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on European Economics |
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Issue of 2009‒10‒31
sixteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Silvia Sgherri; Edda Zoli |
| Abstract: | While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads. |
| Keywords: | Bond markets , Capital markets , European Union , External debt , Financial crisis , Financial sector , Fiscal management , Fiscal policy , Fiscal sector , Investment , Pricing policy , Public finance , Risk premium , Sovereign debt , |
| Date: | 2009–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/222&r=eec |
| By: | Carlo Altavilla (University of Naples Parthenope, Via Medina, 40 - 80133 Naples, Italy.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| 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. JEL Classification: C11, E24, E52, E58. |
| Keywords: | Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091089&r=eec |
| By: | Monica Billio (Università Ca' Foscari di Venezia - Dipartimento di Scienze Economiche); Laurent Ferrara (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, DGEI-DAMEP - Banque de France); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Gian Luigi Mazzi (Eurostat - Office Statistique des Communautés Européennes) |
| Abstract: | In this paper, we aim at assessing Markov-switching and threshold models in their ability to identify turning points of economic cycles. By using vintage data that are updated on a monthly basis, we compare their ability to detect ex-post the occurrence of turning points of the classical business cycle, we evaluate the stability over time of the signal emitted by the models and assess their ability to detect in real-time recession signals. In this respect, we have built an historical vintage database for the Euro area going back to 1970 for two monthly macroeconomic variables of major importance for short-term economic outlook, namely the Industrial Production Index and the Unemployment Rate. |
| Keywords: | Business cycle, Euro zone, Markov switching model, SETAR model, unemployment, industrial production. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00423890_v1&r=eec |
| By: | Figari F; Paulus A; Sutherland H |
| Abstract: | The paper focuses on the support given through tax and benefit systems to families with children and addresses how the size and impact on the income distribution of this kind of support can be accurately measured. While such support is usually measured in rather narrow terms by adding up the benefits explicitly labelled as being for children, we adopt a more comprehensive approach whereby all tax-benefit instruments (or their components) which are contingent on the presence of children are accounted for. We use EUROMOD, the European Union tax-benefit microsimulation model, to quantify the support for children and analyse its impact on household incomes and child poverty for 19 countries. We find that the conventional approach underestimates on average the total amount of support for children by about one fifth. Furthermore, accounting for the net effect of the full range of components of cash support makes little difference in some countries but a lot more in others. For cross-national comparisons it is therefore critical that a comprehensive measure is adopted. |
| Keywords: | European Union, Child poverty, Children, Taxes and cash benefits |
| JEL: | C81 D31 H23 |
| Date: | 2009–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:ese:emodwp:em6/09&r=eec |
| By: | Lydia Mechtenberg; Roland Strausz |
| Abstract: | We develop a model to analyze the determinants and effects of an endogenous imperfect transferability of human capital on natives and immigrants. The model reveals that high migration flows and high skill-transferability are mutually interdependent. Moreover, we show that high mobility within a Federation is necessary to attract highly skilled immigrants into the Federation. We study in how far and in what way the European public policy behind the Bologna and the Lisbon Process can contribute to higher mobility in Europe. |
| Keywords: | human capital, migration, transferability, public policy |
| JEL: | D61 H77 I28 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-048&r=eec |
| By: | Cullis, John; Hudson, John; Jones, Philip |
| Abstract: | This paper explores the importance of the determinants of happiness when assessing the case for international redistribution. It presents a different rationale for international redistribution with reference to the impact that absolute levels of income and relative levels of income exert on happiness. The case for redistribution is so strong that it exists even when citizens are envious of one another and malevolent toward one another. The importance of these two determinants of happiness is explored when assessing the case for redistribution between member states of the European Union. An analysis of the importance of these determinants in the European Union reveals that there is significant scope for further redistribution to increase happiness. An index of happiness is constructed and simulations are presented to shed insight into the role that governments might play in the pursuit of happiness. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:15968&r=eec |
| By: | Anna Lipińska (Bank of England, Monetary Analysis,Monetary Assessment and Strategy Division, Threadneedle Street, London EC2R 8AH, United Kingdom.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In recent years a number of European countries have shifted their tax structure more strongly towards indirect taxes, motivated, inter alia, by the intention to foster competitiveness. Against this background, this paper develops a tractable two-country model of a monetary union, characterised by national fiscal and supranational monetary policy, with price-setting firms and endogenously determined terms of trade. The paper discusses a number of monetary and fiscal policy questions which emerge if one of the countries shifts its tax structure more strongly towards indirect taxes. Qualitatively, it is shown that the long-run effects of such a unilateral policy shift on output and consumption within and between the two countries depend sensitively on whether indirect tax revenues are used to lower direct taxes or to finance additional government expenditures. Moreover, short-run dynamics are shown to depend significantly on the speed at which fiscal adjustments take place, on the choice of the inflation index stabilised by the central bank, and on whether the tax shift is anticipated or not. Quantitatively, the calibrated model version indicates that only if the additional indirect tax revenues are used to finance a cut in direct taxes there is some, though limited scope for non-negligible spillovers between countries. JEL Classification: E61, E63, F42. |
| Keywords: | Fiscal regimes, Monetary policy, Currency union. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091097&r=eec |
| By: | Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez |
| Abstract: | Banks are in the business of taking calculated risks. Expanding the geographic footprint of an organization’s profit-making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the character of safety-net benefits that are available to banks in individual EU countries help to explain the nature of cross-border merger activity. If they wish to protect taxpayers from potentially destabilizing regulatory arbitrage, central bankers need to develop statistical procedures for assessing supervisory strength and weakness in partner countries. We believe that the methods and models used here can help in this task. |
| JEL: | F3 G2 K2 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15447&r=eec |
| By: | Karin Mayr; Giovanni Peri (Department of Economics, University of California, Davis, USA) |
| Abstract: | Recent empirical evidence seems to show that temporary migration is a widespread phenomenon, espe- cially among highly skilled workers who return to their countries of origin when these begin to grow. This paper develops a simple, tractable overlapping generations model that provides a rationale for return migra- tion and predicts who will migrate and who returns among agents with heterogeneous abilities. The model also incorporates the interaction between the migration decision and schooling: the possibility of migrating, albeit temporarily, to a country with high returns to skills produces positive schooling incentive effects. We use parameter values from the literature and data on return migration to simulate the model for the Eastern-Western European case. We then quantify the effects that increased openness (to migrants) would have on human capital and wages in Eastern Europe. We find that, for plausible values of the parameters, the possibility of return migration combined with the education incentive channel reverses the brain drain into a significant brain gain for Eastern Europe. |
| Keywords: | Skilled Migration, Return Migration, Returns to Education, Eastern-Western Europe |
| JEL: | F22 J61 O15 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:jku:nrnwps:2009_19&r=eec |
| By: | Elbert Dijkgraaf (Erasmus School of Economics, Erasmus University Rotterdam); Maarten C.W. Janssen (University of Vienna, and Erasmus School of Economics) |
| Abstract: | An important question in the dynamic European wholesale markets for electricity is whether to define the geographical market at the level of an individual member state or more broadly. We show that if we currently take the traditional approach by considering for each member state whether there is one single other country that provides a substitute for domestic production, the market in each separate member state has still to be considered a separate market. However, if we allow for the possibility that at different moments in time there is another country that provides a substitute for domestic production, then the conclusion should be that certain member states do not constitute a separate geographical market. This is in particular true for Belgium, but also for The Netherlands, France, and to some extent also for Germany and Austria. We call this alternative approach the "and/or" approach. |
| Keywords: | Electricity; convergence; market definition; market coupling |
| JEL: | L94 L40 |
| Date: | 2009–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090079&r=eec |
| By: | Mallard, Graham |
| Abstract: | A political economy model is presented that proposes an effective explanation as to why national allocation plans in the emissions trading scheme of the European Union have taken the form they have. The influence of the national bureaucracy, which is omitted in the majority of the related political economy literature, is shown to be potentially significant and costly – particularly through its interaction with the influence of the affected industrialists. The analysis suggests that the role of the national bureaucracy in the design of environmental policy should be carefully considered and structured, and suggests an avenue of potentially important and fruitful future research. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:15957&r=eec |
| By: | Mehrotra, Aaron (BOFIT); Slacik, Tomas (BOFIT) |
| Abstract: | We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available. |
| Keywords: | determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging; Central and Eastern Europe |
| JEL: | C11 C22 E31 E52 O52 |
| Date: | 2009–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2009_018&r=eec |
| By: | Jozef Barunik (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague) |
| Abstract: | In the paper we test for the different reactions of stock markets to the current financial crisis. We focus on Central European stock markets, namely the Czech, Polish and Hungarian ones, and compare them to the German and U.S. benchmark stock markets. Using wavelet analysis, we decompose a time series into frequency components called scales and measure their energy contribution. The energy of a scale is proportional to its wavelet variance. The decompositions of the tested stock markets show changes in the energies on the scales during the current financial crisis. The results indicate that each of the tested stock markets reacted differently to the current financial crisis. More important, Central European stock markets seem to have strongly different behaviour during the crisis. |
| Keywords: | ewavelet analysis, multiresolution analysis, Central European stock markets, financial crisis |
| JEL: | C14 C22 G15 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2009_23&r=eec |
| By: | Alexander Mihailov; Fabio Rumler; Johann Scharler |
| Abstract: | In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Galí and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries. |
| Keywords: | New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation |
| JEL: | C32 C52 E31 F41 P22 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2009_13&r=eec |
| By: | Zhang, Ying (UNU-MERIT); Filippov, Sergey (UNU-MERIT) |
| Abstract: | Since end of the 1990s, the world has been witnessing a phenomenon of internationalisation of Chinese companies. This internationalisation is often understood through FDI inflows, whereby multinational companies establish their presence in a form of subsidiaries overseas. However, lately many companies (and Chinese firms in particular) started to use strategic alliances and M&As as a pair of tools of internationalisation. Despite the growing body of literature on this topic in the context of advanced western economies, use of strategic alliances in the internationalisation of Chinese firms remains an under-researched topic. In the paper we investigate the potential benefits for Chinese companies to internationalise through strategic alliances and M&As, and specifically in comparison to the traditional forms of outward FDI. By using the data from Thomson SDC database, we specifically focus on the Single European market as a new prospective location for Chinese companies and provide a quantitative overview of Chinese firms' alliances as well as M&As in Europe. To illustrate the optimal pattern of internalisation of Chinese firms in Europe, we additionally use a case study of Chinese automotive manufacturer Chery Automobile Co. Ltd. |
| Keywords: | strategic alliances, emerging economies, China, Europe, internationalisation |
| JEL: | F23 M10 L62 O32 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:unumer:2009041&r=eec |
| By: | Olivier Thevenon (INED - Institut National d'Etudes Démographiques - INED) |
| Abstract: | The current total fertility rate in France has been increasing over this last ten years and is has reached its highest level since the early 1980s with a rate at 1,98 in 2006. Compared to European standards, this high level of fertility makes France an outlier, in spite of rather similar trends in the transition to adulthood, in partnerships, or in attitudes on birth control or in economic situation (rather low growth, increase in poverty rates). Thus, the French case challenges some of the hypotheses ventured to explain the current low fertility observed in European countries. France's fertility level can be explained by its longstanding family policy, which has changed in-depth since the 1980s to accommodate with women's increasing labour force participation. This policy encompasses a wide range of instruments, based on different actors and motivations, since this policy is aimed to serve different objectives. Despite some ambiguities, family policy seems to have created especially positive attitudes towards 2 or 3 children families in France, and to have bounded the propensity to remain childless. We argue that a key aspect is the favourable context created for the conciliation between work and family through a relatively comprehensive and continuous support over the family life-course. The all set of complementary instruments (financial transfers to large families, parental leave schemes and provision of childcare support) creates a rather secure climate for the decision relating to child bearing. It also explains why the decision to have children or to be in employment is less polarised according to socio-economic status than in other countries. |
| Keywords: | fertility; family policies; France |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00424832_v1&r=eec |