nep-eec New Economics Papers
on European Economics
Issue of 2010‒09‒03
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Business cycle convergence in EMU: A first look at the second moment By Jesús Crespo-Cuaresma; Octavio Fernández-Amador
  2. What determines European real exchange rates? By Martin Berka; Michael B. Devereux
  3. The impact of high and growing government debt on economic growth: an empirical investigation for the euro area By Cristina Checherita; Philipp Rother
  4. Fiscal Policy and Growth: Do Financial Crises make a Difference? By António Afonso; Hans Peter Grüner; Christina Kolerus
  5. Persistence Endogeneity Via Adjustment Costs: An Assessment based on Bayesian Estimations By Sebastian Sienknecht
  6. ICT and Productivity Growth in the 1990's: Panel Data Evidence on Europe By Christian M. Dahl; Hans Christian Kongsted; Anders Sørensen
  7. Public and Private Inputs in Aggregate Production and Growth: A Cross-country Efficiency Approach By António Afonso; Miguel St. Aubyn
  8. Corporate Governance and the Cost of Debt of Large European Firms By Schauten, M.B.J.; Dijk, D.J.C. van
  9. Modelling and Forecasting UK Mortgage Arrears and Possessions By Janine Aron; John Muellbauer

  1. By: Jesús Crespo-Cuaresma; Octavio Fernández-Amador
    Abstract: We propose the analysis of the dynamics of the standard deviation of business cycles across euro area countries in order to evaluate the patterns of cyclical convergence in the European Monetary Union for the period 1960-2008. We identify significant business cycle divergence taking place in the mid-eighties, followed by a persistent convergence period spanning most of the nineties. This convergent episode finishes roughly with the birth of the European Monetary Union. A hypothetical euro area including all the new members of the recent enlargements does not imply a sizeable decrease in the optimality of the currency union. Finally, the European synchronization differential with respect to other developed economies seems to have been diluted within a global cycle since 2004.
    Keywords: Business cycles, business cycle convergence, European Monetary Union.
    JEL: E32 E63 F02
    Date: 2010–08
  2. By: Martin Berka; Michael B. Devereux
    Abstract: We study a newly constructed panel data set of relative prices of a large number of consumer goods among 31 European countries. We ¯nd that there is a substantial and non-diminishing deviation from PPP at all levels of aggregation, even among eurozone members. However, real exchange rates are very closely tied to relative GDP per capita within Europe, both across countries and over time. This relationship is highly robust at all levels of aggregation. We construct a simple two-sector endowment economy model of real exchange rate determination. Simulating the model using the historical relative GDP per capita for each country, we ¯nd that for most (but not all) countries there is a very close fit between the actual and simulated real exchange rate.
    Date: 2010–05
  3. By: Cristina Checherita (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Philipp Rother (European Central Bank, Fiscal Policies Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. The channels through which government debt (level or change) is found to have an impact on the economic growth rate are: (i) private saving; (ii) public investment; (iii) total factor productivity (TFP) and (iv) sovereign long-term nominal and real interest rates. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects. JEL Classification: H63, O40, E62, E43.
    Keywords: Public debt, economic growth, fiscal policy, sovereign long-term interest rates.
    Date: 2010–08
  4. By: António Afonso; Hans Peter Grüner; Christina Kolerus
    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.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    JEL: C23 E62 E44 F43 H50
    Date: 2010–06
  5. By: Sebastian Sienknecht (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: This paper estimates a dynamic stochastic general equilibrium (DSGE) model for the European Monetary Union by using Bayesian techniques. A salient feature of the model is an extension of the typically postulated quadratic cost structure for the monopolistic choice of price variables. As shown in Sienknecht (2010a), the enlargement of the original formulation by Rotemberg (1983) and Hairault and Portier (1993) leads to structurally more sophisticated inflation schedules than in the staggering environment by Calvo (1983) with rule-of-thumb setters. In particular, a desired lagged inflation term always arises toghether with a two-period-ahead expectational expression. The two terms are directly linked by a novel structural parameter. We confront the relationships obtained by Sienknecht (2010a) against European data and compare their data description performance against the widespread extension of the Calvo setting with rule-of-thumb behavior.
    Keywords: Bayesian, Simulation, Indexation, Model Comparison
    JEL: C11 C15 E31 E32
    Date: 2010–08–24
  6. By: Christian M. Dahl (University of Southern Denmark, CEBR and CREATES); Hans Christian Kongsted (University of Copenhagen, CAM and CEBR); Anders Sørensen (Copenhagen Business School and CEBR)
    Abstract: What has been the quantitative effect on productivity growth of information and communication technology (ICT) in Europe after 1995? Based on a multi-country sectoral panel data set, we provide econometric evidence of positive and signi?cant productivity effects of ICT in Europe, mainly due to advances in total factor productivity. The impact of ICT in Europe has happened against a negative macro economic shock not related to ICT. This is in contrast to the established evidence for the US. Our main results challenge the consensus in the growth-accounting literature that there has been no acceleration of productivity growth in Europe, mainly due to a dismal performance of ICT-using sectors.
    Keywords: Labor productivity, total factor productivity, information and communications technology, panel data methods.
    JEL: E32 C23 O47
    Date: 2010–08–25
  7. By: António Afonso; Miguel St. Aubyn
    Abstract: In a cross section of OECD countries we replace the macroeconomic production function by a production possibility frontier, TFP being the composite effect of efficiency scores and possibility frontier changes. We consider, for the periods 1970, 1980, 1990, 2000, one output: GDP per worker; three inputs: human capital, public physical capital per worker and private physical capital per worker. We use a semiparametric analysis, computing Malmquist productivity indexes, and we also resort to stochastic frontier analysis. Results show that private capital is important for growth, although public and human capital also contribute positively. A governance indicator, a non-discretionary input, explains inefficiency. Better governance helps countries to achieve a better performance. Non-parametric and parametric results coincide rather closely on the countries movements vis-à-vis the possibility frontier, and on their relative distances to the frontier.
    Keywords: economic growth; public spending; efficiency; Malmquist index.
    JEL: F14
    Date: 2010–05
  8. By: Schauten, M.B.J.; Dijk, D.J.C. van
    Abstract: This paper examines the relation between the quality of corporate governance and the cost of debt for large European firms (FTSEurofirst 300 Index). We use Deminor scores for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. As a proxy for the cost of debt we use the yield and yield spread of 542 bonds issued in the years 2001-2009. After adjusting for issuer characteristics, issue characteristics and market characteristics, we find a negative relation between disclosure and the cost of debt. We uncover that this relation is in fact nonlinear and crucially depends on the quality of shareholder rights. If the quality of shareholder rights is high, the effect of disclosure on the cost of debt is insignificant. However, if the quality of shareholder rights is low, the negative effect of disclosure is statistically and economically significant. This novel interaction effect between shareholders rights and disclosure on the cost of debt is explained by our `share rights or disclose' hypothesis. According to this hypothesis, agency conflicts between the management and the providers of capital are negatively related with the quality of shareholder rights. We argue that firms with higher shareholder rights exhibit lower information risk.
    Keywords: corporate governance;cost of debt;disclosure;shareholder rights
    Date: 2010–06–02
  9. By: Janine Aron; John Muellbauer
    Abstract: This paper presents new models for aggregate UK data on mortgage possessions (foreclosures) and mortgage arrears (payment delinquencies). The innovations include the treatment of difficuly to observe variations in loan quality and shifts in forbearance policy by lenders, by common latent variables estimated in a system of equations for arrears and possessions, for quarterly data over 1983-2009. A second innovation is the theory-justified use of an estimate of the proportion of mortgages in negative equity, based on an average debt to equity ratio, as one of the key drivers of possessions and arrears. A third is the systematic treatment of measurement bias in the months in arrears measures. Finally, the paper does not impose a proportional long-run relationship between possessions and arrears assumed in the previous UK literature. A range of economic forecast scenarios for forecasts to 2013 reveals the sensitivity of mortgage possessions and arrears to different economic conditions, highlighting potential risks faced by the UK and its mortgage lenders. A comprehensive review of data on arrears and possessions completes the paper.
    Keywords: Foreclosures, Mortgage possessions, Mortgage payment delinquencies, Mortgage arrears, UK mortgage market, Defaults, Unobserved components model
    JEL: G21 G28 R21 C51 C53 E27
    Date: 2010

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