nep-eec New Economics Papers
on European Economics
Issue of 2010‒07‒31
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Inflation and inflation uncertainty in the euro area By Guglielmo Maria Caporale; Luca Onorante; Paolo Paesani
  2. Burying the Stability Pact: The Reanimation of Default Risk in the Euro Area By Christian Fahrholz; Roman Goldbach
  3. Transmission of government spending shocks in the euro area: Time variation and driving forces By Markus Kirchner; Jacopo Cimadomo; Sebastian Hauptmeier
  4. Trusting the bankers: a new look at the credit channel of monetary policy By Matteo Ciccarelli; Angela Maddaloni; José-Luis Peydró
  5. Green shoots in the euro area. A real time measure By Maximo Camacho; Gabriel Perez-Quiros; Pilar Poncela
  6. Is the Euro-Area Core Price Index Really More Persistent than the Food and Energy Price Indexes? By José Manuel Belbute
  7. Foreign and Domestic Growth Drivers in Eastern Europe By Weber, Enzo
  8. The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data By Andrew Hughes Hallett; Moritz Kuhn; Thomas Warmedinger
  9. Price and wage formation in Portugal By Carlos Robalo Marques; Fernando Martins; Pedro Portugal
  10. European Export Performance By Angela Cheptea; Lionel Fontagne; Soledad Zignago
  11. Exit: Time to Plan By Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker
  12. Monetary policy and capital regulation in the US and Europe By Ethan Cohen-Cole; Jonathan Morse
  13. The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions By Inci Ötker; Jiri Podpiera
  14. Alternative methods for forecasting GDP. By Dominique Guegan; Patrick Rakotomarolahy
  15. New insights into price-setting behaviour in the United Kingdom By Greenslade, Jennifer; Parker, Miles
  16. Exports and sectoral financial dependence: evidence on French firms during the great global crisis By Jean-Charles Bricongne; Lionel Fontagné; Guillaume Gaulier; Daria Taglioni; Vincent Vicard

  1. By: Guglielmo Maria Caporale (Centre for Empirical Finance, Brunel University, West London, UB8 3PH, United Kingdom.); Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Paolo Paesani (University of Rome “Tor Vergata”.)
    Abstract: This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates their linkages in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steadystate inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, consistently with the idea that the ECB can achieve lower inflation uncertainty by lowering the inflation rate. JEL Classification: E31, E52, C22.
    Keywords: Inflation, Inflation Uncertainty, Time-Varying Parameters, GARCH Models, ECB, EMU.
    Date: 2010–07
  2. By: Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Roman Goldbach
    Abstract: -
    Keywords: -
    JEL: E62 G12 G14 H30 H61
    Date: 2010–06–14
  3. By: Markus Kirchner (Tinbergen Institute, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands.); Jacopo Cimadomo (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sebastian Hauptmeier (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers. JEL Classification: C32, E62, H30, H50.
    Keywords: Government spending shocks, Fiscal transmission mechanism, Structural change, Structural vector autoregressions, Time-varying parameter models.
    Date: 2010–07
  4. By: Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Any empirical analysis of the credit channel faces a key identification challenge: changes in credit supply and demand are difficult to disentangle. To address this issue, we use the detailed answers from the US and the confidential and unique Euro area bank lending surveys. Embedding this information within a standard VAR model, we find that: (1) the credit channel is active through the balance-sheets of households, firms and banks; (2) the credit channel amplifies the impact of a monetary policy shock on GDP and inflation; (3) for business loans, the impact through the (supply) bank lending channel is higher than through the demand and balance-sheet channels. For household loans the demand channel is the strongest; (4) during the crisis, credit supply restrictions to firms in the Euro area and tighter standards for mortgage loans in the US contributed significantly to the reduction in GDP. JEL Classification: E32, E44, E5, G01, G21.
    Keywords: Non-financial borrower balance-sheet channel, Bank lending channel, Credit channel, Credit crunch, Lending standards, Monetary policy.
    Date: 2010–07
  5. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España); Pilar Poncela (Universidad autónoma de Madrid)
    Abstract: We show that an extension of the Markov-switching dynamic factor models that accounts for the specificities of the day to day monitoring of economic developments such as ragged edges, mixed frequencies and data revisions is a good tool to forecast the Euro area recessions in real time. We provide examples that show the nonlinear nature of the relations between data revisions, point forecasts and forecast uncertainty. According to our empirical results, we think that the real time probabilities of recession are an appropriate statistic to capture what the press call green shoots.
    Keywords: Business Cycles, Output Growth, Time Series
    JEL: E32 C22 E27
    Date: 2010–07
  6. By: José Manuel Belbute (Universidade de Évora, Departamento de Economia e CEFAGE-UE)
    Abstract: The purpose of this paper is to measure the degree of persistence of the overall, core, food and energy Harmonized Indexes of Consumer Prices for the European Monetary Zone (HICP-EAs) and to identify its implications for decision-making in the private sector and in public policy. Using a non-parametric approach, our results demonstrate the presence of a statistically significant level of persistence in four HICP-EAs: headline, core, food and energy. Moreover, contrary to popular belief, the core index does not reflect permanent price changes. We also find evidence that the food and energy price indexes are more volatile and more persistent than the other two price indexes. Our results also show a reduction in persistence for both the headline and the core price indexes after the implementation of the single monetary policy, but not for food and energy. These results have important implications for both the private sector and for policymakers who use the core as a reference price index for their decision-making because the use of this index can lead to an erroneous perception of price movements
    Keywords: Harmonized Index of Consumption Prices, Core Inflation, Euro Area, Persistence
    JEL: C14 C22 E31 E52
    Date: 2010
  7. By: Weber, Enzo
    Abstract: This paper analyses the growth effects of capital formation, exports and FDI as major drivers of economic development in Eastern Europe. The fundamental innovations are identified by empirically and theoretically motivated short- and long-run restrictions in structural cointegrated vector autoregressions. Impulse responses and variance decompositions reveal quite different growth effects in various Eastern European countries. Generally, strong reliance on exports goes along with higher GDP, and FDI bears substantial potential for fostering economic growth. It is shown that the recent worldwide recession clearly hit Eastern Europe through the export channel, whereas the recovery is mainly supported by positive demand shocks.
    Keywords: Eastern Europe; Growth; Exports; Investment; Identification
    JEL: O11 C32
    Date: 2010–07–22
  8. By: Andrew Hughes Hallett (George Mason University, 4400 University Drive, Fairfax, Virginia 22030, USA.); Moritz Kuhn (University of Bonn, D-53012 Bonn, Germany.); Thomas Warmedinger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper does two things. First it examines the use of real time inter-annual cash data and the role of early interventions for improving the monitoring of national fiscal policies and the correction of fiscal indiscipline. Early warnings are important because they allow us to spread the necessary adjustments over time. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. Second, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries. JEL Classification: E62, H50, H68.
    Keywords: fiscal surveillance, early warning, cash data, additive vs. slope adjustments, fiscal credibility.
    Date: 2010–07
  9. By: Carlos Robalo Marques (Banco de Portugal, Research Department, Portugal.); Fernando Martins (Banco de Portugal, Research Department, Portugal.); Pedro Portugal (Banco de Portugal, Research Department, Portugal.)
    Abstract: This paper brings together empirical research on price and wage dynamics for the Portuguese economy based both on micro and macro data. As regards firms' pricing behaviour the most noticeable finding is that prices in Portugal are somewhat less flexible than in the United States but more flexible than in the Euro Area. Regarding firms' wage setting practices, we uncover evidence favouring the hypothesis of aggregate and disaggregate wage flexibility. Despite the existence of mandatory minimum wages, the presence of binding wage floors and the general use of extension mechanisms, the firms still retain some ability to circumvent collective agreements via the mechanism of the wage cushion. The evidence also suggests that Portuguese wages behave in a fashion consistent with the wage curve literature, but the responsiveness of real wages to unemployment changes may have declined over the last decade. JEL Classification: C42, D40, E31, J30.
    Keywords: Survey data, wage and price rigidities, persistence, wage cushion.
    Date: 2010–07
  10. By: Angela Cheptea; Lionel Fontagne; Soledad Zignago
    Abstract: Countries no longer specialise in products or sectors, but in varieties of the same product (sold at different prices). To study the way in which the European Union copes with the emergence of new big world exporters in this context, we analyse the redistribution of world market shares at the level of product variety. We distinguish for each product three price ranges. We decompose the growth of exports into structural effects (geographic and sectoral) and into a pure performance effect. From 1994 to 2007 the EU25 withstood the competition of emerging countries better than the U.S. and Japan. European market share losses arise during the 1994-2000 period, and are mainly explained by poor export performance of old member states. More precisely, the EU gains market shares in the upper segment of the market, by cumulating good performance and favourable structure effects, contrary to the U.S. and Japan which withdraw extensively from this segment of the market. Finally, all developed countries lose market shares in high-technology products to developing countries, with the EU losing less than other countries.
    Keywords: International trade; export performance; market shares; shift-share; European Union
    JEL: F12 F15
    Date: 2010–07
  11. By: Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker
    Abstract: Prepared for presentation at the informal ECOFIN Council meetings in Gothenberg, Sweden, on 1 Oct 2009, this paper discusses recommendations regarding exit strategies for budgetary policy, monetary policy and financial sector policy across Europe. The authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should set debt targets to be reached by the end of 2014. They also explain that proper incentives are necessary to ensure that an exit strategy is implemented in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors recommend, in order to avoid a buildup of financial instability during the process.
    Date: 2009–09
  12. By: Ethan Cohen-Cole (Robert H Smith School of Business, 4420 Van Munching Hall, University of Maryland, College Park, MD 20742, USA.); Jonathan Morse (Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA, USA.)
    Abstract: From the onset of the 2007-2009 crisis, the Federal Reserve and the European Central Bank have aggressively lowered interest rates. Both sets of changes are at odds with an anti-inflationary stance of monetary policy; indeed, as the crisis began in August 2007 inflation expectations were high and rising, particularly in the United States. We have two additions to the literature. One, we present a model economy with a leveraged and regulated financial sector. Two, we find optimal Taylor rules for our economy that are consistent with a strong pro-inflationary reaction during financial crisis while maintaining a standard output-inflation mandate. We have three interpretations of our results. One, because the Federal Reserve has partial control over bank regulation it can exercise regulatory lenience. Two, the Fed’s stronger output orientation means that it will potentially respond more quickly when faced with constrained banks. Three, our results support procyclical capital regulation. JEL Classification: E52, E58, G18, G28.
    Keywords: monetary policy, capital regulation, crisis.
    Date: 2010–07
  13. By: Inci Ötker; Jiri Podpiera
    Abstract: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
    Date: 2010–06–29
  14. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Patrick Rakotomarolahy (Centre d'Economie de la Sorbonne)
    Abstract: An empirical forecast accuracy comparison of the non-parametric method, known as multivariate Nearest Neighbor method, with parametric VAR modelling is conducted on the euro area GDP. Using both methods for nowcasting and forecasting the GDP, through the estimation of economic indicators plugged in the bridge equations, we get more accurate forecasts when using nearest neighbor method. We prove also the asymptotic normality of the multivariate k-nearest neighbor regression estimator for dependent time series, providing confidence intervals for point forecast in time series.
    Keywords: Forecast, economic indicators, GDP, Euro area, VAR, multivariate k-nearest neighbor regression, asymptotic normality.
    JEL: C22 C53 E32
    Date: 2010–07
  15. By: Greenslade, Jennifer (Bank of England); Parker, Miles (Bank of England)
    Abstract: It is important to understand how companies set prices, since price-setting behaviour plays a key role in the monetary policy transmission mechanism. Many surveys have been conducted in a range of countries to shed light on this issue by asking companies directly about how they set prices. This paper reviews the results of a new survey of the price-setting behaviour by the Bank of England of around 700 UK firms. In terms of how companies set prices, the survey evidence supported the use of the mark-up over costs form of pricing. Firms reviewed prices more frequently than actually changing them, with the median firm changing price only once per year, but the frequency with which companies changed their prices varied considerably across sectors. Over the past decade a significant number of firms had increased the frequency of price changes. Different factors influenced price rises and price falls. Higher costs – in particular, labour costs and raw materials – were the most important driver behind price rises, whereas lower demand and competitors’ prices were the main factor resulting in price falls. Nearly half of firms changed their prices within three months of an increase in costs or a fall in demand.
    Keywords: Price-setting; nominal rigidity; survey data
    JEL: D40 E30
    Date: 2010–07–19
  16. By: Jean-Charles Bricongne (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Lionel Fontagné (Paris School of Economics, University Paris 1, 106-112 Bd de l’Hôpital, 75647 Paris Cedex 13, France.); Guillaume Gaulier (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Daria Taglioni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vincent Vicard (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.)
    Abstract: The unprecedented drop in international trade during the last quarter of 2008 and the first quarter of 2009 has mainly been analysed at the macroeconomic or sectoral level. However, exporters who are heterogeneous in terms of productivity, size or external financial dependence should be heterogeneously affected by the crisis. This issue is examined in this paper by using data on monthly exports at the product and destination level for some 100,000 individual French exporters, up to 2009M4. We show that the drop in French exports is mainly due to the intensive margin of large exporters. Small and large exporters are evenly affected when sectoral and geographical specialisations are controlled for. Lastly, exporters (small and large) in sectors structurally more dependent on external finance are the most affected by the crisis. JEL Classification: F02, F10, G01.
    Keywords: financial crisis, international trade, firms’ heterogeneity, intensive and extensive margins.
    Date: 2010–07

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