nep-eec New Economics Papers
on European Economics
Issue of 2010‒07‒03
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade? By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  2. Banking and sovereign risk in the euro area By Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
  3. The Euro’s Trade Effect under Cross-Sectional Heterogeneity and Stochastic Resistance By Helmut Herwartz; Henning Weber
  4. Detecting and interpreting financial stress in the euro area By Marianna Blix Grimaldi
  5. The Introduction of a Private Wealth Module in CAPP_DYN: an Overview By Carlo Mazzaferro; Marcello Morciano; Elena Pisano; Simone Tedeschi
  6. Fiscal policy and growth: do financial crises make a difference? By António Afonso; Hans Peter Grüner; Christina Kolerus
  7. L'impact des chocs externes sur et dans la zone euro : un modèle VAR structurel By Jean-Baptiste Gossé; Cyriac Guillaumin
  8. The Federal Funds Rate and the Conduction of the International Orchestra By Antonio Ribba
  9. Regional growth in Portugal: assessing the contribution of earnings and education inequality By Adelaide Duarte; Marta Simões
  10. The yield curve and the prediction on the business cycle: a VAR analysis for the European Union By Cinquegrana, Giuseppe; Sarno, Domenico
  11. What can EMU countries' sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? By Dötz, Niko; Fischer, Christoph
  12. Les banques étrangères dans les pays d’Europe Centrale et Orientale : source de vulnérabilité ou facteur de stabilisation By BEURAN, Monica; BRACK, Estelle
  13. The transmission of the global financial crisis to the Italian economy. A counterfactual analysis, 2008-2010. By Michele Caivano; Lisa Rodano; Stefano Siviero
  14. Don't raise the retirement age! An experiment on opposition to pension reforms and East-West differences in Germany By Beatice Scheubel; Daniel Schunk; Joachim Winter
  15. The crisis and employment in Italy By Federico Cingano; Roberto Torrini; Eliana Viviano
  16. Sveriges Riksbank's Inflation Interval Forecasts 1999-2005 By Lundholm, Michael
  17. The Netherlands of 2040 By Bas ter Weel; Albert van der Horst; George Gelauff

  1. By: Sebnem Kalemli-Ozcan (University of Houston, Department of Economics, Houston, TX, 77204, USA.); Elias Papaioannou (Dartmouth College, 6106 Rockefeller Hall, 319 Silsby Hanover, NH 03755, USA.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro’s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro’s impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence has also contributed to the spur of cross-border financial transactions. Trade in goods, while highly correlated with bilateral financial activities, does not play a key role in explaining the euro’s positive effect on financial integration. JEL Classification: F1, F3, G2, K0.
    Keywords: Financial integration, Law and finance, Euro, European Union, FSAP, Trade, Regulation.
    Date: 2010–06
  2. By: Gerlach, Stefan; Schulz, Alexander; Wolff, Guntram B.
    Abstract: We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors and low equity ratios in the banking sector experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads. --
    Keywords: Sovereign bond markets,banking,liquidity,EMU
    JEL: E43 E44 G12
    Date: 2010
  3. By: Helmut Herwartz; Henning Weber
    Abstract: This paper investigates if the euro's effect on euro-area trade differs across trade sectors and across country pairs, and to what degree heterogeneity matters for estimating the aggregate euro effect. Time-varying latent variables, which are specific to each sector in each country pair, control for omitted trade costs and mismeasured resistance terms. Parameter heterogeneity and time-varying latent variables are both strongly supported by the data. Due to decreasing trade costs, aggregate exports within the euro area increase between 2000 and 2002 by 15 to 25 percent compared with aggregate exports between European economies which are not members of the euro area. Adjustment within individual sectors is rapid whereas aggregate adjustment is more spread out and gradual since different sectors adjust at distinct times
    Keywords: Euro's trade effect, parameter heterogeneity, smooth-transition model
    JEL: C31 C33 F13 F15 F33 F42
    Date: 2010–06
  4. By: Marianna Blix Grimaldi (Sveriges Riksbank, 103 37 Stockholm, Sweden.)
    Abstract: There is a need to find better models and indicators for large disruptive events, not least in order to be more prepared and mitigate their effects. In this paper we take a step in this direction and discuss the performance of a financial stress indicator with a specific focus on the euro area. As far as we know, our indicator is the first attempt to develop an indicator of financial stress with a specific focus on the euro area. It is also the first to exploit the information contained in central bank communication to help measure stress in financial markets. For use in real time, the indicator is able to efficiently extract information from an otherwise noisy signal and provide information about the level of stress in the markets. JEL Classification: E44, E50, G10.
    Keywords: Financial stress, central bank communication, logit distribution, leading indicator, behavioural finance.
    Date: 2010–06
  5. By: Carlo Mazzaferro; Marcello Morciano; Elena Pisano; Simone Tedeschi
    Abstract: Household saving rate in Italy declined over the last two decades.This trend still persists despite three pension reforms have been enacted since the beginning of the nineties. In this paper we search further evidence of general macroeconomic effects through the analysis of households behaviour. In the first part of the paper we use data from five surveys of the Bank of Italy Surveys of Household Income and Wealth (SHIW) to estimate the lifetime profiles of saving and wealth accumulation. Estimates show that the age profile of the propensity to save has been influenced more by cohort effects than by general trend effects; whereas the age profile of the ratios of financial assets to disposable income has been subject to relevant trend effects. In the second part of the paper we analyse the effects of pension reforms on saving behaviour of Italian Households. Firstly we use a difference-in-difference estimator in order to test whether the groups more severely hit by the reforms actually increased their saving rate relative to the other groups. Then we estimate the Social Security Net Wealth (SSWN) for each individual in the SHIW in the analysed period (1989-2000). Finally we estimate the substitution coefficient between SSWN and private wealth taking into account that the reaction of saving to a change in SSWN depends also on age of the individual. Our results show that the reduction of SSWN is unequally distributed across individuals. The cut is stronger for self employed, young workers and women. Most of the groups more severely hit by the reforms did not increase their saving rate relative to the control group: younger households, in particular, did not increase the saving rate. On the whole a reduction of one Euro in SSWN seems to induce, on the average, a compensating increase in private wealth by about fifty cents. The substitution coefficient between private and social security wealth is higher for the richest and oldest part of the sample. Finally when we split the sample observations by year we find that the more dramatised is the impact of the reform, the higher is the substitution coefficient.
    Keywords: Pension reform; household saving; social security wealth; difference-in-difference
    JEL: E21 H55
    Date: 2010–04
  6. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Hans Peter Grüner (University of Mannheim, D-68131 Mannheim, Germany.); Christina Kolerus (University of Mannheim, D-68131 Mannheim, Germany.)
    Abstract: In this paper we assess to what extent in the existence of a financial crisis, government spending can contribute to mitigate economic downturns in the short run and whether such impact differs in crisis and non crisis times. We use panel analysis for a set of OECD and non-OECD countries for the period 1981-2007. The fiscal multiplier for the full sample for instrumented regular and crisis spending is about 0.6-0.8 considering the sample average government spending share of GDP of about one third. Altogether, we cannot reject the hypothesis that crisis spending and regular spending have the same impact using a variation of controls, sub-samples and specifications. JEL Classification: C23, E62, E44, F43, H50.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    Date: 2010–06
  7. By: Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Ce papier étudie l'impact des principaux chocs externes qu'a connu la zone euro et ses pays membres depuis le début des années 2000 : chocs monétaire (baisse des taux d'intérêts mondiaux), financier (deux crises boursières) et réel (augmentation des prix du pétrole et accumulation de déséquilibres courants mondiaux). Pour cela, nous utilisons la méthodologie VAR structurel (SVAR) à partir de laquelle nous définissons quatre chocs structurels : externe, offre, demande et monétaire. L'estimation de modèles SVAR permet de déterminer l'impact de ces chocs sur la zone euro et sur les pays la composant. Cette étude met en évidence l'hétérogénéité des réactions dans la zone euro. Si les chocs pétrolier et monétaire ont des répercussions assez similaires sur l'ensemble des pays de la zone euro – à l'exception des Pays-Bas et du Royaume-Uni – les chocs financiers et de déséquilibres mondiaux ont des effets très différents. Les chocs externes contribuent à expliquer un cinquième de la variance du différentiel de croissance et de la balance courante et environ un tiers des fluctuations du taux de change effectif réel en Europe. L'impact du choc pétrolier est particulièrement fort mais il déprécie l'euro. Les déséquilibres mondiaux expliquent également une part importante des fluctuations du taux de change mais entraînent une appréciation de l'euro. Par ailleurs, les fonctions de réponses aux chocs financier et monétaire sont similaires à l'exception de celles de la balance courante. En effet, un choc financier semble provoquer davantage de sorties de capitaux qu'un choc monétaire. Cette étude met donc en évidence l'hétérogénéité des réactions dans la zone euro et montre que les chocs externes expliquent davantage les variations du taux de change effectif réel que celles du différentiel de croissance ou de la balance courante tout en soulignant le rôle particulièrement important des déséquilibres mondiaux dans les fluctuations du cours des devises européennes.
    Keywords: déséquilibres mondiaux, balances courantes, zone euro, modèles VAR structurels, restrictions contemporaines et de long terme, chocs externes, hypothèse d'exogénéité.
    Date: 2010–04–01
  8. By: Antonio Ribba
    Abstract: In the first ten years of EMU, monetary policy choices of the European Central Bank (ECB) in setting the short-term interest rate have followed, systematically, monetary policy decisions made by the Federal Reserve System (Fed). For, despite the presence of variable lags with respect to Fed decisions, turning points of European short-term interest rates have been largely anticipated by movements in the federal funds rate. In this paper we show that, in the context of a bivariate cointegrated system, a clear long-run US dominance emerges. Moreover, the structural analysis reveals that a permanent increase in the federal funds rate causes a permanent one-for-one movement in the eonia rate.
    Keywords: Monetary policy; Identification; Structural Cointegrated VARs
    JEL: C32 E5
    Date: 2010–06
  9. By: Adelaide Duarte (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal); Marta Simões (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal)
    Abstract: Regional economic growth in Portugal has mainly been studied from the perspective of convergence with data ending by the early 2000’s. The country as a whole has stopped converging to the output levels of the richest European countries by this period and has also become one of the most unequal EU member-states in terms of income distribution in the meantime. It is thus important to analyze the growth performance at the regional level in a more recent period, 1995-2007, emphasizing regional disparities in inequality as explanatory factors. This study examines the relationship between inequality and regional growth in Portugal at NUTS III level exploring the explanatory power of earnings and education inequality measures computed with data from the Quadros de Pessoal database. The results point to a positive relationship between initial inequality and regional growth, stronger for education than for earnings inequality, but with earnings inequality measures revealing a higher explanatory power. Moreover, there is evidence that it is inequality at the top of the distribution that is the relevant to explain regional growth, a result that reinforces the higher propensities to save of the richer and the incentives mechanisms of transmission from inequality to growth. Additionally, the evidence does not support the existence of convergence among Portuguese NUTS III regions during the period under analysis. These findings are robust to the introduction of most additional control variables and the consideration of alternative measures of earnings and education inequality.
    Keywords: regional growth, Portugal, earnings inequality, education inequality
    Date: 2010–06
  10. By: Cinquegrana, Giuseppe; Sarno, Domenico
    Abstract: The literature on the yield curve deals with the capacity to predict the future inflation and the future real growth from the term structure of the interest rates. The aim of the paper is to verify this predictive power of the yield curve for the European Union at 16 countries in the 1995-2008 years. With this regard we propose two VAR models. The former is derived from the standard approach, the later is an extended version considering explicitly the macroeconomic effects of the risk premium. We propose the estimates of the models and their out-of-sample forecasts through both the European Union GDP (Gross Domestic Product) quarterly series and the European Union IPI (Industrial Production Index) monthly series. We show that the our extended model performs better than the standard model and that the out-of-sample forecasts of the IPI monthly series are better than ones of the GDP quarterly series. Moreover the out-of-sample exercises seems us very useful because they show the crowding out arising from Lehman Brother’s unexpected crash and the becoming next fine tuning process.
    Keywords: yield curve; monetary policy; business cycle; risk premium; real growth
    JEL: E43 E52 E44 E47
    Date: 2010–01
  11. By: Dötz, Niko; Fischer, Christoph
    Abstract: This paper presents a new approach for analysing the recent development of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying default probabilities are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors' focus as financial sector soundness weakened. --
    Keywords: Sovereign bond spread,GARCH-in-mean,default probability
    JEL: E43 G15 C32 H63 F36
    Date: 2010
  12. By: BEURAN, Monica; BRACK, Estelle
    Abstract: We study the impact of foreign banks' presence in Central and Eastern Europe's countries on their economic development and on the financial crisis they went through. We show that, despite a certain vulnerability of the domestic banking systems, the consequences of the opening of the banking markets to the foreign banks was globally positive. Thanks to local acquisitions by foreign investors, domestic banks have been recapitalized and transformed into effective and profitable banks with modern methods of risk management. Their access to international financial markets allowed the increase of credit supply and returned this supply less sensitive to domestic shocks. Without this opening the existing financing methods would not have been adequate to the economic development these countries knew the last years. The presence of foreign banks is so identified as a factor of stabilization.
    Keywords: Financial crisis contagion economic development regional integration foreign banks
    JEL: F23 E44 G21
    Date: 2009–10
  13. By: Michele Caivano (Banca d'Italia); Lisa Rodano (Banca d'Italia); Stefano Siviero (Banca d'Italia)
    Abstract: The world recession triggered by the financial crisis has impacted with extraordinary violence on economic activity in Italy.What has been the contribution of the various channels through which the crisis was transmitted to the Italian economy? What have been the effects stemming from the reaction of economic policies? To address these questions, our paper makes a counterfactual analysis of the Italian economy over the period 2008-2010, exploring a set of “no-crisis†scenarios. We estimate that the events prompted by the financial turmoil subtracted 6.5 percentage points from economic activity over the period 2008-2010. Specifically, crisis factors curtailed GDP growth by about 10 percentage points, while economic policies and automatic stabilizers mitigated the impact by about 3.5 percentage points. According to our results, the effects of the crisis were mostly “imported from abroadâ€; the worsening of domestic financing conditions and of the business and household climates played lesser - though not negligible - roles.
    Keywords: global financial crisis, counterfactual simulations, business fluctuations.
    JEL: E27 E37 E65
    Date: 2010–04
  14. By: Beatice Scheubel; Daniel Schunk; Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: For policy reforms to increase a society's welfare, reliable information on people's prefer- ences and expectations is crucial. Representative opinion polls, often involving simpli¯ed questions about the complex topics under debate, are an important source of information for both policy-makers and the public. Do people's answers to these poll questions reliably re°ect their preferences and expec- tations, or does fundamental, undiscriminating opposition to reforms distort them? We address this question in the context of a recent German pension reform which raised the statutory retirement age by two years to age 67. By introducing an experiment into a representative household survey, we are able to disentangle expectations of work ability at retirement and fundamental opposition. Our results show that expected work ability declines substantially with increasing target age (63, 65, or 67 years). Answers from West German respondents re°ect their current life situation as well as individual health and other risk factors. However, a fundamental opposition to reforms of the welfare state appears to strongly affect responses from East German households.
    JEL: J10 H30 H55 D84
    Date: 2009–09–01
  15. By: Federico Cingano (Banca d'Italia); Roberto Torrini (Banca d'Italia); Eliana Viviano (Banca d'Italia)
    Abstract: The fall in employment and the increase in unemployment rates in Italy in 2009 were fairly modest, given the sharp drop in GDP and compared with the recession of the early 1990s. This work shows that these data should be interpreted with caution, however. Firstly, employment trends as measured by Italian labour force survey may understate the decline in total employment if, as seems plausible, a lag exists between the entry of immigrants into the country and their registration. Secondly, the rise in the unemployment rate has been curbed by extensive recourse to temporary income support schemes to reduce working hours (such as the Cassa integrazione guadagni or Wage Supplementation Fund) in the northern regions, and by the sharp drop in participation in the South (the discouragement effect). The results of the Bank of Italy’s Survey of Industrial and Service Firms conducted in September 2009 show that the largest employment cuts occurred in the firms most exposed to international markets. Based on estimated labour input elasticity and on the available GDP forecast for 2010-11, we calculate that Italian employment is likely to remain well below its pre-crisis level in the coming quarters.
    Keywords: crisis, employment,unemployment
    JEL: E24 J20 J60
    Date: 2010–06
  16. By: Lundholm, Michael (Dept. of Economics, Stockholm University)
    Abstract: Are Sveriges Riksbank's inflation (CPI and KPIX) interval forecasts calibrated in the sense that the intervals cover realised inflation with the stated ex ante coverage probabilities 50, 75 and 90 percent? In total 150 interval forecast 1999:Q2-2005:Q2 are assessed for CPI and KPIX. The main result is that the forecast uncertainty is understated, but there are substantial differences between individual forecast origins and inflation measures.
    Keywords: Inflation; forecast; interval forecast; forecast uncertainty
    JEL: C53 E31 E37
    Date: 2010–06–23
  17. By: Bas ter Weel; Albert van der Horst; George Gelauff
    Abstract: This study develops four scenarios that can be used to think about the future of the Dutch economy in 2040. The study addresses the question of how we will earn our money in 2040 by looking at people and cities. It is hard to predict how the Dutch economy will evolve in the next five years, or even in the next one or two years—let alone thirty years ahead. Yet, policymakers have to take decisions today that have long-lasting consequences—about infrastructure projects, investments in education and science and welfare state reforms, for example. How should policymakers deal with the uncertainty about the future—as far as 2040—when taking such strategically important decisions?
    Keywords: 2040; Long-term scenarios; human capital development; urban development; technological change; scope of government
    JEL: F1 H1 H2 O16
    Date: 2010

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