nep-eec New Economics Papers
on European Economics
Issue of 2010‒11‒13
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Financial Integration, Monetary Policy and Stock Prices: Empirical Evidence for the New EU Member States By Pirovano M.
  2. The Risk of Sudden Depreciation of the Euro in the Sovereign Debt Crisis of 2009-2010 By Cho-Hoi Hui; Tsz-Kin Chung
  3. The impact of supply constraints on bank lending in the euro area - crisis induced crunching? By Hannah Sabine Hempell; Christoffer Kok Sørensen
  4. Squaring the circle in Euroland? Some remarks on the Stability and Convergence Programmes 2010-2013 By Till van Treeck; Silke Tober; Achim Truger; Michael Brecht
  5. The euro area interbank market and the liquidity management of the eurosystem in the financial crisis By Hauck, Achim; Neyer, Ulrike
  6. The monetary policy response to the financial crisis in the Euro area and in the United States: a comparison By Domenica Tropeano
  7. Explaining the demand for money by non-financial corporations in the euro area: A macro and a micro view By Carmen Martínez-Carrascal; Julian von Landesberger
  8. How much does the public know about the ECB's monetary policy? Evidence from a survey of Dutch households By Carin van der Cruijsen; David-Jan Jansen; Jakob de Haan
  9. Crises and Joint Employment-Productivity Dynamics: A Comparative Perspective for European Countries By Enrico Marelli; Marcello Signorelli; Joanna Tyrowicz
  10. Social Models in the Enlarged EU By David G. Mayes; Zaidah Mustaffa
  11. Real wages and the business cycle in Germany By Marczak, Martyna; Beissinger, Thomas
  12. Inequality, Growth and Public Spending in Central, East and Southeast Europe By Mario Holzner
  13. Inter-industry wage differentials in EU countries: what do cross-country time varying data add to the picture? By Philip Du Caju; Gábor Kátay; Ana Lamo; Daphne Nicolitsas; Steven Poelhekke

  1. By: Pirovano M.
    Abstract: We provide empirical evidence on the interaction between monetary policy and stock prices in 4 new EU member states of Central and Eastern Europe by estimating a small open economy macroeconometric model (SVAR) identi?ed by means of short-run restrictions. Our modeling choices refl?ect the increasing integration between the NMS and the Euro Area. Our contributions are twofold. We analyze the monetary transmission mechanism through stock prices in the NMS and we determine the extent to which fi?nancial markets in the aforementioned countries are sensitive to euro area monetary policy actions. We conclude that stock prices in the NMS are more sensitive to changes in the Euro Area interest rate than to the domestic one. Only in the Czech Republic and Poland we fi?nd a signi?cant negative effect of contractionary monetary policy on stock prices. Moreover, we fi?nd that the volatility of stock prices in the NMS is mainly due to shocks related to exchange rate and Euro Area monetary policy shocks.
    Date: 2010–10
  2. By: Cho-Hoi Hui (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Tsz-Kin Chung (Hong Kong Monetary Authority)
    Abstract: The economic-political instability of a country, which is tied to its credit risk, often leads to sharp depreciation and heightened volatility in its currency. This paper shows that not only the creditworthiness of the euro-area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out-of-the-money euro put option prices, which embedded information on the euro crash risk during the sovereign debt crisis of 2009-2010. Using information on the option prices under the stochastic-volatility jump-diffusion model, the euro's crash probability of 11% in a year with crash size of 14% is estimated at the end of April 2010. However, during the period of the global financial crisis between the Lehman default and September 2009 before the debt crisis began, the estimated crash size reflects the potential sharp devaluation of the US dollar that might result from quantitative easing in the US.
    Keywords: European Sovereign Debt Crisis, Currency Options, Credit Default Swaps, Currency Crash
    JEL: F31 G13
    Date: 2010–10
  3. By: Hannah Sabine Hempell (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Aggregate loan development typically hinges on a combination of factors that impact simultaneously on the demand and the supply side of bank lending. The financial turmoil starting in mid-2007 had detrimental consequences for banks’ balance-sheets, cost of funds and profitability, thus weighing negatively on their ability to supply new loans. This paper examines the impact of supply constraints on bank lending in the euro area with a special focus on this turmoil period. The empirical evidence presented suggests that banks’ ability and willingness to supply loans affects overall bank lending activity in general and has done so particularly during the financial crisis. Applying a cross-country panel-econometric approach using a unique confidential data set on results from the Eurosystem’s bank lending survey allows us to disentangle loan supply and demand effects. We find that even when controlling for the effects coming from the demand side loan growth is negatively affected by supply-side constraints. This applies both for loans to households for house purchase and for loans to non-financial corporations. We furthermore provide evidence that the impact of supply-side constraints, especially related to disruptions of banks’ access to wholesale funding and their liquidity positions, was reinforced since the eruption of the financial crisis and corresponding adjustments in banks’ loan portfolios seem to have been geared primarily via prices rather than outright quantity restrictions. JEL Classification: C23, E51, E52, G21.
    Keywords: bank credit, loan supply constraints, euro area, panel data.
    Date: 2010–11
  4. By: Till van Treeck (Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation); Silke Tober (Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation); Achim Truger (Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation); Michael Brecht
    Abstract: It is generally held, from both a global and a European perspective, that the three most impor-tant objectives for the years to come are 1) the reduction of current account imbalances, 2) the reduction of public deficits, and 3) the reduction of unemployment. This paper argues that the Stability and Convergence Programmes (SCPs) for the period 2010-2013, submitted by the euro area member states to the European Commission in January/February 2010, will not achieve all three objectives. Indeed, under current circumstances, the simultaneous realisation of these objectives would be like "squaring a circle". We show that the SCPs rely on rather optimistic assumptions about private sector demand and GDP growth, given the degree of fiscal consolidation. At the same time, they imply that current account imbalances in EMU would remain quite significant until 2013. Our analysis is mainly based on a few simple accounting identities and places special emphasis on Germany. It leads us to conclude that, in the absence of a drastic deterioration of private financial balances, the only way to achieve the GDP growth rates projected in the SCPs (and, ideally, current account rebalancing) would be for the governments of surplus countries to be prepared to run higher deficits over the next few years. This would be more "fiscally responsible" than the current focus on deficit reduc-tion. Failure to do so may result in persistently high unemployment in the years to come and may threaten the European Monetary Union.
    Date: 2010
  5. By: Hauck, Achim; Neyer, Ulrike
    Abstract: This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if costs of participating in the interbank market are high, the central bank assumes an intermediary function between liquidity surplus banks and liquidity deficit banks and thereby replaces the interbank market. From a policy perspective, we argue that possible measures of the Eurosystem to reactivate the interbank market may conflict, inter alia, with monetary policy aims. --
    Keywords: Liquidity,Monetary Policy Instruments,Interbank Market,Financial Crisis
    JEL: E52 E58 G21
    Date: 2010
  6. By: Domenica Tropeano (University of Macerata)
    Abstract: <p>The paper aims at drawing a comparison between the reactions to the recent financial crisis by the European Central Bank and by the Federal Reserve. Though the tools used have been largely the same, the quality and quantity of the interventions has been very different depending on the different structure of financial markets in the two areas. In particular, the ECB has not replaced private markets that did not work any more as the Federal Reserve did. The policy design behind those interventions is di®erent too. The Federal Reserve through the quantitative easing policy aims at lowering both short term and long term interest rates and has recently stated that this policy may continue in the future. The European Central Bank does not justify in this way its own interventions in the market and apparently seems not have given up its traditional goal, fighting inflation. The evolution of financial markets both in the U.S and in Europe after the crisis reflect different initial conditions and expectations for the future. Thus many differences in the structure of markets and in policy design exist. This, however, will not save Europe from the consequences of future disorders in the Us markets. The crisis spread to Europe largely because of the global dimension of the inter-bank market. Given that the interconnections between European and US banks have survived the financial crisis, nothing ensures that the same thing will not happen again.</p>
    Date: 2010–10
  7. By: Carmen Martínez-Carrascal (Banco de España); Julian von Landesberger (European Central Bank)
    Abstract: This paper analyses euro area non-financial corporations (NFCs) money demand, both from a macro and a microeconomic point of view. At a macro level, money holdings are modelled as a function of real gross added value, the price level, the long-term interest rate on bank lending to non-financial corporations, the own rate of return on M3 and the real capital stock of NFCs. The results indicate that NFCs money holdings adjust quickly when deviations from their long-run level are registered, and that the large increase observed recently in NFCs money holdings has been driven by changes in their fundamentals and hence they stand in line with their long-run equilibrium level. The disaggregated analysis also shows that cash holdings are linked to balance-sheet ratios (such as non-liquid short term assets, tangible assets or indebtedness) and other variables such as the firm’ cash flow, its volatility or the size of the firm, which cannot be taken into account in the macro analysis. Likewise, results indicate that the main drivers of the increase in NFCs cash holdings in the last years have been cyclical factors, captured by gross-added value and the cash-flow respectively. Variations in the opportunity cost of holding money, have also contributed to explain M3 developments but more modestly than at the end of the nineties, when its increase contributed negatively to cash accumulation.
    Keywords: keyword, money demand, coinegrated VARs, panel estimation
    JEL: E41 C23 C32 D21
    Date: 2010–11
  8. By: Carin van der Cruijsen (De Nederlandsche Bank.); David-Jan Jansen (De Nederlandsche Bank.); Jakob de Haan (De Nederlandsche Bank.)
    Abstract: Does the general public know what central banks do? Is this kind of knowledge relevant? Using a survey of Dutch households, we investigate these questions for the case of the European Central Bank (ECB). Our findings suggest that knowledge on the ECB's objectives is far from perfect. Both a weak desire to be informed and unawareness of insufficient knowledge are barriers for improving the public's understanding of monetary policy. However, our results also show that more intensive use of information improves understanding, suggesting that the media channel may play an important and constructive role in building knowledge. Finally, we find that knowledge on monetary policy objectives contributes to an individual's ability to form realistic inflation expectations. JEL Classification: D12, D84, E52, E58.
    Keywords: monetary policy, knowledge, transparency, financial literacy, inflation expectations, ECB.
    Date: 2010–11
  9. By: Enrico Marelli (Faculty of Economics, Department of Economics, University of Brescia); Marcello Signorelli (Faculty of Political Sciences, Department of Economics, Finance and Statistics, University of Perugia); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw, National Bank of Poland, Rimini Centre for Economic Analysis)
    Abstract: The aim of the paper is to investigate the short-term joint dynamics of productivity and employment during the economic down cycles in the EU economies over the past 20 years. Disentangling the shift in labour demand into a change of employment-productivity schedule and a movement along it, we focus on the last 2-3 crises, highlighting the peculiarities of the last recession. Namely, we demonstrate that many of the EU countries – unlike the United States –do not follow the RBC pattern. We also suggest some possible institutional fundamentals that could explain this phenomenon.
    Keywords: recession, employment and productivity dynamics, RBC, labour hoarding
    JEL: E32 J21 J23 O47 O52
    Date: 2010
  10. By: David G. Mayes; Zaidah Mustaffa
    Abstract: This paper considers the impact of the developments of the last 20 years on the nature of social models in the EU as categorized by the traditional Anglo-Saxon, Continental, Nordic and Southern regimes. It looks in particular at the impact of enlargement, globalisation and the pressures within the EU for harmonisation. In order to consider whether the addition of the new member states constitutes a further separate model it looks at the case of healthcare in Poland, the Czech Republic and Estonia. The conclusion is that neat categorisation is becoming increasingly difficult as countries adopt characteristics of other regimes and develop different parts of the social welfare system in different ways. While there is some element of increasing similarity, distinct regimes continue and it would not be realistic to talk about a single European social model in further research on the implications for democracy in the framework of the RECON project.
    Keywords: Czech Republic; Estonia; health policy; Poland; social policy; welfare state
    Date: 2010–10–15
  11. By: Marczak, Martyna; Beissinger, Thomas
    Abstract: This paper establishes stylized facts about the cyclicality of real consumer wages and real producer wages in Germany. As detrending methods we apply the deterministic trend model, the Beveridge-Nelson decomposition, the Hodrick-Prescott filter, the Baxter-King filter and the structural time series model. The detrended data are analyzed both in the time domain and in the frequency domain. The great advantage of an analysis in the frequency domain is that it allows to assess the relative importance of particular frequencies for the behavior of real wages. In the time domain we find that both real wages display a procyclical pattern and lag behind the business cycle. In the frequency domain the consumer real wage lags behind the business cycle and shows an anticyclical behavior for shorter time periods, whereas for longer time spans a procyclical behavior can be observed. However, for the producer real wage the results in the frequency domain remain inconclusive. --
    Keywords: real wages,business cycle,frequency domain,time domain,trend-cycle decomposition,structural time series model,phase angle,Germany
    JEL: E32 C22 C32 J30
    Date: 2010
  12. By: Mario Holzner (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The paper analyses the joint determinants of inequality and growth with a special emphasis on public spending structures in transition. The mutual benefit of low real interest rates, to both equity and economic development is a major result of this paper. In terms of public spending items we find a positive correlation with equity and a negative one with growth as several of the government expenditure items seem to act counter-cyclically. In the late 1990s and early 2000s the European integration process allowed most of the transition economies to aim for the best of both worlds: equity and economic development.
    Keywords: inequality, government expenditures, economic growth, transition
    JEL: D63 H5 O4 P2
    Date: 2010–10
  13. By: Philip Du Caju (National Bank of Belgium); Gábor Kátay (Magyar Nemzeti Bank); Ana Lamo (European Central Bank); Daphne Nicolitsas (Bank of Greece); Steven Poelhekke (De Nederlandsche Bank)
    Abstract: This paper documents the existence and main patterns of inter-industry wage differentials across a large number of industries for 8 EU countries (Belgium, Germany, Greece, Hungary, Ireland, Italy, Netherlands, and Spain) at two points in time (in general 1995 and 2002) and explores possible explanations for these patterns. The analysis uses the European Structure of Earnings Survey (SES), an internationally harmonised matched employer-employee dataset, to estimate inter-industry wage differentials conditional on a rich set of employee, employer and job characteristics. After investigating the possibility that unobservable employee characteristics lie behind the conditional wage differentials, a hypothesis which cannot be accepted, the paper investigates the role of institutional, industry structure and industry performance characteristics in explaining interindustry wage differentials. The results suggest that inter-industry wage differentials are consistent with rent sharing mechanisms and that rent sharing is more likely in industries with firm-level collective agreements and with higher collective agreement coverage.
    Keywords: inter-industry wage differentials, rent sharing, unobserved ability
    JEL: J31 J41 J51
    Date: 2010

This nep-eec issue is ©2010 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.