nep-eec New Economics Papers
on European Economics
Issue of 2007‒05‒04
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Tax reform and labour-market performance in the euro area - a simulation-based analysis using the New Area-Wide Model By Günter Coenen; Peter McAdam; Roland Straub
  2. Economic Integration and Financial Stability: A European Perspective By Gianni De Nicoló; Alexander F. Tieman
  3. Market discipline, financial integration and fiscal rules - what drives spreads in the euro area government bond market? By Simone Manganelli; Guido Wolswijk
  4. Policy Credibility and Sovereign Credit--The Case of New EU Member States By David Hauner; Jiri Jonas; Manmohan S. Kumar
  5. Do Economists' and Financial Markets' Perspectives on the New Members of the EU Differ? By Pipat Luengnaruemitchai; Susan Schadler
  6. International Finance and Income Convergence: Europe is Different By Ashoka Mody; Abdul Abiad; Daniel Leigh
  7. Fiscal Harmonization in the Presence of Public Inputs By Gonzalo Fernández de Córdoba; José L. Torres
  8. Interpreting EU Funds Data for Macroeconomic Analysis in the New Member States By Robert Sierhej; Christoph B. Rosenberg
  9. Earnings Instability and Tenure By Lorenzo Cappellari; Marco Leonardi
  10. Testing Market Efficiency and Price Discovery in European Carbon Markets By George Milunovich; Roselyne Joyeux
  11. Tax, Welfare, and Pension Reforms in Slovenia: Implications for Work Incentives and Labor Participation By Anita Tuladhar; Philippe Egoumé-Bossogo
  12. The Shortcomings of a Partial Release of Employment Protection Laws: The Case of the 2005 French Reform By Pierre Cahuc; Stephane Carcillo
  13. Kids or Courses? Gender Differences in the Effects of Active Labour Market Policies By Lechner, Michael; Wiehler, Stephan
  14. On the Job Search and Job Competition: Relevance and Wage Impact in the UK By Simonetta Longhi

  1. By: Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter McAdam (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we employ a calibrated two-country version of the New Area-Wide Model (NAWM) currently under development at the European Central Bank to examine the potential benefits and spillovers of reducing labour-market distortions caused by euro area tax structures. Our analysis shows that lowering tax distortions to levels prevailing in the United States would result in an increase in hours worked and output by more than 10 percent. At the same time, tax reductions would have positive spillovers to the euro area’s trade partners, bolstering the case for tax reforms from a global perspective. Finally, we illustrate that, in the presence of heterogeneous households, distributional effects may be of importance when gauging the impact of tax reforms. JEL Classification: E32, E62.
    Keywords: DSGE modelling, limited asset-market participation, fiscal policy, tax reform, euro area.
    Date: 2007–04
  2. By: Gianni De Nicoló; Alexander F. Tieman
    Abstract: This paper assesses changes in synchronization of real activity and financial market integration in Western Europe and evaluates their implications for financial stability. We find increased synchronization of real activity since the early 1980s and increased equity markets integration since the early 1990s. We also find that measures of systemic risk at large European financial institutions have not declined during the period 1990-2004 and that bank systemic risk profiles have converged. At the same time, the sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries. Overall, these results suggest that the integration process does not necessarily entail an unambiguously positive effect on financial stability.
    Keywords: Financial stability , economic integration , Europe , Financial stability , Europe , European Union , Economic models ,
    Date: 2007–01–08
  3. By: Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Guido Wolswijk (Fiscal Policies Division of DG-Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration – by improving market efficiency – is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates. JEL Classification: G12, G18, C23.
    Keywords: Bond spreads, credit risk, liquidity risk.
    Date: 2007–04
  4. By: David Hauner; Jiri Jonas; Manmohan S. Kumar
    Abstract: References to policy credibility, particularly with regard to fiscal policy, are ubiquitous in both economic literature and financial markets, even though it is not directly observable. The case of the EU new member states (NMS)-emerging markets joining a supranational entity that is generally considered to have higher policy credibility-provides a unique experiment to assess the effects of credibility on sovereign credit. This paper examines the impact of EU accession on three key variables that can reflect in varying degrees policy credibility: sovereign ratings, foreign currency spreads, and local currency yields. The results suggest that the NMS appear to have enjoyed higher credibility compared to their peers.
    Keywords: Policy credibility , credit spreads , sovereign ratings , EU new member states , Fiscal policy , Europe , European Union , Credit , Currencies , Foreign exchange , Economic models ,
    Date: 2007–01–09
  5. By: Pipat Luengnaruemitchai; Susan Schadler
    Abstract: In the past several years, the ten new Central and Eastern European members of the European Union have enjoyed rapid growth but frequently alongside growing external imbalances. Economists have pointed to rising vulnerabilities, but markets compressed sovereign bond yields. This paper examines the evidence from the perspective of economists' vulnerability analysis and markets' pricing of sovereign bonds. It finds that spread are lower than can be explained by "fundamentals" and speculates on the causes and permanence of this yield compression.
    Keywords: New Member States , Emerging Markets , Sovereign Spreads , Emerging markets , European Union , Economic growth , Bonds , Prices , Capital markets ,
    Date: 2007–03–22
  6. By: Ashoka Mody; Abdul Abiad; Daniel Leigh
    Abstract: Recent studies conclude that the ongoing global financial integration may have had little or no value in advancing economic growth, especially in poor countries. Capital is often found to flow "uphill" from poor to rich countries. And, when it does flow into the less developed economies, it is negatively correlated with growth, calling into question the desirability of foreign capital. In this paper we report that Europe-including the new member states of the European Union-provides a counterexample to these global anomalies. With increasing financial integration, capital in Europe has traveled "downhill" from rich to poor countries, and has done so with gathering strength. These inflows have been associated with significant acceleration of income convergence.
    Keywords: Current account deficits , financial integration , growth , convergence , Current account deficits , Europe , Globalization , Capital inflows , Economic growth , Income distribution ,
    Date: 2007–03–19
  7. By: Gonzalo Fernández de Córdoba (Universidad de Salamanca); José L. Torres (Universidad de Málaga)
    Abstract: Fiscal harmonization for the European Union member states is a goal that encounters major difficulties for its implementation. Each country faces a particular trade-off between fiscal revenues generated by taxation and the productive efficiency loss induced by their respective tax code. Countries for which a particular harmonized tax code requires more taxation, will have to face an increased efficiency loss, for those required to decrease their taxes, will have to face a loss in fiscal revenue.
    Keywords: Fiscal harmonization, applied general equilibrium,Armonización fiscal, equilibrio general aplicado.
    JEL: E43 E62
    Date: 2007
  8. By: Robert Sierhej; Christoph B. Rosenberg
    Abstract: Drawing on a dataset suitable for macroeconomic analysis, the paper provides an overview of the magnitudes, purpose and institutional implications of EU-related transfers to and from the new member states. A rough analysis of accounting identities and first-round effects shows that EU funds may have led to a fiscal drag of up to 1 percent of GDP and an additional aggregate demand stimulus of up to 1 percent of GDP during the first years of membership. These effects are likely to increase as additional funding become available under the new financial perspective, pointing to the need to consider policy tradeoffs.
    Keywords: EU transfers , new member states; EU funds data ,
    Date: 2007–04–05
  9. By: Lorenzo Cappellari (Department of Economics, Università Cattolica di Milano); Marco Leonardi (University of Milan)
    Abstract: This paper develops a tractable empirical approach to estimate the effect of on-the-job tenure on the permanent and the transitory variance of earnings. The model is also used to evaluate earnings instability associated with fixed-term contracts (short-tenure contracts) in Italy. Our results indicate that each year of tenure on the job reduces earnings instability on average by 15%. Workers on a fixed-term contract on average have an earnings instability 10% higher than workers on a permanent contract. Workers who spend their entire working life on fixed-term contracts can expect an earnings instability twice as high.
    Date: 2007–02
  10. By: George Milunovich (Department of Economics, Macquarie University); Roselyne Joyeux (Department of Economics, Macquarie University)
    Abstract: We examine the issues of market efficiency and price discovery in the European Union carbon futures market. Our findings suggest that none of the carbon futures contracts examined here are priced according to the cost-of-carry model, although two of the three futures contracts studied here form a stable long-run relationship with the spot price, and hence act as adequate risk mitigation instruments. We apply a new testing procedure and find weak evidence of convenience yield in the market for carbon allowances. In terms of price discovery, it appears that the spot and futures markets share information efficiently and contribute to price discovery jointly. Similar to the information diffusion pattern found in returns, we report some evidence of bi-directional volatility transfers between the spot and various futures contracts.
    Keywords: Carbon-dioxide allowances, futures, cost-of-carry, price discovery, market efficiency, cointegration, granger causality, volatility spillover, global warming.
    JEL: C32 G13 G14 C32 Q25 Q40
    Date: 2007–03
  11. By: Anita Tuladhar; Philippe Egoumé-Bossogo
    Abstract: The labor participation rate in Slovenia has been lower than in the EU-15 (the members states prior to May 2004), particularly for the low-income and older individuals. Using simulations of tax and social benefits and public pensions, the paper shows how the current tax, welfare, and pension systems create disincentives to work among these groups. The paper finds that incentives to retire early are strong for men, especially low-wage earners. The marginal effective tax rates also make it costly for low-income individuals to work and negatively affect the probability of participating. The paper proposes reform measures to enhance work incentives and labor participation, which will be crucial for dealing with population aging and for achieving higher potential growth in Slovenia.
    Keywords: Labor particiaption , retirement , pensions , taxation , welfare , Slovenia , Labor supply , Slovenia , Labor policy , Tax reforms , Pensions , Early retirement incentives ,
    Date: 2007–01–08
  12. By: Pierre Cahuc; Stephane Carcillo
    Abstract: This paper proposes an ex ante evaluation of the effects of new labor contracts such as the "Contrat Nouvelle Embauche" (CNE) introduced in France in 2005. The lessons we draw are of sufficiently general interest to be applicable to other countries or reforms of employment protection laws. Using a model that captures the characteristics of the French labor market, we simulate the effects of this reform on unemployment, employment, and welfare. We estimate that the CNE will lead to the creation of 70,000 additional jobs in the long run, but at the cost of a slight deterioration in welfare.
    Keywords: Employment protection , labor contract , reform , search models ,
    Date: 2007–01–11
  13. By: Lechner, Michael; Wiehler, Stephan
    Abstract: This paper investigates active labour market programs in Austria with a special emphasis on male-female effect heterogeneity. On average, we find only small effects, if any, for most of the programs. A crucial advantage of the large and informative administrative data we use is that it provides records about pregnancies and times of parental leave, in addition to the information that can typically be found in European administrative data sources used for evaluating active labour market policies. We show that these variables play a key role in removing selection bias and defining outcome variables which may explain why other similar studies found such programs to be more effective for women than for men. In particular for younger women a key effect of the programs is to reduce or postpone pregnancies and to increase the attachment to the labour force. After taking into account gender specific selection effects and the effects of the programs on pregnancies, gender differences (almost) disappear.
    Keywords: Active Labour market policy; matching estimation; panel data; program evaluation
    JEL: J68
    Date: 2007–04
  14. By: Simonetta Longhi (Institute for Social and Economic Research)
    Abstract: In the literature job competition is often measured by the unemployment rate. By neglecting on-the-job search, however, the unemployment rate is likely to be a biased measure of job competition: various studies have suggested that on-the-job search varies over time and across groups of people, and might have a relevant impact on the outflow from unemployment. In the UK, for example, less than half of people who are actively looking for a job are unemployed; the other half already has a job. This paper estimates the direct impact of job competition on individual wages in the UK using data from the quarterly Labour Force Survey for the period 1993-2005. Measures of job competition based only on the unemployment rate are compared to measures that account for on-the-job search as well as regional accessibility. The results suggest that job competition has a negative impact on wages, and that this impact is not equally distributed across workers.
    Keywords: UK, labour market tightness, wages
    Date: 2007–03

This nep-eec issue is ©2007 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.