nep-eec New Economics Papers
on European Economics
Issue of 2010‒01‒10
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Fiscal policy shocks in the euro area and the US: an empirical assessment. By Pablo Burriel; Francisco de Castro; Daniel Garrote; Esther Gordo; Joan Paredes; Javier J. Pérez
  2. Exchange Rate Pass-through in Central and Eastern European Member States. By John Beirne; Martin Bijsterbosch
  3. Explaining government revenue windfalls and shortfalls: an analysis for selected EU countries. By Richard Morris; Claudia Rodrigues Braz; Francisco de Castro; Steven Jonk; Jana Kremer; Suzanne Linehan; Maria Rosaria Marino; Christophe Schalck; Olegs Tkacevs
  4. Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area. By Olli Castrén; Ilja Kristian Kavonius
  5. A quarterly fiscal database for the euro area based on intra-annual fiscal information. By Joan Paredes; Diego J. Pedregal; Javier J. Pérez
  6. Nonparametric Hybrid Phillips Curves Based on Subjective Expectations: Estimates for the Euro Area. By Marco Buchmann
  7. The Janus-Headed Salvation: Sovereign and Bank Credit Risk Premia during 2008-09. By Jacob W. Ejsing; Wolfgang Lemke
  8. Taxation of human capital and wage inequality: a cross-country analysis By Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan
  9. Cross-National Differences in Determinants of Multiple Deprivation in Europe By Figari F
  10. Euroization in Central, Eastern and Southeastern Europe – New Evidence On Its Extent and Some Evidence On Its Causes. By Thomas Scheiber; Helmut Stix
  11. A Different Rationale for Redistribution: Pursuit of Happiness in the European Union By Cullis, John; Hudson, John; Jones, Philip
  12. Private Equity and Industry Performance By Shai Bernstein; Josh Lerner; Morten Sørensen; Per Strömberg
  13. The impact of the EU ETS on the sectoral innovation system for power generation technologies: findings for Germany By Rogge, Karoline; Hoffmann, Volker
  14. Comparison of the Evolution of Energy Intensity in Spain and in the EU15. Why is Spain Different? By María Mendiluce; Ignacio J. Pérez-Arriaga; Carlos Ocaña
  15. Why is there such a gap between health expenditures and outcomes in Norway compared to Finland? By Melberg, Hans Olav
  16. Financial Literacy and Retirement Planning in the Netherlands By Maarten van Rooij; Annamaria Lusardi; Rob Alessie
  17. Are bank lending shocks important for economic fluctuations? By Jørn Inge Halvorsen; Dag Henning Jacobsen

  1. By: Pablo Burriel (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Francisco de Castro (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Daniel Garrote (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Esther Gordo (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.); Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.)
    Abstract: We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly available quarterly dataset of fiscal variables for the period 1981-2007. To allow for comparability with previous results on euro area countries and the US, we use a standard structural VAR framework, and study the impact of aggregated and disaggregated government spending and net taxes shocks. In addition, to frame euro area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the provided results to the inclusion of variables aiming at measuring “financial stress” (increases in risk) and “fiscal stress” (sustainability concerns). Analysing US and euro area data with a common methodology provides some interesting insights on the interpretation of fiscal policy shocks. JEL Classification: E62, H30.
    Keywords: Euro area, SVAR, Fiscal Shocks, Fiscal multipliers.
    Date: 2009–12
  2. By: John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Bijsterbosch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides estimates of the exchange rate pass-through (ERPT) to consumer prices for nine central and eastern European EU Member States. Using a five-variate cointegrated VAR (vector autoregression) for each country and impulse responses derived from the VECM (vector error correction model), we show that ERPT to consumer prices averages about 0.6 using the cointegrated VAR and 0.5 using the impulse responses. We also find that the ERPT seems to be higher for countries that have adopted some form of fixed exchange rate regime. These results are robust to alternative normalisation of the VAR and alternative ordering of the impulse responses. JEL Classification: E31, F31.
    Keywords: exchange rate pass-through, inflation, central and eastern Europe.
    Date: 2009–12
  3. By: Richard Morris (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Claudia Rodrigues Braz (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Francisco de Castro (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Steven Jonk (De Nederlandsche Bank, Westeinde 1, NL-1017 ZN Amsterdam, NL.); Jana Kremer (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Suzanne Linehan (Central Bank and Financial Services Authority of Ireland,Dame Street, Dublin 2, Ireland.); Maria Rosaria Marino (Banca d’Italia,Via Nazionale 91, I-00184 Rome, Italy.); Christophe Schalck (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Olegs Tkacevs (Latvijas Banka, K. Valdemara iela 2a, LV-1050 Riga, Latvia.)
    Abstract: In recent years, government revenues in many EU countries experienced significant and erratic changes, which, a priori, could not be fully explained by macroeconomic developments or by discretionary fiscal policy measures. We investigate this issue by estimating “unexplained” changes in tax and social contribution revenues, based on proxies for tax revenue bases and elasticities commonly used for forecasting or cyclically adjusting government revenues and taking into account estimates of the impact of legislation changes. This is done for a selection of EU countries, including the “big five” euro area countries (Germany, Spain, France, Italy and the Netherlands) together with Ireland, Latvia and Portugal. We also undertake the same exercise using alternative tax base proxies, either taken from forecasting models or on the basis of our knowledge of the tax system in each country. The results show that, in the aggregate, revenue windfalls and shortfalls have exhibited a broadly cyclical pattern, driven mainly by developments in profit-related taxes and, to a somewhat lesser extent, VAT. Other, more structural factors also play a role, such as declining consumption of fuel and tobacco, as well as factors specific to individual countries, such as developments in property markets. The estimated revenue windfalls and shortfalls can explain a substantial proportion of changes in the euro area cyclically adjusted budget balance over the period 1999-2007. Since these unexplained revenue changes have exhibited a largely cyclical character and might therefore be viewed as partly temporary, this highlights the importance of a careful interpretation of fiscal indicators adjusted for the economic cycle. Except in a small number of cases, the results do not change significantly when alternative tax base proxies are used, suggesting that the potential for improving existing indicators by a better matching of taxes to their bases is likely to be limited. JEL Classification: H20, H68, E62.
    Keywords: Tax revenues, fiscal forecasting, cyclical adjustment.
    Date: 2009–11
  4. By: Olli Castrén (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ilja Kristian Kavonius (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis has highlighted the need for models that can identify counterparty risk exposures and shock transmission processes at the systemic level. We use the euro area financial accounts (flow of funds) data to construct a sector-level network of bilateral balance sheet exposures and show how local shocks can propagate throughout the network and affect the balance sheets in other, even seemingly remote, parts of the financial system. We then use the contingent claims approach to extend this accounting-based network of interlinked exposures to risk-based balance sheets which are sensitive to changes in leverage and asset volatility. We conclude that the bilateral cross-sector exposures in the euro area financial system constitute important channels through which local risk exposures and balance sheet dislocations can be transmitted, with the financial intermediaries playing a key role in the processes. High financial leverage and high asset volatility are found to increase a sector’s vulnerability to shocks and contagion. JEL Classification: C22, E01, E21, E44, F36, G01, G12, G14.
    Keywords: Balance sheet contagion, financial accounts, network models, contingent claims analysis, systemic risk, macro-prudential analysis.
    Date: 2009–12
  5. By: Joan Paredes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Diego J. Pedregal (Uuniversidad. Castilla-La Mancha, Real Casa de la Misericordia C/ Altagracia 50, 13071 Ciudad Real, España.); Javier J. Pérez (Banco de España, Research Department, Alcalá 50, E-28014 Madrid, Spain.)
    Abstract: The analysis of the macroeconomic impact of fiscal policies in the euro area has been traditionally limited by the absence of quarterly fiscal data. To overcome this problem, we provide two new databases in this paper. Firstly, we construct a quarterly database of euro area fiscal variables for the period 1980-2008 for a quite disaggregated set of fiscal variables; secondly, we present a real-time fiscal database for a subset of fiscal variables, composed of biannual vintages of data for the euro area period (2000-2009). All models are multivariate, state space mixed-frequencies models estimated with available national accounts fiscal data (mostly annual) and, more importantly, monthly and quarterly information taken from the cash accounts of the governments. We provide not seasonally- and seasonally-adjusted data. Focusing solely on intra-annual fiscal information for interpolation purposes allows us to capture genuine intra-annual "fiscal" dynamics in the data. Thus, we provide fiscal data that avoid some problems likely to appear in studies using fiscal time series interpolated on the basis of general macroeconomic indicators, namely the well-known decoupling of tax collection from the evolution of standard macroeconomic tax bases (revenue windfalls/shortfalls). JEL Classification: C53, E6, H6.
    Keywords: Euro area, Fiscal policies, Interpolation, Unobserved Components models, Mixed frequencies.
    Date: 2009–12
  6. By: Marco Buchmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper addresses the estimation of Phillips curve equations for the euro area while employing less stringent assumptions on the functional correspondence between price inflation, inflation expectations and marginal costs. Expectations are not assumed to be an unbiased predictor of actual inflation and instead derived from the European Commission’s Consumer Survey data. The results suggest that expectations drive inflation with a lag of about 6 months, which casts further doubt on the validity of the New Keynesian Phillips curve. Moreover, the trade off between inflation and real economic activity is not vertical in the short run. Non- and Semiparametric estimates reveal an important nonlinearity in the sense that demand pressure on price inflation is not invariant to the state of the economy as it increases considerably at times of high economic activity. Conventional linear Phillips curves cannot capture this empirical regularity. Some implications for monetary policy are discussed. JEL Classification: C14, E31, E32.
    Keywords: Inflation, Phillips Curve, Survey Expectations, Non- and Semiparametric Econometrics, Monetary Policy.
    Date: 2009–12
  7. By: Jacob W. Ejsing (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: As the global banking crisis intensified in the fall of 2008, governments announced comprehensive rescue packages for financial institutions. In this paper, we put the joint response of euro area bank and sovereign CDS premia under the microscope. We find that the bank rescue packages led to a clear structural break in these premia's comovement, which had been rather tight and stable in the weeks preceding the in-tensification of the crisis. Firstly, the packages induced a decrease in risk spreads for banks at the expense of a marked increase in risk spreads for governments. Secondly, we show that in addition to this one-off jump in the levels of CDS spreads, the packages strongly increased the sensitivity of sovereign risk spreads to any further aggravation of the crisis. At the same time, the sensitivity of bank credit risk premia declined and became more sovereign-like, reflecting the extensive government guarantees of banking sector liabilities. JEL Classification: G15, G21.
    Keywords: Financial crisis, risk transfer, credit default swaps.
    Date: 2009–12
  8. By: Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan
    Abstract: Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts. We begin by documenting two new empirical facts that link these inequality differences to tax policies. First, we show that countries with more progressive labor income tax schedules have significantly lower before-tax wage inequality at different points in time. Second, progressivity is also negatively correlated with the rise in wage inequality during this period. We then construct a life cycle model in which individuals decide each period whether to go to school, work, or be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. We find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 76% of the difference in inequality at the upper end (log 90-50 differential). When this economy experiences skill-biased technological change, progressivity also dampens the rise in wage dispersion over time. The model explains 41% of the difference in the total rise in inequality and 58% of the difference at the upper end.
    Keywords: Wages ; Human capital ; Taxation
    Date: 2009
  9. By: Figari F (Institute for Social and Economic Research)
    Abstract: This paper analyses the relationship between deprivation, income and other individual dimensions over time, in eleven European countries, exploiting the longitudinal nature of the European Community Household Panel (ECHP). First, the determinants of deprivation are analysed by using fixed effects models for each country separately. Second a decomposition of the deprivation gaps between countries highlights the reasons for the differentials across Europe. The results show that changes in income and deprivation do not strictly coincide. In countries where deprivation is higher, income is more effective in reducing the deprivation differential but the family structure contributes to determine such a gap.
    Date: 2009–12–08
  10. By: Thomas Scheiber (Oesterreichische Nationalbank, Foreign Research Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna); Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner-Platz 3, POB 61, A-1011 Vienna)
    Abstract: We present new evidence on de facto euroization in eleven Central, Eastern and Southeastern European countries. Estimates of the extent of foreign currency cash holdings are derived from survey data. Furthermore, we define overall euroization indices, relating both assets and cash holdings. Results confirm that some countries are heavily euroized and that euro cash holdings constitute a sizeable share of local currency in circulation. Euroization levels in other –mainly Central European– countries are low and economically insignificant. Evidently, high euroization bears various significant consequences for economic policies. Therefore, we inquire on the determinants of euroization. We find that euroization is highly correlated with the quality of past economic governance, reflecting past periods of instabilities. In contrast, the more recent –pre-financial crisis– course of economic history had only limited impact. Thus, our results are in line with the view that policy makers in highly euroized countries are severely constrained by past events and that euroization levels might be difficult to revert through stable macroeconomic policies.
    Keywords: Dollarization, Euroization, Currency Substitution, Survey Data, Central,Eastern, Southeastern, Europe, CEE, SEE
    JEL: E41 E50 D14
    Date: 2009–11–27
  11. 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
  12. By: Shai Bernstein (Harvard Business School); Josh Lerner (Harvard Business School, Finance Unit, EM Unit); Morten Sørensen (Columbia Business School); Per Strömberg (Stockholm School of Economics - Department of Finance)
    Abstract: The growth of the private equity industry has spurred concerns about its potential impact on the economy more generally. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where PE funds have invested in the past five years have grown more quickly in terms of productivity and employment. There are few significant differences between industries with limited and high private equity activity. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. These patterns are not driven solely by common law nations such as the United Kingdom and United States, but also hold in Continental Europe.
    Date: 2010–12
  13. By: Rogge, Karoline; Hoffmann, Volker
    Abstract: This paper provides an overview of early changes in the sectoral innovation system for power generation technologies which have been triggered by the European Emission Trading Scheme (EU ETS). Based on a broad definition of the sector, our research analyses the impact of the EU ETS on the four building blocks knowledge and technologies, actors and networks, institutions and demand by combining two streams of literature, namely systems of innovation and environmental economics. Our analysis is based on 42 exploratory inter-views with German and European experts in the field of the EU ETS, the power sector and technological innovation. We find that the EU ETS mainly affects the rate and direction of the technological change of power generation technologies within the large-scale, coal-based power generation technological regime to which carbon capture technologies are added as a new technological trajectory. While this impact can be interpreted as defensive behaviour of incumbents, the observed changes should not be underestimated. We argue that the EU ETS' impact on corporate CO2 culture and routines may prepare the ground for the transition to a low carbon sectoral innovation system for power generation tech-nologies. --
    Keywords: EU emission trading scheme (EU ETS),innovation system,power sector
    Date: 2009
  14. By: María Mendiluce; Ignacio J. Pérez-Arriaga; Carlos Ocaña
    Abstract: Energy intensity in Spain has increased since 1990, while the opposite has happened in the EU15. Decomposition analysis of primary energy intensity ratios has been used to identify which are the key sectors driving the Spanish evolution and those responsible for most of the difference with the EU15 energy intensity levels. It is also a useful tool to quantify which countries and economic sectors have had most influence in the EU15 evolution. The analysis shows that the Spanish economic structure is driving the divergence in energy intensity ratios with the EU15, mainly due to the strong transport growth, but also because of the increase of activities linked to the construction boom, and the convergence to EU levels of household energy demand. The results can be used to pinpoint successful EU strategies for energy efficiency that could be used to improve the Spanish metric.
    Date: 2009–08
  15. By: Melberg, Hans Olav (Institute of Health Management and Health Economics)
    Abstract: According to the OECD Norway spends 47% more on health care per capita compared to Finland and about 30% more than the other Nordic countries. At the same time indicators of health status show that Norway is not better on important indicators of health. This raises the question of why there is such a gap between spending and outcome in Norway compared to the other Nordic countries. This paper lists a number of possible explanations and quantifies their importance. The conclusion is that higher wages may explain up to 38% of the difference between Norway and Finland and differences in staff levels explain about 25%. Data errors are difficult to quantify, but the data on in long term care suggests that it accounts for at least 20% of the difference. Diminishing or zero marginal return is a controversial explanation for the lack of difference in outcomes despite higher spending and a brief review of the literature shows conflicting evidence. Finally, the last section argue that a convincing explanation of the growth of health spending should be based on a model that takes into account the fact that health care to a large extent is provided outside the free-market and that people seems to have special moral intuitions when it comes to the provision of health services as opposed to many other goods. <p>
    Keywords: Health expandures; OECD; wages; Norway
    JEL: H51 I10 I12
    Date: 2009–12–14
  16. By: Maarten van Rooij; Annamaria Lusardi; Rob Alessie
    Abstract: The complexity of financial decisions households are faced with has increased tounprecedented levels. At the same time, recent research documents large differences ineconomic knowledge among households and indicates that household financial skills may beinadequate to cope with the increasing responsibility for making retirement decisions. In thispaper, we examine the relationship between financial knowledge and retirement planning inthe Netherlands. For this purpose, we have designed a customized module for the DNB (DeNederlandsche Bank) Household Survey. We identify a strong and positive associationbetween financial knowledge and retirement planning. Using information on economicseducation when young, we show that the nexus of causality goes from literacy to planningrather than the other way around. 
    Keywords: Thinking about Retirement; Knowledge of Finance and Economics; FinancialSophistication; Economics Schooling.
    JEL: J26 D12
    Date: 2009–12
  17. By: Jørn Inge Halvorsen (Norges Bank and Norwegian School of Management (BI)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway))
    Abstract: We analyze the importance of bank lending shocks on real activity in Norway and the UK, using structural VARs and based on quarterly data for the past 21 years. The VARs are identified using a combination of sign and short-term zero restrictions, allowing for simultaneous interaction between various variables. We find that a negative bank lending shock causes output to contract. The significance of bank lending shocks seems evident as they explain a substantial share of output gap variability. This suggests that the banking sector is an important source of shocks. The empirical analysis comprises the Norwegian banking crisis (1988-1993) and the recent period of banking failures and recession in the UK. The results are clearly non-negligible also when omitting periods of systemic banking distress from the sample.
    Keywords: Identification, VAR, Monetary Policy, Bank lending.
    Date: 2009–12

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