nep-eec New Economics Papers
on European Economics
Issue of 2010‒11‒27
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Towards expenditure rules and fiscal sanity in the euro area By Sebastian Hauptmeier; Jesus Sanchez Fuentes; Ludger Schuknecht
  2. Exchange Rate Misalignments at World and European Levels: A Fundamental Equilibrium Exchange Rate Approach By Se-Eun Jeong; Jacques Mazier; Jamel Saadaoui
  3. Keynesian government spending multipliers and spillovers in the euro area By Tobias Cwik; Volker Wieland
  4. Europe integrates less than you think: Evidence from the market for corporate control in Europe and the US By Umber, Marc P.; Grote, Michael H.; Frey, Rainer
  5. Inflation risk premia in the US and the euro area By Peter Hördahl; Oreste Tristani
  6. Cash holdings, firm size and access to external finance. Evidence for the euro area By Carmen Martínez-Carrascal
  7. How Do Central Banks React to Wealth Composition and Asset Prices? By Vitor Castro; Ricardo M. Sousa
  8. Why do firms invest in the Baltic Sea Region By Markku Kotilainen; Nuutti Nikula
  9. Quality-adjusted similarity of EU-countries´ export structure By Ville Kaitila
  10. More Jobs? A Panel Analysis of the Lisbon Strategy By Sergio Destefanis; Giuseppe Mastromatteo
  11. Bypassing Russia: Nabucco project and its implications for the European gas security By Erdogdu, Erkan

  1. By: Sebastian Hauptmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jesus Sanchez Fuentes (Universidad Complutense Madrid, Ciudad Universitaria - 28040 Madrid, Spain.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The study looks at primary expenditure developments in the euro area, its three largest members and four “macro-imbalances” countries for the period 1999-2009. It compares actual expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. It also calculates the implications for debt trends. It finds that, all sample countries except Germany applied expansionary expenditure policies. This resulted in much higher expenditure and debt paths compared to a counterfactual neutral expenditure stance. Simple and prudent rules-based spending policies could have led to much safer fiscal positions much more in line with the EU’s Stability and Growth Pact rules. JEL Classification: E17, E61, E65, H50, H60.
    Keywords: Expenditure policies, public debt, expenditure rules, sustainability, fiscal stance.
    Date: 2010–11
  2. By: Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Since the mid-1990s, we observe an increase of world current account imbalances. These imbalances have only been partially reduced since the burst of the crisis in 2007. They reflect, to some extent, exchange rate misalignments, an issue which has been frequently studied in the literature. However, these imbalances, which have reinforced in the 2000s, are also important inside the Euro area. This analysis cannot be reduced to simple estimates of euro misalignment at the world level because of the specific constraints that exist for each member of the Euro area. This article aims to examine to what extent the intra-European imbalances reflect exchange rate misalignments for each “national euro”.
    Keywords: Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance
    Date: 2010–06–02
  3. By: Tobias Cwik (House of Finance, Goethe University of Frankfurt, Grueneburgplatz 1, D-60323 Frankfurt am Main, Germany.); Volker Wieland (House of Finance, Goethe University of Frankfurt, Grueneburgplatz 1, D-60323 Frankfurt am Main, Germany.)
    Abstract: The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending — the Keynesian multiplier effect. Thus, we investigate whether the spending package announced by Euro area governments for 2009 and 2010 is likely to boost GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and parameterizations. We use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of the fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private consumption and investment significantly. Only a model that largely ignores the forward-looking behavioral response of consumers and firms implies crowding-in of private spending. We review a range of issues that may play a role in the recession of 2008-2009. Implementation lags are found to reinforce crowding-out and may even cause an initial contraction. Zero-bound effects may lead the central bank to abstain from interest rate hikes and increase the GDP impact of government spending. Crowding-in, however, requires an immediate anticipation of at least two years at the zero bound. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of an euro appreciation. New-Keynesian DSGE models provide a strong case for government savings packages. Announced with sufficient lead time, spending cuts induce a significant short-run stimulus and crowding-in of private spending. JEL Classification: E62, E63, H31.
    Keywords: fiscal policy, government spending multipliers, model uncertainty, New-Keynesian models.
    Date: 2010–11
  4. By: Umber, Marc P.; Grote, Michael H.; Frey, Rainer
    Abstract: National borders are still strong barriers for mergers and acquisitions in Europe. We estimate a gravity equation model based on NUTS 2-regions and find that the restraining impact of national borders decreased by about a third between 1990 and 2007. However, there has been no significant change since 1997, i.e., two years before the introduction of the Euro. To benchmark our results we run a corresponding analysis within the United States using the ten federal OMB regions as country equivalents. The 'quasi border'-effect in the US is weaker than in the EU and even declines more during the same time period. We conclude that European integration policy has little effect on fostering cross-border transactions. --
    Keywords: European integration,corporate control,border effects
    JEL: F21 G34
    Date: 2010
  5. By: Peter Hördahl; Oreste Tristani
    Abstract: We use a joint model of macroeconomic and term structure dynamics to estimate inflation risk premia in the United States and the euro area. To sharpen our estimation, we include in the information set macro data and survey data on inflation and interest rate expectations at various future horizons, as well as term structure data from both nominal and index-linked bonds. Our results show that, in both currency areas, inflation risk premia are relatively small, positive, and increasing in maturity. The cyclical dynamics of long-term inflation risk premia are mostly associated with changes in output gaps, while their high-frequency fluctuations seem to be aligned with variations in inflation. However, the cyclicality of inflation premia differs between the US and the euro area. Long term inflation premia are countercyclical in the euro area, while they are procyclical in the US.
    Keywords: term structure of interest rates, inflation risk premia, central bank credibility
    Date: 2010–11
  6. By: Carmen Martínez-Carrascal (Banco de España)
    Abstract: This paper investigates the empirical determinants of corporate cash holdings in the euro area as a function of firm size. The results show that there are significant differences in investment in liquid assets for firms of different size. More specifically, liquid assets for smaller firms in the euro area are more strongly linked to firm cash flow and its variability than cash holdings for larger firms, possibly as a result of their more restricted access to external funds and the need to provide for future investment needs. Likewise, results show that the link between cash holdings and tangible assets, which facilitate access to external finance, is stronger for small and medium-sized firms than for large firms. In contrast, cash holding sensitivity to variations in the spread between the return on liquid assets and alternative uses of these funds (debt repayment, in the empirical specification presented in this paper) is higher for larger firms, something that might be linked to their better access to capital markets and their lower need to keep a cash buffer for precautionary reasons.
    Keywords: cash holdings, financing constraints, panel data
    JEL: C23 E41 G31 G32
    Date: 2010–11
  7. By: Vitor Castro (Faculdade de Economia, Universidade de Coimbra, Portugal / NIPE); Ricardo M. Sousa (University of Minho, NIPE, London School of Economics and FMG)
    Abstract: We assess the response of monetary policy to developments in asset markets in the Euro Area, the US and the UK. We estimate the reaction of monetary policy to wealth composition and asset prices using: (i) a linear framework based on a fully simultaneous system approach in a Bayesian environment; and (ii) a nonlinear specification that relies on a smooth transition regression model. The linear framework suggests that wealth composition is indeed important in the formulation of monetary policy. However, the attempts of central banks to mitigate undesirable fluctuations in say, financial wealth, may disrupt housing wealth. A similar result can be found when we assess the reaction of monetary authority to asset prices, although concerns about "price" effects are smaller. The nonlinear model confirms these findings. However, the concerns over wealth and its components are stronger once inflation is under control, i.e. below a certain target. Some disruptions between financial and housing wealth effects are still present. They can also be found in the reaction to asset prices, despite being less intense.
    Keywords: monetary policy rules, wealth composition, asset prices.
    JEL: E37 E52
    Date: 2010–09
  8. By: Markku Kotilainen; Nuutti Nikula
    Abstract: We have defined the Baltic Sea Region as consisting of the following countries and regions : Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden, and the regions of St Petersburg, Leningrad Oblast and Kaliningrad in Russia. We have investigated the factors af-fecting FDI in the Baltic Sea Region in three ways. First, we have studied the factors affecting FDI on the basis of the existing theoretical and empirical literature. Secondly, we have studied the characteristics of the existing FDI in the Baltic Sea Region. Thirdly, we have researched the investment motives through two firm questionnaires : 1) firms participating in the MIPIM real estate fairs and 2) Finnish firms active in the Baltic Sea Region (Finpro register). The common results of both empirical enquiries were : 1) the most important reasons for FDI are market size and its growth potential, 2) companies do not see the BSR as a single market in their actual decision making process, 3) there are clear benefits in having the non-Euro area countries as members of the EMU, but the results are not very robust : obviously they are weakened by the already rather credible pegs of the Estonian, Danish, Latvian and Lithuanian currencies and the diversification benefits of the floating Swedish krone, and 4) governmental investment promotion organizations have a rather small role in the actual investment decision making process. Their role is rather in giving general information on the country’s investment environment. The most important differences between the samples of firms are : 1) in the real estate sector the majority of FDI is done through buying an existing firm, whereas in the sample of Finnish firms most FDI is done as a greenfield investment (establishing a new firm), 2) among the real estate firms Sweden, Finland, Germany and Poland are the most important destinations for FDI, while in the Finnish sample of firms (including more manufacturing and service firms) St Petersburg, Poland, Estonia and Sweden are the most important destinations, 3) in the sample of real estate firms R&D and the proximity of the Russian market are not important motives for FDI, contrary to the Finnish, more manufacturing and retail trade-oriented sample, and 4) among the real estate firms the potential for large increases in real estate prices is an important motive for FDI.
    Keywords: Foreign direct investment (FDI), Baltic Sea Region, Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Sweden, St Petersburg, Leningrad Region, Kaliningrad
    JEL: F21 F23 F13 F15
    Date: 2010–11–19
  9. By: Ville Kaitila
    Abstract: We propose a new way to measure the extent to which countries compete in their exports. We augment the similarity index proposed by Finger and Kreinin (1979) with product quality. Quality is measured using unit export prices in the tradition of the horizontal/vertical intra-industry trade literature. We analyse the EU27 countries’ export structures using 1) overall similarity à la Finger and Kreinin, 2) same-quality similarity, and 3) quality-adjusted similarity that combines the first two measures. We find that the similarity of the export structures of the new member countries and the cohesion countries vis-à-vis the non-cohesion EU15 countries has increased, but that there remains a divide between them especially in terms of same-quality exports.
    Keywords: exports, similarity, quality
    JEL: F14 F15
    Date: 2010–11–15
  10. By: Sergio Destefanis (Università di Salerno, CELPE and CSEF); Giuseppe Mastromatteo (Università Cattolica di Milano.)
    Abstract: We assess the impact on employment growth of the Lisbon Strategy, examining long-run trends in total, female and old-age employment rates from 1994 to 2009. We find that the Strategy had some favourable (but weak) impact, especially for old-age workers. However, no improvement ensued from its mid-term reassessment.
    Keywords: European Employment Strategy, difference-in-difference, employment policies
    JEL: E24 J08 E65
    Date: 2010–11–18
  11. By: Erdogdu, Erkan
    Abstract: Restrictions on CO2 emissions, the nuclear phase out announced by some member states, high emissions from coal-fired power plants, and barriers to rapid development of renewable generation are factors that make the European Union (EU) highly dependent on natural gas. With three non-EU countries (Russia, Algeria and Norway) currently supplying more than half the gas consumed within the EU and with projections pointing out that by 2030 internal sources will only be able to meet 25% of demand, EU desperately looks for means to secure new sources of gas supply. In this context, the Nabucco pipeline is planned to deliver gas from Caspian and Middle East regions to EU market. It runs across Turkey and then through Bulgaria, Romania and Hungary before connecting with a major gas hub in Austria. On paper, Nabucco project makes perfect sense, offering a new export route to EU markets for Caspian gas producers (Azerbaijan, Turkmenistan and Kazakhstan) as well as Iran and, in time, Iraq. The project is backed by the EU and strongly supported by the United States. Perhaps most importantly, Nabucco would completely bypass Russia. This paper addresses issues surrounding Nabucco project and their implications for European gas security.
    Keywords: European natural gas security; Nabucco project; energy policy
    JEL: Q38 Q41 Q34 Q31 Q48
    Date: 2010–12

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