nep-eec New Economics Papers
on European Economics
Issue of 2010‒06‒26
eight papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Economic downturn and stress testing European welfare systems By Figari F; Salvatori A; Sutherland H
  2. Financial Dollarization and European Union Membership By Kyriakos C. Neanidis
  3. Welfare implications of country size in a monetary union By Mykhaylova, Olena
  4. Price, Wage and Employment Response to Shocks: Evidence from the WDN Survey By Bertola, G.; Dabusinskas, A.; Hoeberichts, M.; Izquierdo, M.; Kwapil, C.; Montornès, J.; Radowski, D.
  5. Short-run Projections of Patterns of Job Contraction in the EU By Robert Stehrer; Terry Ward
  6. A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market By Perlin, Marcelo; Dufour, Alfonso; Brooks, Chris
  7. Interstate Risk Sharing in Germany: 1970-2006 By Ralf Hepp; Jürgen von Hagen
  8. Financial Stability and Monetary Policy By Christopher Martin; Costas Milas

  1. By: Figari F (Institute for Social and Economic Research); Salvatori A (Institute for Social and Economic Research); Sutherland H (Institute for Social and Economic Research)
    Abstract: As unemployment rises across the European Union (EU) it is important to understand the extent to which the incomes of the new unemployed are protected by tax-benefit systems and to assess the cost pressures on the governments. This paper uses the EU tax-benefit model EUROMOD to explore these issues, comparing effects in five countries. It provides evidence on the differing degrees of resilience of the household incomes of the newly unemployed due to the variations in the protection offered by the tax-benefit systems, according to whether unemployment benefit is payable, the household situation of the unemployed person, and across countries.
    Date: 2010–06–17
  2. By: Kyriakos C. Neanidis
    Abstract: We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollarization. The negative effect on deposit dollarization captures the increased confidence of the private sector in the domestic currency as they consider the EU admission process to reflect their government’s commitment in promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation for a lower currency risk, which diminishes the cost of foreign currency borrowing.
    Date: 2010
  3. By: Mykhaylova, Olena
    Abstract: This paper calculates differences in welfare costs of nominal rigidities in large and small EMU countries. I use a two-country DSGE model characterized by optimizing agents, monopolistic wage and price setting, distortionary taxes and government debt dynamics. I find that these costs are virtually identical for all members of the EMU, and small countries are not at a disadvantage when it comes to the setting of the common monetary policy. This conclusion is primarily due to highly correlated technological processes in Europe, which cause national and Euro-wide inflations to move together. These findings are robust to the asset market structure, trade openness, and different specifications of the Taylor rule.
    Keywords: European monetary union; nominal rigidities; welfare costs
    JEL: E31 E58 E63 F33
    Date: 2009–08–31
  4. By: Bertola, G.; Dabusinskas, A.; Hoeberichts, M.; Izquierdo, M.; Kwapil, C.; Montornès, J.; Radowski, D.
    Abstract: This paper analyses information from survey data collected in the framework of the Eurosystem's Wage Dynamics Network (WDN) on patterns of firm-level adjustment to shocks. We document that the relative intensity and the character of price vs. cost and wage vs. employment adjustments in response to cost-push shocks depend - in theoretically sensible ways - on the intensity of competition in firms' product markets, on the importance of collective wage bargaining and on other structural and institutional features of firms and of their environment. Focusing on the pass-through of cost shocks to prices, our results suggest that the pass-through is lower in highly competitive firms. Furthermore, a high degree of employment protection and collective wage agreements tend to make this pass-through stronger.
    Keywords: Wage bargaining, Labour-market institutions, Survey data, European Union.
    JEL: J31 J38 P50
    Date: 2010
  5. By: Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Terry Ward
    Abstract: As the economic recession in the EU seems to be drawing to a close, there is inevitable interest in what the effects on employment in different sectors of activity and occupations have been, or are still likely to be once all the repercussions have materialized. Indeed, given the lags in both the collection of data and, more importantly, in the effect of a downturn in output on employment, it is likely to be only some time after the recession comes to an end and economic growth gets back close to its trend rate that the consequences for jobs will be apparent in the official statistics. Although any estimates, or predictions, of this kind are fraught with difficulty and highly uncertain, it is instructive to look back at previous episodes of economic downturn to see what can be learned from them, in particular about their differential effect on different parts of the economy and on different groups of worker. This is the concern of the present study. Specifically, the aim is to examine previous downturns in the EU economies and the different consequences they had, first, for sectors of activity because of the varying nature of the goods and services produced and, second, for the different types of job within sectors. The further aim is then to use the results of this examination as the basis for constructing projections of developments in employment over the period 2008-2010 given the present forecast of the overall change in GDP. From this, the subsequent step is to consider the implications for employment in different types of job. As part of this, the concern is also to identify the kinds of job which stand to be most affected by the current downturn and the characteristics of the people at present employed in them in different parts of the EU.
    Keywords: employment projections, crisis effects, employment structures, job quality
    JEL: E17 J23 J24 J29
    Date: 2010–02
  6. By: Perlin, Marcelo; Dufour, Alfonso; Brooks, Chris
    Abstract: This paper is set to investigate the existence of spillover effects for the trading process of correlated financial instruments. While the main literature in price impact models has focused mainly on multivariate processes for a unique asset, we argue that transitory spillover effects in such class of models should exist as a simple biproduct of explicit relationships among prices of different (but correlated) financial instruments. Firstly we assess the theoretical implications of a transitory spillover effect in an extended microstructure model and then we investigate our different hypothesis in the European bond market with a formal econometric model. The results showed that the estimated parameters of the econometric models do conform to what we expect in the theoretical derivations, where the trades of one instrument would be correlated to the trades in others. But, even though the results are positive, they could also be explained by traders splitting orders across different instruments or joint periods of intensive trading. Further analysis also showed that the trading intensity in other instruments does affect the trading process of the particular bonds. We found that a buy (sell) order is less likely to be followed by a buy (sell) order if the market is trading intensively. We explain such effect as an inventory problem, where volatility of prices forces market makers to improve trades in the opposite direction from the current order flow. The main conclusion of this study is that we find inconclusive results towards the particular microstructure model set in the theoretical part of the paper, but positive results for a general spillover effect in the trading process of European fixed income instruments.
    Keywords: market microstructure; spillover effect; commonalities; liquidity; price impact of a trade.
    JEL: D53 C1
    Date: 2010–06
  7. By: Ralf Hepp (Fordham University, Department of Economics); Jürgen von Hagen (University of Bonn, Indiana University, and CEPR)
    Abstract: We study the channels of interstate risk sharing in Germany for the time period 1970 to 2006 following the methodology of Asdrubali et al. (1996). Their framework allows us to estimate the degree of smoothing of a shock to a state’s gross domestic product by factor markets, the government sector, and credit markets, respectively. For the time period from 1970 to 1994 – pre-unification Germany – we find that about 19 percent of shocks to a state’s gross domestic product (GDP) are smoothed by private factor markets, 50 percent are smoothed by the German government sector, and a further 17 percent are smoothed through credit markets. For the post-reunification period, 1995 to 2006, the relative importance of the smoothing channels changes. In the complete sample, factor markets contribute around 50.5 percent to income smoothing, and credit markets contribute another 17.5 percent. The government sector’s role is diminished: it smoothes around 10 percent of a shock. For this period, we also split our sample between West and East German states. In West Germany, 63 percent of idiosyncratic income shocks are smoothed out by factor markets; and another 15 percent by the government sector. In East Germany, factor markets smooth about 34.5 percent of the volatility in state GDP, the government sector about 19 percent, and another 18 percent are smoothed by credit markets.
    Keywords: Regional Risk-sharing, Factor Markets, Consumption Smoothing, Fiscal Federalism
    JEL: H77 E63 F42
    Date: 2010
  8. By: Christopher Martin (Department of Economics, University of Bath, UK); Costas Milas (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We argue that although UK monetary policy can be described using a Taylor rule in 1992-2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
    Keywords: monetary policy, financial crisis
    JEL: C51 C52 E52 E58
    Date: 2010–01

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