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on European Economics |
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Issue of 2008‒03‒01
eighteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Crowley, Patrick (College of Business, Texas A&M University) |
| Abstract: | Optimal currency area theory suggests that business cycle co-movement is a sufficient condition for monetary union, particularly if there are low levels of labour mobility between potential members of the monetary union. Previous studies of co-movement of business cycle variables found that there was a core of member states in the EU that could be grouped together as having similar business cycle co-movements, but these studies have always used Germany as the country against which to compare. This study updates and extends corresponding previous analyses. More specifically, it correlates the countries against both German and euro area macroeconomic aggregates and uses more recent techniques in cluster analysis, namely model-based clustering. |
| Keywords: | business cycles; co-movement; optimal currency areas; model-based cluster analysis |
| JEL: | F15 F31 |
| Date: | 2008–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_003&r=eec |
| By: | Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg) |
| Abstract: | Since the preparation of the Single Market program in the 80s, financial integration in Europe has been expected to provide gains in growth by favoring competition and efficiency on financial markets. Our paper aims to check whether financial integration has taken place on the banking markets, by investigating the convergence in banking efficiency for European Union countries. We measure cost efficiency of banks from 10 EU countries between 1994 and 2005 with the stochastic frontier approach. Our work then constitutes the first one to apply tests of β and σ convergence specified for panel data on banking efficiency measures. We provide evidence of cross-country differences in cost efficiency and of an improvement in cost efficiency for all EU countries. Tests of convergence support the view of a process in convergence in cost efficiency between EU countries. Robustness checks with alternative specifications confirm these findings. These results support the view that financial integration has taken place on the EU banking markets in the recent years. |
| Keywords: | Banking, convergence, efficiency, European integration, stochastic frontier approach. |
| JEL: | G21 D21 F36 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2008-07&r=eec |
| By: | François Haas |
| Abstract: | The Markets in Financial Instruments Directive (MiFID) which comes to life on November 1, 2007, represents a major step toward the creation of a single, more competitive, cross-border securities market in Europe. Together with other components of the European Commission's Financial Services Action Plan, MiFID has the potential to significantly transform the provision of financial services and the functioning of capital markets in Europe. This paper assesses the directive and the dynamics it creates from a broad perspective, focusing on those aspects that carry relatively higher transformation potential, and on the appropriate supervisory arrangements for European securities markets once MiFID is operational. |
| Keywords: | Working Paper , Financial integration , European Union , Liquidity , Securities regulations , Stock markets , Capital markets , |
| Date: | 2007–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/250&r=eec |
| By: | Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Antonello D’Agostino (Central Bank and Financial Services Authority of Ireland, Economic Analysis and Research Department, PO Box 559, Dame Street, Dublin 2, Ireland.) |
| Abstract: | This paper evaluates how well sectoral stock prices forecast future economic activity compared to traditional predictors such as the term spread, dividend yield, exchange rates and money growth. The study is applied to euro area financial asset prices and real economic growth, covering the period 1973 to 2006. The paper finds that the term spread is the best predictor of future growth in the period leading up to the introduction of Monetary Union. After 1999, however, sectoral stock prices in general provide more accurate forecasts than traditional asset price measures across all forecast horizons. JEL Classification: C52, C53. |
| Keywords: | Forecasting Models, Asset Prices. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080876&r=eec |
| By: | Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper assesses the performance of monetary indicators as well as of a large range of economic and financial indicators in predicting euro area HICP inflation out-of-sample over the period first quarter 1999 till third quarter 2006 considering standard bivariate forecasting models, factor models, simple combination forecasts as well as trivariate two-pillar Phillips Curve forecasting models using both ex-post revised and real-time data. The results suggest that the predictive ability of money-based forecasts relative to a simple random walk benchmark model was high at medium-term forecasting horizons in the early years of EMU, but has substantially deteriorated recently. A significantly improved forecasting performance vis-à-vis the random walk can, however, be achieved based on the ECB’s internal M3 series corrected for the effects of portfolio shifts and by combining monetary and economic indicators. JEL Classification: E31, E40, C32. |
| Keywords: | Euro area, inflation, leading indicators, money. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080867&r=eec |
| By: | María J. Nieto (Banco de España); Garry J. Schinasi (International Monetary Fund) |
| Abstract: | European finance is becoming increasingly cross-border, while the European architecture for safeguarding financial stability —including decision-making processes for providing financial-stability public goods— have remained decentralized with some explicit mechanisms for coordination across countries. Policy makers are aware of the limitations of the existing institutional setting, but opinions on how to proceed, including on burden sharing, are lining up along national and regional political lines with less attention paid to European needs. This paper applies the ‘economics of alliances’ to examine these European policy challenges. The paper establishes benchmarks for assessing the ability of Europe’s existing institutional architecture to efficiently allocate resources to safeguard the EU financial system against systemic threats to stability, such as the insolvency of a pan European bank. |
| Keywords: | Safeguarding EU financial stability, crisis resolution, burden sharing |
| JEL: | C7 F3 G15 G20 G38 H41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:0801&r=eec |
| By: | Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The theory of liquidity management under uncertainty predicts that, under certain conditions, commercial banks will accumulate minimum reserve requirements linearly over the reserve maintenance period. This prediction is empirically tested using daily data (from March 2004 until February 2007) on the current accounts and minimum reserve requirements of a panel of 79 commercial banks from the euro area. The linear accumulation hypothesis is not rejected by the data with the exception of small banks which build-up excess reserves. The empirical analysis suggest that idio-syncratic liquidity uncertainty is much higher than aggregate liquidity uncertainty. Nevertheless, on the penultimate day in the reserve maintenance period, the inverse demand schedule of the representative bank is relatively flat around the middle of the interest rate corridor set by the standing facilities. This suggests that liquidity effects on the overnight inter-bank rate should be very muted on this day. Our calibration exercise suggests that the probability of an individual bank's daily overdraft in the euro area is very low (less than 1.0%). This is confirmed by the analysis of the daily recourses to the marginal lending facility by the panel banks. JEL Classification: C23, E4, E5, G2. |
| Keywords: | Monetary policy implementation, Reserve requirements, Rate corridor, Liquidity management, Panel data. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080869&r=eec |
| By: | Baybars Karacaovali (Fordham University, Department of Economics); Nuno Limao (University of Maryland, Department of Economics; NBER; CEPR) |
| Abstract: | Preferential trade agreements (PTAs) are characterized by liberalization with respect to only a few partners and thus they can potentially clash with, and retard multilateral trade liberalization (MTL). Yet there is almost no systematic evidence on whether the numerous existing PTAs actually affect MTL. We provide a model showing that PTAs hinder MTL unless they entail accession to a customs union with internal transfers. Using product-level tariffs negotiated by the European Union (EU) in the last two multilateral trade rounds we find that several of its PTAs have clashed with its MTL. However, this effect is absent for EU accessions. Moreover, we provide new evidence on the political economy determinants of trade policy in the EU. |
| Keywords: | Preferential trade agreements, customs unions, multilateral trade negotiations, MNF tariff concessions, reciprocity |
| JEL: | D78 F13 F14 F15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-02&r=eec |
| By: | Johan Eyckmans and Cathrine Hagem (Statistics Norway) |
| Abstract: | The literature suggests that Russia and Ukraine may become large sellers of greenhouse gas emissions permits under the Kyoto Protocol and might exploit their market power to maximize trading profits. The EU countries taken together will probably be net buyers of permits. For any given global target for emission, participation by developing countries with low-cost abatement options would benefit the net buyers of permits because the market price for carbon permits would go down. We explore how the EU could benefit from a broader participation through specific bilateral agreements with developing countries in the post-Kyoto period. The bilateral agreement involves a minimum permit sales requirement which is compensated by a financial transfer from EU to the developing country. Such bilateral agreement enables the EU to act strategically in the permit market on behalf of its member states, although firms in each member state are assumed to be price takers in the permit market. In a numerical simulation we show that an appropriately designed bilateral agreement between the EU and China can cut EU’s total compliance cost by one third. |
| Keywords: | emissions permits; post-Kyoto climate agreement; strategic permit trading |
| JEL: | D43 Q54 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:530&r=eec |
| By: | Alena Bicakova; Eva M. Sierminska |
| Abstract: | This paper uses the newly constructed Luxembourg Wealth Study data to document cross-country variation in homeownership rates and the homeownership-income inequality among young households in Finland, Germany, Italy, the UK and the US, and relate it to cross-country differences in mortgage market maturity. We find that aside from Italy, homeownership rates and inequality in the four countries correspond to their mortgage take up rates and its distribution across income, reflecting the different degree of development of their respective mortgage markets. In Italy, alternative ways of financing, such as family transfers, substitute the limited mortgage availability and explains the second highest homeownership rate in our sample, despite the lowest mortgage take up. The mortgage market in the UK is the most open and the most equal, which leads to the highest and most equally distributed homeownership in this country as well. The mortgage market in Germany is on the other side of the spectrum with very low mortgage take-up rates and strong dependence of homeownership and mortgage take up on household income. Finland and the US are in-between. Counterfactual predictions suggest that although household characteristics play some role in explaining the variation in home ownership rates across the five countries, it is mostly the country specific effects of these characteristics determined by the institutional environment as well as the functioning of the housing and mortgage markets that drive the main result. |
| Keywords: | Homeownership, credit constraints, mortgage market |
| JEL: | D14 D31 G21 R21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp90&r=eec |
| By: | Franziska Ohnsorge; Nada Choueiri; Rachel van Elkan |
| Abstract: | This paper explores inflation determinants within the EU and implications for new members' euro adoption plans. Factor analysis partitions observed inflation in EU25 countries into common-origin and country-specific (idiosyncratic) components. Cross-country differences in common-origin inflation within the EU are found to depend on gaps in the initial price level, changes in the nominal effective exchange rate, the quality of institutions, and the economy's flexibility. Idiosyncratic inflation is generally small in magnitude. Nonetheless, the results show that country-specific shocks have systematically pushed down headline inflation, potentially influencing the assessment of compliance with the Maastricht inflation criterion. |
| Keywords: | Inflation , Euro Area , Globalization , Trade , |
| Date: | 2008–01–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/21&r=eec |
| By: | Andrea M. Maechler; Bas Berend Bakker; Christoph Duenwald; Piritta Sorsa; Andrew Tiffin |
| Abstract: | While large inflows of capital into Southeastern Europe (SEE) have raised incomes, this has increased vulnerability to financial risks, which, if realized, can lead to costly adjustments. Traditional vulnerability indicators in SEE have reached levels that in other countries have not been sustainable, and sectoral analysis shows rising imbalances and raises questions about efficient use of the inflows. While factors related to EU integration mitigate these vulnerabilities, weaker institutions reduce these benefits in SEE compared to more advanced European emerging markets. To insure against setbacks to income convergence, SEE policymakers should take measures to reverse the buildup of vulnerabilities. |
| Keywords: | Working Paper , Economic indicators , Europe , Capital inflows , Emerging markets , Adjustment process , Crisis prevention , |
| Date: | 2007–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/236&r=eec |
| By: | Andrea M. Maechler; Srobona Mitra; DeLisle Worrell |
| Abstract: | This paper assesses how various types of financial risk such as credit risk, market risk, and liquidity risk affect banking stability in the ten countries that joined the European Union most recently, and eight neighboring countries. It also examines how the quality of supervisory standards may have mitigated the vulnerabilities arising from these risk factors. Using panel data, the study finds substantial variation in the impacts of financial risks, the macroeconomic environment, and supervisory standards on banks' risk profile across different country clusters. Credit quality is of general concern especially in circumstances where credit growth is accelerating. |
| Keywords: | Working Paper , Financial risk , Europe , Bank soundness , Bank supervision , Economic models , |
| Date: | 2007–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/248&r=eec |
| By: | Klaus F. Zimmermann (IZA, DIW Berlin, Bonn University); Martin Kahanec (IZA); Amelie Constant (IZA, DIW DC, Georgetown University); Don DeVoretz (IZA, Simon Fraser University); Liliya Gataullina (IZA, DIW Berlin); Anzelika Zaiceva (IZA, University of Bologna) |
| Abstract: | Report for the High Level Advisory Group on Social and Labour Market Integration of Ethnic Minorities and the European Commission |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izarrs:16&r=eec |
| By: | Karolina Ekholm; Katarina Hakkala |
| Abstract: | The Nordic countries are characterized by relatively compressed wage structures, implying that the incentives to offshore activities intensive in low-skilled labour might be particularly strong in these countries. In this paper, we document the recent changes in measures of offshoring and find that there has been an overall increase since the mid 1990s but that the experience varies considerably across sectors. We also document the recent trends in wage-bill shares of workers with different levels of educational attainment. As in most industrialized countries, there has been an overall increase in the wage-bill share of highly educated workers, a development that is relatively uniform across sectors. In an econometric analysis we estimate the relationship between offshoring of intermediate input production and labour demand in Sweden, Finland and Norway, distinguishing between workers with different educational attainments. We only find weak relationships. In this sense, the results suggest that the gains from an increased specialisation due to fragmentation of production and the emergence of production networks involving low-wage countries are reaped without any large adverse effects on income distribution. For Sweden, we find that offshoring to low-income countries is associated with a shift in demand towards workers with a relatively high level of education. For Finland, however, it is rather offshoring to high-income countries that is associated with such a shift. Moreover, in the Swedish case the shift is away from workers with upper secondary education whereas in the Finnish case it is away from workers with lower secondary education. |
| Keywords: | manufacturing, outsourcing |
| Date: | 2008–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:oec:traaab:61-en&r=eec |
| By: | Oscar Bajo-Rubio (Universidad de Castilla-La Mancha and Instituto de Estudios Fiscales); Carmen Díaz-Mora (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha) |
| Abstract: | The massive increase in foreign direct investment (FDI) inflows following the Spanish integration with the now European Union (EU) in 1986, has been one of the most important features shaping the behaviour of the Spanish economy in the last twenty years. In this paper we will try to assess the impact of FDI on regional economic growth following Spain’s entry into the EU, using data for the 17 Spanish regions. The results support the important role played by FDI in promoting productivity growth, for those regions that received higher FDI inflows over the period analyzed. |
| Keywords: | Economic growth, Foreign direct investment, Regions |
| JEL: | F21 O40 R58 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:0708&r=eec |
| By: | Günter Franke (University of Konstanz); Julia Hein (University of Konstanz) |
| Abstract: | A recent trend in the German Asset Backed Securities (ABS) market is the securitisation of subordinated loans and profit participation agreements (PPAs) granted to medium-sized enterprises (MEs). This paper provides an overview of this growing market and analyses the benefits of such transactions for the portfolio companies as well as originators and potential investors. Simulations of ten recent transactions indicate that despite of relatively low interest rates charged on obligors, originators and investors can earn attractive returns at fairly low risk. In particular, the junior tranches of these securitisations exhibit quite attractive risk-return profiles. |
| Keywords: | securitisation, middle market transactions, mezzanine loans, medium-sized enterprises, junior tranche |
| JEL: | G10 G21 G24 |
| Date: | 2007–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:knz:cofedp:0709&r=eec |
| By: | Daniel Leigh; Etibar Jafarov |
| Abstract: | This paper considers long-term fiscal policy options in Norway, the world's fifth largest oil exporter, in light of the substantial expected increase in pension outlays. It compares the current fiscal rule, which targets a (central government structural) non-oil deficit equal to 4 percent of Government Pension Fund assets, with three alternatives that save a larger share of oil revenue and accumulate more assets to pay for aging costs. It also analyzes the macroeconomic consequences of accumulating more assets, finding that the additional income generated from more assets allows lower tax rates, with positive effects on long-term output. |
| Keywords: | Working Paper , Fiscal policy , Norway , Oil revenues , Pensions , |
| Date: | 2007–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/241&r=eec |