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on European Economics |
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Issue of 2010‒08‒14
thirteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | John Lewis |
| Abstract: | This paper analyses how the financial crisis has affected task of meeting the Maastricht Criteria for the eight Central and Eastern European Countries which have yet to join the euro. It identifies the channels by which the crisis has fed through to deficits, debt, interest rates and inflation and seeks to provide numerical estimates of these factors. Deficits have worsened, but for most countries the problem is still primarily structural rather than cyclical. Debts have risen, but only in the cases of Latvia and Poland has the crisis changed the outlook for meeting the criterion. Inflation has fallen, particularly in the Baltic states on account of large output gap declines. The depth of the recession is likely to depress inflation rates for several years. Lastly, the interest rate criterion is more challenging because of the rise in spreads since the crisis. |
| Keywords: | New Member States; Convergence Criteria; Euro Adoption; Financial Crisis |
| JEL: | E61 E66 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:253&r=eec |
| By: | Sandra Gomes (Bank of Portugal); Pascal Jacquinot (European Central Bank); Massimiliano Pisani (Bank of Italy) |
| Abstract: | Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and GLobal Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. |
| Keywords: | Open-economy macroeconomics, DSGE models, econometric models, policy analysis |
| JEL: | C53 E32 E52 F47 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_770_10&r=eec |
| By: | Rebeca Jimenez-Rodriguez; Amalia Morales-Zumaquero; Balazs Egert |
| Abstract: | This paper investigates the impact of international shocks – interest rate, commodity price and industrial production shocks – on key macroeconomic variables in ten Central and Eastern European (CEE) countries by using near-VAR models and monthly data from the early 1990s to 2009. In contrast to previous work, the empirical analysis takes explicit account of the possibility of (multiple) structural breaks in the underlying time series. We establish strong evidence of structural breaks, particularly along the years 2007 and 2008, suggesting the very relevant impact of the recent global crisis on CEE economies. Moreover, our results suggest that the way how countries react to world commodity price shocks is related to the underlying economic structure and the credibility of the monetary policy. We also find that some countries like Slovakia and Slovenia – already euro area members – react stronger to foreign industrial production shocks than other countries and that the responses to such shocks are strongly correlated for selected CEE countries. Nevertheless, our results also shed light on substantial differences in responses to foreign interest rate shocks that originate from the US or the euro area. |
| Keywords: | monetary policy; foreign shocks; multiple structural breaks; near-VAR model; CEE economies. |
| JEL: | E43 E50 E52 C22 O52 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-989&r=eec |
| By: | Libero Monteforte (Bank of Italy); Gianluca Moretti (Bank of Italy) |
| Abstract: | We present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives. |
| Keywords: | forecasting inflation, real time forecasts, dynamic factor models, MIDAS regression, economic derivatives |
| JEL: | C13 C51 C53 E37 G19 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_767_10&r=eec |
| By: | Laurent Cavenaile; David Dubois |
| Abstract: | In this paper, we investigate the convergence process within the European Union (27 countries). More particularly, we study the convergence process of the new entrants from Central and Eastern Europe and of the 15 Western countries between 1990 and 2007. Applying a panel approach to the convergence equation derived by Mankiw et al. (1992) from the Solow model, we highlight the existence of heterogeneity in the European Union and show that new entrants and former members of the European Union can be seen as belonging to significantly differ ent groups of convergence. The existence of heterogeneity in the European Union or the Eurozone might affect their stability as the recent Greece’s sovereign debt crisis illustrates it. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rpp:wpaper:1001&r=eec |
| By: | Ansgar Belke |
| Abstract: | After the dramatic rescue package for the euro area, the governing council of the European Central Bank decided to purchase European government bonds - to ensure an "orderly monetary policy transmission mechanism". Many observers argued that, by bond purchases, national fiscal policies could from now on dominate the common monetary policy. This note argues that they are quite right. The ECB has indeed become more dependent in political and financial terms. The ECB has decided to sterilise its bond purchases - compensating those purchases through sales of other bonds or money market instruments to keep the overall money supply unaffected. This is to counter accusations that the ECB is monetizing government debt. This note addresses how effective these sterilisation policies are. One problem inherent in the sterilization approach is that it reshuffles only the liability side of the ECB's balance sheet. It is not well-suited to either diminish the bloated ECB balance sheet or to remove the potentially toxic covered or sovereign bonds from it. In addition, the intake of potentially toxic assets as collateral and by outright purchases in the central bank balance sheet artificially keeps the asset prices up and does not prevent the (quite intransparent) risk transfer from one group of countries to another to occur. Finally, sterilization takes place in a setting of still ultra-lax monetary policies, i.e. of new liquidity-enhancing operations with unlimited allotment, and, hence, does not appear to be overly irrelevant. A credible strategy to deal with the financial crisis should deal primarily with the asset side of the ECB balance sheet. [...]<br /> |
| Keywords: | Accountability, bail-out, bond purchases, central bank independence, insolvency risk, Securities Markets Programme, transparency |
| JEL: | G32 E42 E51 E58 E63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1040&r=eec |
| By: | Aleksander Aristovnik; Matevz Meze |
| Abstract: | The main objective of the following article is to present the key findings of the existent research in the field of the influence the introduction of the euro had on the trade of the member states of the Economic and Monetary Union (EMU). The intention of this article is also to inspire further research (especially concerning the effect of the euro on the Slovene foreign trade). Recent empirical researches show that the trade among the members of the EMU has grown on average by 10–15 % due to the use of a common currency and there was also an increase in trade with the non-member states. The trade benefits of the entry of new countries into the EMU will thus not be the same as the benefits of the initial formation of the EMU in the nineties. This claim has been tested on the example of Slovenia. A regression analysis of time series shows that there has been a positive effect on Slovenia’s exports into and a negative effect on its imports from the eurozone precisely at the time of the creation of the EMU in 1999. |
| Keywords: | euro, foreign trade, Economic and monetary union (EMU), Slovenia, time series |
| JEL: | F13 F17 F30 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-982&r=eec |
| By: | Balazs Egert |
| Abstract: | This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-makret service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment. |
| Keywords: | European Union, inflation, Balassa-Samuelson, real convergence,catching up, Bayesian model average, non-linearity. |
| JEL: | E43 E50 E52 C22 G21 O52 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-991&r=eec |
| By: | Stefan Gerlach; John Lewis |
| Abstract: | This paper estimates a monetary policy reaction function for the ECB over the period 1999-2009. To allow for a potential shift in interest rate setting during the financial crisis, we permit a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. They suggest that the ECB cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound. |
| Keywords: | ECB, reaction functions; zero lower bound; smooth transition |
| JEL: | C2 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:254&r=eec |
| By: | Evzen Kocenda; Jan Hanousek |
| Abstract: | We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high-frequency five-minute intraday data on stock market index returns and four classes of EU and U.S. macroeconomic announcements during 2004–2007. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day-of-the-week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research. |
| Keywords: | finance, intra-day data, macroeconomic news, European emerging stock markets,volatility |
| JEL: | C52 F36 G15 P59 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-983&r=eec |
| By: | András Rezessy (Joint Research Centre of the European Commission) |
| Abstract: | The paper estimates currency risk premia for the Czech Republic, Hungary, Poland and Slovakia. Three different approaches are applied: a constant premium approach based on rational expectations, while time-varying premia are estimated with a method using financial market analysts’ surveys and also with a Kalman filter technique. A novelty in this paper is a crosscheck based on the three different approaches applied and also making use of implied and historical volatilities. The results highlight the importance of such a crosscheck: in the case of the Czech and the Slovak koruna and the Polish zloty this exercise reveals severe problems with the results, which otherwise would not have been discovered. On the other hand, the estimation methods produce convincing results for the Hungarian forint. The estimated Hungarian premium series reflect the major events that intuitively may have shaped currency risk in the country. A possible reason for these findings is a high signal-to-noise ratio in the case of Hungary where the risk premium has been large and exhibited substantial shifts through time. Finally, the strong comovement of the premium series obtained with the Kalman-filter and the survey data for the Hungarian forint also indicates that the survey expectations are largely in line with both the riskpremium- extended UIP and the rational expectations hypothesis, which is theoretically important as the UIP relates exchange rate expectations to the interest rate differential. |
| Keywords: | risk premium, exchange rate, Kalman filter, survey data |
| JEL: | C30 C42 F31 G15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2010/7&r=eec |
| By: | Balazs Egert; Rafal Kierzenkowski |
| Abstract: | France has seen a marked deterioration in its export performance in the last 10 years or so. Previous empirical research pointed out that weak export performance was due to i) vigorous domestic demand; ii) lower mark-ups due to head-to-head competition with Germany; iii) low non-price competitiveness of French export goods; iv) offshoring of entire production processes (especially in the automobile sector); and v) difficulties of French manufacturing firms to reach critical size for exporting. This paper adds an additional explanation to this list. We argue that resource reallocation from the exporting to the construction sector triggered by fast rising property prices hindered France to meet world export demand vis-à-vis its products. Our econometric analysis shows that the resource reallocation argument helps explain French export performance between the early 2000s and 2007, unexplained by traditional models. This result is confirmed for a set of OECD countries that experienced a marked decline in their export performance and sustained realestate boom after 2000. |
| Keywords: | OECD; France; Competitiveness; exports; export performance; construction; house prices; resource allocation |
| JEL: | F10 F14 O14 O52 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-985&r=eec |
| By: | Francisco Nadal De Simone; Franco Stragiotti |
| Abstract: | This paper performs market and funding liquidity stress testing of the Luxembourg banking sector using stochastic haircuts and run-off rates. It takes into account not only the shocks to the banking sector and banks? responses to them, but second-round effects due to the effects of banks? reactions on asset prices and reputation. In general, banks? business lines and, therefore their buffers? composition, determine the net effect of the shocks on banks? stochastic liquidity buffers. So, results differ across banks. Second-round effects exemplify the relevance of contagion effects that reduce the systemic benefits of diversification. While systemic liquidity risk is low following a shock to the interbank market, for Luxembourg, with its high number of subsidiaries of large foreign financial institutions, the results indicate the importance of monitoring the liquidity of parent groups to which Luxembourg institutions belong. In particular, shocks to related-party deposits are important. Finally, the results, including those of a run-on-deposits shock, show the relevance of system-wide measures to minimize the systemic effects of liquidity crises. |
| Keywords: | stress test, liquidity risk, banks, stochastic, contagion, macro-prudential |
| JEL: | E5 C1 G2 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:cahier_etudes_45&r=eec |