nep-eec New Economics Papers
on European Economics
Issue of 2010‒04‒17
eighteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness By Zemanek, Holger; Belke, Ansgar; Schnabl, Gunther
  2. Housing Cycles In The Major Euro Area Countries By Luis J. Álvarez; Guido Bulligan; Alberto Cabrero; Laurent Ferrara; Harald Stahl
  3. the Reliability of Real Time Estimates of the EURO Area Output Gap By Massimiliano Marcellino; Alberto Musso
  4. Down the non-linear road from oil to consumer energy prices: no much asymmetry along the way By Fabrizio Venditti
  5. EFR 2009-01 A factor analysis approach to measuring European loan and bond market integration By Wagenvoort, Rien; Ebner, André; Morgese Borys, Magdalena
  6. Mortgage finance in central and eastern Europe -- opportunity or burden ? By Beck, Thorsten; Kibuuka, Katie; Tiongson, Erwin
  7. Monetary Transmission Right from the Start: The (Dis)Connection Between the Money Market and the ECB’s Main Refinancing Rates By Puriya Abbassi; Dieter Nautz
  8. Fiscal Expectations on the Stability and Growth Pact: Evidence from Survey Data By Marcos Poplawski-Ribeiro; Jan-Christoph Rülke
  9. Assessing the Casual Relationship between Euro-Area Money and Price in Time-Varying Environment By Stephen Hall
  10. The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover By Lunn, Pete; Duffy, David
  11. Simultaneous monetary policy announcements and international stock markets response: an intraday analysis By Hussain, Syed Mujahid
  12. Deep Financial Integration and Volatility By Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
  13. Identification in Structural Vector Autoregressions Through Graphical Modelling and Monetary Policy: A Cross-Country Analysis By Fragetta, Matteo
  14. Financial Market Conditions, Real Time, Nonlinearity and European Central Bank Monetary Policy: In-Sample and Out-of-Sample Assessment By Costas Milas; Ruthira Naraidoo
  15. The Macroeconomic Consequences of EMU : International Evidence from a DSGE Model By Jürgen Jerger; Oke Röhe
  16. Macro-fiscal volatility and the composition of public spending By Riscado, Sara Maria; Stančík, Juraj; Välilä, Timo
  17. Fiscal Adjustment and the Costs of Public Debt Service: Evidence from OECD Countries By Christoph A. Schaltegger; Martin Weder
  18. The Transatlantic Banking Crisis: Lessons and EU Reforms By Welfens, Paul J. J.

  1. By: Zemanek, Holger (University of Leipzig); Belke, Ansgar (University of Duisburg-Essen); Schnabl, Gunther (University of Leipzig)
    Abstract: Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.
    Keywords: structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term
    JEL: E24 F15 F16 F32 F33
    Date: 2009–04
  2. By: Luis J. Álvarez (Banco de España); Guido Bulligan (Banca d’Italia); Alberto Cabrero (Banco de España); Laurent Ferrara (Banque de France); Harald Stahl (Deutsche Bundesbank)
    Abstract: The recent burst of the house price bubble in the United States and its spillover effects on real economies worldwide has rekindled the interest in the role of housing in the business cycle. In this paper, we investigate the relationships between housing cycles among the four major euro area countries (Germany, France, Italy and Spain) over the sample 1980Q1-2008Q4. Our main findings are that GDP cycles show a high degree of comovement across these four countries, reflecting trade linkages, but much weaker ones for housing market cycles, where idiosyncratic factors play a major role. House prices are even less related than quantities across countries. We also find much stronger relationships in the common monetary policy period.
    Keywords: Housing cycles, synchronisation measures, euro area countries
    JEL: E32 R21 R32
    Date: 2010–03
  3. By: Massimiliano Marcellino; Alberto Musso
    Abstract: This paper provides evidence on the reliability of euro area real-time output gap estimates, including those provided by the IMF, OECD and EC and a set of model based measures. A genuine real-time data set is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2006. It turns out that real-time estimates of the output gap are characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability, while data revisions seem to play a minor role. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real time estimates are much more correlated with final estimates than for the euro area, data revisions play a larger role, but overall the unreliability in real time of the US output gap measures detected in earlier studies is confirmed in the more recent period.
    Keywords: Output gap, real-time data, euro area, data revisions
    JEL: E31 E37 E52 E58
    Date: 2010
  4. By: Fabrizio Venditti (Bank of Italy)
    Abstract: In the past decade changes in oil prices have played a significant role in shaping inflation dynamics in the US and in the euro area, largely through their direct effect on fuels prices, reviving the controversy over whether the prices of petroleum products respond more promptly to positive than to negative oil price shocks. This paper provides fresh evidence on this issue for the US, the euro area and the four largest euro area countries (Germany, France, Italy and Spain), both for petrol and diesel prices. Inference is based on the dynamic response of downstream prices to upstream shocks, rather than on tests on the regression slopes as in the majority of existing studies, taking into account the non-linearity of the impulse response function in models with asymmetric adjustment, so far ignored in this literature. The empirical analysis shows that fuels prices respond very promptly to oil price shocks, with some heterogeneity across countries, and that no systematic evidence of asymmetries emerges. This result is robust across periods of high and low oil price volatility and holds both for standard and large shocks.
    Keywords: energy, oil prices, asymmetry, inflation
    JEL: C52 Q43 E31
    Date: 2010–03
  5. By: Wagenvoort, Rien (European Investment Bank, Economic and Financial Studies); Ebner, André (Munich Graduate School of Economics); Morgese Borys, Magdalena (University La Sapienza)
    Abstract: By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.
    Keywords: financial market integration; corporate loan; corporate bond; panel unit root test; factor analysis
    JEL: C12 C23 G12 G21
    Date: 2009–11–30
  6. By: Beck, Thorsten; Kibuuka, Katie; Tiongson, Erwin
    Abstract: Household credit, especially for mortgages, has doubled over the past years in the new European Union member countries, raising concerns about the economic and social consequences of household indebtedness in the event of a macroeconomic crisis. Using household survey data for 2005, 2006, and 2007 for both old and new European Union members, this paper assesses the determinants of access to mortgage finance. It also examines whether mortgage holders were more likely to suffer financial distress compared with non-mortgage holders in the period before the global financial crisis. The analysis does not find any systematic evidence that mortgage holders are financially more vulnerable than renters or outright owners; in fact, the incidence of financial vulnerability generally fell between 2005 and 2007, possibly reflecting the strong income growth experienced by these countries over this period. In addition, although tenure status is more difficult to explain in the new European Union member countries, the analysis finds that many of the same drivers of tenure status in the older member countries generally drive tenure status in the newer member countries as well. Finally, there is no evidence that access to mortgage credit is based on expected income in the old or in the new European Union member countries.
    Keywords: Access to Finance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Emerging Markets,Housing Finance
    Date: 2010–02–01
  7. By: Puriya Abbassi; Dieter Nautz
    Abstract: The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.
    Keywords: Financial Crisis, Monetary transmission process, Central bank auctions, European Central Bank, Money markets
    JEL: E43 E52 E58 D44
    Date: 2010–03
  8. By: Marcos Poplawski-Ribeiro; Jan-Christoph Rülke
    Abstract: The paper uses survey data to analyze whether the Stability and Growth Pact (SGP) has changed financial market’s expectations on government budget deficits in France, Germany, Italy, and the UK. Our findings indicate that accuracy of financial experts’ deficit forecasts has increased in France during the SGP. The Pact seems to have also promoted a gain in credibility of European Commission’s deficit forecasts in France, Italy, and in the UK, particularly after its reform in 2005 and up to December 2007. Nevertheless, the National Fiscal Authorities’ forecasts of France, Germany, and Italy seem to have not been credible among market experts during the SGP. These results suggest that additional measures could be taken in order to make the fiscal rules of the Pact more credible among market specialists.
    Keywords: Expectations; credibility; stability and growth pact; survey data
    JEL: E62 H11 H30 H50
    Date: 2010–03
  9. By: Stephen Hall
    Abstract: The paper provides new evidence on the causal relationship between money and price for the euro area using quarterly data for the period 1980 to 2006, employing two alternative methods of estimation: the vector error correction (VEC) and time-varying coefficient (TVC) estimation techniques. The latter technique has the advantage over the former technique in that it can deal with possible specification biases and spurious relationships that may have arisen from structural changes. The empirical results from the VEC method reveal a bidirectional causal relationship between money and price. Contrary, the results from the TVC technique suggest that money is acting as an exogenous process determining the price level.
    Keywords: Causality; VEC, Time Varying Coefficient Estimation; Euro Area
    JEL: C20 E41
    Date: 2009–09
  10. By: Lunn, Pete; Duffy, David
    Abstract: Following the Euro changeover in January 2002, consumers across the Euro Area perceived a sharp rise in inflation, in contrast to official figures. Several theories have been advanced to explain this apparent economic illusion, but they struggle to account for its striking scale and persistence. We offer an alternative account, based on the premise that the currency changeover increased consumers' perceptual error when assessing the value of monetary amounts. Under plausible assumptions, this would lead them to experience a loss of purchasing power. We confirm two empirical hypotheses in support of the theory: (1) the extent of overestimation of inflation was strongly associated with subjective difficulty using the Euro; (2) there was a simultaneous downward shift in expected inflation. Our results imply that currency changeovers are not simple matters of numerical conversion.
    Keywords: consumer behaviour/Euro changeover/inflation expectations/inflation perceptions/uncertainty
    Date: 2010–03
  11. By: Hussain, Syed Mujahid (Department of Finance and Statistics, Hanken School of Economics, Helsinki)
    Abstract: This paper investigates the return and volatility responses of major European and the US equity indices to monetary policy surprises using extensive intraday data on 5-minute price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news. Our results show that monetary policy decisions generally exert an immediate and significant influence on stock index returns and volatilities in both European US markets. Our findings also indicate that European Central Bank’s (ECB) press conferences following monetary policy decisions on the same day have define impacts on European index return volatilities, implying that they convey important information to market participants. However, in contrast to some earlier evidence, we do not find any support for the hypothesis that return volatilities in European and US markets are significantly affected by the path surprises. Overall, our analysis suggests that the use of high frequency data is critical for separating the effects of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.
    Keywords: conditional mean; conditional volatility; macroeconomic news; monetary policy; high frequency data
    JEL: G14 G15
    Date: 2010–03–10
  12. By: Sebnem Kalemli-Ozcan; Bent Sørensen; Vadym Volosovych
    Abstract: We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset from EU countries over time, we construct a measure of "deep" financial integration at the regional level based on foreign ownership at the firm level. We find a positive effect of foreign ownership on volatility of firms' outcomes. This effect survives aggregation and carries over to regional output. Exploiting variation in the transposition dates of EU-wide legislation, we find that high trust regions in countries who harmonized capital markets sooner have higher levels of financial integration and volatility.
    JEL: E32 F15 F36 O16
    Date: 2010–04
  13. By: Fragetta, Matteo (CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy)
    Abstract: There is an ongoing debate on how to identify monetary policy shocks in SVAR models. Graphical modelling exploits statistical properties of data for identification and offers a data based tool to shed light on the issue. We conduct a cross-country analysis, considering European Monetary Union (EMU), Japan and US. We obtain some important results. The information set of the monetary authorities, which is essential for the identification of the monetary shock seems to depend on availability of data in terms of higher frequency with respect to the policy instrument (US and Japan). Moreover, there is not yet a widespread consensus on whether or not the European Monetary Union should be considered as a closed economy. Our results indicate that EMU official interest rate depends on the US federal funds rate.
    Keywords: monetary policy; SVAR; graphical modelling
    JEL: C32 E50
    Date: 2010–04–12
  14. By: Costas Milas (Economics Group, Keele Management School, Keele University, UK and Rimini Centre for Economic Analysis, Rimini, Italy); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: We explore how the ECB sets interest rates in the context of policy reaction functions. Using both real-time and revised information, we consider linear and nonlinear policy functions in inflation, output and a measure of financial conditions. We find that amongst Taylor rule models, linear and nonlinear models are empirically indistinguishable within sample and that model specifications with real-time data provide the best description of in-sample ECB interest rate setting behavior. The 2007-2009 financial crisis witnesses a shift from inflation targeting to output stabilisation and a shift, from an asymmetric policy response to financial conditions at high inflation rates, to a more symmetric response irrespectively of the state of inflation. Finally, without imposing an a priori choice of parametric functional form, semiparametric models forecast out-of-sample better than linear and nonlinear Taylor rule models.
    Keywords: monetary policy, nonlinearity, real time data, financial conditions
    JEL: C51 C52 C53 E52 E58
    Date: 2009–10
  15. By: Jürgen Jerger (Osteuropa-Institut, Regensburg (Institut for East European Studies)); Oke Röhe (University of Regensburg)
    Abstract: In this paper, we estimate a New Keynesian DSGE model developed by Ireland (2003) on French, German and Spanish data with the aim to explore the macroeconomic consequences of EMU. In order to validate the results from the DSGE model, we amend this analysis by stability tests of monetary policy reaction functions for these countries. We find that (a) the DSGE structure is well suited for the characterization of key macroeconomic features of the three economies; (b) significant effciency gains were realized in terms of lower adjustment cost of prices and the capital stock; (c) the behavior of monetary policy did not change in Germany, unlike in France and Spain. Specifically, the impact of inflation on interest rates increased considerably in the two latter countries.
    Keywords: DSGE, monetary policy, EMU
    JEL: E31 E32 E52
    Date: 2009–10
  16. By: Riscado, Sara Maria (European University Institute, Department of Economics); Stančík, Juraj (CERGE-EI, Charles University Prague and Academy of Sciences of the Czech Republic); Välilä, Timo (European Investment Bank, Economic and Financial Studies)
    Abstract: Earlier empirical literature has examined some long- and medium-term aspects of macro-fiscal volatility while leaving its short-term fiscal impact unexplored. To help fill that gap, we examine the impact of macro-fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991—2007. Our results suggest that contemporaneous increases in the volatility of regularly collected revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc –type of taxes such as capital taxes tend to favour public consumption spending. A possible explanation to these differences concerns news about the underlying economic conditions embedded in short-term volatility changes: the policy maker may be more inclined to increase public investment in response to persistent changes in the economic conditions, while temporary changes may prompt a reaction on consumption spending.
    Keywords: tax volatility; public investment; public consumption
    JEL: C33 E32 E62 H29 H50
    Date: 2010–02–28
  17. By: Christoph A. Schaltegger; Martin Weder
    Abstract: We use a panel of 21 OECD countries from 1970 to 2009 to investigate the effects of different fiscal adjustment strategies on long-term interest rates – a key fiscal indicator reflecting the costs of government debt service. A government confronted with high deficits and rising debt will sooner or later need to enact fiscal adjustments in order to avoid solvency problems. Over the last four decades, such measures taken by governments in OECD countries have varied in duration, size, composition and in their success to re-establish fiscal sustainability. Control-ling for various economic, fiscal and political factors, we find that the size and the composi-tion of a fiscal adjustment significantly affect interest rates as well as yield spreads. Adjust-ments that are relatively large and those that primarily depend on expenditure cuts lead to substantially lower long-term interest rates. However, periods of fiscal adjustments do not generally have an influence on interest rates, even if they were successful and led to lower deficits and debt levels. Instead, financial markets only seem to value strict and decisive measures – a clear sign that the government’s pledge to cut the deficit is credible.
    Keywords: Fiscal Adjustment; Consolidation Policy; government deficit; long-term interest rates
    JEL: E61 E63 H61
    Date: 2010–04
  18. By: Welfens, Paul J. J. (University of Wuppertal)
    Abstract: The key dynamics of the transatlantic banking crisis are analyzed – with emphasis on the fact that the banking disaster of 2007/08 was not really a surprise –, and the five key requirements for restoring stability and efficiency in the EU/OECD banking sector are highlighted. Most important, however, is the introduction of a new tax regime designed to encourage bankers to take a more long term time horizon in decision-making and to reduce excessive risk-taking. Banks and funds should be taxed not only on the basis of profits but also on the basis of the variability – read variance – of the rate of return on equity: the higher the variability over time the higher the tax to be paid. The quality and comprehensiveness of banks’ balance sheets must be radically improved and all off-balance sheet activities must be included in future total balance sheets. The medium term structure of employment in terms of the breakdown nontradables/tradables will have to adjust.
    Keywords: banking, financial market reforms, EU, globalization, USA
    JEL: E50 F01 F30
    Date: 2009–04

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