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on European Economics |
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Issue of 2010‒05‒15
fifteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Robert E. Krainer (University of Wisconsin Madison) |
| Abstract: | In this paper we compare a traditional demand oriented model to a non-traditional capital budgeting model of bank lending based on movements in the equity cost of capital for France, Germany, and the Euro area. Using non-nested hypothesis tests and omitted variables tests, we find that we reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions in France and the Euro area. For Germany the results are inconclusive. Even though Europe is a bank-based financial system, it appears the stock market plays a key role in the lending decisions of banks. |
| Keywords: | Bank Loans, Stock Market, Non-nested Hypothesis Tests. |
| JEL: | E3 E5 G2 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:urb:wpaper:10_09&r=eec |
| By: | Kai Christoffel (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Anders Warne (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper we review the methodology of forecasting with log-linearised DSGE models using Bayesian methods. We focus on the estimation of their predictive distributions, with special attention being paid to the mean and the covariance matrix of h-step ahead forecasts. In the empirical analysis, we examine the forecasting performance of the New Area-Wide Model (NAWM) that has been designed for use in the macroeconomic projections at the European Central Bank. The forecast sample covers the period following the introduction of the euro and the out-of-sample performance of the NAWM is compared to nonstructural benchmarks, such as Bayesian vector autoregressions (BVARs). Overall, the empirical evidence indicates that the NAWM compares quite well with the reduced-form models and the results are therefore in line with previous studies. Yet there is scope for improving the NAWM’s forecasting performance. For example, the model is not able to explain the moderation in wage growth over the forecast evaluation period and, therefore, it tends to overestimate nominal wages. As a consequence, both the multivariate point and density forecasts using the log determinant and the log predictive score, respectively, suggest that a large BVAR can outperform the NAWM. JEL Classification: C11, C32, E32, E37. |
| Keywords: | Bayesian inference, DSGE models, euro area, forecasting, open-economy macroeconomics, vector autoregression. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101185&r=eec |
| By: | Salvador Barrios; Per Iversen; Magdalena Lewandowska; Ralph Setzer |
| Abstract: | This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period. |
| Keywords: | sovereign bond, intra-euro area government bond spreads, spread determinants, financial crisis Barrios, Iversen, Lewandowska, Setzer |
| JEL: | E44 F36 G12 G15 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0388&r=eec |
| By: | Maela Giofré (CeRP-Collegio Carlo Alberto, Turin) |
| Abstract: | This paper demonstrates that, after integration, equity portfolios of countries that joined the European Monetary Union have converged at faster rate than those of NON EMU countries. This outcome can be interpreted as a combination of the convergence of inflation rates and the convergence of investment barriers. On the one hand, the common monetary policy might have driven a stronger comovement in inflation rates, leading to increasingly similar hedging strategies among member countries. On the other hand, exposure to the common currency might have homogenized bilateral investment barriers, thus inducing increasingly similar portfolio allocations among member countries. We find that the comovement of inflation rates has not significantly increased after EMU inception, pointing toward an exclusive role for convergence in investment barriers. |
| Keywords: | Financial integration; EMU; inflation hedging; investment barrier |
| JEL: | F21 F30 F36 G11 G15 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:88&r=eec |
| By: | Susanne Lütz; Matthias Kranke |
| Abstract: | The latest global financial crisis has allowed the International Monetary Fund (IMF) a spectacular comeback. But despite its notorious reputation as a staunch advocate of restrictive economic policies, the Fund has displayed less preference for austerity in recent crisis lending. Though widely welcomed as overdue, the IMF’s shift away from what John Williamson coined the ‘Washington Consensus’ was met with resistance from the European Union (EU) where it concerned Central and Eastern European (CEE) countries. The situation of hard-hit Hungary, Latvia, and Romania propelled unprecedented cooperation between the IMF and the EU, in which the EU has very actively promoted orthodox measures in return for loans. We argue that this represents a European rescue of the Washington Consensus. The case of Latvia is paradigmatic for the profound disagreements between an austerity-demanding EU and a less austere IMF. The IMF’s stance contradicts conventional wisdom about the organization as the guardian of economic orthodoxy. To solve this puzzle, we shed light on three complementary factors of (non)learning that have shaped the EU’s relations vis-à-vis CEE borrowing countries in comparison to the IMF’s: (1) a disadvantageous institutional setting; (2) vociferous creditor coalitions; (3) the precarious eurozone project. |
| Keywords: | International Monetary Fund (IMF); European Union (EU); Washington Consensus; lending; learning; Central and Eastern Europe (CEE); Latvia |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:22&r=eec |
| By: | Harry P. Bowen (Queens University of Charlotte); Haris Munandar (Bank Indonesia); Jean-Marie Viaene (Erasmus University Rotterdam, and CESifo) |
| Abstract: | European economic integration is commonly believed to be incomplete, and that further reforms are needed. In this context, the union of U.S. states is considered the benchmark of complete economic integration and is often the basis for comparison regarding the extent of E.U economic integration. Yet, with low trade barriers and with productive factors at least notionally mobile across E.U. countries, is the belief that U.S. states are more integrated than E.U. member states correct? To address this question, this paper first develops three theoretical predictions about the distribution of output and factors that would arise among members of a fully integrated economic area in which goods, capital and labor are freely mobile and policies are harmonized. These theoretical predictions are then empirically tested using data on the output and factor stocks of 14 E.U. member states and the 51 U.S. states (includes District of Columbia) for the period 1965 to 2000. The empirical results convincingly support each theoretical prediction. Hence, contrary to popular belief, the extent of E.U. economic integration is not statistically different from that among U.S. states. |
| Keywords: | Economic integration; capital mobility; factor price equalization; Brownian motion; Zipf’s law |
| JEL: | E13 F15 F21 F22 F4 O57 |
| Date: | 2010–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20100009&r=eec |
| By: | Michał Brzoza-Brzezina (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.); Tomasz Chmielewski (Warsaw School of Economics, al. Niepodległości 162, 02-554 Warszawa, Poland.); Joanna Niedźwiedzińska (National Bank of Poland, ul. Świętokrzyska 11/21, 00-919 Warszawa, Poland.) |
| Abstract: | In this paper we analyse the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. Our results, based on a panel of four biggest Central European countries (the Czech Republic, Hungary, Poland and Slovakia) confirm significant and probably strong substitution between these loans. Restrictive monetary policy leads to a decrease in domestic currency lending but simultaneously accelerates foreign currency denominated loans. This makes the central bank’s job harder. JEL Classification: E44, E52, E58. |
| Keywords: | Domestic and foreign currency loans, substitution, monetary policy, Central Europe. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101187&r=eec |
| By: | Jan Annaert (Universiteit Antwerpen); Marc De Ceuster (Universiteit Antwerpen); Patrick Van Roy (National Bank of Belgium, Financial Stability Department; Université Libre de Bruxelles); Cristina Vespro (National Bank of Belgium, Financial Stability Department) |
| Abstract: | This paper decomposes the explained part of the CDS spread changes of 31 listed euro area banks according to various risk drivers. The choice of the credit risk drivers is inspired by the Merton (1974) model. Individual CDS liquidity and other market and business variables are identified to complement the Merton model and are shown to play an important role in explaining credit spread changes. Our decomposition reveals, however, highly changing dynamics in the credit, liquidity, and business cycle and market wide components. This result is important since supervisors and monetary policy makers extract different signals from liquidity based CDS spread changes than from business cycle or credit risk based changes. For the recent financial crisis, we confirm that the steeply rising CDS spreads are due to increased credit risk. However, individual CDS liquidity and market wide liquidity premia played a dominant role. In the period before the start of the crisis, our model and its decomposition suggest that credit risk was not correctly priced, a finding which was correctly observed by e.g. the International Monetary Fund |
| Keywords: | credit default spreads, credit risk, financial crisis, financial sector, liquidity premia, structural model |
| JEL: | G12 G21 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201005-10&r=eec |
| By: | Elsa Fornero (University of Turin and CeRP-Collegio Carlo Alberto, Turin); Annamaria Lusardi (Dartmouth College); Chiara Monticone (CeRP-Collegio Carlo Alberto, Turin) |
| Abstract: | This paper contributes to the ESF Forward Look project “Ageing, Health and Pensions in Europe” by providing an overview of policy questions and research literature on the adequacy of saving for old age in European countries. Given the current status and practices, the paper describes remaining knowledge gaps and the requirements in terms of research infrastructures, data, and methodologies to fill such gaps. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:87&r=eec |
| By: | Alfonso Arpaia; Kamil Dybczak; Fabiana Pierini |
| Abstract: | After presenting an extensive overview of the reforms undertaken in the EU between 1990 and 2006, The paper assess with a diff-in-diff technique the short-term effects of pension reforms on the participation rates of individuals aged between 50 and 64 years. The analysis suggests that in the short-term pension reforms have different effects on the participation rate of men and women. First, reforms tightening the access to early retirement have a positive effect on female participation, but reduce somewhat male participation rates. Second, the results for non-fundamental reforms are more uncertain. Third, reforms that change the way of financing pensions or the eligibility conditions (what we dubbed fundamental reforms), usually with long phasing-in periods, may have unintended short-run effects on the female participation rate. Thus, our findings point at the importance of designing pension reforms and strategies to reform social security that reduce the risks of undesired effects on the decision to remain in the labour market. Workers' information about pension rules and uncertainties about long transition periods may influence in the short-term the retirement decision in a way which is not consistent with the intended effects of the reform |
| Keywords: | Diff-in-Diff, pension reforms, participation rates, Arpaia, Dybczak, Pierini |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0385&r=eec |
| By: | Salvador Barrios; Andrea Schaechter |
| Abstract: | Ensuring high quality of public finances (QPF) with a view to supporting long-term economic growth has gained new urgency as the room for fiscal manoeuvre has shrunk in light of the current crisis. To more systematically analyse QPF and compare developments across countries and over time, a greater focus on identifying and developing comparable QPF indicators is needed. This paper provides a first attempt in this respect. Based on the view that QPF is a multi-dimensional concept, it creates composite indicators for twelve areas of public finances that are linked to long-term economic growth. While the proposed alternative calculation methods yield relatively robust results and findings are in line with conventional wisdom, due to data problems the composite indicators should only be seen as a useful starting point for identifying a country's main strengths and weaknesses in QPF. This would need to be complemented by qualitative analysis that also accounts for country and other specificities. JEL classification: E62, H11, H50, H52, H60 |
| Keywords: | Quality of public finances, public finances, fiscal policy, long-term economic growth, public expenditure, public revenue, fiscal governance, Barrios, Schaechter |
| JEL: | E62 H11 H50 H52 H60 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0382&r=eec |
| By: | Giuliana Passamani; Roberto Tamborini |
| Abstract: | In this paper we present an empirical analysis of the "credit-cost channel" (CCC) of monetary policy transmission. This model combines bank credit supply, as a means whereby monetary policy affects economic activity ("credit channel"), and interest rates on loans as a cost to firms ("cost channel"). The thrust of the model is that the CCC makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence a) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, b) the real effects of monetary policy are larger and persistent. We have applied the Johansen-Juselius CVAR methodology to Italy and Germany in the "hard" EMS period and in the EMU period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. We have also replicated the Johansen-Juselius technique for the simulation of rule-based stabilization policy for both Italy and Germany in the EMU period. As a result, we have found confirmation that inflationtargeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the stochastic equilibrium paths of both inflation and output. |
| Keywords: | Macroeconomics and monetary economics, Monetary transmission mechanisms, Structural cointegration models, Italian economy, German economy |
| JEL: | E51 C32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:1001&r=eec |
| By: | Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development); Pragidis, Ioannis (Democritus University of Thrace, Department of International Economic Relations and Development) |
| Abstract: | Several studies have established the predictive power of the yield curve in terms of real economic activity. In this paper we use data for a variety of E.U. countries: both EMU (Germany, France, Italy) and non-EMU members (Sweden and the U.K.). The data used range from 1991:Q1 to 2009:Q1. For each country, we extract the long run trend and the cyclical component of real economic activity, while the corresponding interbank interest rates of long and short term maturities are used for the calculation of the country specific yield spreads. We also augment the models tested with non monetary policy variables: the countries’ unemployment rates and stock indices. The methodology employed in the effort to forecast real output, is a probit model of the inverse cumulative distribution function of the standard distribution, using several formal forecasting and goodness of fit evaluation tests. The results show that the yield curve augmented with the non-monetary variables has significant forecasting power in terms of real economic activity but the results differ qualitatively between the individual economies examined raising non-trivial policy implications. |
| Keywords: | GDP; Probit; Forecasting; Yield Curve |
| JEL: | C53 E43 E44 E52 |
| Date: | 2010–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2010_002&r=eec |
| By: | Ugo Colombino; Marilena Locatelli; Edlira Narazani; Cathal O’Donoghue |
| Abstract: | We develop and estimate a microeconometric model of household labour supply in four European countries representative of different economies and welfare policy regimes: Denmark, Italy, Portugal and the United Kingdom. We then simulate, under the constraint of constant total net tax revenue (fiscal neutrality), the effects of various hypothetical tax-transfer reforms which include alternative versions of a Basic Income policy: Guaranteed Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. We produce indexes and criteria according to which the reforms can be ranked and compared to the current tax-transfer systems. The exercise can be considered as one of empirical optimal taxation, where the optimization problem is solved computationally rather than analytically. It turns out that many versions of the Basic Income policies would be superior to the current system. The most successful policies are those involving non means-tested versions of basic income (Universal or Participation Basic Income) and adopting progressive tax-rules. If – besides the fiscal neutrality constraint – also other constraints are considered, such as the implied top marginal top tax rate or the effect on female labour supply, the picture changes: unconditional policies remain optimal and feasible in Denmark and the UK; instead in Italy and Portugal universal policies appear to be too costly in terms of implied top marginal tax rates and in terms of adverse effects on female participation, and conditional policies such as Work-Fare, emerge as more desirable. |
| Keywords: | Minimum Guaranteed Income, Work Fare, Participation Basic Income, Universal Basic Income, Models of Labour Supply, Tax Reforms, Welfare Evaluation, Optimal Taxation |
| JEL: | C25 H24 H31 I38 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:wpc:wplist:wp04_10&r=eec |
| By: | Gianluca OREFICE (University of Milano and Centro Studi Luca D Agliano) |
| Abstract: | This paper investigates the effects of immigration flows and their skill content on per capita GDP in 24 OECD host countries. Theoretical models concludes that the effect of immigrants in host country's income depends on the capital content of migrants (Benhabib 1996); empirically the question is still open and this paper contributes to make light on this. So we propose an empirical estimation on the effects of immigrants and their skill level on per capita GDP. Using a IV model to solve the endogeneity problem we found that high skilled migration has a positive effect on per capita GDP, but it is not enough to fully compensate the overall negative effects of migration on per capita GDP. |
| Keywords: | International migration, economic performances, factor mobility |
| JEL: | F22 F12 |
| Date: | 2010–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2010015&r=eec |