nep-eec New Economics Papers
on European Economics
Issue of 2009‒06‒03
twenty-one papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Current Account Imbalances and Structural Adjustment in the Euro Area : How to Rebalance Competitiveness By Holger Zemanek; Ansgar Belke; Gunther Schnabl
  2. Do institutional changes affect business cycles? Evidence from Europe By Fabio Canova; Matteo Ciccarelli; Eva Ortega
  3. The EU ETS: CO2 prices drivers during the learning experience (2005-2007) By Emilie Alberola; Julien Chevallier; Benoît Chèze
  4. Realized portfolio selection in the euro area By Claudio Morana
  5. Tax Co-ordination in Europe: Assessing the First Years of the EU-Savings Taxation Directive By Thomas Hemmelgarn; Gaëtan Nicodème
  6. Have Agriculture Green House Gas Emissions Converged among European Union Member States? By Fernando Brito Soares
  7. On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting By Julien CHEVALLIER; Benoît SEVI
  8. Low Pay Persistence in European Countries By Clark, Ken; Kanellopoulos, Nikolaos C.
  9. The Effects of Monetary Policy on Unemployment Dynamics Under Model Uncertainty. Evidence from the US and the Euro Area By Carlo Altavilla; Matteo Ciccarelli
  10. Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission By Silvio Colarossi; Andrea Zaghini
  11. Optimal Wind Power Deployment in Europe - a Portfolio Approach By Fabien Roques; Céline Hiroux; Marcelo Saguan
  12. Composite indicators for monetary analysis By Andrea Nobili
  13. Interest Rate Convergence in the Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields By Gabrisch, Hurbert; Orlowski, Lucjan
  14. A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries By Hubert Gabrisch; Lucjan T. Orlowski
  15. Cyclical dimensions of labour mobility after EU enlargement By Alan Ahearne; Herbert Brücker; Zsolt Darvas; Jakob von Weizsäcker
  16. Hospital productivity and the Norwegian ownership reform – A Nordic comparative study By Kittelsen, Sverre A.C.; Magnussen, Jon; Sarheim Anthun, Kjartan; Häkkinen, Unto; Linna, Miika; Medin, Emma; Olsen, Kim Rose; Rehnberg, Clas
  17. Health inequality in Nordic welfare states - more inequality or the wrong measures? By Brekke, Kjell Arne; Kverndokk, Snorre
  18. Early Retirement and Inequality in Britain and Germany : How Important Is Health? By Jennifer Roberts; Nigel Rice; Andrew M. Jones
  19. Migrants at School: Educational Inequality and Social Interaction in the UK and Germany By Entorf, Horst; Tatsi, Eirini
  20. Convergence between the Romanian and the EU RD/I Systems By Sandu, Steliana; Paun, Cristian
  21. The Swiss Housing Market By Steven C. BOURASSA; Martin HOESLI; Donato SCOGNAMIGLIO

  1. By: Holger Zemanek; Ansgar Belke; Gunther Schnabl
    Abstract: Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.
    Keywords: Structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term
    JEL: E24 F15 F16 F32 F33
    Date: 2009
  2. By: Fabio Canova; Matteo Ciccarelli; Eva Ortega
    Abstract: We study the effects that the Maastricht treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from ten European countries - seven from the Euro area and three outside of it. There are slow changes in the features of business cycles and in the transmission of shocks. Time variations appear to be unrelated to the three events of interest and instead linked to a process of European convergence and synchronization.
    Keywords: Business cycles, EuropeanMonetary Union, Panel VAR, Structural changes
    JEL: C15 C33 E32 E42
    Date: 2009–03
  3. By: Emilie Alberola (Mission Climat Caisse des Dépôts - Université Panthéon-Sorbonne - Paris I); Julien Chevallier (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Benoît Chèze (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)
    Abstract: This chapter identifies the main price drivers of European Union Allowances (EUAs), valid for compliance under the European Union Emissions Trading Scheme (EU ETS) created in 2005 to regulate CO2 emissions of more than 10,000 high carbon-intensive installations across Member States. Based on key design features of the EU ETS, this chapter develops carbon pricing strategies based on allowances supply and demand, institutional decisions, and the influence of other energy markets and weather conditions. Finally, we discuss the likely effects on economic growth on CO2 emissions and carbon prices as a by product. The discussions developed in this chapter focus on Phase I (2005-2007) of the EU ETS, which may described as the “pilot” period for the future development of this environmental market scheme.
    Keywords: EU ETS; Cap-and-Trade Program; Climate Change Policy; CO2 Price; Energy Markets; Weather Influences; Institutional Influences; Energy Policy
    Date: 2009–05–30
  4. By: Claudio Morana
    Abstract: A new approach to mean-variance efficient portfolio selection is introduced. The method is based on realized regression theory and the regression based portfolio selection approach of Britten-Jones (1999), yielding a conditional version of the Britten-Jones (1999) method. Application to euro area stock markets diversi?cation, differently from other standard approaches, actually yields a balanced and stable allocation of wealth, free from the problem of corner solutions, suggesting that diversi?cation among euro area stock markets is still be feasible and desirable. Evidence that the monetary union may have had a much less important impact on the integration of euro area equity markets, as well as that the latter is still in progress, is provided.
    Keywords: asset allocation, portfolio choice, stock market integration, international diversi?cation, euro area, realized regression.
    JEL: C13 C22 F30 G11
    Date: 2008–06
  5. By: Thomas Hemmelgarn (European Commission.); Gaëtan Nicodème (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, ECARES, Université Libre de Bruxelles, Brussels, European Commission and CESifo.)
    Abstract: This paper reviews the economic effects of the EU Savings Taxation Directive. The Directive aims at enabling taxation of foreign interest payments received by individuals in accordance with the rules of their State of residence. The data suggest that the Directive, which is based on automatic information exchange, has not led to major shifts in international savings. However, this result has to be interpreted with caution since the available data is scarce and not always conclusive.
    Keywords: Savings Taxation, Withholding Tax, Information Exchange, European Union
    JEL: F21 F33 G12 G28 H24 H26 H87 K34 O16
    Date: 2009–06
  6. By: Fernando Brito Soares
    Abstract: Panel unit root tests are used to identify convergence of Green House Gas (GHG) emissions among the agr icultural sectors of the European Union 27 member states. Although a clear cut conclusion on the existence of convergence could not be established, it looks like there is some evidence of convergence for EU 27 during the entire 1973-2007 period. This same evidence exists for EU15 but only for the shorter 1996-2006 time period. If emissions are to converge, then it will be easier to make EU members to accept policy measures aimed at reducing the negative impact on environment.
    Date: 2009–05
  7. By: Julien CHEVALLIER; Benoît SEVI
    Abstract: The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008-2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.
    Keywords: CO2 price, realized volatility, HAR-RV, GARCH, futures trading, emissions markets, EU ETS, intraday data, forecasting
    JEL: C5 G1 Q4
    Date: 2009
  8. By: Clark, Ken (University of Manchester); Kanellopoulos, Nikolaos C. (affiliation not available)
    Abstract: Using panel data for twelve European countries over the period 1994-2001 we estimate the extent of state dependence in low pay. Controlling for observable and unobservable heterogeneity as well as the endogeneity of initial conditions we find positive, statistically significant state dependence in every single country. The magnitude of this effect varies by country, however this variation is not systematically related to labour market institutions.
    Keywords: initial conditions, state dependence, low pay persistence, low pay, dynamic random effects probit models
    JEL: C23 C25 J31 J69
    Date: 2009–05
  9. By: Carlo Altavilla (University of Naples Parthenope and CSEF); Matteo Ciccarelli (European Central Bank)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule
    JEL: C11 E24 E52 E58
    Date: 2009–06–07
  10. By: Silvio Colarossi (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: This paper proposes a possible way of assessing the effect on interest rate dynamics of changes in the decision-making approach, in the communication strategy and in the operational framework of a central bank. Through a GARCH specification we show that the US and the euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policy-making and found empirical evidence to show that the transmission of overnight volatility along the yield curve had entirely vanished.
    Keywords: monetary policy, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2009–05
  11. By: Fabien Roques; Céline Hiroux; Marcelo Saguan
    Abstract: Geographic diversification of wind farms can smooth out the fluctuations in wind power generation and reduce the associated system balancing and reliability costs. The paper uses historical wind production data from five European countries (Austria, Denmark, France, Germany, and Spain) and applies Mean-Variance Portfolio theory to identify cross-country portfolios that minimize the total variance of wind production for a given level of production. Theoretical unconstrained portfolios show that countries (Spain and Denmark) with the best wind resource or whose size contributes to smoothing out the country output variability dominate optimal portfolios. The methodology is then elaborated to derive optimal constrained portfolios taking into account national wind resource potential and transmission constraints and compare them with the projected portfolios for 2020. Such constraints limit the theoretical potential efficiency gains from geographical diversification, but there is still considerable room to improve performance from actual or projected portfolios. These results highlight the need for more cross-border interconnection capacity, for greater coordination of European renewable support policies, and for renewable support mechanisms and electricity market designs providing locational incentives. Under these conditions, a mechanism for renewables credits trading could help aligning wind power portfolios with the theoretically efficient geographic dispersion.
    Keywords: wind power variability, geographic diversification, optimal portfolios, mean variance portfolio theory
    Date: 2009–02–25
  12. By: Andrea Nobili (Bank of Italy)
    Abstract: The prominent role assigned to money by the ECB has been the subject of an intense debate because of the declining predictive power of the monetary aggregate M3 for inflation in recent years. This paper reassesses the information content of monetary analysis for future inflation using dynamic factors extracted from a new and richer cross-section of data including the monetary aggregate M3, its components and counterparts, and a detailed breakdown of deposits and loans at sectoral level. Weighting monetary and credit variables according to their signal to noise ratio allows us to downplay those that in recent times contributed significantly to the deterioration of the information content of the M3. Factor-model based inflation forecasts turn out to be more accurate than those produced by traditional competitor models at the relevant policy horizon of six-quarters ahead. All in all, our results support the view that an analysis based on a large set of monetary and credit variables is a more useful tool for assessing risks to price stability than one that simply focuses on the dynamic of the overall monetary aggregate M3.
    Keywords: monetary analysis, factor models, forecasting
    JEL: C22 E37 E50
    Date: 2009–05
  13. By: Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University)
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we test empirically volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001- January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Keywords: interest rate convergence, common currency area, new EU Member States, interest rate risk, GARCH
    JEL: E44 F36
    Date: 2009–04
  14. By: Hubert Gabrisch; Lucjan T. Orlowski
    Abstract: We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
    Date: 2009–05
  15. By: Alan Ahearne (Bruegel, National University of Ireland in Galway, Trinity College Dublin); Herbert Brücker (Institute for Employment Research in Nürnberg, University of Bamberg); Zsolt Darvas (Bruegel, Hungarian Academy of Sciences, Corvinus University of Budapest); Jakob von Weizsäcker (Bruegel)
    Abstract: This paper explores the influence of the economic cycle on labour mobility within the EU, focusing on the likely impact of the present economic crisis. To do so, we use an econometrically calibrated simulation and a case study of Ireland. We find that, in the short run, the crisis is likely to lead to a somewhat lower stock of migrants from the new member states in the EU15 than would have been the case without the crisis on account of diminished job opportunities for migrants. By contrast, in the longer run the crisis might lead to a moderate increase in migration from some of the new member states compared to what would have been the case without the crisis. The latter is driven by the observation that the crisis may have undermined the economic growth model of some of the new member states, thereby slowing down their economic catching-up process.
    Keywords: labour mobility, economic cycle, crisis, European Union
    JEL: F22 C33 J61 O11 O15 O24
    Date: 2009–03–02
  16. By: Kittelsen, Sverre A.C. (Ragnar Frisch Centre for Economic Research); Magnussen, Jon (Department of Public Health and Community Medicine); Sarheim Anthun, Kjartan (SINTEF Health Research); Häkkinen, Unto (Centre for Health Economics); Linna, Miika (Centre for Health Economics); Medin, Emma (Medical Management Centre); Olsen, Kim Rose (Danish Institute for Health Services Research); Rehnberg, Clas (Medical Management Centre)
    Abstract: In a period where decentralisation seemed to be the prominent trend, Norway in 2002 chose to re-centralise the hospital sector. The reform had three main aims; cost control, efficiency and reduced waiting times. This study investigates whether the hospital reform has improved hospital productivity using the other four major Nordic countries as controls. Hospital productivity measures are obtained using data envelopment analysis (DEA) on a comparable dataset of 728 Nordic hospitals in the period 1999 to 2004. First a common reference frontier is established for the four countries, enveloping the technologies of each of the countries and years. Bootstrapping techniques are applied to the obtained productivity estimates to assess uncertainty and correct for bias. Second, these are regressed on a set of explanatory variables in order to separate the effect of the hospital reform from the effects of other structural, financial and organizational variables. A fixed hospital effect model is used, as random effects and OLS specifications are rejected. Robustness is examined through alternate model specifications, including stochastic frontier analysis (SFA). The SFA approach in performed using the Battese & Coelli (1995) one stage procedure where the inefficiency term is estimated as a function of the set of explanatory variables used in the second stage in the DEA approach. Results indicate that the hospital reform in Norway seems to have improved the level of productivity in the magnitude of approximately 4 % or more. While there are small or contradictory estimates of the effects of case mix and activity based financing, the length of stay is clearly negatively associated with estimated productivity. Results are robust to choice of efficiency estimation technique and various definition of when the reform effect takes place.
    Keywords: Efficiency; productivity; DEA; SFA; hospitals
    JEL: C14 D24 I12
    Date: 2009–06–02
  17. By: Brekke, Kjell Arne (Department of Economics, University of Oslo,); Kverndokk, Snorre (Ragnar Frisch Centre for Economic Research)
    Abstract: Several empirical papers have indicated that the health inequalities in the Nordic welfare states seem to be at least as high as health inequalities in other European countries even if the Nordic states have a more egalitarian income structure. This is in contrast to standard economic theory that predicts that income equality should lead to health equality everything else equal. We argue that there may be a straightforward explanation why Nordic countries appear to have a steeper health gradient than other countries. Health and income are related, and the correlation between income and health will be weaker the more noise there is in terms of other determinants of income. If the Nordic countries have succeeded in reducing the impacts of other determinants of income, like social class, then the correlation between income and health will be stronger in the Nordic countries. This story also holds for other measures of health inequality. However, if the causality is running from income to health, there may be a reason why health inequality is higher in more egalitarian states based on cognitive stress theory. We argue however, that even in this case the difference between Nordic states and the rest of Europe may be a result of poor measures.
    Keywords: Health inequality; socio-economic status; Nordic welfare states; egalitarian countries
    JEL: D31 I12
    Date: 2009–05–19
  18. By: Jennifer Roberts; Nigel Rice; Andrew M. Jones
    Abstract: Both health and income inequalities have been shown to be much greater in Britain than in Germany. One of the main reasons seems to be the difference in the relative position of the retired, who, in Britain, are much more concentrated in the lower income groups. Inequality analysis reveals that while the distribution of health shocks is more concentrated among those on low incomes in Britain, early retirement is more concentrated among those on high incomes. In contrast, in Germany, both health shocks and early retirement are more concentrated among those with low incomes. We use comparable longitudinal data sets from Britain and Germany to estimate hazard models of the effect of health on early retirement. The hazard models show that health is a key determinant of the retirement hazard for both men and women in Britain and Germany. The size of the health effect appears large compared to the other variables. Designing financial incentives to encourage people to work for longer may not be sufficient as a policy tool if people are leaving the labour market involuntarily due to health problems.
    Keywords: health, early retirement, hazard models
    JEL: J26 I10 C23 C41
    Date: 2009
  19. By: Entorf, Horst (University of Frankfurt); Tatsi, Eirini (University of Frankfurt)
    Abstract: We test potential social costs of educational inequality by analysing the influence of spatial and social segregation on educational achievements. In particular, based on recent PISA data sets from the UK and Germany, we investigate whether good neighbourhoods with a relatively high stock of social capital lead to larger 'social multipliers' than neighbourhoods with low social capital. Estimated 'social multipliers' are higher for the German early tracking schooling system than for comprehensive schools in the UK. After aggregating data and employing the Oaxaca-Blinder decomposition, the results suggest that the educational gap between natives and migrants is mainly due to the 'endowment effect' provided by the socioeconomic background of parents and cultural capital at home. Some adverse 'integration effects' do exist for female migrants in Germany who lose ground on other groups.
    Keywords: peer effects, identification, social interaction, reflection problem, empirical analysis, education, migrants
    JEL: I20 J15 J18 O15 Z13
    Date: 2009–05
  20. By: Sandu, Steliana; Paun, Cristian
    Abstract: The globalisation of economy and communications, quick technological progress and its social implications led to the creation of the European Research Area, an important objective for the convergence of national RD&I systems. The monitoring of convergence process is achieved, since 2000, through a system of indicators, developed and refined every year, in order to make them consistent with new trends and requirements for relevant and systemic expression of the progress made in the RD&I field, in relation to both inputs and outputs and RD&I contribution as a determinant factor of improving national and European competitiveness. This paper analyses the progress made in the last six years in achieving the convergence of European RD&I systems, the factors that have accelerated or slowed down the process, laying the stress on Romania’s position in closing the gaps that separate it from European average and from the leaders in this area. For this purpose, we tested a model for estimating the degree of convergence of the Romanian RD&I system with the EU27 system by the clustering method.
    Keywords: European Research Area (ERA), convergence of RD&I systems, innovation gaps, clustering
    JEL: F15 O32 O47
    Date: 2009–06
  21. By: Steven C. BOURASSA (University of Louisville); Martin HOESLI (University of Geneva, University of Aberdeen and Bordeaux Management School); Donato SCOGNAMIGLIO (IAZI / CIFI)
    Abstract: In contrast to many other countries, Switzerland generally has not seen soaring house prices in the 2000s and house prices have only recently started to diminish slightly. Also, Swiss authorities do not engage in trying to increase the homeownership rate much above its current relatively low level of 37.5%. In this paper, we present the main aspects of housing policy and finance in Switzerland which can help to explain these idiosyncrasies. We also analyze house prices and rents, and construct an index of residential land prices. The policies which are discussed in this paper may be useful to housing policy makers in other countries.
    Keywords: Housing policy, housing finance, house prices, rents, taxation, homeownership,Switzerland
    JEL: R31
    Date: 2009–05

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