nep-eec New Economics Papers
on European Economics
Issue of 2009‒08‒08
29 papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Optimum Currency Areas Structural Changes and the Endogeneity of the OCA Criteria: Evidence from Six New EU Member States By Dimitrios Sideris
  2. Vulnerabilities in Central and Eastern European countries : Dynamics of asymmetric shocks By Aleksandra Zdzienicka
  3. Understanding Inter-Industry Wage Structures in the Euro Area. By Véronique Genre; Karsten Kohn; Daphne Momferatou
  4. Are more data always better for factor analysis? Results for the euro area, the six largest euro area countries and the UK. By Giovanni Caggiano; George Kapetanios; Vincent Labhard
  5. Do house price developments spill over across euro area countries? Evidence from a Global VAR. By Isabel Vansteenkiste; Paul Hiebert
  6. Labour Force Participation in the Euro Area: A Cohort Based Analysis. By Almut Balleer; Ramon Gomez-Salvador; Jarkko Turunen
  7. Optimal sticky prices under rational inattention. By Domenico Giannone; Michele Lenza; Lucrezia Reichlin
  8. Fiscal policy in Central and Eastern Europe with real time data: Cyclicality, inertia and the role of EU accession By John Lewis
  9. The role of labor markets for euro area monetary policy. By Kai Christoffel; Keith Kuester; Tobias Linzert
  10. What drives returns to euro area housing? Evidence from a dynamic dividend-discount model. By Paul Hiebert; Matthias Sydow
  11. Euro area private consumption: Is there a role for housing wealth effects? By Frauke Skudelny
  12. Cross-Border Mergers and Acquisitions: Financial and Institutional Forces. By Nicolas Coeurdacier; Roberto A. De Santis; Antonin Aviat
  13. Bidding behaviour in the ECB's main refinancing operations during the financial crisis. By Jens Eisenschmidt; Astrid Hirsch; Tobias Linzert
  14. Assessing long-term fiscal developments - a new approach. By António Afonso; Luca Agnello; Davide Furceri; Ricardo Sousa
  15. Large debt financing: syndicated loans versus corporate bonds. By Yener Altunbaş; Alper Kara; David Marqués-Ibáñez
  16. The dynamic effects of shocks to wages and prices in the United States and the Euro Area. By Rita Duarte; Carlos Robalo Marques
  17. EMU@10: Coping with Rotating Slumps By Oliver Landmann
  18. Does Private Equity Investment Spur Innovation? Evidence from Europe. By Alexander Popov; Peter Roosenboom
  19. Inflation forecasting in the new EU member states. By Olga Arratibel; Christophe Kamps; Nadine Leiner-Killinger
  20. Cyclical Dimensions of Labour Mobility after EU Enlargement By Alan Ahearne; Herbert Brcker; Zsolt Darvas; Jakob von Weizs„cker
  21. Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro. By Marcel Fratzscher; Livio Stracca
  22. Wealth Effects on Consumption: Evidence from the euro area. By Ricardo M. Sousa
  23. Fertility Determinants and Economic Uncertainty:An Assessment Using European Panel Data By George Hondroyiannis
  24. Levels of recent union formation: six European countries compared By Jan M. Hoem; Giuseppe Gabrielli; Aiva Jasilioniene; Dora Kostova; Anna Matysiak
  25. Fiscal behaviour in the European Union: rules, fiscal decentralization and government indebtedness. By Ingo Fender; Martin Scheicher
  26. Liquidity risk premia in unsecured interbank money markets. By Jens Eisenschmidt; Jens Tapking
  27. European Union Direct Payments to Farmers Revisited By Fernando Brito Soares
  28. Revisiting the Merger and Acquisition Performance of European Banks By Ioannis Asimakopoulos; Panayiotis Athanasoglou,
  29. Consumer Financial Capability: A Comparison of the UK and Ireland By O’Donnell, Nuala

  1. By: Dimitrios Sideris (Bank of Greece and Panteion University)
    Abstract: The present paper has two aims. The first aim is to test whether six new member states of the European Union (the six Central and Eastern European Countries) form an optimum currency area (OCA) with the eurozone, in an attempt to assess their readiness for euro adoption. The second aim is to examine whether the introduction of the euro in 1999 and the decision of the countries to seek to join the euro area created any forces fostering their convergence, evidence which would be in line with the theory on the endogeneity of the OCA criteria. Our findings indicate that the introduction of the euro did promote integration of the six new member states and that, at present, they are quite well aligned with the eurozone.
    Keywords: EU enlargement; OCA; real exchange rates; cointegration; GPPP.
    JEL: C32 F33 F36 F42
    Date: 2009–07
  2. By: Aleksandra Zdzienicka (GATE-CNRS/ENS LSH, University of Lyon, France; PSE, Université de Paris 1 Panthéon-Sorbonne, and EPEE, Université d'Evry Val d'Essonne, France)
    Abstract: In this work, we use the VAR and space-state methodology to analyze how the recent developments in 20 European countries have modified the dynamics of structural shocks. Our results confirm a visible progress in (predominated output fluctuations) supply shocks convergence between the CEECs and the euro zone, but also corroborate a positive initial impact of EMU creation and EU enlargement supply shocks correlation. In particular, we find that Croatia, Poland, Slovakia and Slovenia are good candidates to the euro adoption under condition of greater fiscal policy alignment.
    Keywords: segregation, Schelling, potential function, coordination, tax, vote
    JEL: C63 C72 C73 D62 J15
    Date: 2009
  3. By: Véronique Genre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Karsten Kohn (KfW Bankengruppe Frankfurt, Palmengartenstraße 5-9,D-60325 Frankfurt am Main, Germany.); Daphne Momferatou (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.)
    Abstract: This paper focuses on the euro area wage structure and its potential determinants from a sectoral viewpoint. Merging information from the OECD Structural Analysis database with data from the EU Labour Force Survey, we construct a cross-country panel of 22 industries in 8 euro area countries for 1991-2002. Data inspection confirms the existence of a fairly stable inter-industry wage structure that is similar across countries. We then apply panel data techniques to identify factors explaining inter-industry wage differentials in the euro area. Both workforce characteristics (e.g., human capital variables) and firm-related characteristics (e.g., capital intensity, productivity) contribute significantly. However, considerable wage heterogeneity across sectors remains. Idiosyncratic sector and country specifics, reflecting different sociocultural and institutional backgrounds, appear to bear a major role. While our paper only uses direct evidence from workforce and firm-related characteristics, we also try to relate the remaining heterogeneity to institutional characteristics, based on available relevant literature. JEL Classification: J31, J24, J51.
    Keywords: euro area, inter-industry wage differentials, panel estimation, firm and workforce characteristics, labour market institutions.
    Date: 2009–03
  4. By: Giovanni Caggiano (Department of Economics, University of Padua, Via del Santo 33, 35123 Padova, Italy.); George Kapetanios (Department of Economics, Queen Mary University of London, Mile End Road, London E1 4NS, United Kingdom.); Vincent Labhard (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Factor based forecasting has been at the forefront of developments in the macroeconometric forecasting literature in the recent past. Despite the flurry of activity in the area, a number of specification issues such as the choice of the number of factors in the forecasting regression, the benefits of combining factor-based forecasts and the choice of the dataset from which to extract the factors remain partly unaddressed. This paper provides a comprehensive empirical investigation of these issues using data for the euro area, the six largest euro area countries, and the UK. JEL Classification: C100,C150,C530.
    Keywords: Factors, Large Datasets, Forecast Combinations.
    Date: 2009–05
  5. By: Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Paul Hiebert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper empirically assesses the prospects for house price spillovers in the euro area, where co-movement in house prices across countries may be particularly relevant given a general trend with monetary union toward increasing linkages in trade, financial markets, and general economic conditions. The application involves a Global VAR for three housing demand variables (real house prices, real per capita disposable income, and the real interest rate) on the basis of quarterly data for 10 euro area countries (Belgium, Germany, Ireland, Spain, France, Italy, the Netherlands, Austria, Portugal and Finland) over the period 1989-2007. The results suggest limited house price spillovers in the euro area, with evidence of some overshooting in the first 1-3 years after the shock, followed by a long run aggregate euro area impact of country-specific changes in real house prices related in part to the country's economic weight. This contrasts with the impacts of a shock to domestic long-term interest rates, with the latter causing a permanent shift in house prices after around 3 years. Underlying this aggregate development are rather heterogeneous house price spillovers at the country level, with a strong importance for economic weight in the euro area in governing their general magnitude, while geographic proximity appears to also play a role. JEL Classification: R21, R31, C32.
    Keywords: House price, Global VAR (GVAR), International linkages.
    Date: 2009–03
  6. By: Almut Balleer (Universität Bonn, D-53012 Bonn, Germany.); Ramon Gomez-Salvador (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We use a cohort based model to analyse determinants of labour force participation for disaggregated groups of workers in the euro area and the five largest euro area countries. The model captures age and cohort effects as indicators of (unobserved) determinants of participation behaviour. We use these effects and observed determinants to construct trends and projections of labour supply. Our results suggest that age and cohort effects can account for a substantial part of the recent increase in participation. Cohort effects are particularly relevant for women with those born in the late 1960s and early 1970s more likely to participate over the life-cycle. There is substantial variation in the estimated age and cohort effects across countries. Looking forward, positive cohort effects for women are not large enough to compensate for the downward impact of population ageing on participation rates in the euro area. JEL Classification: J11, J21.
    Keywords: labour force participation, cohort analysis, labour market institutions.
    Date: 2009–05
  7. By: Domenico Giannone (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michele Lenza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School, Regent's Park, London NW1 4SA, United Kingdom.)
    Abstract: This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP per-capita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. JEL Classification: E32, E33, C5, F2, F43.
    Keywords: Euro area, International Business Cycle, European Monetary Union, European integration.
    Date: 2009–02
  8. By: John Lewis
    Abstract: This paper evaluates the cyclicality, inertia and effect of EU accession on fiscal policy in Central and Eastern Europe using a real time dataset. Budget balances are found to react in a stabilising way to economic activity, and they are less inert than is typically found in Western Europe. There is clear evidence of a fiscal loosening in the run-up to EU accession. This began in 1999 in larger central European countries, often identified as “front-runners”. The other seven began loosening in 2001, after the Nice Treaty had been agreed and their EU entry confirmed. For both sets of countries, this loosening cumulatively amounts to some 3% of GDP.
    Keywords: Central and Eastern Europe; Fiscal Policy; Real Time Data; EU Accession.
    JEL: E62 H6 E61
    Date: 2009–07
  9. By: Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Keith Kuester (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behaviour and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy. JEL Classification: E32, E52, J64, C11.
    Keywords: Labor Market, wage rigidity, bargaining, Bayesian estimation.
    Date: 2009–03
  10. By: Paul Hiebert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Matthias Sydow (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We apply a dynamic dividend-discount model to analyse unexpected housing returns in a panel of eight euro area countries which together comprise 90% of euro area GDP. The application of this model allows for a decomposition of house price movements into movements in rent (cash-flow) and expected return news components. The empirical application of the model involves the estimation of a panel vector autoregressive model (VAR) for four variables –excess return to housing, rents, the real interest rate and real disposable per capita income– using quarterly data over the period 1985-2007. This empirical investigation yields two main findings. First, the bulk of the variability of house price movements in the panel of countries analysed can be attributed to movements in the rental yield. Indeed, perturbations to rents appear to result in a one-to-one analogous movement in house prices over the long term once controlling for changes in expected returns. Second, evidence from the dynamic profile of shocks along with the negative co-movement between changing rental yield expectations and changing expected returns on housing assets would suggest that euro area house prices overreact to news. JEL Classification: R21, C33, G12.
    Keywords: House price, housing rental yield, return decomposition, panel VAR estimation, cash flow news.
    Date: 2009–03
  11. By: Frauke Skudelny (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper adds to the literature on wealth effects on consumption by disentangling financial wealth effects from housing wealth effects for the euro area. We use two macro-datasets for our estimations, one on the aggregate euro area for the period 1980-2006, and one on the individual euro area countries from1995-2006, using panel data techniques. The impact of all wealth variables on euro area consumption is significant and positive in most specifications for both datasets. The marginal propensity to consume (MPC) out of financial wealth is roughly in line with the literature, with 2.4 to 3.6 cents per euro of financial wealth spent on consumption according to the estimations with euro area aggregate data. However, the panel estimation yields somewhat lower results (0.6 to 1.1 cents). The MPC out of nominal housing wealth lies between 0.7 to 0.9 cents per euro for both datasets. When specifying housing wealth in real terms, i.e. when taking out the effect of volatile house prices, we find similar effects in the times series estimation while the MPC is larger in the panel estimation (2.5 cents). JEL Classification: E21
    Keywords: Housing wealth, financial wealth, consumption, euro area.
    Date: 2009–05
  12. By: Nicolas Coeurdacier (London Business School, Regent's Park, London NW1 4SA, UK.); Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Antonin Aviat (Paris School of Economics, Pse--Ens, 48 bd Jourdan, F-75014 Paris, France.)
    Abstract: Cross-border mergers and acquisitions (M&As) sharply increased over the last two decades. It is often pointed out that cross-border capital reallocation is partly the result of financial liberalization policies, government policies and regional agreements. In this paper, we identify some of the main forces driving cross-border M&As using a unique database on bilateral cross-border M&As at the sectoral level (in manufacturing and services) over the period 1985-2004. We focus on the role of institutional and financial developments with a special attention to the role played by the European Integration process. We identify the impact of (i) joining the European Union and (ii) joining the Euro on cross-border M&As. We show that EU and EMU have almost doubled M&As in manufacturing towards their members from all over the globe, with an additional 50% increase within EMU countries. Conversely, the service sector did not exploit the opportunity offered by the single currency. We also show how cross-border M&As are linked to the acquirer expected profitability and provide insights on the effectiveness of policies to attract foreign capital (such as corporate tax incentives, and interventions to improve the country's financial system and product market regulations). JEL Classification: F30, F36, F41, G11.
    Keywords: Cross Mergers and Acquisitions, Gravity Equation, Euro.
    Date: 2009–03
  13. By: Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Liquidity provision through its repo auctions has been one of the main instruments of the European Central Bank (ECB) to address the recent tensions in financial markets since summer 2007. In this paper, we analyse banks’ bidding behaviour in the ECB’s main refinancing operations (MROs) during the ongoing turmoil in money and financial markets. We employ a unique data set comprising repo auctions from March 2004 to October 2008 with bidding data from 877 counterparties. We find that increased bid rates during the turmoil can be explained by, inter alia, the increased individual refinancing motive, the increased attractiveness of the ECB’s tender operations due to its collateral framework and banks’ bidding more aggressively, i.e. at higher rates to avoid being rationed at the marginal rate in times of increased liquidity uncertainty. JEL Classification: E52, D44, C33, C34.
    Keywords: Central Bank Auctions, Financial Market Turmoil, Panel Sample Selection Model, Bidding Behavior, Monetary Policy Instruments.
    Date: 2009–05
  14. By: António Afonso (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Luca Agnello (University of Palermo, Department of Economics, Viale delle Scienze, 90128 Palermo, Sicily, Italy.); Davide Furceri (OECD, 2, rue André Pascal, F-75775 Paris Cedex 16, France.); Ricardo Sousa (Economic Policies Research Unit (NIPE), University of Minho, Department of Economics, Campus of Gualtar, 4710-057 - Braga, Portugal.)
    Abstract: We use a new approach to assess long-term fiscal developments. By analyzing the time varying behaviour of the two components of government spending and revenue – responsiveness and persistence – we are able to infer about the sources of fiscal behaviour. Drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a Three-Stage Least Square method. In this way we track fiscal developments, i.e. possible fiscal deteriorations and/or improvements for eight European Union countries plus the US. Results suggest that positions have not significantly changed for Finland, France, Germany, Spain, the United Kingdom and the US, whilst they have improved for Belgium, Italy, and the Netherlands. JEL Classification: E62, H50.
    Keywords: Fiscal Deterioration, Fiscal Sustainability.
    Date: 2009–03
  15. By: Yener Altunbaş (Bangor Business School, Bangor University, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Alper Kara (Loughborough University Business School, LE113TU, United Kingdom.); David Marqués-Ibáñez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Following the introduction of the euro, the markets for large debt financing experienced a historical expansion. We investigate the financial factors behind the issuance of syndicated loans for an extensive sample of euro area non-financial corporations. For the first time we compare these factors to those of its major competitor: the corporate bond market. We find that large firms, with greater financial leverage, more (verifiable) profits and higher liquidation values tend to prefer syndicated loans. In contrast, firms with larger levels of short-term debt and those perceived by markets as having more growth opportunities favour financing through corporate bonds. JEL Classification: D40, F30, G21.
    Keywords: syndicated loans, corporate bonds, debt choice, the euro.
    Date: 2009–03
  16. By: Rita Duarte (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Carlos Robalo Marques (Banco de Portugal, Research Department, 148 Rua do Comercio, P-1101 Lisbon Codex, Portugal.)
    Abstract: This paper investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent productivity shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the paper. JEL Classification: C32, C51, E31, J30.
    Keywords: structural error-correction model, impulse response function, persistence.
    Date: 2009–07
  17. By: Oliver Landmann (Department of International Economic Policy, University of Freiburg)
    Abstract: On the eve of the financial and economic crisis of 2008/09, the European Economic and Monetary Union (EMU) could look back to a decade of remarkable macroeconomic stability. Somewhat surprisingly, though, inflation differentials across member states have been substantial and persistent, causing large cumulative changes in relative price levels. This paper presents a stylized theoretical model of a monetary union which demonstrates how persistent inflation differentials can arise from inflation inertia in conjunction with the loss of monetary control on the national level. The interaction of inflation and output dynamics which is at the core of the model generates a pattern of ‘rotating slumps’ (a term coined by Blanchard 2007b). A number of implications are derived from the model which shed light on the observed behavior of cyclical conditions and inflation rates in the euro area. The paper concludes that the monetary-fiscal framework of EMU does not pay adequate attention to the need of dealing with internal macroeconomic tensions within the euro zone.
    Keywords: EMU
    Date: 2009–07
  18. By: Alexander Popov (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Peter Roosenboom (Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3062 PA Rotterdam, Netherlands.)
    Abstract: We provide the first cross-country evidence of the effect of investment by private equity firms on innovation, focusing on a sample of European countries and using Kortum and Lerner’s (2000) empirical methodology. Using an 18-country panel covering the period 1991-2004, we study how private equity finance affects patent applications and patent grants. We address concerns about causality in several ways, including exploiting variation in laws regulating the investment behaviour of pension funds and insurance companies across countries and over time. We also control for the standard determinants of innovation like R&D, human capital, and patent protection. Our estimates imply that while private equity investment accounts for 8% of aggregate (private equity plus R&D) industrial spending, PE accounts for as much as 12% of industrial innovation. We also present similar evidence from the biotech industry to alleviate concerns that our results are biased by aggregation. JEL Classification: C23, G15, O16.
    Keywords: private equity, venture capital, innovation.
    Date: 2009–06
  19. By: Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christophe Kamps (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: To the best of our knowledge, our paper is the first systematic study of the predictive power of monetary aggregates for future inflation for the cross section of New EU Member States. This paper provides stylized facts on monetary versus non-monetary (economic and fiscal) determinants of inflation in these countries as well as formal econometric evidence on the forecast performance of a large set of monetary and non-monetary indicators. The forecast evaluation results suggest that, as has been found for other countries before, it is difficult to find models that significantly outperform a simple benchmark, especially at short forecast horizons. Nevertheless, monetary indicators are found to contain useful information for predicting inflation at longer (3-year) horizons. JEL Classification: C53, E31, E37, E51, E52, E62, P24
    Keywords: Inflation forecasting, leading indicators, monetary policy, information content of money, fiscal policy, New EU Member States
    Date: 2009–02
  20. By: Alan Ahearne (Department of Economics-National University of Ireland, Bruegel-Brussels, Trinity College Dublin); Herbert Brcker (Head of the Department for International Comparisons and European Integration, Institute for Employment Research, University of Bamberg); Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences, Bruegel-Brussels, Corvinus University of Budapest); Jakob von Weizs„cker (Bruegel, Brussels)
    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: 2009–06
  21. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper there-fore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions. JEL Classification: F31, F33, G14.
    Keywords: Euro, Italy, political economy, exchange rates, asset prices, financial markets, shocks.
    Date: 2009–06
  22. By: Ricardo M. Sousa (Economic Policies Research Unit (NIPE) and Department of Economics, University of Minho, Campus of Gualtar, 4710-057 Braga, Portugal.)
    Abstract: This paper estimates the wealth effects on consumption in the euro area as a whole. I show that: (i) financial wealth effects are relatively large and statistically significant; (ii) housing wealth effects are virtually nil and not significant; (iii) consumption growth exhibits strong persistence and responds sluggishly to shocks; and (iv) the immediate response of consumption to wealth is substantially different from the long- run wealth effects. By disaggregating financial wealth into its major components, the estimates suggest that wealth effects are particularly large for currency and deposits, and shares and mutual funds. In addition, consumption seems to be very responsive to financial liabilities and mortgage loans. JEL Classification: E21, E44, D12.
    Keywords: consumption, housing wealth, financial wealth.
    Date: 2009–05
  23. By: George Hondroyiannis (Bank of greece and Harokopio University)
    Abstract: This paper examines the determinants of fertility, using panel data for twenty-seven European countries. We employ panel co-integration to estimate fertility as function of demographic and economic variables. We show that low fertility in most industrialized countries in Europe is due to low infant mortality rates, high female employment, low nuptiality rate and high opportunity cost of having children. Using two measures of economic uncertainty, which are associated with labor market decisions - a production (an output) volatility measure and the unemployment rate - we examine to what extent economic insecurities affect fertility decisions. The empirical results show that both measures of economic uncertainty have a significant negative impact on fertility implying that labor market insecurities might be a significant factor affecting fertility decisions.
    Keywords: Fertility Choice; Panel Estimation
    JEL: J13 C22
    Date: 2009–04
  24. By: Jan M. Hoem (Max Planck Institute for Demographic Research, Rostock, Germany); Giuseppe Gabrielli (Max Planck Institute for Demographic Research, Rostock, Germany); Aiva Jasilioniene (Max Planck Institute for Demographic Research, Rostock, Germany); Dora Kostova (Max Planck Institute for Demographic Research, Rostock, Germany); Anna Matysiak (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: We offer a comparison between the age profiles of risks of formation of marital and non-marital unions in Russia, Romania, Poland, Hungary, Bulgaria, and Italy. We show that there is considerable variability across these populations in the level and age pattern of union-entry risks, ranging (i) from the high and early risks in Russia to the slow and late entries in Italy, and (ii) from an emphasis on marriage in Russia, Poland, Italy, and particularly Romania, to the dominant role of cohabitation reported for Bulgaria. Some of this mostly re-iterates known features (like the patterns for Italy), but they are displayed with unusual clarity in the comparative framework, which also highlights unusual patterns like those for Bulgaria. We cannot see much commonality in union-entry risks among ex-communist countries.
    Keywords: Bulgaria, Hungary, Italy, Poland, Romania, Russia
    JEL: J1 Z0
    Date: 2009–07
  25. By: Ingo Fender (Bank for International Settlements (BIS), Monetary and Economic Department, Centralbahnplatz 2, 4002 Basel, Switzerland.); Martin Scheicher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the market pricing of subprime mortgage risk on the basis of data for the ABX.HE family of indices, which have become a key barometer of mortgage market conditions during the recent financial crisis. After an introduction into ABX index mechanics and a discussion of historical pricing patterns, we use regression analysis to establish the relationship between observed index returns and macroeco-nomic news as well as market based proxies of default risk, interest rates, liquidity and risk appetite. The results imply that declining risk appetite and heightened concerns about market illiquidity - likely due in part to significant short positioning activity - have provided a sizeable contribution to the observed collapse in ABX prices since the summer of 2007. In particular, while fundamental factors, such as indicators of housing market activity, have continued to exert an important influence on the subordinated ABX indices, those backed by AA and AAA exposures have tended to react more to the general deterioration of the financial market environment. This provides further support for the inappropriateness of pricing models that do not sufficiently account for factors such as risk appetite and liquidity risk, particularly in periods of heightened market pressure. In addition, as related risk premia can be captured by unconstrained investors, ABX pricing patterns appear to lend support to government measures aimed at taking troubled assets off banks’ balance sheets - such as the US Troubled Asset Relief Program (TARP) in its original form. JEL Classification: E43, G12, G13, G14.
    Keywords: ABX index, mortgage-backed securities, pricing, risk premia.
    Date: 2009–05
  26. By: Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jens Tapking (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Unsecured interbank money market rates such as the Euribor increased strongly with the start of the financial market turbulences in August 2007. There is clear evidence that these rates reached levels that cannot be explained alone by higher credit risk. This article presents this evidence and provides a theoretical explanation which refers to the funding liquidity risk of lenders in unsecured term money markets. JEL Classification: G01, G10, G21.
    Keywords: Liquidity premium, interbank money markets, unsecured lending, 2007/2008 financial market turmoil.
    Date: 2009–03
  27. By: Fernando Brito Soares
    Abstract: A logistic function framework is used to allocate European Union Common Agricultural Policy (CAP) direct payments to farmers among the different member states. Total CAP expenditure is the starting point for the process, which contemplates two phases. In Phase 1 expenditure is allocated by taking into consideration the economic dimension of farms in each country. In Phase 2 the amount allocated to each member state is further modulated to accommodate both economic efficiency and green house gas emissions generated by the country.
    Date: 2009–07
  28. By: Ioannis Asimakopoulos (Bank of Greece); Panayiotis Athanasoglou, (Bank of Greece)
    Abstract: The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
    Keywords: Bank mergers; mergers and acquisitions; abnormal returns
    JEL: G14 G21 G34
    Date: 2009–08
  29. By: O’Donnell, Nuala (Central Bank and Financial Services Authority of Ireland)
    Abstract: Financial capability refers to the study of a person’s knowledge of financial products, their understanding of their own financial position and their ability to choose products appropriate to that position along with their ability to plan ahead financially and to seek and act on appropriate advice when necessary. Financial capability and financial literacy are becoming increasingly important in a world of changing financial markets and products, increased life expectancy and changing pension arrangements. The first substantial evidence on financial capability in Ireland using a survey dataset designed for the specific purpose of measuring financial capability in Ireland was recently described in O’Donnell and Keeney (2009). The Irish survey closely followed a recent UK survey and this makes it possible to compare and contrast responses and results across the two countries, which is the topic of this paper.
    JEL: D14 D31 G0
    Date: 2009–06

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