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on European Economics |
| By: | Janko Gorter; Fauve Stolwijk; Jan Jacobs; Jakob de Haan |
| Abstract: | We estimate Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the period 1998.6-2010.8. We first examine whether the recent financial crisis has affected ECB policies. Our results indicate that the ECB puts stronger emphasis on maintaining price stability than earlier point estimates suggested. Next, we analyse whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging economic developments in the countries in the euro area, notably during the recent financial crisis, we do not find support for the view that policy decisions have been influenced by regional developments. |
| Keywords: | Taylor rule; ECB; regional influence; real time data |
| JEL: | C22 E52 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:272&r=eec |
| By: | Michał Brzoza-Brzezina (National Bank of Poland.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcin Kolasa (National Bank of Poland.) |
| Abstract: | Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. JEL Classification: E52, E58, E63. |
| Keywords: | boom-bust cycles, euro area accession, dynamic general equilibrium models |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101280&r=eec |
| By: | Heather M. Anderson; Mardi Dungey; Denise R Osborn; Farshid Vahid |
| Abstract: | Time series analysis for the Euro Area requires the availability of sufficiently long historical data series, but the appropriate construction methodology has received little attention. The benchmark dataset, developed by the European Central Bank for use in its Area Wide Model (AWM), is based on fixed-weight aggregation across countries with historically distinct monetary policies and financial markets of varying international importance. This paper proposes a new methodology for producing back-dated financial series for the Euro Area, that is based on the time-varying distance of periphery countries from core countries with respect to monetary integration. Historical decompositions of the residuals of vector autoregressive models of the Euro Area economy are then used to explore and compare the monetary policy implications of using the new methodology versus the use of AWM fixed weight series. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:152&r=eec |
| By: | Giorgio Canarella (California State University, Los Angeles, and University of Nevada, Las Vegas); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Stephen K. Pollard (California State University, Los Angeles) |
| Abstract: | We investigate the dynamics of stochastic convergence of the original Euro Area countries for inflation rates, nominal interest rates, and real interest rates. We test for convergence relative to Germany, taken as the benchmark for core EU standards, using monthly data over the period January 2001 to September 2010. We examine, in a time-series framework, three different profiles of the convergence process: linear convergence, nonlinear convergence, and linear segmented convergence. Our findings both contradict and support convergence. Stochastic convergence implies the rejection of a unit root in the inflation rate, nominal interest rate, and real interest rate differentials. We find that the differentials are consistent with a unit-root hypothesis when the alternative hypothesis is I(0) with a linear trend. But we frequently, but not always, reject the unit-root hypothesis when the alternative is I(0) with a broken trend. We also note that the current financial crisis plays a significant role in dating the breaks. |
| Keywords: | Stochastic convergence, Nonlinearity, Unit-root tests, Structural breaks. |
| JEL: | F36 F42 C20 C50 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2010-32&r=eec |
| By: | Marco J. Lombardi; Philipp Maier |
| Abstract: | We evaluate forecasts for the euro area in data-rich and ‘data-lean’ environments by comparing three different approaches: a simple PMI model based on Purchasing Managers’ Indices (PMIs), a dynamic factor model with euro area data, and a dynamic factor model with data from the euro plus data from national economies (pseudo-real time data). We estimate backcasts, nowcasts and forecasts for GDP, components of GDP, and GDP of all individual euro area members, and examine forecasts for the ‘Great Moderation’ (2000-2007) and the ‘Great Recession’ (2008-2009) separately. All models consistently beat naïve AR benchmarks. More data does not necessarily improve forecasting accuracy: For the factor model, adding monthly indicators from national economies can lead to more uneven forecasting accuracy, notably when forecasting components of euro area GDP during the Great Recession. This suggests that the merits of national data may reside in better estimation of heterogeneity across GDP components, rather than in improving headline GDP forecasts for individual euro area countries. Comparing factor models to the much simpler PMI model, we find that the dynamic factor model dominates the latter during the Great Moderation. However, during the Great Recession, the PMI model has the advantage that survey-based measures respond faster to changes in the outlook, whereas factor models are more sluggish in adjusting. Consequently, the dynamic factor model has relatively more difficulties beating the PMI model, with relatively large errors in forecasting some countries or components of euro area GDP. |
| Keywords: | Econometric and statistical methods; International topics |
| JEL: | C50 C53 E37 E47 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-37&r=eec |
| By: | Jaromir Benes; Marianne Johnson; Kevin Clinton; Troy Matheson; Petar Manchev; Roberto Garcia-Saltos; Douglas Laxton |
| Abstract: | This paper develops a simple model for measuring potential output that uses data on inflation, unemployment, and capacity utilization. We apply the model to 10 countries, in addition to the United States and the euro area. While there is a substantial amount of uncertainty around our estimates, we find that the financial crisis has resulted in a reduction in potential output. |
| Keywords: | Cross country analysis , Economic growth , Economic models , Financial crisis , Fiscal policy , Global Financial Crisis 2008-2009 , Industrial production , Inflation , Monetary policy , Unemployment , |
| Date: | 2010–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/285&r=eec |
| By: | Antonio Bassanetti (Bank of Italy); Roberto Torrini (Bank of Italy); Francesco Zollino (Bank of Italy) |
| Abstract: | We investigate whether the completion of the Single Market Programme has enhanced competition on the product markets across European countries, taking into account the companion structural reforms undertaken by the member countries, particularly in the labour market and the institutional setting of important industries (i.e. network industries). We test for a break in both mark-ups and the division of rent between capital and labour based on a statistical model incorporating efficient bargaining in the labour market. Using industry data for ten EU countries we find that, without controlling for changes in the rent sharing, mark-up estimates tend to increase in the 1990s. However, once we assume efficient bargaining in the labour market, mark-ups remain virtually unchanged or, in some sectors or groups of countries, even decrease; this reflects the declining shares of rents accruing to workers as a result of their diminished bargaining power. The evidence is particularly strong for high and medium-tech manufacturing, for construction and for those activities that went through deep institutional changes and privatization programmes. |
| Keywords: | institutional changes, mark-up, rent-sharing |
| JEL: | D40 J50 L50 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_781_10&r=eec |
| By: | Yoo-Duk Kang (Korea Institute for International Economic Policy) |
| Abstract: | In this paper I examine the evolution of intra-industry trade (IIT) in intra-European trade in the period of accession of the Central and Eastern European countries (CEEC). In order to identify changes in IIT in intra-European trade, I calculate the Grubel and Lloyd index for the static dimension and Brülhart A index for the dynamic dimension. Based on Grubel and Lloyd index, I conduct gravity-type empirical tests to verify determinants of IIT at the intra-European level. I find that CEECs experienced considerable increase in IIT, particularly during transitional periods before their accession. However, the level of IIT between CEECs is still considerably low. Given that a trade-investment nexus exists to explain IIT in intra-European trade, IIT in CEECs can increase further, as they receive more FDI from their neighbors. |
| Keywords: | Intra-industry trade, foreign direct investment, EU enlargement, European integration |
| JEL: | F14 F15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:2453&r=eec |
| By: | António Afonso; Ana Sequeira |
| Abstract: | We assess the business cycle synchronization features of aggregate output in the 27 EU countries using annual data for the period 1970-2009. In particular, we compute measures of synchronisation for private consumption, government spending, gross fixed capital formation, exports and imports. Our results show a rise in synchronization over the full period, and although private consumption is the biggest component of GDP, external demand tends to be a more important determinant of business cycle synchronization. |
| Keywords: | EU, business cycle synchronization. |
| JEL: | E32 F15 F41 F42 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp222010&r=eec |
| By: | M. Conti; Giovanni Sulis |
| Abstract: | Using data for 51 manufacturing and service sector for the period 1970-2005 in 14 countries, this paper show that employment protection legislation has a negative and significant effect on growth of value added and hours of work in more human capital intensive sectors. We argue that labour market regulation has a negative impact on the technology adoption mechanism through its heterogeneous impact on firms workforce adjustment requirements. In fact, technology adoption depends both on the skill level of the workforce and the capacity of firms to optimally adjust their employment levels as technology changes. As a consequence, firing costs have a relatively stronger impact in sectors in which technology adoption is more important. Our empirical results are robust to various sensitivity checks such as interactions of human capital intensity with other country level variables, of employment protection with other sector level variables and endogeneity of firing restrictions. We also show that the negative effect of EPL is stronger the smaller the distance from the technology frontier and after the 1990s. |
| Keywords: | Growth; Human Capital; Technology Adoption; Employment Protection Legislation; Sectors |
| JEL: | J24 J65 O47 O52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201028&r=eec |
| By: | Mariam Camarero (Jaume I University); Josep Lluís Carrion-i-Silvestre (University of Barcelona); Cecilio Tamarit (University of Valencia) |
| Abstract: | A monetary union raises new economic questions about the interpretation and the implications of high current account de?cits for the economic performance of its members in the medium term. Recent literature has argued that conventional measures of external sustainability are misleading because they omit capital variations on net foreign asset positions. In this paper we analyze external sustainability making use of the database developed by Lane and Milesi-Ferretti (2007a) that incudes these valuation effects. The sample period studied covers from the launching of the monetary integration process in Europe (the creation of the ?European Snake? in 1972) up to 2007. The econometric methodology used accounts for the increasing cross-section dependence among EMU countries as well as possible structural breaks endogenously determined. The results point to the need of abrupt adjustments, either led by the markets or promoted by pro-active policy measures in order to offset external disequilibria. The lack of these timely interventions together with the rigidities and institutional imperfections of the present EMU are on the ground of the excessive cost in terms of growth and employment of the current crisis. |
| Keywords: | Current account imbalances, EMU, panel stationarity, structural breaks, cross-section dependence. |
| JEL: | F32 F41 C23 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1009&r=eec |
| By: | Andrade, P.; Le Bihan, H. |
| Abstract: | We use the ECB Survey of Professional Forecasters to characterize the dynamics of expectations at the micro level. We find that forecasters (i) have predictable forecast errors; (ii) disagree; (iii) fail to systematically update their forecasts in the wake of new information; (iv) disagree even when updating; and (v) differ in their frequency of updating and forecast performances. We argue that these micro data facts are qualitatively in line with recent models in which expectations are formed by inattentive agents. However building and estimating an expectation model that features two types of inattention, namely sticky information à la Mankiw-Reis and noisy information à la Sims, we cannot quantitatively generate the error and disagreement that are observed in the SPF data. The rejection is mainly due to the fact that professionals relatively agree on very sluggish forecasts. |
| Keywords: | imperfect information, inattention, forecast errors, disagreement, business cycle. |
| JEL: | D84 E3 E37 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:307&r=eec |