) that contains direct measures of asset holdings and consumption. A distinguishing feature of the EFF is the availability of such information from a representative sample subject to stratification by wealth. Furthermore we believe we are able to measure wealth effects due to precautionary motives only. This is confirmed by the estimated pattern of wealth effects across age groups. To control for the potential endogeneity of housing wealth, we exploit geographical house price variation and inheritance information in the EFF as instrumental variables. We focus on the effects of housing wealth, distinguishing between main and secondary housing, but also report OLS estimates of financial wealth effects. We find large and statistically significant housing wealth effects for prime age households. Overall, the largest wealth effects are for owner occupied housing, followed by secondary housing, with financial wealth effects being smaller and insignificant.
    Keywords: house prices; precautionary savings; two-stage least squares matching; wealth effects
    JEL: D91
    Date: 2006–10
  19. By: Paola Di Giulio (Max Planck Institute for Demographic Research, Rostock, Germany); Alessandro Rosina
    Abstract: Cohabitation has been spreading in the population during the last thirty years, and this is one of the most striking aspects of wider social changes that have taken place throughout the industrialized world. However, this change did not take place uniformly across Europe. The purpose of this paper is to contribute to the current debate around the compatibility of cohabitation experiences with the Italian cultural context. Using an individual-level diffusion approach we obtain results that are consistent with the crucial role that family ties play in the choice of cohabitation in place of (or before) marriage.
    Keywords: Italy, cohabitation, diffusion of innovations
    JEL: J1 Z0
    Date: 2006–10
  20. By: Cörvers Frank; Dupuy Arnaud (ROA wp)
    Abstract: We develop a new model to explain the occupational structure of Dutchsectors of industry. The non-homothetic production function we use takesaccount of capital-skill complementarities, skill-biased technological changeand the interaction between labour demand and supply.We estimate the structural parameters of the model for the periodbetween 1988 and 2003 using system dynamic OLS techniques to accountfor the employment dynamic dependence across occupations and sectors ofindustry. The employment series by occupation and sector have both a longrun and a short-run relationship with value added, capital and R&D. Theshort run dynamics can further be decomposed into intra and intersectoraldynamics.We find that both the long run and short run relationships explaina significant part of employment by occupation and sector of industry.Moreover, employment by occupation and sector is significantly affectedby both the intra- and intersectoral dynamics.JEL Classification: J21, J23.Keywords: Labour demand, Occupational structure, Skill-biased technologicalchange, Capital-skill complementarity.
    Keywords: Economics ;
    Date: 2006
    Abstract: We analyse taxes and employment in a system of firm-level labour demand and industry-level regional labour supply, using linked employer-employee data from Finland in 1990- 2003. We show that virtually all of the wage tax burden is borne by employers since wages fully adjust. Labour demand also responds with short lags within a year or two to cuts in taxes and labour costs. A unit decrease in wage tax rate (2.2% lower taxes) leads to an average long-run employment improvement of 0.8%, while an equivalent cut in social security payments has effects that are nearly twice as low. Tax cuts thus explain a substantial part of the recent improvement in employment since the deep recession of the early 1990s (besides the release of firms’ liquidity constraints). Nearly half of the tax revenue loss due to wage tax cuts is paid back in the form of higher employment and lower unemployment costs. Tax cuts with emphasis on low-wage, low-productivity firms may appear undesirable, as tax cuts cure employment of low- skilled workers especially in skill-intensive firms.
    Keywords: taxation on labour, labour demand, regional labour supply, wage bargaining, wage elasticity
    JEL: J31 J59 C24
    Date: 2006–10–26
  22. By: Richardson, Katarina; van den Berg, Gerard J
    Abstract: The vocational employment training program is the most ambitious and expensive training program in Sweden and a cornerstone of labor market policy. We analyze its causal effects on the individual transition rate from unemployment to employment by exploiting variation in the timing of treatment and outcome, dealing with selectivity on unobservables. We demonstrate the appropriateness of this approach in our context by studying the process leading to enrollment. We also develop a model allowing for duration dependence and unobserved heterogeneity (leading to spurious duration dependence) in the treatment effect itself, and we prove non-parametric identification. The data cover the population and include multiple unemployment spells for many individuals. The results indicate a large significantly positive effect on exit to work shortly after exiting the program. The effect at the individual level diminishes after some weeks. When taking account of the time spent in the program, the effect on the mean unemployment duration is often close to zero.
    Keywords: duration analysis; duration dependence; hazard rate; identification; program evaluation; selectivity bias; transition to work; treatment effect; vocational training
    JEL: C14 C41 J64
    Date: 2006–10

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