nep-eec New Economics Papers
on European Economics
Issue of 2010‒05‒22
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Heterogeneity in money holdings across euro area countries: The role of housing By Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
  2. Origins of persistent macroeconomic imbalances in the Euro area By Nils Holinski; Clemens Kool; Joan Muysken
  3. Inflation Target Shocks and Monetary Policy Inertia in the Euro Area By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
  4. Euro area fiscal policies and the crisis By Ad van Riet
  5. The Euro-dividend: public debt and interest rates in the Monetary Union By Simone Salotti; Luigi Marattin
  6. Cyclicality and Term Structure of Value-at-Risk in Europe By Bec, Frédérique; Gollier, Christian
  7. Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment By Merkl, Christian; Schmitz, Tom
  8. Automatic Stabilizers, Economic Crisis and Income Distribution in Europe By Dolls, Mathias; Fuest, Clemens; Peichl, Andreas
  9. Designing the payout phase of funded pension pillars in central and eastern European countries By Vittas, Dimitri; Rudolph, Heinz; Pollner, John
  10. The Blue Bond Proposal By Jakob von Weizsäcker; Jacques Delpla
  11. Old Europe Ages. Can it Still Prosper? By Börsch-Supan, Axel; Ludwig, Alexander
  12. Main drivers of the ECB financial accounts and ECB financial strength over the first 11 years By Olivier Vergote; Werner Studener; Ioannis Efthymiadis; Niall Merriman
  13. GDP Trend Deviations and the Yield Spread: the Case of Five E.U. Countries By Periklis Gogas; Ioannis Pragidis
  14. The payout phase of pension systems : a comparison of five countries By Rocha, Roberto; Vittas, Dimitri; Rudolph, Heinz P.
  15. Trade consistency in the context of the Eurosystem projection exercises an overview By Kirstin Hubrich; Tohmas Karlsson
  16. An Input-Output Approach to the Estimation of the Maximum Attainable Economic Dependency Ratio in four European Economies By Mariolis, Theodore; Soklis , George; Groza, Heleni
  17. Disinflation Shocks in the Eurozone: a DSGE Perspective By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume

  1. By: Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
    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: Money,housing,national contribution,euro area
    JEL: E41 E51 E52
    Date: 2010
  2. By: Nils Holinski; Clemens Kool; Joan Muysken
    Abstract: In this paper we document the growing dispersion of external and internal balances between countries in the North and South of the Euro area over the time period 1992 to 2007. We find a persistent divergence process that seems to have started with the introduction of the common currency and has its roots in the savings and investment behavior of private sectors. We dismiss the common argument in the literature that imbalances are the temporary outcome of an overall European economic convergence process and argue that future research should place greater emphasis on country heterogeneity in behavior to fully understand economic developments in the Euro area and to derive policy implications.
    Keywords: Euro area, current acccount imbalances, Stability and Growth Pact
    JEL: F15 F32 F41
    Date: 2010–05
  3. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Date: 2009–07
  4. By: Ad van Riet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: In mid-September 2008, a global financial crisis erupted which was followed by the most serious worldwide economic recession for decades. As in many other regions of the world, governments in the euro area stepped in with a wide range of emergency measures to stabilise the financial sector and to cushion the negative consequences for their economies. This paper examines how and to what extent these crisis-related interventions, as well as the fall-out from the recession, have had an impact on fiscal positions and endangered the longer-term sustainability of public finances in the euro area and its member countries. The paper also discusses the appropriate design of fiscal exit and consolidation strategies in the context of the Stability and Growth Pact to ensure a rapid return to sound and sustainable budget positions. Finally, it reviews some early lessons from the crisis for the future conduct of fiscal policies in the euro area. JEL Classification: E10, E62, G15, H30, H62
    Keywords: fiscal policies, financial crisis, fiscal stimulus, financial markets, sustainability, Stability and Growth Pact
    Date: 2010–04
  5. By: Simone Salotti (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Luigi Marattin (Dipartimento di Scienze Economiche, Universita` degli Studi di Bologna)
    Abstract: The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates. Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond.
    Keywords: Panel VAR, Fiscal policy, government bond’s yields
    JEL: E62 G12
    Date: 2010–02
  6. By: Bec, Frédérique; Gollier, Christian
    Abstract: This paper explores empirically the link between stocks returns Value-at-Risk (VaR) and the state of financial markets cycle. The econometric analysis is based on a simple vector autoregression setup. Using quarterly data from 1970Q4 to 2008Q4 for France, Germany and the United-Kingdom, it turns out that the k-year VaR of equities is actually dependent on the cycle phase: the expected losses as measured by the VaR are smaller in recession times than expansion periods, whatever the country and the horizon. These results strongly suggest that the European rules regarding the solvency capital requirements for insurance companies should adapt to the state of the financial market’s cycle.
    Date: 2009–05
  7. By: Merkl, Christian (Kiel Institute for the World Economy); Schmitz, Tom (HEC Paris)
    Abstract: This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.
    Keywords: labor market institutions, output and inflation volatility, labor turnover costs, unemployment benefits, unemployment, eurozone
    JEL: E24 E32 J20
    Date: 2010–05
  8. By: Dolls, Mathias (University of Cologne); Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA)
    Abstract: This paper investigates to what extent the tax and transfer systems in Europe protect households at different income levels against losses in current income caused by economic downturns like the present financial crisis. We use a multi country micro simulation model to analyse how shocks on market income and employment are mitigated by taxes and transfers. We find that the aggregate redistributive effect of the tax and transfer systems increases in response to the shocks. But the extent to which households are protected differs across income levels and countries. In particular, there is little stabilization of disposable income for low income groups in Eastern and Southern European countries.
    Keywords: automatic stabilization, crisis, inequality, redistribution
    JEL: E32 E63 H2 H31
    Date: 2010–04
  9. By: Vittas, Dimitri; Rudolph, Heinz; Pollner, John
    Abstract: Over the past decade or so, most Central and Eastern European countries have reformed their pension systems, significantly downsizing their public pillars and creating private pillars based on capitalization accounts. Early policy attention was focused on the accumulation phase but several countries are now reaching the stage where they need to address the design of the payout phase. This paper reviews the complex policy issues that will confront policymakers in this effort and summarizes recent plans and developments in four countries (Poland, Hungary, Estonia, and Lithuania). The paper concludes by highlighting a number of options that merit detailed consideration.
    Keywords: Debt Markets,Pensions&Retirement Systems,Financial Literacy,Insurance&Risk Mitigation,Investment and Investment Climate
    Date: 2010–04–01
  10. By: Jakob von Weizsäcker; Jacques Delpla
    Abstract: Soaring debt levels and the crisis in Greece has sharpened the focus on fiscal sustainability among eurozone members. The European Union has to tackle high debt levels in vulnerable states which are compounded by a hike in risk premiums on government bonds leading to a debt trap, while designing ways to efficiently finance debt. Furthermore, European solidarity with weaker states should not undermine incentives for individual members to pursue fiscally sustainable policies. This Policy Brief proposes a Blue Bond to resolve these challenges. The authors, Bruegel Research Fellow Jakob von Weizsäcker and Jacques DelplaConseil d'Analyse Économique, Paris, explain the economics behind their proposal, its institutional underpinnings and the implication of it on various participating countries.  
    Date: 2010–05
  11. By: Börsch-Supan, Axel (Asian Development Bank Institute); Ludwig, Alexander (Asian Development Bank Institute)
    Abstract: Population aging will be a major determinant of long-run economic development in industrial and developing countries. The extent of the demographic changes is dramatic in some countries and will deeply affect future labor, financial, and goods markets. The expected strain on public budgets and especially on social security has already received prominent attention, but aging poses many other economic challenges that threaten productivity and growth if they remain unaddressed. <p>There is no shortage of policy proposals to address population aging. However, little is known about behavioral reactions, e.g., to pension and labor market reform. This paper sheds light on such reactions in three large Continental European countries. France, Germany, and Italy have large pay-as-you-go pension systems and vulnerable labor markets. At the same time, these countries show remarkable resistance against pension and labor market reform. Key issues taken up in this paper are interactions between pension and labor market policies, and the behavioral reactions to reform. Which behavioral reactions will strengthen, which will weaken reform policies? Can Old Europe prosper even if behavioral reactions counter current reform efforts?
    Keywords: aging pension labor reform; labor supply reactions reform; aging europe reform reactions
    JEL: D13 E27 F16 F21 H55 J11 J21
    Date: 2009–11–25
  12. By: Olivier Vergote (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Werner Studener (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ioannis Efthymiadis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Niall Merriman (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper analyses the main drivers of the ECB’s balance sheet and profit and loss account over the first 11 years of the ECB’s existence. Furthermore, the paper assesses the financial strength of the ECB. As monetary policy operations are normally conducted by national central banks under the impulse and instructions from the ECB, the Eurosystem balance sheet is the primary reference for the analysis of Eurosystem monetary policy operations. Three main drivers of the balance sheet and profit and loss account are identified. Firstly, financial market developments and portfolio management decisions imply changes in the value of the foreign reserve and own funds portfolios, which represent a substantial part of the balance sheet (with the share of own funds becoming increasingly larger over the period under review). At the same time, the profit and loss account depends to an important degree on interest income and expenses, realised gains and losses, and write-downs on these portfolios. Secondly, strong banknote demand has gradually increased the size of the balance sheet since the euro changeover in 2002. Banknotes in circulation also provide a strong base for seigniorage income, which is an important item of the profit and loss account. Thirdly, the liquidity-providing operations in foreign currency, which the Eurosystem has undertaken since 2007 in response to the financial crisis, increased significantly the size of the ECB’s (and the Eurosystem’s) balance sheet. In terms of income and expenses, these operations were rather immaterial at the level of the ECB, although the income generated was substantial at the Eurosystem level. The ECB has remained financially strong over the 11-year period. Factors that support the financial position are strong legislative provisions on e.g. independence and income, the use of financial buffers, seigniorage as a reliable income source and an effective loss-coverage mechanism. The main risk stems from adverse financial market developments, in particular low interest rates and depreciating foreign reserve currencies, implying security price and currency write-downs. JEL Classification: E58, E42, M41
    Keywords: central banking, central bank balance sheet, financial accounts, financial strength
    Date: 2010–05
  13. By: Periklis Gogas; Ioannis Pragidis
    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.
    Date: 2010–05
  14. By: Rocha, Roberto; Vittas, Dimitri; Rudolph, Heinz P.
    Abstract: This paper provides a comparative summary of the payout phase of pension systems in five countries -- Australia, Chile, Denmark, Sweden, and Switzerland. All five countries have large pension systems with mandatory or quasi-mandatory retirement savings schemes. But they exhibit important differences in the structure and role of different pillars, regulation of payout options, level of annuitization, market structure, capital regulations, risk management, and use of risk sharing arrangements. The paper summarizes the experience of these countries and highlights the lessons they offer to other countries.
    Keywords: Pensions&Retirement Systems,Debt Markets,Emerging Markets,Insurance&Risk Mitigation,Investment and Investment Climate
    Date: 2010–04–01
  15. By: Kirstin Hubrich (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Tohmas Karlsson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The Eurosystem macroeconomic projection exercises are part of the input prepared for the Governing Council’s decision-making meetings. Under the economic analysis pillar of the ECB’s monetary policy strategy, they are a key element in the assessment of economic prospects and of the short to medium-term risks to price stability. The projection exercises are conducted on the basis of a number of “technical” assumptions. In particular, assumptions are made about future developments in world trade, foreign prices and nominal exchange rates. The purpose of the trade consistency exercise (TCE) is to ensure that individual country forecasts are consistent with each other regarding the assumptions made about the international environment. Trade consistency is ensured in two directions: first, the cross-trade consistency part of the TCE involves examining the consistency of the trade projections at any given point in time; and second, the ex ante/ex post trade consistency part involves comparing the projections for a given variable across different projection rounds. This paper provides a comprehensive description of the data and techniques underlying the trade consistency exercises in the context of the projection exercises of the Eurosystem and the ECB. JEL Classification: E37, E61, F14, F16, F17
    Keywords: Trade projections, cross-country consistency, market shares, competitiveness
    Date: 2010–03
  16. By: Mariolis, Theodore; Soklis , George; Groza, Heleni
    Abstract: The purpose of this paper is to explore, in terms of input-output models, the proximate determinants of the maximum attainable Economic Dependency Ratio and to provide estimates of that ratio in four European economies (Finnish, German, Greek, Spanish). The evaluation of the results reveals certain central socio-technical features of the actual economies under consideration.
    Keywords: Austrian rate of surplus labour; net labour saving from trade; economic dependency ratio-consumptions-growth frontier
    JEL: H55 E24 D57 C67
    Date: 2010–05–12
  17. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Date: 2009–09

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