nep-eec New Economics Papers
on European Economics
Issue of 2010‒10‒23
twelve papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Case for Reforming Euro Area Entry Criteria By Zsolt Darvas
  2. Fiscal developments in the euro area beyond the crisis: some lessons drawn from fiscal reaction functions By Dufrénot G.; Paul L.
  3. The Impact of ECB and FED announcements on the Euro Interest Rates By Andrea Monticini; David Peel; Giacomo Vaciago
  4. Sources of exchange rate dynamics in the European transition economies By Mirdala, Rajmund
  5. Aggregate Employment Dynamics and (Partial) Labour Market Reforms By Rebeca Jiménez-Rodríguez; Giuseppe Russo
  6. Environmental Policy and Economic Growth: Empirical Evidence from Europe By Morley, Bruce
  7. European Transition at Twenty By Berglöf, Erik; Bruynooghe, Lise; Harmgart, Heike; Sanfey, Peter; Schweiger, Helena; Zettelmeyer, Jeromin
  8. Predicting recession probabilities with financial variables over multiple horizons By Fabio Fornari; Wolfgang Lemke
  9. Is there Evidence of Shift-Contagion in International Housing Markets? By Olivier de Bandt and Sheheryar Malik;
  10. Preferential Tariff Formation -- The Case of the European Union By Vivek Joshi
  11. The potential effects for families of introducing the French fiscal system in Germany By Honekamp, Ivonne; Schwarze, Johannes
  12. Nonlinearity and Inflation Rate Differential Persistence: Evidence from the Eurozone. By Nikolaos Giannellis

  1. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Science, Bruegel-Brusselss)
    Abstract: The global economic and financial crisis has raised further concerns about the euro-entry criteria, in addition to other factors, such as the effective tightening of the criteria due to the enlargement of the EU from 12 to 27 members, the highly unfavourable property of business cycle dependence, the internal inconsistency of the criteria due to the structural price level convergence of Central and Eastern European countries, and the continuous violation of the criteria by euro-area members. The interest rate criterion became a highly volatile measure. Many US metropolitan areas would fail to qualify to be members of the US monetary union by applying the currently used inflation criterion to the US. It is time to reform the criteria and to strengthen their economic rationale within the legal framework of the EU treaty. A good solution would be to relate all criteria to the average of the euro area and simultaneously to extend the compliance period from the currently considered one year to a longer period.
    Keywords: Euro; EU institutions; financial crisis; Maastricht-criteria
    JEL: F33 F36 F53
    Date: 2010–09
  2. By: Dufrénot G.; Paul L.
    Abstract: In this paper, we examine whether the fact that governments incorporate an objective of sustainability in their budgetary decisions is an element likely to increase the likelihood of a decrease in their deficit and debt ratios beyond the crisis (over the years from 2010 to 2015). We estimate a fiscal reaction function for the Euro area countries and demonstrate that the discretionary policies seem to be pro cyclical in average, thereby influencing the budget balance in the opposite direction than the automatic stabilizers. Our simulations of these rules over the next five years lead us to conclude that two groups of countries could emerge as regards their respective budgetary situations. On the one hand, some “virtuous” countries whose structural deficits will diminish whatever the “exit crisis” scenario envisaged, whereas on the other side, others will not succeed in stabilizing their national debt ratio, because their discretionary fiscal policy is less pro cyclical.
    Keywords: euro zone ; exit crisis scenario ; fiscal policy
    JEL: C23 H61 H63
    Date: 2010
  3. By: Andrea Monticini (Catholic University, Milan, Italy); David Peel; Giacomo Vaciago
    Abstract: Employing a new method of analysis suggested by Thornton (2009) we investigate the impact of news in the ECB and FED monetary policy announcements on daily changes in Euro interest rates. We document significant impacts of ECB announcements throughout the period but only until mid-2004 of FED announcements. The latter result on the news content of FED announcements is consistent with the analysis of Thornton (2009) who reports an insignificant impact of FED announcements on changes in US interest rates over a sample period that has significant overlap with the one employed in this letter.
    Keywords: monetary policy shocks, identification, wild bootstrap
    JEL: E40 E52
    Date: 2010–09
  4. By: Mirdala, Rajmund
    Abstract: Exchange rates in the European transition economies are currently exposed to the exogenous shocks as a result of higher uncertainty on the foreign exchange markets related to the various kinds of world economic crisis implications. Higher vulnerability of exchange rates of these countries to the exogenous shocks reflects decreased confidence of financial markets to the recovery process as well as an ability of the governments to sustain persisting fiscal pressures leading to higher fiscal deficits and public debt. Another issue that emphasizes the role of exogenous shocks in determining the exchange rate development in the European transition economies is the ability of national central banks to perform “suitable” monetary policy that would be able to support the recovery process in these economies while still being able to protect exchange rate of the national currency against speculative attacks and to keep exchange rate stable in the medium term horizon. In the paper we analyze the sources of exchange rate movements in the European transition economies (Bulgaria, the Czech republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania) in the period 2000-2009 using SVAR (structural vector autoregression) approach applied on each country individual data as well as panel data. We decompose the variability of NEER and REER in these countries to permanent and temporary shocks. Impulse-response functions are also computed in order to estimate the behaviour of NEER and REER after structural one standard deviation innovations. The relevant outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU member countries - EU-12 group). This approach helps us to understand the common as well as differing features of NEER and REER determination in the European transition economies and the old EU member countries.
    Keywords: exchange rates; exogenous shocks; structural vector autoregression; variance decomposition; impulse-response function; panel data analysis
    JEL: C32 E52
    Date: 2010–05
  5. By: Rebeca Jiménez-Rodríguez (University of Salamanca); Giuseppe Russo (University “Ca’ Foscari” of Venice, CSEF and CEPR)
    Abstract: European labour markets have undergone several important innovations over the last three decades. Most countries have reformed their labour markets since the mid-1990s, with the liberalization of fixed-term contracts and temporary work agencies being the common elements to such reforms. This paper investigates the existence of a change in the dynamic behaviour of the aggregate employment for major European Union countries - France, Germany, Italy, and Spain. According to our results, partial labour market reforms have made the response of the aggregate employment to output shocks larger and quite comparable to that found for the UK - the most flexible labour market in Europe since the Thatcher reforms.
    Keywords: labour market deregulation; dynamic responses
    JEL: C22 J23
    Date: 2010–10–11
  6. By: Morley, Bruce
    Abstract: The aim of this study is to determine whether environmental policies affect economic growth. Using a standard model of economic growth and a panel of European data, there is evidence that environmental taxes have had a negative effect on economic growth over the last ten years, indicating the ‘double dividend’ does not hold. This effect is particularly evident when other distortionary taxes are included in the model. A second contribution of this study is to incorporate the complimentary measure of renewable energy provision into the model. Again the results indicate a negative relationship between renewable energy and economic growth, offering support for the curse of natural resources.
    Keywords: Environmental policy; economic growth; renewable energy; natural resources
    Date: 2010–10
  7. By: Berglöf, Erik; Bruynooghe, Lise; Harmgart, Heike; Sanfey, Peter; Schweiger, Helena; Zettelmeyer, Jeromin
    Abstract: This study gauges the status of transition in the formerly centrally planned economies of Eastern Europe and Central Asia, using a broad approach that compares countries with respect to their business environment, competition, and managerial practices; and assesses transition progress at the level of 13 economic sectors. The largest transition gaps remain in Central Asia and some Eastern European and Western Balkans countries. However, significant reform needs also remain in some Central European and Baltic countries, particularly in energy efficiency, transport, and in the financial sector where regulatory regimes require strengthening and local capital markets need to be developed.
    Keywords: transition, economic reform, managerial practices, competition, business environment
    Date: 2010
  8. By: Fabio Fornari (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We forecast recession probabilities for the United States, Germany and Japan. The predictions are based on the widely-used probit approach, but the dynamics of regressors are endogenized using a VAR. The combined model is called a ‘ProbVAR’. At any point in time, the ProbVAR allows to generate conditional recession probabilities for any sequence of forecast horizons. At the same time, the ProbVAR is as easy to implement as traditional probit regressions. The slope of the yield curve turns out to be a successful predictor, but forecasts can be markedly improved by adding other financial variables such as the short-term interest rate, stock returns or corporate bond spreads. The forecasting performance is very good for the United States: for the out-of-sample exercise (1995 to 2009), the best ProbVAR specification correctly identifies the ex-post classification of recessions and non-recessions 95% of the time for the one-quarter forecast horizon and 87% of the time for the four-quarter horizon. Moreover, the ProbVAR turns out to significantly improve upon survey forecasts. Relative to the good performance reached for the United States, the ProbVAR forecasts are slightly worse for Germany, but considerably inferior for Japan. JEL Classification: C25, C32, E32, E37.
    Keywords: Recessions, forecasting, probit, VAR.
    Date: 2010–10
  9. By: Olivier de Bandt and Sheheryar Malik;
    Abstract: The paper attempts to provide, for housing markets, evidence of "shift-contagion" at the international level, i. e. regime shifts in the transmission of asset prices during crisis periods. The focus is in particular on UK and Spain. We use a Markov Switching FAVAR framework and regime-dependent impulse response functions. The `Crisis' regime which we identify endogenously is shown to also correspond to an exogenously determined index of frequency of financial crises in OECD countries, which peaked in the early 1990s and in the more recent Subprime crisis. Furthermore, we find that the response of domestic house price to a shock to a common (global) house price factor during a `Crisis' regime is relatively more amplified than in a `Normal' (more tranquil) regime. Less compelling evidence is found for France.
    Keywords: contagion, housing market, regime shifts, FAVAR model
    JEL: R31 G15 C32
    Date: 2010
  10. By: Vivek Joshi (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: In this paper, we address the impact of multilateral trade liberalisation (MTL) on the preferential tariffs granted by the EU, who is one of the top traders as well as biggest contributors to MTL. We empirically address two important questions. First, if the MFN tariff for a product is higher, does it lead to a higher or lower preferential tariff? Second, the EU being a large trading partner in such agreements, does reciprocity matter for giving meaningful preferential access? For a given MFN tariff, we model the preferential tariff with a simple linear functional form. We draw three important conclusions. First, the products that are highly protected do not get high preferential access even at the regional level. Second, reciprocity plays only a limited role in granting better preferential access. Third, GSP preferences matters when the EU negotiates with the developed partners but it does not matter when it negotiates with the developing partners.
    Keywords: MFN tariffs, preferential tariffs, reciprocity, GSP
    JEL: F13 F15
    Date: 2010–03
  11. By: Honekamp, Ivonne; Schwarze, Johannes
    Abstract: In Germany 1,41 children are born per women which results in a much lower birth-rate than in France. Time and again it has been discussed if a family orientated tax- and transfer system can influence birth rates. In Germany, France is often designated as a role model. Based on a model calculation this contribution shows how disposable income of German families would change, if the French tax- and transfer system were introduced. It will be distinguished among different family and employment compositions. One of the results is that families with only one child would be financially worth of under the French system while families with more children would benefit.
    Keywords: Families; Fiscal system; Disposable income; Germany; France
    JEL: J13 D31 H24 M52
    Date: 2010–10–10
  12. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece)
    Abstract: We employ a linear unit root test as well as a nonlinear two-regime Threshold Autoregressive (TAR) unit root test to determine whether inflation differentials in the Eurozone during the period 1970-2009 were persistent or transitory. The results imply that inflation rate differentials in the Eurozone are characterized by threshold nonlinearity. After modeling the nonlinear characteristics of the series with the appropriate unit root test, our test's results reveal that inflation rate differentials in the Eurozone are mainly persistent. Our findings imply that the higher the increase of the inflation rate differential, the more persistent the inflation rate differential is likely to be.
    Keywords: EMU; Inflation Rate Differential; Unit Root; Nonlinearity; Threshold
    JEL: C22 E31 F15 F36
    Date: 2010–07–01

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