|
on European Economics |
|
Issue of 2010‒03‒28
nineteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Regling, Klaus (Asian Development Bank Institute); Deroose, Servaas (Asian Development Bank Institute); Felke, Reinhard (Asian Development Bank Institute); Kutos, Paul (Asian Development Bank Institute) |
| Abstract: | The first decade of economic and monetary union in Europe (EMU) has been a huge success. EMU has significantly benefited its member countries and accelerated the European integration process. Imbalances within EMU-differences in growth, inflation, competitiveness, current account and budget balances-have, however, increased in the last 10 years and, with their economic implications, have become more evident in the global economic crisis. The euro has served as a shield during the crisis, and arguments that the crisis would lead to a breakup of the monetary union are neither new nor convincing. But there are lessons to be learned. Policies should be better coordinated among EMU members and structural reforms accelerated, the framework for the supervision of financial markets strengthened, and external representation streamlined. The crisis has also made the euro more attractive, and most EU countries that are not yet members of EMU are expected to join during the next decade. |
| Keywords: | european monetary union; first decade; enlarging euro area; financial storm |
| JEL: | E60 F15 F30 F42 |
| Date: | 2010–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0205&r=eec |
| By: | Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Josef Pöschl (The Vienna Institute for International Economic Studies, wiiw); Anton Mihailov; Waltraut Urban (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sándor Richter (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Gábor Hunya (The Vienna Institute for International Economic Studies, wiiw); Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Zdenek Lukas (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | After a long period of convergence, Central, East and Southeast Europe experienced a deep recession in 2009. The relatively moderate GDP decline (-3.6%) on average for the new EU member states (NMS) reflects Poland's weight in the group, the only EU country to have recorded positive GDP growth last year (Albania and Kazakhstan registered positive growth rates as well - see Table). In most other countries the catching-up process was interrupted, in particular the Baltic States were thrown several years back - more than Russia and Ukraine. The most conspicuous response to the crisis was a radical depletion of inventories and, closely related to this, a dramatic improvement in net exports since the contraction of imports was much larger than that of exports. This, together with less profit realized by foreign companies operating in the region, resulted in a sizeable reduction of current account deficits. Most countries in the region have emerged from the trough of the crisis already at the end of 2009. Several leading indicators point to a modest upswing. Poland's growth will once again boost the NMS average in 2010, while the rate of expansion in the Czech Republic, Slovakia and Slovenia will be meagre. Hungary, Romania and Bulgaria are still expected to stagnate in 2010, the Baltic States will record further negative growth rates - just as Croatia, Bosnia and Herzegovina and Montenegro. Russia, Ukraine and Kazakhstan will rebound more strongly. We expect all countries in the region to be growing again only by 2011. That growth may accelerate slightly in 2012, but will in general be slower than in the pre-crisis period. The main prerequisite of an upturn is a marked recovery in global trade, including a rise in demand for imports from the region. Increases in private consumption are not likely to be very pronounced as long as employment fails to grow. Investment will not act as a strong engine of growth either. Given the generally weak rebound of economic activities, unemployment will continue to rise, probably peaking in 2010, before falling slowly to pre-crisis levels. The most vulnerable group of workers affected by the crisis are again those with low skills. China's economy expanded at a rate of 8.7% in 2009, more than earlier expected. This fast growth despite a slump in exports was due to massive government stimulus measures driving investment and supporting private consumption. With the expansionary fiscal policy still in place and foreign demand picking up, the Chinese economy may grow even faster in the coming years. There are several downward risks to our forecast. The revival of financial intermediation may turn out to be sluggish. With the upturn of economic activities more firms may find it difficult to secure funding. Withdrawal of demand-supporting schemes and the need to consolidate fiscal balances may delay or weaken recovery in the EU and put a brake on export-driven growth of the region. A possible revival of cross-border capital flows would again exert strong pressure on exchange rate appreciation - with all the familiar negative effects. The main risk associated with the current problems in Greece is that the extension of the euro area may be delayed. That may well cross the plans of those NMS that have based their medium-term economic strategy on the earliest possible adoption of the euro. 'Redirecting the growth model?' Until the recent economic crisis, the countries of Central, East and Southeast Europe benefited for a long period from a process of 'catching-up' based on two pillars: (i) a high degree of liberalization of trade, capital movements and financial market integration, and (ii) membership in the EU or the prospects of either accession or a strong association with the EU. Both these two sets of factors will still be in operation also after the crisis, but there will be some significant changes in the way the 'integration growth model' will function. A combination of both changed external conditions (for example slow growth in main export markets, more difficult EMU entry) as well as internal behavioural responses to the crisis (for example more difficult financing conditions, increasing savings rates of the household sector, constraints of fiscal spending) will shape the growth paths of the region. The paper elaborates on policy issues that arise from the necessary 'redirecting of the growth model': the need for countercyclical fiscal policy, the importance of an adjustment in the real exchange rate and getting the credit system going in the short and medium run, as well as the issue of changes in regulatory frameworks and shared responsibilities in an integrated financial market context. The EU can play important roles in assisting these economies in their adjustments to the new situation and allowing them to return as quickly as possible to a sustainable catching-up growth path. |
| Keywords: | Central and East European new EU member states, Southeast Europe, future EU member states, Balkans, former Soviet Union, China, Turkey, economic forecasts, growth model, employment, competitiveness, exchange rates, inflation, EU integration, foreign trade, fiscal policy |
| JEL: | G18 O52 O57 P24 P27 P33 P52 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:wii:fpaper:fc:5&r=eec |
| By: | Ansgar Belke; Barbara von Schnurbein |
| Abstract: | We analyze the ECB Governing Council's voting procedures. The literature has by now discussed numerous aspects of the rotation model but does not account for many institutional aspects of the voting procedure of the GC. Using the randomization scheme based on the multilinear extension (MLE) of games, we try to close three of these gaps. First, we integrate specific preferences of national central bank presidents, i.e. their desired interest rates. Second, we address the agenda-setting power of the ECB president. Third, we do not simulate an average of the decisions but look at every relevant point in time separately. |
| Keywords: | Euro area, European Central Bank, monetary policy, rotation, voting rights |
| JEL: | D72 D78 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp983&r=eec |
| By: | Anindya Banerjee; Victor Bystrov; Paul Mizen |
| Abstract: | Much of the literature on interest rate pass through assumes banks set retail rates in relation to contemporary market rates. We argue that future rates also matter, and if forecasts of future rates are included, the empirical specifications of many previous studies are misspecified. Including forecasts rquires careful choice of the data and models used to make forecasts: a large number of variables could influence future market rates, suggesting that factor forecasts method may be an appropriate method to consider. We evaluate forecasts before including them in a model of retail rate adjustment for five interest rates in five European countries and the euro area as a whole. We find a significant role for forecasts of future interest rates in determining short- and long-run pass through, and we show that models which do not include future rates do not provide accurate estimates. |
| Keywords: | forecasting, factor models, interest rate pass-through |
| JEL: | C32 C53 E43 E47 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:10-07&r=eec |
| By: | Karsten Staehr |
| Abstract: | This paper discusses the public finances of the 10 new EU Countries from Central and Eastern Europe, with particular emphasis on the effects of the global financial crisis that started in 2008. The budget outcomes have differed markedly across the new EU countries, both before and during the crisis. The direct impact of the crisis on public finances was limited, but the severe downturns have strained public finances and increased debt ratios considerably. Estimations of budget reaction functions reveal that the budget balance has, in general, been moderately counter-cyclical, but also that the counter-cyclicality derives entirely from the revenue side. The medium-term fiscal outlook rests, to a large extent, on growth prospects. The uncertainties regarding future economic |
| Keywords: | global financial crisis, fiscal policy, budget reaction functions, Central and Eastern Europe |
| JEL: | H6 E62 P27 |
| Date: | 2010–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2010-02&r=eec |
| By: | Domenico Giannone; Michele Lenza; Daphne Momferatu; Luca Onorante |
| Abstract: | In this paper, we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro Area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Price (HICP) and their determinants. The model is estimated using Bayesian shrinkage. We evaluate the model in real time and find that it produces accurate forecasts. We use the model to study the pass-through of an oil shock and to study the evolution of inflation during the global financial crisis. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2010_011&r=eec |
| By: | Waltraud Schelkle |
| Abstract: | The crisis since August 2007 provides an opportunity to observe the workings of good governance institutions under an extreme stress test and in radically different political settings. Institutions such as independent central banks, fiscal rules and regulatory oversight of public finances were meant to depoliticize macroeconomic stabilization. The comparison of responses to the crisis in the United States and in the European Union shows that good governance institutions are in crisis in the US while it has been a good crisis for governance so far in the EU. Levels of fiscal stimulus and monetary easing are surprisingly similar between the EU and the US, yet the ECB has maintained its independence and member states have been restrained from inserting protectionist elements in their stimulus measures. By contrast, the boundaries between economic stabilization and distributive politics have been wiped out in the US because neither the political forces in the states nor the economic forces in the financial sector erected many defences. In the EU, the boundaries as drawn are inimical to joint stabilization efforts but this is exactly why they are politically self-enforcing. |
| Keywords: | central bank independence, crisis, depoliticization, European Union, fiscal rules, United States |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:16&r=eec |
| By: | Andrzej Torój (Ministry of Finance, Poland) |
| Abstract: | This paper generalizes the standard methods of solving rational expectations models to the case of time-varying nonstochastic parameters, recurring in a finite cycle. Such a specification occurs in a simple stylized New Keynesian model of the euro area when we combine the rotation in the ECB Governing Council (as constituted by the Treaty of Nice) and home bias in the interest rate decisions taken by its members. In small and mid-size economies, this combination slightly increases output and inflation volatility, as compared to a monetary policy setup without rotation. The method of Christiano (2002) has also been applied to solve the model when we assume a lagged perception of foreign macroeconomic shocks by domestic agents. When the cross-country synchronization of shocks is low or moderate and when these shocks are relatively persistent, the exclusion of contemporaneous foreign shocks from domestic agents' information sets may raise the volatility of output. There is also some tentative evidence that this effect could particularly affect mid-size economies. |
| Keywords: | EMU, monetary policy, solving rational expectations models, generalized Schur decomposition, heterogeneity. |
| JEL: | C32 C61 E52 F15 |
| Date: | 2009–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:fpo:wpaper:1&r=eec |
| By: | Jens R. Clausen; Bianca Clausen |
| Abstract: | This paper simulates out-of-sample inflation forecasting for Germany, the UK, and the US. In contrast to other studies, we use output gaps estimated with unrevised real-time GDP data. This exercise assumes an information set similar to that available to a policymaker at a given point in time since GDP data is subject to sometimes substantial revisions. In addition to using real-time datasets for the UK and the US, we employ a dataset for real-time German GDP data not used before. We find that Phillips curves based on ex post output gaps generally improve the accuracy of inflation forecasts compared to an AR(1) forecast but that real-time output gaps often do not help forecasting inflation. This raises the question how operationally useful certain output gap estimates are for forecasting inflation. |
| Keywords: | Cross country analysis , Economic forecasting , Economic growth , Germany , Gross domestic product , Inflation , United Kingdom , United States , |
| Date: | 2010–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/52&r=eec |
| By: | Tito Boeri |
| Abstract: | Negative perceptions about migrants in Europe, the Continent with the largest social policy rogrammes, are driven by concerns that foreigners are a net fiscal burden. Increasing concerns are pressing Governments, in the midst of the recession, to reduce welfare access by migrants or further tighten migration policies. Are there politically feasible alternatives to these two hardly enforceable (and procyclical) policy options? In this paper we look at economic and cultural determinants of negative perceptions about migrants in Europe. Based on a simple model of the perceived fiscal effects of migration and on a largely unexploited database (EU-Silc), we find no evidence that legal migrants, notably skilled migrants, are net recipients of transfers from the state. However, there is evidence of “residual dependency” on contributory transfers and self-selection migrants more likely to draw on welfare in the countries with the most generous welfare state. Moreover, those favouring redistribution to the poor do not overlap with those considering migrants as part of the same community. A way out of the migration dilemma facing Europe involves i. co-ordinating safety nets across the EU, and ii. adopting explicitly selective migration policies. Other options involve restricting welfare access by migrants and subsidising voluntary return migration of lowskilled migrants during the recession. |
| Keywords: | Migration policy, Welfare access, Fiscal externality |
| JEL: | J38 J5 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:05&r=eec |
| By: | Guiseppe Bertola; Lorenza Mola |
| Abstract: | International posting of workers and mobility of self-employed service suppliers lie between outright migration and trade in goods: their regulation, for both distributional and marketcorrecting purposes, is not as difficult to harmonize as that of labour markets, but personal mobility is more visible and socially intrusive than product market interactions. This paper analyzes economic and legal tensions between national regulatory frameworks and international competition in these areas, in both the intra-EU and global contexts, highlighting how interactions between the external and internal roles of the European Commission may foster efficient integration of markets and policies in this and other fields. |
| Keywords: | Economic integration, Trade in services, GATS, European Union, Labour regulation, Services regulation, Harmonization, Posted workers |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:09&r=eec |
| By: | Arnstein Aassve; Cristina Ruggeri; Zsolt Spéder |
| Abstract: | Increasing life expectancy coupled with declining birth rates is prompting European countries to revise their current pension schemes. The key elements of pension reforms are 1) introducing funded schemes as a means to supplement the current pay-as-you-go system, and 2) a lengthening of the working careers of European citizens. The policy reforms needed constitutes perhaps the biggest challenge facing European policy makers since the introduction of the welfare state after the Second World War. The urgency of the policy reforms are reflected by the European Council Summits of Stockholm (2001) and Barcelona (2002), where the attending policy makers agreed to both increase the labour force participation among older workers and to delay the retirement period. Notwithstanding the efforts, recent changes in the employment rates and the retirement age indicate that the great majority of countries are way off the targets set for 2010. On the backdrop of the policy challenges lying ahead, we consider in this paper individuals' preferences for work and retirement in 23 European countries. A deeper understanding of these preferences helps policy makers, not only informing them about the potential success of the planned pension reforms, but also to make adjustments to its design that may lead to efficiency gains in welfare provision. We find that on average individuals prefer to retire at a younger age than the current mean retirement age. However, there is huge variation in these preferences both at the individual and country levels. We find rather robust evidence to suggest that individuals are willing to work longer as the average life expectancy is increasing. |
| Keywords: | life expectancy, GDP, retirement preferences, pension reforms, European Social Survey, multilevel models |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:don:donwpa:022&r=eec |
| By: | Jean Pisani-Ferry |
| Abstract: | Jean Pisani-Ferry discusses the emergence of China as a key economic and global player from a European perspective. Looking ahead, this paper focuses on two key aspects, the rebalancing of global growth and the strengthening of global governance, and explains how these will shape Sino-European economic relations. The author argues that now is the time for high-quality dialogue between policymakers from both sides. China and the European Union must overcome their institutional differences to pave the way for fruitful economic cooperation. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:404&r=eec |
| By: | Anita Tuladhar; Alexander W. Hoffmaister; Jorge Roldos |
| Abstract: | This paper applies the models used to study yield curve dynamics and spillovers in the U.S. and other countries to Central and Eastern European countries (CEE countries). Using the Diebold, Rudebusch, and Aruoba (2006) dynamic version of the Nelson-Siegel representation of the yield curve, the paper finds that the two-way relationship between macroeconomic and financial variables in the CEE countries is similar to the one in mature economies. However, inflation shocks have very little persistence in the CEE countries, owing to the strong convergence trends in these countries-which tend to re-anchor expectations faster. Increased convergence in policies and market integration over time are associated with a stronger correlation between the levels of the yield curves, while the curves slopes are more driven by idiosyncratic factors. Shifts in the euro yield curve are transmitted both to interest rates and inflation expectations in the CEE countries-and transmission is stronger after 2004. |
| Keywords: | Central and Eastern Europe , Cross country analysis , Economic integration , Economic models , International bond markets , Regional shocks , Spillovers , |
| Date: | 2010–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/51&r=eec |
| By: | Staehr, Karsten |
| Abstract: | This paper investigates the process of price convergence in the 10 new EU countries from Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibit little explanatory power towards relative inflation, while the lagged price level has some explanatory power. In the long term the relative income and price levels are closely correlated implying concurrent nominal and real convergence. Deviations from the long-term relation between price and income levels are gradually closed by changes in relative inflation and GDP growth, but the process of convergence appears to be rather slow. In the short term the capital inflows associated with current account deficits put substantial upward pressure on the relative price inflation, while the Balassa-Samuelson effect appears to be subdued |
| Keywords: | real convergence, nominal convergence, real exchange rate, inflation, transition economies |
| JEL: | E31 O57 P24 |
| Date: | 2010–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2010-04&r=eec |
| By: | Andrés Rodríguez-Pose; Anne Krøijer |
| Abstract: | The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having a significantly negative to a significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency. |
| Keywords: | Fiscal decentralization, economic growth, efficiency, devolution, Central and Eastern Europe |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:12&r=eec |
| By: | Daniel Kanda |
| Abstract: | Asset booms and sectoral changes can distort traditional estimates of structural fiscal revenue, and could lead to serious fiscal policy errors. This paper extends the estimation of structural revenues to take account of asset prices and sectoral changes, and applies this to the case of Ireland, where a property bust has revealed a large hole in the public finances. It is shown that excluding these factors led to a substantial bias in the estimation of structural revenues, and the structural balance prior to the crisis was much larger than earlier estimated. |
| Keywords: | Asset prices , Business cycles , Economic growth , Economic models , Fiscal analysis , Fiscal policy , Government expenditures , Housing prices , Ireland , National income , Revenues , Taxes , |
| Date: | 2010–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/57&r=eec |
| By: | Yvonne Schindele (School of Economics and Business Administration, Friedrich-Schiller-University Jena) |
| Abstract: | Since the beginning of the transformation of East Germany from a socialist planned economy to a market economy, there has been an ambitious political goal of fostering entrepreneurial activity in that part of the country. One of the most-hoped for results of this undertaking is the anticipated contribution of small and new firms to solving the economic, social, and political problems of East Germany, thereby narrowing the gap between East and West Germany. This paper uses panel data from 1992 to 2005 on 97 German regions to analyze recent convergence in self-employment rates. An astonishing catching-up process is observed for East German regions during the period under study. However, the general convergence between East and West Germany observed during the first years after reunification has not been maintained. In short, some East German regions have achieved convergence with West German self-employment rates and some have not. |
| Keywords: | Entrepreneurship, regional convergence, self-employment, regional devel- opment, transition, Germany |
| JEL: | L26 M13 O1 O18 O47 R11 |
| Date: | 2010–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-015&r=eec |
| By: | Geyer, Johannes (DIW Berlin); Steiner, Viktor (DIW Berlin) |
| Abstract: | We analyze the impact of changing employment patterns and pension reforms on the future level of public pensions across birth cohorts in Germany. The analysis is based on a rich dataset that combines household survey data from the German Socio-Economic Panel Study (SOEP) and process-produced microdata from the German pension insurance. A microsimulation model is developed which accounts for cohort effects in individual employment and unemployment and earnings over the lifecycle as well as the differential impact of recent pension reforms. Cohort effects for individuals born between 1937 and 1971 vary greatly by region, gender and education and strongly affect lifecycle wage profiles. The largest effects can be observed for younger cohorts in East Germany and for the low educated. Using simulated life cycle employment and income profiles, we project gross future pensions across cohorts taking into account changing demographics and recent pension reforms. Simulations show that pension levels for East German men and women will fall dramatically among younger birth cohorts, not only because of policy reforms but due to higher cumulated unemployment. For West German men, the small reduction of average pension levels among younger birth cohorts is mainly driven by the impact of pension reforms, while future pension levels of West German women are increasing or stable due to rising labor market participation of younger birth cohorts. |
| Keywords: | public pensions, cohort effects, microsimulation |
| JEL: | H55 J26 J11 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4815&r=eec |