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on European Economics |
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Issue of 2010‒05‒08
thirteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice |
| Abstract: | Following the launch of the Euro in 1999, integration among Euro area financial markets increased considerably. As a result, portfolio home bias declined across the European financial markets. However, greater market integration has generated a new bias: portfolio Euro bias, a situation where Euro investors tend to hold large proportion of assets issued within the Euro region. The first part of this paper presents an empirical analysis of the economic factors at play behind the switch from home bias to Euro bias. We find that decline in default risk and transaction cost are two key determinants of the rise in portfolio Euro bias. The second part of the paper goes deeper into the effects of Euro bias on Euro area bond and equity markets. We observe that both government and corporate bond markets revealed clear signs of strain during the recent financial turmoil. Our results also reveal that the risk-reduction potential from geographic diversification within the Euro equity market is lower than that of the Euro sector diversification. |
| Keywords: | Financial integration; home bias; Euro bias; transaction costs. |
| JEL: | G11 G12 F21 F36 |
| Date: | 2010–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22430&r=eec |
| By: | Ralph Setzer; Paul van den Noord; Guntram B. Wolff |
| Abstract: | In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments.Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market. |
| Keywords: | european union eu setzer wolff van den Noord euro area money heterogeneity money holdings |
| JEL: | E41 E51 E52 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0407&r=eec |
| By: | Salvador Barrios; Pietro Rizza |
| Abstract: | This paper analyzes the size and the determinants of unexpected changes in EU countries' tax revenues and their impact on the ability of EU governments to use fiscal policy as a macroeconomic stabilisation device. We make use of information taken from the Stability and Convergence Programmes (SCP) setting countries' medium-term fiscal plans and focus on the period preceding the 2008/2009 global financial crisis. Tax revenue surprises are found to have fluctuated widely, alternating periods of sizeable windfalls and periods of substantial shortfalls.When analysing this, we find that GDP growth surprises and, in some cases (i.e. Ireland, Spain the UK and Finland) asset prices fluctuations have exerted the most significant influence. In the sequel we provide evidence on the incidence of these unexpected changes in governments' tax revenues on the ability of governments to conduct counter-cyclical fiscal policies, which are desirable from a macroeconomic perspective.We find that countries that have experienced the largest tax revenue windfalls in the run-up to the 2008/2009 crisis have also tended to run more pro-cyclical fiscal policies although these results vary depending on the use of ex-post vs. real-time data and on the method used to calculate the cyclical position of the economy. Put differently, these results tend to indicate that while tax revenue windfalls may be good for the public purse during favourable times they may also (paradoxically) dwindle the ability of the countries concerned to run counter-cyclical fiscal policies when cyclical conditions revert. |
| Keywords: | european union eu tax revenues windfalls shortfalls business cycles fiscal policy stabilisation barrios rizza |
| JEL: | E62 E63 E65 E32 H2 H6 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0404&r=eec |
| By: | Lars Jonung; Eoin Drea |
| Abstract: | This study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question. |
| Keywords: | The euro, optimum currency area, ECB, EMU, Federal Reserve System, monetary unification, Europe, United States, Jonung, Drea |
| JEL: | B22 E E5 F02 F33 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0395&r=eec |
| By: | Giorgio Barba Navaretti (University of Milan, Centro Studi Luca d'Agliano); Giacomo Calzolari (University of Bologna, CEPR, Centro Studi Luca d'Agliano); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d'Agliano); Micol Levi (Centro Studi Luca d'Agliano) |
| Abstract: | This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks' foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates has been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks' internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups' affiliates, compared to standing alone national banks. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:40&r=eec |
| By: | Benchimol, Jonathan (CES, University Paris 1 Panthéon-Sorbonne and Department of Economics, ESSEC Business School); Fourçans, André (ESSEC Business School, Department of Economics) |
| Abstract: | In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents’ risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor. |
| Keywords: | Bayesian Estimation; DSGE Model; Euro Area; Money |
| JEL: | E31 E51 E58 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-10005&r=eec |
| By: | Francesca D'Auria; Andrea Pagano; Marco Ratto; Janos Varga |
| Abstract: | This paper calibrates the Roeger-Varga-Veld (2008) micro-founded DSGE model with endogenous growth for all EU member states using country specific structural characteristics and employs the individual country models to analyse the macroeconomic impact of various structural reforms. We analyse the costs and benefits of reforms in terms of fiscal policy instruments such as taxes, benefits, subsidies and administrative costs faced by firms. We find that less R&D intensive countries would benefit the most from R&D promoting and skill-upgrading policies. We also find that shifting from labour to consumption taxes, reducing the benefit replacement rate and relieving administrative entry barriers are the most effective measures in those countries which have high labour taxes and entry barriers. |
| Keywords: | Structural reforms, endogenous growth, DSGE modelling, EU member states, tax credits, tax shifts, entry barriers, human capital, D'Auria, Pagano, Ratto, Varga |
| JEL: | E32 E62 O30 O41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0392&r=eec |
| By: | Alfonso Arpaia; Nicola Curci |
| Abstract: | This paper provides an analysis of the labour market adjustment to the 2008-2009 recession. It highlights differences in the response of employment and unemployment across countries and different socioeconomic groups. For all EU Member States, it provides evidence of the developments during the crisis of the monthly job finding and separation rates. This helps to assess whether the increase in unemployment is due to an increase of job separation or to a decline in the job finding rate. The paper discusses the risks of jobless growth and compares the dynamics of unemployment and employment across different periods. It provides evidence of an asymmetric response over the cycle, with recessions being characterised by more job destruction than by job creation in the following recoveries. The analysis of the wage dynamics suggests that there has been an adjustment in the compensation per employee led by the variable component; yet, this has not been sufficient to avoid the increase in the nominal unit labour costs due to labour hoarding. |
| Keywords: | european union eu recession labour markets unemeployment Workers' flows job separation job finding rate Okun's law arpaia curci |
| JEL: | E24 E32 J6 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0405&r=eec |
| By: | Werner Roeger; Janos Varga; Jan in 't Veld |
| Abstract: | This paper uses a semi-endogenous growth model to identify possible sources for three interrelated stylised differences between the EU and the US, namely a higher level of productivity and knowledge investment and larger skill premia in the US compared to the EU. The model allows us to explain these differences in terms of differences in subsidies to R and D, mark ups, administrative entry barriers and financial frictions.The paper provides a ranking about the relative importance of these factors. Goods market competition and both administrative and financial entry barriers are the most important explanatory factors for lower productivity in the EU, while entry barriers explain the bulk of the knowledge investment gap and high skilled wage premia. |
| Keywords: | productivity differences endogenous growth R and D market structure skill composition dynamic general equilibrium modelling Economic P how to close the productivity gap between the US a quantitative assessment using a semi-endogenou Varga Roeger in 't Veld European Economy. Economic Papers |
| JEL: | C51 E21 E22 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0399&r=eec |
| By: | Carlos Garcimartín (Universidad Rey Juan Carlos); Luis Rivas (IE University); Pilar García Martínez (Universidad de Salamanca) |
| Abstract: | Broadly speaking, the balance-of-payments constraint hypothesis as developed by Thirlwall has been empirically supported. Yet, it shows some shortcomings highlighted in the literature. In our opinion, two of them must be analysed. First, temporary disequilibria and capital flows must be incorporated into the balance-of-payments constrained growth models. Second, the role of relative prices must be made explicit, since it can be relevant even in an external constraint framework. This study is aimed at developing a model that incorporates both possibilities: temporary external disequilibria and a the impact of relative prices. This model is subsequently used to analyse the evolution of the Spanish and Portuguese economies in last decades, and, in particular, the different path shown by both countries since their accession to the Eurozone. |
| Keywords: | Growth, Balance of payments constraint, Exchange rate. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:05-10&r=eec |
| By: | Julia Lendvai; Werner Roeger |
| Abstract: | This paper studies external deficits in the Baltics between 1995 and 2007.It uses a calibrated small-open-economy dynamic general equilibrium model incorporating a financial accelerator to assess to what extent deficits can be explained by productivity growth, fall in spreads and increasing access to credit.Results suggest that the external deficit and other key macroeconomic aggregates can be well fitted by the equilibrium response of the model economy. Real convergence is found to have been dominant in the first half of the sample. More reversible financial factors became increasingly important towards the end of the period pointing to growing vulnerability. Positive growth outlook is also likely to have played a significant role in the build up of the foreign debt. Reversal scenarios confirm the need for a sizable readjustment. |
| Keywords: | Baltic States financial accelerator dynamic general equilibrium Roeger Lendvai External Deficits in the Baltics 1995 to 2007 Catching Up or Imbalances |
| JEL: | F41 C68 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0398&r=eec |
| By: | Arghyrou, Michael G (Cardiff Business School); Tsoukalas, John D. |
| Abstract: | We use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for Greek government bonds. We argue that the crisis itself and its escalating nature are very likely to be the result of: (a) steady deterioration of Greek macroeconomic fundamentals over 2001-2009 to levels inconsistent with longterm EMU participation; and (b) a double shift in markets. expectations, from a regime of credible commitment to future EMU participation under an implicit EMU/German guarantee of Greek fiscal liabilities, to a regime of non-credible EMU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. We argue that the risk of contagion to other periphery EMU countries is significant; and that without extensive structural reforms the sustainability of the EMU is in question. |
| Keywords: | Currency crises; bonds market; expectations; fiscal guarantees; contagion |
| JEL: | F31 F33 F34 F41 F42 F50 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/3&r=eec |
| By: | Eilev S. Jansen (Statistics Norway) |
| Abstract: | A dynamic consumption function, where consumption in the long run is determined by households’ disposable income and wealth, has been superior to the Euler equation in explaining the development of Norwegian aggregate consumption over several decades. This period covers the years of financial deregulation in the mid 1980s, the banking crisis around 1990 following the deregulation and the current international financial crisis. In the current version, long run consumption is homogeneous in income and wealth and there is also a significant effect from after-tax real interest rates. A change in the correlation pattern between real interest rates and wealth, which is related to a change in the monetary policy regime, is the reason why both variables need to be included in the long run relationship in order to explain the development over the past four years. |
| Keywords: | financial crisis; consumption; wealth effects; interest rates; savings rate. |
| JEL: | C51 C52 C53 E21 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:616&r=eec |