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on European Economics |
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Issue of 2008‒04‒12
seventeen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Favero, Carlo A; Giavazzi, Francesco |
| Abstract: | The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are thus more important in EMU than country-specific shocks used to be in the previous states, e.g. in Germany. It is thus not surprising that the models built by the staff of the European Central Bank (ECB) to study optimal monetary policy in the Euro area (for instance Smets and Wouters, 2004a, 2004b) typically assume that this works essentially as a closed economy, hit by domestic shocks - the same assumption made in standard models of U.S. monetary policy (see e.g. Christiano et al., 1999 ), where all shocks are domestic with the only possible exception of energy price shocks. Two-country models exist at the ECB (e.g. de Walque, Smets, Wouters, 2005) but they overlook asset price fluctuations and their international comovements. This paper studies monetary policy in the Euro area looking at the variable most directly related to current and expected monetary policy, the yield on long term government bonds. We explore how the behaviour of European long-term rates has been affected by EMU and whether the response of long-term rates to monetary policy has got any closer to that consistent with a closed economy. We find that the level of long-term rates in Europe is almost entirely explained by U.S. shocks and by the systematic response of U.S. and European variables (inflation, short term rates and the output gap) to these shocks. Our results suggest in particular that U.S. variables are more important than local variables in the policy rule followed by European monetary authorities: this was true for the Bundesbank before EMU and has remained true for the ECB, at least so far. Using closed economy models to analyze monetary policy in the Euro is thus inconsistent with the empirical evidence on the determinants of Euro area long-term rates. It is also inconsistent with the way the Governing Council of the ECB appears to make actual policy decisions. We also find that Euro area long rates respond more to financial shocks, in particular shocks to term premia, than they do to monetary policy "shocks" - i.e. instances when the ECB deviates from its rule. This finding point to the importance of incorporating into the analysis of Euro area monetary policy of the effects of fluctuations in international asset prices. |
| Keywords: | DSGE models; ECB; monetary policy; yield curve |
| JEL: | E43 E52 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6654&r=eec |
| By: | Dew-Becker, Ian; Gordon, Robert J |
| Abstract: | Throughout the post-war era until 1995 labour productivity grew faster in Europe than in the United States. Since 1995, productivity growth in the EU-15 has slowed while that in the United States has accelerated. But Europe’s productivity growth slowdown was largely offset by faster growth in employment per capita, leaving little difference in growth of output per capita between the EU and US going back to 1980. This paper is about the strong negative trade-off between productivity and employment growth within Europe. We document this trade-off in the raw data, in regressions that control for the two-way causation between productivity and employment growth, and we show that there is a robust negative correlation between productivity and employment growth across countries and time. Our primary explanatory variables to explain both the revival of EU employment growth and the slowdown in productivity growth include six policy and institutional variables. We find that several of these variables have significant negative effects on employment per capita, with policy changes that raised labour costs reducing employment both before and after 1995. These variables, together with employment per capita, are then used to explain productivity growth, using several alternative treatments with instrumental variables. We also find a significant time effect, and we link this to an increase in labour force participation by women, particularly in southern European countries. We find that the negative effect of changes in employment per capita on changes in productivity is robust to alternative instruments and to the inclusion or exclusion of particular countries like the US or Spain. We conclude by suggesting that evaluations of alternative policy reforms in Europe should take into account any offsetting effects on employment and productivity by examining the ultimate impact on changes in income per capita. |
| Keywords: | Effects of tax wedge on employment; Employment protection legislation; European employment growth; European productivity growth; labour force participation of women; Product market regulation |
| JEL: | D24 E20 E23 J20 J30 N34 O47 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6722&r=eec |
| By: | Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:103&r=eec |
| By: | Eichengreen, Barry |
| Abstract: | The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU. |
| Keywords: | European Monetary Union |
| JEL: | F15 N14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6642&r=eec |
| By: | Petrongolo, Barbara; Pissarides, Christopher |
| Abstract: | In this paper we study the contribution of inflows and outflows to the dynamics of unemployment in three European countries, the United Kingdom, France and Spain. We compare performance in these three countries making use of both administrative and labour force survey data. We find that the impact of the 1980s reforms in Britain is evident in the contributions of the inflow and outflow rates. The inflow rate became a bigger contributor after the mid 1980s, although its significance subsided again in the late 1990s and 2000s. In France the dynamics of employment are driven virtually entirely by the outflow rate, which is consistent with a regime with strict employment protection legislation. In Spain, however, both rates contribute significantly to the dynamics, very likely as a consequence of the prominence of fixed-term contracts since the late 1980s. |
| Keywords: | Job finding rates; Job separation rates; Unemployment dynamics |
| JEL: | E24 E32 J6 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6681&r=eec |
| By: | Berglöf, Erik; Burkart, Mike; Friebel, Guido; Paltseva, Elena |
| Abstract: | This short paper analyses the tension between "widening" and "deepening" of organizations such as the European Union. Members have the same consumption benefit of reform but weak and strong members differ in their cost of exerting reform efforts. As decisions are taken by unanimity, the reform level is determined by the weakest member. However, strong members can coerce weak members to exert more effort by threatening to form a "club-in-the-club". Widening (bringing in additional members into the Union) can have different effects on deepening (more reform effort). When a new member is stronger than the weakest incumbent member, deepening and widening are complements, that is, the Union-wide reform efforts increase. When a new member is weaker, deepening and widening can be substitutes, and the reform efforts in the Union may fall. Our analysis helps to understand the history of the EU treaties, in particular the differences between enlargement waves such as the Northern vs. the Eastern Enlargement. It also rationalizes the general move from unanimity voting to different types of majority. |
| Keywords: | Club-in-the-club; Reform; Resistance to change; Unanimity |
| JEL: | D71 D72 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6672&r=eec |
| By: | Arjan Lejour; Gerard Verweij |
| Abstract: | This paper presents two scenarios for the future of manufacturing in Europe with varying trends in globalisation, technological progress and energy efficiency. From these scenarios, we conclude that the trend towards a services economy is likely to continue with employment shifting away from manufacturing towards services. However, manufacturing production still grows and is important for trade in Europe. The sectors which are already the most open ones for international trade are also the ones mostly affected by this trend. These include chemicals, rubber and plastics, the combined machinery and equipment sectors, textiles and wearing apparel, and wood and other manufacturing. R&D policies and internal market policies in Europe can have strong positive impact on manufacturing. These policies do not alter the trend that Europe’s share in global production and trade will continue to decline, but they do mitigate the overall decline, in particular in the chemicals, rubber and plastics, and combined machinery and equipment sectors. |
| Keywords: | Scenarios; Manufacturing; Industrial policy; Europe |
| JEL: | L60 C68 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:docmnt:160&r=eec |
| By: | Angelini, Elena; Camba-Mendez, Gonzalo; Giannone, Domenico; Reichlin, Lucrezia; Rünstler, Gerhard |
| Abstract: | This paper evaluates models that exploit timely monthly releases to compute early estimates of current quarter GDP (now-casting) in the euro area. We compare traditional methods used at institutions with a new method proposed by Giannone, Reichlin and Small, 2005. The method consists in bridging quarterly GDP with monthly data via a regression on factors extracted from a large panel of monthly series with different publication lags. We show that bridging via factors produces more accurate estimates than traditional bridge equations. We also show that survey data and other `soft' information are valuable for now-casting. |
| Keywords: | Factor Model; Forecasting; Large data-sets; Monetary Policy; News; Real Time Data |
| JEL: | C33 C53 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6746&r=eec |
| By: | Beetsma, Roel; Giuliodori, Massimo |
| Abstract: | We explore how fiscal policies in the OECD have responded to unexpected information about the economy during the period 1995-2006. In particular, we first estimate standard fiscal rules using ex-ante data (i.e. forecasts). We then estimate how fiscal policy reacts to new information, especially on the business cycle. In this second step, we use various approaches in dealing with potential endogeneity and changes in data construction methodology after the ex ante data were released. All variants lead to similar results. There are marked differences between ex-ante behaviour and responses to new information, as well as between fiscal policy of the EU countries and the other OECD countries. In particular, the EU countries react in a pro-cyclical way to unexpected changes in the output gap, while the responses of the other OECD countries are a-cyclical. However, ex ante fiscal policy is a-cyclical for the EU countries and counter-cyclical for the other countries. |
| Keywords: | cyclicality; EU; first-release data; Fiscal policy; OECD; real-time data |
| JEL: | E62 H60 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6692&r=eec |
| By: | Campa, Jose M. (IESE Business School); Gonzalez, Jose M. (Banco de España); Sebastia, Maria (Bank of England) |
| Abstract: | This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments); b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities. |
| Keywords: | exchange rate adjustment; monetary union; |
| JEL: | F31 F36 F42 |
| Date: | 2008–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0734&r=eec |
| By: | Joanna Wolszczak-Derlacz |
| Abstract: | This article examines the price dispersion in the European Union in the last fifteen years (1990-2005). The analysis of price convergence is examined on aggregate and disaggregate levels. The macro approach is based on Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes actual prices of 148 individual products sold in the 15 capital cities of the EU. The calculations comprise of sigma and beta convergence adopted from the real growth literature. The different results of the speed of convergence are obtained according to the different econometric methods. Moreover the gravity model is tested to measure the contribution of different factors in explaining the observed convergence pattern. |
| Keywords: | price convergence, international price dispersion, law of one price, |
| JEL: | E31 F36 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0614&r=eec |
| By: | Hans-Helmut Kotz; Reinhard H. Schmidt |
| Abstract: | The introduction of a common currency as well as the harmonization of rules and regulations in Europe has significantly reduced distance in all its guises. With shrunken costs of overcoming space, this emphasizes centripetal forces and it should foster consolidation of financial activity. In a national context, as a rule, comparable developments have led to the emergence of one financial center. Hence, Europeanization of financial and monetary affairs could foretell the relegation of some European financial hubs such as Frankfurt and Paris to third-rank status. Frankfurt’s financial history is interesting insofar as it has lost (in the 1870s) and regained (mainly in the 1980s) its preeminent place in the German context. However, because Europe is still characterized by local pockets of information-sensitive assets as well as a demand for variety, the national analogy probably does not hold. There is room in Europe for a number of financial hubs of an international dimension, including Frankfurt. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:185&r=eec |
| By: | Bauwens, Luc; Mion, Giordano; Thisse, Jacques-François |
| Abstract: | Using a data set of highly cited researchers in all fields of science, we show that the gap in scientific performance between Europe, especially continental Europe, and the USA is large. We model the number of highly cited researchers in a sample of countries as a function of physical and human capital and a country-specific, factor-augmenting Hicks-neutral productivity term. We find that differences in productivity between Anglo-Saxon countries and other countries are not solely due to differences in the levels of inputs. Not surprisingly, our results reveal the importance of English proficiency. However, they also show that the governance and design of research institutions that characterize Anglo-Saxon countries, as well as a few other countries that have similar institutions, is another critical factor for research output. |
| Keywords: | citations; knowledge economics; research performance; university governance |
| JEL: | C25 I23 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6625&r=eec |
| By: | Ian Babetskii; Lubos Komarek; Zlatuse Komarkova |
| Abstract: | The paper considers the empirical dimension of financial integration among stock markets in four new European Union member states (the Czech Republic, Hungary, Poland and Slovakia) in comparison with the euro area. The main objective is to test for the existence and determine the degree of the four states’ financial integration relative to the euro currency union. The analysis is performed at the country level (using national stock exchange indices) and at the sectoral level (considering banking, chemical, electricity and telecommunication indices). Our empirical evaluation consists of (1) an analysis of alignment (by means of standard and rolling correlation analysis) to outline the overall pattern of integration; (2) the application of the concept of beta convergence (through the use of time series, panel and state-space techniques) to identify the speed of integration; and (3) the application of so-called sigma convergence to measure the degree of integration. We find evidence of stock market integration on both the national and sectoral levels between the Czech Republic, Hungary, Poland and the euro area. |
| Keywords: | Beta convergence, new EU member states, sigma convergence, stock markets. |
| JEL: | C23 G15 G12 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/7&r=eec |
| By: | Giavazzi, Francesco; McMahon, Michael |
| Abstract: | In 1997 Chancellor Kohl proposed a major pension reform and pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law---one that is crucial for our identification strategy---is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labour market choices: we find evidence of a labour supply response by those workers who can use the margin offered by part-time employment. |
| Keywords: | labour supply; policy uncertainty; precautionary saving |
| JEL: | E21 E61 J22 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6766&r=eec |
| By: | Nicole Bosch; Anja Deelen; Rob Euwals |
| Abstract: | To balance work and family responsibilities, the Netherlands have chosen a rather unique model that combines a high female employment rate with a high part-time employment rate. The model is likely to be the result of (societal) preferences as the removal of institutional barriers, like lower marginal tax rates for partners and better childcare facilities, has not led to more working hours. It is, however, an open question whether the model is here to stay or whether younger generations of women will choose full-time jobs in the near future. In this study, we investigate the development of working hours over successive generations of women using the Dutch Labour Force Survey 1992-2005. We find evidence of an increasing propensity to work part-time over the successive generations, and a decreasing propensity to work full-time for the generations born after the early 1950s. Our results are in line with results of studies on social norms and attitudes as they find a similar pattern over the successive generations. It therefore seems likely that without changes in (societal) preferences the part-time employment model is indeed here to stay for some more time. |
| Keywords: | female labour supply; working hours |
| JEL: | J16 J22 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:100&r=eec |
| By: | Henning Lohmann |
| Abstract: | This paper regards the incidence of in-work poverty and how it is reduced by the payment of social transfers in 20 European countries. It combines a micro- and a macro-level perspective in two-level models. The basis for the analysis is micro-data from the EU Statistics on Income and Living Conditions (EU-SILC) 2005 and macro-data from sources such as the OECD and Eurostat. The broad comparative perspective allows for a separation of different institutional influences, namely the influence of the degree of decommodification, defamilisation and bargaining centralisation. In contrast to previous studies on the working poor which have mainly described country differences in in-work poverty, this paper focuses on the question of how such differences can be ex-plained from a broader perspective of poverty research. In general, the results confirm the overall hypothesis that both welfare state measures and labour market institutions have an influence on in-work poverty. By analysing influences on pre-transfer poverty and poverty reduction separately, I show that such factors have varied effects on in-work poverty. While bargaining centralisation proves to be relevant for the distribution of pre-transfer incomes only, the set-up of the social security system in particular im-pacts the extent of poverty reduction. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp776&r=eec |