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on European Economics |
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Issue of 2007‒11‒17
seventeen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Michael Ehrmann (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Refet S. Gürkaynak (CEPR and Bilkent University, 06800 Bilkent, Ankara, Turkey.); Eric T. Swanson (Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105, USA.) |
| Abstract: | We study the convergence of European bond markets and the anchoring of inflation expectations in euro area countries using high-frequency bond yield data for France, Germany, Italy and Spain. We find that Economic and Monetary Union (EMU) has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels, unconditional daily fluctuations, and conditional responses to major macroeconomic data announcements. Our findings also suggest a substantial increase in the anchoring of long-term inflation expectations since EMU, particularly for Italy and Spain, which since monetary union have seen their long-term interest rates become much lower, much less volatile, and much better anchored in response to news. Finally, the reaction of far-ahead forward interest rates to macroeconomic announcements has converged substantially across euro area countries and even been eliminated over time, thus underlining not only market integration but also the credibility that financial markets attach to monetary policy in the euro area. JEL Classification: E52, E58. |
| Keywords: | Bond markets, euro area, EMU, convergence, anchoring, credibility, monetary policy. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070817&r=eec |
| By: | Michael G. Arghyrou; Andros Gregoriou; Alexandros Kontonikas |
| Abstract: | We test for real interest parity (RIP) in the EU25 area. Our contribution is two-fold: First, we account for the previously overlooked effects of structural breaks on real interest rate differentials. Second, we test for RIP against the EMU average. For the majority of our sample countries we obtain evidence of real interest rate convergence towards the latter. Convergence, however, is a gradual process subject to structural breaks, typically falling close to the launch of the euro. Our findings have important implications relating to the single monetary policy and the progress new EU members have achieved towards joining the euro. |
| Keywords: | real interest rate parity; convergence, structural breaks; EU; EMU |
| JEL: | F21 F32 C15 C22 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_21&r=eec |
| By: | Fladung, Michael |
| Abstract: | This study examines differences in the interest rate response to an ECB policy impulse in the euro area, the new EU-member states, and in the other non-eurozone EU countries in order to gauge the degree of interest rate alignment in Europe. To this end, PANIC, a Panel Analysis of Non-stationarity in I diosyncratic and Common components, is employed in a structural factor set-up. Under the assumption that the ECB sets the short end of the yield curve, the analysis shows that : (i) The response of Europe’s money and government bond markets to new information can be summarized by two common stochastic trends and one stationary common factor, which together explain more than 68% of the overall variation of the two market segments; (ii) one of the factor innovations can be associated with the ECB’s policy stance, which strongly affects the short end of the euro area’s yield curve; (iii) compared to the euro area, the short-term market segments in the new EU-member states react, on average, 12% more weakly to the monetary policy signal, whereas these countries’ long-term government bond yields respond up to 25% more strongly to such a common innovation. |
| Keywords: | Factor Models, Common Stochastic Trends, Interest Rate Channel, New Member States, Mixed Data Sampling |
| JEL: | C33 E52 G15 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6343&r=eec |
| By: | Joseph P. Byrne; Norbert Fiess |
| Abstract: | EMU monetary policy targets aggregate Euro Area inflation. Concerns are growing that a focus on aggregate inflation may cause national inflation rates to diverge. While different explanations for diverging aggregate Euro Area inflation have been brought forward, the very impact of aggregation on divergence has however not been studied. We find a striking difference in convergence depending on the level of aggregation. While aggregate national inflation rates are diverging, disaggregate inflation rates are converging. We find that aggregation appears to bias evidence towards non-convergence. Our results are consistent with prominent theoretical and empirical evidence on aggregation bias |
| Keywords: | Euro Area Inflation; Aggregation Bias; Convergence |
| JEL: | C12 C22 E31 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_41&r=eec |
| By: | Xiaoshan Chen (Dept of Economics, Loughborough University) |
| Abstract: | This paper offers an insight into the optimality of the European Economic and Monetary Union (EMU) and its common monetary policies by evaluating the degree of business cycle synchronisation among the EMU member states with respect to the Eurozone aggregate. Business cycles for each country, defined by turning points, are extracted from multivariate coincident macroeconomic variables by using both classical and modern business cycle dating procedures, including the Bry-Boschan Quarterly (BBQ) algorithm, the multivariate dynamic-factor model and the multivariate dynamic-factor Markov-switching (DFMS) model. The degree of cycle synchronisation between the EMU members and the Eurozone aggregate is measured using the index of concordance, the mean corrected index of concordance and correlation-coefficients. The inference provided by the pairwise correlation-coefficients of the smoothed recession probabilities in the dynamic-factor Markov-switching model is also used to indicate cycle corrections. Overall, close cycle correlations are found between the Eurozone aggregate and the core EMU countries. A catching-up process of cycle convergence is observed in some of the peripheral countries (Spain and Finland), perhaps as a result of participating in the ERM and the EMU. To date there have been few studies measuring cycle synchronisation using business cycles extracted from multivariate coincident macroeconomic indicators for the EMU countries. This paper contributes to this area. |
| Keywords: | Business Cycle Turning Point, Markov-Switching, Dynamic-factor model |
| JEL: | C14 C22 C32 E32 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2007_27&r=eec |
| By: | Juan A. Lafuente (Universitat Jaume I); Javier Ordoñez (Universitat Jaume I) |
| Abstract: | This paper deals with the time evolution of stock market integration around the introductionof the euro. In particular we test whether the degree of integration between the main eurozonecountries increased after European monetary union. The contribution of the paper to the extantliterature is twofold: a) first, we take into account the potential long-run equilibrium relationshipbetween stock indices allowing for structural changes in the cointegration space that might capturethe effect of the introduction of the euro, and b) we formally test the existence of greater financialintegration after European monetary union across the main member countries and between thesemembers and the UK. Empirical evidence reveal the existence of long-run equilibrium relationshipsbetween European stock markets even before the introduction of the euro. Our empirical findingssuggest that financial integration is not the direct consequence of the removal of exchange rate riskdue to currency unification. Rather, it arises as a result of macroeconomic convergence. This aspectis corroborated by the nature of the principal component structure of estimated conditionalcorrelations. Este trabajo analiza la evolución del grado de integración de los mercados bursátileseuropeos en torno a la introducción del euro. En particular se contrasta si el grado de integraciónentre los principales miembros de la Unión Europea y Monetaria se ha incrementado a partir de laintroducción del euro. La contribución del trabajo es doble: a) por un lado se tiene en cuenta laposible existencia de relaciones de cointegración entre los índices bursátiles, permitiendo laexistencia de cambios estructurales en el espacio de cointegración y b) se proporciona un contrasteformal para la hipótesis nula de mayor grado de integración después de la introducción de la monedacomún. La evidencia empírica revela la existencia de relaciones de equilibrio a largo plazo entre losmercados, incluso antes de la introducción del euro. Los resultados sugieren que la integraciónfinanciera no es el resultado de la adopción de la moneda común sino que es un proceso dinámicoque se ha visto fortalecido por la unificación de la moneda. Este aspecto es corroborado por lanaturaleza de la estructura de componentes principales que se obtiene a partir de la medida deintegración considerada. |
| Keywords: | cointegración, mercados financieros, Unión Europea y Monetaria, integración financiera dinámica cointegration, dynamic financial integration, stock markets, European Monetary Union. |
| JEL: | C32 E44 G15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasec:2007-12&r=eec |
| By: | Marques, Luis B |
| Abstract: | This paper measures the welfare cost to consumers of the bloc of Central and Eastern European Countries (CEEC), plus Malta and Cyprus, of choosing a de- preciated conversion rate when joining the European Monetary Union. For this, I present and solve an appropriately calibrated small open economy model where a euro-denominated bond and the equity on a traded goods sector are traded internationally. I show that the cost of depreciating the domestic currency against the euro by 20%, at the time of joining the European Monetary Union, entails a cost of approximately 1.65% in terms of lost lifetime utility (measured in equivalent units of consumption). |
| Keywords: | trade effect; valuation effect; wealth effect; exchange rate. |
| JEL: | F41 F47 F31 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5723&r=eec |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | Using daily data on inflation-indexed bonds, we find evidence of a negative relationship between ECB communication regarding risks to price stability - measured on the basis of the frequency and strength of the keyword vigilance' - and changes in euro area break-even inflation. However, this result is only found for the second half of 2005. At that time, the start of a tightening of ECB monetary policy was increasingly likely. This suggests that communication should be closely in line with policy actions before it can be effective. Still, we also find that the economic significance of this type of communication has been small. |
| Keywords: | central bank communication; ECB; inflation expectations |
| JEL: | C71 C78 E52 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:148&r=eec |
| By: | Konstantinos Angelopoulos; Apostolis Philippopoulos; Vanghelis Vassilatos |
| Abstract: | We incorporate an uncoordinated redistributive struggle for extra fiscal privileges into an otherwise standard dynamic stochastic general equilibrium model. The main aim is to get model-consistent quantitative evidence of the extent of rent seeking. Our work is motivated by the common belief that interest groups compete with each other for privileged transfers, subsidies and tax treatments at the expense of the general public interest. The model is calibrated to the euro area as a whole, and to individual euro member-countries, over the period 1980-2003. We find that an important proportion of tax revenue is appropriated by rent seekers and that the introduction of rent seeking moves the model in the right direction vis-à-vis the data |
| Keywords: | Fiscal policy, real business cycles, rent seeking. |
| JEL: | E62 E32 O17 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_29&r=eec |
| By: | Alberto Montagnoli; Andros Gregoriou; Alexandros Kontonikas |
| Abstract: | This paper examines the time series properties of inflation differentials in twelve EMU countries. We compute three alternative measures of inflation differentials using deviations from the policy reference value implied by the Maastricht Treaty, the ECB target, and deviations from the EMU average inflation. The evidence from standard linear unit root tests indicate that inflation differentials are highly persistent. However, when we account for endogenously determined structural breaks, we obtain greater support for stationarity. In addition, when we allow for the possibility that inflation differentials can be charterised by a non-linear mean reverting process we find evidence of stationarity. Our empirical results suggest that once we allow for structural breaks or non-linearities, inflation differentials do not consistently intensify real divergence in the euro area |
| Keywords: | EMU, ESTAR models; Inflation; Structural break; Unit root tests |
| JEL: | C22 E31 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2007_13&r=eec |
| By: | Antonio Afonso (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Christophe Rault (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France.) |
| Abstract: | We assess the sustainability of public finances in the EU15 over the period 1970-2006 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within subperiods (1970-1991 and 1992-2006). JEL Classification: C23, E62, H62, H63. |
| Keywords: | Intertemporal budget constraint, fiscal sustainability, EU, panel unit root, panel cointegration. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070820&r=eec |
| By: | Aleksandra Riedl (Department of Economics, Vienna University of Economics & B.A.); Silvia Rocha-Akis (Department of Economics, Vienna University of Economics & B.A.) |
| Abstract: | In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country’s taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries’ tax bases are more responsive to neighbouring countries’ tax policies, which is in contrast to the classic asymmetric tax competition literature. |
| JEL: | H71 H72 H77 H87 C21 C23 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp112&r=eec |
| By: | Paul Levine (University of Surrey); Emanuela Lotti (University of Surrey); Joseph Pearlman (London Metropolitan University); Richard Pierse (University of Surrey) |
| Abstract: | Using a calibrated two-bloc endogenous growth model of the European economy, we assess the growth and welfare impact of East-West European migration of different skill compositions. The East has a lower total factor productivity and a lower endowment of skilled labour. Migration can induce two growth-enhancing effects: an efficiency effect from the more e±cient use of labour in the West and a sectoral reallocation effect from a fall in the Western skilled-unskilled wage rates. Despite growth gains there are both winners (migrants, the representative Western non-migrant household) and losers (the representative Eastern household remaining). Remittances can see the latter group joining the winners. |
| Keywords: | migration, endogenous growth, welfare, immigration surplus, emigration |
| JEL: | F22 F43 O41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1507&r=eec |
| By: | Jean-Claude Barbier (Centre d'Economie de la Sorbonne) |
| Abstract: | The French system of social protection, contrary to many simplistic accounts, has undergone quite a great number of reforms in the past 30 years. This were very differentiated across sectors but also appear as linked to the business cycle. The French system, in its present developments does not manifest a too simplistic "path-dependency", because of its hybrid character : it is not easy to insert it into the traditional tripartition of welfare regimes, and, precisely because of this hybrid nature, the current developments can be explained in terms of the "imprint" of past history, which has perhaps always been hybrid. This text is a follow-up to the book written with Bruno Théret, Le nouveau système français de protection sociale (Editions La Découverte). |
| Keywords: | France, social protection, welfare state. |
| JEL: | I38 H55 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:r07048&r=eec |
| By: | Celeste Amorim Varum (Universidade de Aveiro); Carlos Pinho (Universidade de Aveiro) |
| Abstract: | The present paper is conducted under the research project “Enterprise of the Future: Trends and Scenarios towards Competitiveness” which attempts to disclosure determinants of future enterprise competitiveness. Innovation is not only a must today but also an imperative in future competitiveness scenarios. In modern evolutionary economics it is argued that sector-specific factors are one of the key factors explaining innovative behaviour and performance of firms. Several contributions have pointed that industries largely differ in terms of knowledge base and technological sources, opportunities and appropriation of innovative activities, technological trajectories and firms’ strategies. Using as background Pavitt’s taxonomy, this paper explores the nature, extent and sources of variety of innovation in the manufacturing industry, aiming at identifying common patterns across industries, and sectoral patterns across countries. This paper presents evidence based on the aggregated results of the last IV Community Innovation Survey released by EUROSTAT (CIS4), for which data is available for a number of industries and countries. |
| Keywords: | innovation, manufacturing industry, Community Innovation survey CIS |
| JEL: | L6 O3 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:ave:wpaper:482007&r=eec |
| By: | José M. Marín (IE Business School and IMDEA); Thomas A. Rangel (Universitat Pompeu Fabra) |
| Abstract: | We study the use of derivatives in the Spanish mutual fund industry. The picture that emerges from our analysis is rather negative. In general, the use of derivatives does not improve the performance of the funds. In only one out of eight categories we find some (very weak and not robust) evidence of superior performance. In most of the cases users significantly underperform non users. Furthermore, users do not seem to exhibit superior timing or selectivity skills either, but rather the contrary. This bad performance is only partially explained by the larger fees funds using derivatives charge. Moreover, we do not find evidence of derivatives being used for hedging purposes. We do find evidence of derivatives being used for speculation. But users in only one category exhibit skills as speculators. Finally, we find evidence of derivatives being used to manage the funds\' cash inflows and outflows more efficiently. |
| Keywords: | mutual funds; derivative use; risk management |
| JEL: | G11 G2 |
| Date: | 2007–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2007-22&r=eec |
| By: | Janlöv, Nils (Department of Economics, Lund University) |
| Abstract: | This paper investigates the relative efficiency of 21 Swedish county councils through two efficiency models; one focusing on a traditional productivity measure (activity model) in terms of the production of intermediate outputs, and the other on quality outputs in the form of health-related outcomes (outcome model). Efficiency is estimated using Data Envelopment Analysis (DEA) and the two models are used to test whether there are significantly different efficiency estimates among the councils. The efficiency concept used consists of technical efficiency, here measured as cost efficiency, where the relationship between inputs and outputs for each council is compared to a “best practice” consisting of a production frontier. A weak positive correlation is found between the two models, indicating that cost efficiency regarding activities and outcomes may foremost be seen as complements in the production process. In a second stage, the efficiency scores in both models are used as dependent variables in multiple regressions with several independent structural factors that may be used to explain differences in efficiency. The paper finds that councils which are net receivers in the equalization grant system have lower efficiency scores in both models. |
| Keywords: | Productive efficiency; quality indicators; data envelopment analysis; Tobit regression; Sweden |
| JEL: | C14 I11 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2007_017&r=eec |