nep-eec New Economics Papers
on European Economics
Issue of 2011‒02‒05
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Central bank communication and the perception of monetary policy by financial market experts By Schmidt, Sandra; Nautz, Dieter
  2. Can we prevent boom-bust cycles during euro area accession? By Michał Brzoza-Brzezina; Pascal Jacquinot; Marcin Kolasa
  3. Monitoring the unsecured interbank money market using TARGET2 data By Ronald Heijmans; Richard Heuver; Daniëlle Walraven
  4. The Stability and Growth Pact: Lessons from the Great Recession By Larch, Martin; van den Noord, Paul; Jonung, Lars
  5. Exploring the Economic Convergence in the EU New Member States by Using Nonparametric Models By Monica Raileanu Szeles
  6. Financial integration and growth - Is emerging Europe different? By Christian Friedrich; Isabel Schnabel; Jeromin Zettelmeyer
  7. The forecasting horizon of inflationary expectations and perceptions in the EU. Is it really 12 months? By Jonung, Lars; Lindén, Staffan
  8. Addressing private sector currency mismatches in emerging Europe By Jeromin Zettelmeyer; Piroska M. Nagy; Stephen Jeffrey
  9. What can EMU countries' sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis? By Niko Dotz; Christoph Fisher
  10. Raising Potential Growth After the Crisis: A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond By Romain Bouis; Romain Duval
  11. Microeconomic implications of credit booms: evidence from emerging Europe By Fabrizio Coricelli; Nigel Driffield; Sarmistha Pal; Isabelle Roland
  12. Fostering growth in CEE countries: a country-tailored approach to growth policy By Philippe Aghion; Heike Harmgart; Natalia Weisshaar
  13. Future Bangalores? The increasing role of Central and Eastern Europe in the global services offshoring market: evidence from trade statistics By Gál, Zoltán
  14. Welfare State - The Scandinavian Model By Torben M. Andersen
  15. Foreign currency lending in emerging Europe: bank-level evidence By Martin Brown; Ralph De Haas
  16. MOSES: Model of Swedish Economic Studies By Gunnar Bårdsen, Ard den Reijer, Patrik Jonasson and Ragnar Nymoen
  17. Euroisation in Serbia By Alexandre Chailloux; Franziska Ohnsorge; David Vavra

  1. By: Schmidt, Sandra; Nautz, Dieter
    Abstract: This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis. --
    Keywords: Central bank communication,Interest rate forecasts,Survey expectations,Panel random coefficient model
    JEL: E47 E52 E58 C23
    Date: 2010
  2. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute); Pascal Jacquinot (European Central Bank); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    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.
    Keywords: boom-bust cycles, euro area accession, dynamic general equilibrium models
    JEL: E52 E58 E63
    Date: 2011
  3. By: Ronald Heijmans; Richard Heuver; Daniëlle Walraven
    Abstract: We investigate the euro unsecured interbank money market during the current financial crisis. To identify the loans traded in this market and settled in TARGET2, we extend the algorithm developed by Furfine (1999) and adapt it to the European interbank loan market with maturity up to one year. This paper solves the problem of systematic errors which occur when you only look at overnight loans (as the Furfine algorithm does). These errors especially occur in times of (very) low interest rates. The algorithm allows us to track the actual interest rates rather than quoted interest rates on liquidity trading by participants of the Dutch part of the euro large value payment system (TARGET2-NL). The algorithm enables us to constitute the Dutch part of the EONIA, making it possible to compare the interest rates developments in the Dutch market to the European average ones. Based on the new algorithm, we develop a policy tool to monitor the interbank money market, both at macro level (whole market) and individual bank level (Money Market Monitoring Dashboard).
    Keywords: payment systems; financial stability; experiment; decision making
    JEL: E42 E44
    Date: 2011–01
  4. By: Larch, Martin (Directorate General for Economic and Financial Affairs, European Commission); van den Noord, Paul (Organisation for Economic Co-operation and Development (OECD)); Jonung, Lars (School of Economics and Management)
    Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.
    Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty
    JEL: E62 E63 H60
    Date: 2011–01–27
  5. By: Monica Raileanu Szeles
    Abstract: This paper analyzes the process of real economic convergence in the New Member States (NMS) bein g formerly centrally planned economies, using nonparametric methods instead of conventional parametric measurement tools like beta and sigma models. This methodological framework allows the examining of the relative income distribution in different periods of time, the number of modes of the density distribution, the existence of “convergence clubs” in the distribution and the hypothesis of convergence at a single point in time. The modality tests (e.g. the ASH-WARPing procedure) and stochastic kernel are nonparametric techniques used in the empirical part of the study to examine the income distribution in the NMS area. Additionally, random effects panel regressions are used, but only for comparison reasons. The main findings of the paper are the bimodality of the income density distribution over time and across countries, and the presence of convergence clubs in the income distribution from 1995 to 2008. The findings suggest a lack of absolute convergence in the long term (1995-2008) and also when looking only from 2003 onwards. The paper concludes that, in comparison with the parametrical approach, the nonparametric one gives a deeper, real and richer perspective on the process of real convergence in the NMS area.
    Date: 2011–01
  6. By: Christian Friedrich (Graduate Institute for International and Development Studies, Geneva); Isabel Schnabel (Johannes Gutenberg University, Mainz); Jeromin Zettelmeyer (EBRD)
    Abstract: Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyse several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the European Union. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.
    JEL: O1 P2 P5
    Date: 2010–12
  7. By: Jonung, Lars (School of Economics and Management); Lindén, Staffan (Directorate-General Economic and Financial Affairs)
    Abstract: The standard way today to obtain measures of inflationary expectations is to use questionnaires to ask a representative group of respondents about their beliefs of the future rate of inflation during the coming 12 months. This type of data on inflationary expectations as well as on inflationary perceptions has been collected in a unified way on an EU-wide basis for several years. By now, probably the largest database on inflationary expectations has been built up in this way. We use this database to explore the forecasting horizons implicitly used by the respondents to questions about the expected rate of inflation during the coming 12 months. The analysis covers all EU member states that have relevant data. We examine the forecast errors, the mean error and the RMSEs, to study if the forecast horizon is truly 12 months as implied by the questionnaires. Our working hypothesis is that the forecast error has a U-shaped pattern, reaching its lowest value on the 12-month horizon. We also study the "backcast" error for inflationary perceptions in a similar way. Our exploratory study reveals large differences across countries. For most countries, we get the expected U-shaped outcome for the forecast errors. The horizon implicitly used by respondents when answering the questions is not related to the explicit time horizon of the questionnaire. On average respondents use the same horizon when answering both questions, e.g. when respondents use a 12-month forecast horizon answering to the question on future inflation, they use the same forward looking horizon when answering to the question on past inflation. We suggest possible explanations for the differences observed.
    Keywords: Inflationary expectations; inflationary perceptions; forecasting error; forecasting horizon; EU; euro
    JEL: C33 E31 E32 E37 E58
    Date: 2011–01–26
  8. By: Jeromin Zettelmeyer (EBRD); Piroska M. Nagy (EBRD); Stephen Jeffrey (University of Warwick)
    Abstract: This paper provides a survey of the theoretical and empirical literature on the dollarisation of corporate and household liabilities; presents evidence on the causes of FX lending specifically in transition economies; and proposes a set of criteria to help decide on the right policy response based on country characteristics. These criteria particularly affect the extent to which regulation should be part of the policy response. Regulation to contain FX mismatches is useful in relatively advanced countries in which small market size and/or proximity to the euro make it difficult to fully develop local currency capital markets. In contrast, regulatory responses could be counterproductive in less advanced countries with high macroeconomic volatility. In these countries, the route to de-dollarisation first and foremost requires the strengthening of macroeconomic institutions.
    JEL: O1 P2 P5
    Date: 2010–06
  9. By: Niko Dotz; Christoph Fisher
    Abstract: This paper presents a new approach to analysing recent movements of EMU sovereign bond spreads. Based on a GARCH-in-mean model originally used in the exchange rate target zone literature, spreads are decomposed into a risk premium, an expected loss component and a liquidity premium. Time-varying probabilities of default are derived. The results suggest that the rise in sovereign spreads during the recent financial crisis mainly reflects an increased expected loss component. In addition, the rescue of Bear Stearns in March 2008 seems to mark a change in market perceptions of sovereign bond risk. The government bonds of some countries lost their former role as a safe haven. While price competitiveness always helps to explain sovereign spreads, it increasingly moved into investors’ focus as financial sector soundness weakened.
    Keywords: Liquidity (Economics) ; Default (Finance) ; Bonds - Prices
    Date: 2011
  10. By: Romain Bouis; Romain Duval
    Abstract: This paper provides an illustrative assessment of the impacts on potential GDP over a 5 to 10-year horizon of structural reform scenarios in the areas of product and labour markets, relying on existing OECD empirical studies. Results of simulations suggest that a gradual alignment of product market regulations to best practice in a broad range of non-manufacturing sectors could boost aggregate labour productivity levels by several per cent over the next decade in many OECD countries, and by over five per cent across most of continental Europe, as well as for the BRIICS. Relaxation of job protection legislation could also raise productivity growth for a while in many OECD and non-OECD G20 countries, although the effects are estimated to be smaller than those from product market reforms. In a scenario under which they would be phased in relatively quickly, labour market reforms in the areas of unemployment benefit systems, activation policies, labour taxes and pension systems could raise employment rates by several percentage points in a number of OECD countries over a 10-year horizon. Large continental European countries would have the largest benefits to reap from reforms. The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis.<P>Augmenter la croissance potentielle après la crise : une évaluation quantitative des gains potentiels de différentes réformes structurelles au sein de l'OCDE et au-delà<BR>Cet article fourni une évaluation illustrative des impacts sur le PIB potentiel à des horizons de 5 et 10 ans de scénarios de réformes structurelles dans les domaines des marchés des produits et du travail, à partir de travaux empiriques de l’OCDE. Les résultats des simulations suggèrent qu’un alignement graduel des réglementations du marché des produits dans un large ensemble de secteurs non manufacturiers aux meilleurs pratiques pourrait augmenter la productivité agrégée du travail de plusieurs pour cent au cours de la prochaine décennie dans plusieurs pays de l’OCDE, et de plus de cinq pour cent au sein de la plupart des pays d’Europe continentale, ainsi que dans les BRIICS. Un relâchement de la législation sur la protection de l’emploi pourrait augmenter la croissance de la productivité d’un montant non négligeable dans plusieurs pays de l’OCDE et pays non OCDE membres du G20, bien que les effets estimés soient plus faibles que ceux attendus de réformes du marché des produits. Dans un scénario dans lequel elles seraient mises en oeuvre assez rapidement, les réformes du marché du travail dans les domaines des systèmes d’indemnisation chômage, de politiques d’activation, de fiscalité du travail et de systèmes de retraite pourraient augmenter les taux d’emploi de plusieurs points de pourcentage dans plusieurs pays de l’OCDE à un horizon de 10 ans sous un scénario de mise en oeuvre rapide. Le gain en PIB potentiel pour le pays moyen de l’OCDE d’une mise en oeuvre de l’ensemble des réformes considérées ici pourrait approcher 10 % à un horizon de 10 ans, indiquant la présence de gains substantiels liés aux réformes structurelles susceptibles de compenser les pertes définitives en PIB consécutives à la crise récente.
    Keywords: growth, productivity, employment, structural reforms, productivité, croissance, réforme structurelle, emploi
    JEL: E27 O43
    Date: 2011–01–18
  11. By: Fabrizio Coricelli (Université Paris 1, Panthéon-Sorbonne); Nigel Driffield (Aston Business School); Sarmistha Pal (Brunel University); Isabelle Roland (London School of Economics)
    Abstract: While credit is essential for investment, innovation and economic growth, there are risks related to excessive indebtedness in the corporate sector in the form of increased likelihood of financial distress and bankruptcy. The recent global crisis has highlighted the macroeconomic risks of credit booms. This paper focuses on microeconomic implications of high leverage and provides an innovative firm-level approach to endogenously identify the threshold leverage beyond which corporate indebtedness becomes “excessive”. Estimates for emerging central and eastern European countries suggest that total factor productivity (TFP) growth increases with leverage until it reaches a critical threshold. Beyond this threshold, higher leverage lowers TFP growth.
    JEL: O1 P2 P5
    Date: 2010–10
  12. By: Philippe Aghion (Harvard University); Heike Harmgart (EBRD); Natalia Weisshaar (Royal Holloway College)
    Abstract: This paper analyses the long term growth experiences of the eastern European accession countries and the effect of various tailored growth policies. We find that there are two overarching growth-enhancing policies that can substantially increase long-term growth: competition and the quality of education. We find empirical evidence that if accession countries from the transition region want to achieve – and sustain – higher growth rates they will need to ensure competition by continuing to remove entry and trade barriers and by strengthening competition agencies. We also find evidence on the positive long-run impact of quality of education on growth, and hence the high return on public investment in education, particularly at the primary and secondary level. The private sector’s role in overcoming skill mismatches will benefit from deepening financial intermediation and reducing constraints in access to finance.
    JEL: O1 P2 P5
    Date: 2010–10
  13. By: Gál, Zoltán
    Abstract: Many Central and Eastern European countries invigorated by EU enlargement became important locations for offshored service centres. Building on the region’s nearshoring advantages such as geographical-cultural proximity and on its multilingual graduate supply, CEE is likely to utilise more value added and quality-driven services. Trade statistics support the assumption that an expanding export in other business and ICT services has been associated with offshoring services in the six NMS analysed in detail in the paper. The service export data adopted from the Balance of Payments statistics gives a good approximation to indentify those sections of service trade, which can be regarded as offshorable. The paper summarises the additional factors favouring nearshoring (as in CEE locations) over offshoring (e.g. India) and lists several factors besides size why CEE countries cannot outpace India’s market potential.
    Keywords: offshoring; nearshoring; service trade; balance of payments statistics; offshorable services; Central and Eastern Europe; new member states; India; offshoring advantages
    JEL: F16 L84 F23 F21 R12 L86
    Date: 2010–04–12
  14. By: Torben M. Andersen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: The Scandinavian countries have achieved both a high level of living standard (measured by e.g. average income) and an egalitarian outcome (measured by e.g. income inequality) despite a very large public sector and thus a large tax burden (about 50 % of GDP). The Scandinavian cluster thus poses a challenge to the standard view on the tradeoff between efficiency and equity. How come that the Scandinavian countries have been able to achieve high equality without much sacrifice of efficiency in terms of income? This paper addresses this question with the outset in recent work stressing the insurance aspect of the welfare state. A broad interpretation of the Scandinavian welfare model in terms of social insurance or common pool aspects is given. The effects of social insurance are discussed and the potential incentive problems arising in a common pool arrangement are argued to be mitigated by a number of counteracting mechanisms. Issues in policy design and the political economy of the welfare state are also discussed.
    Keywords: Risk-sharing, incentives, common-pool problems, political support
    JEL: H1 E62 F22 P1
    Date: 2011–01–24
  15. By: Martin Brown (Swiss National Bank, Tilburg University); Ralph De Haas (EBRD)
    Abstract: Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the determinants of foreign currency (FX) lending in emerging Europe. We find that FX lending by all banks, regardless of their ownership structure, is strongly determined by the macroeconomic environment. We find no evidence of foreign banks ‘pushing’ FX loans indiscriminately because of easier access to wholesale funding in foreign currency. In fact, while foreign banks do lend more in FX to corporate clients, they do not do so to retail clients. We also find that after a take-over by a foreign bank, the acquired bank does not increase its FX lending any faster than a bank which remains in domestic hands.
    JEL: O1 P2 P5
    Date: 2010–12
  16. By: Gunnar Bårdsen, Ard den Reijer, Patrik Jonasson and Ragnar Nymoen (Department of Economics, Norwegian University of Science and Technology)
    Abstract: MOSES is an aggregate econometric model for Sweden, estimated on quarterly data, and intended for short-term forecasting and policy simulations. After a presentation of qualitative model properties, the econometric methodology is summarized. The model properties, within sample simulations, and examples of dynamic simulation (model forecasts) for the period 2009q2-2012q4 are presented. We address practical issues relating to operational use and maintenance of a macro model of this type. The detailed econometric equations are reported in an appendix.
    Date: 2011–01–28
  17. By: Alexandre Chailloux (IMF); Franziska Ohnsorge (EBRD); David Vavra (OGResearch)
    Abstract: Euroisation in Serbia is rooted in a long history of macroeconomic instability. Extreme inflation volatility has undermined trust in the dinar and discouraged dinar savings. At the same time, an abundant supply of foreign capital inflows has provided easy access to foreign currency lending at low interest rates in an environment of perceived exchange rate stability – a perception reinforced by the choice of exchange rate regime. As a result, both the asset and the liability side of banks’ balance sheets, and even those of the non-bank sector, is heavily foreign currency-denominated. This paper documents the forces that promote euroisation in Serbia. The paper argues that, in the wake of the global crisis, a window of opportunity has emerged that could foster a process of de-euroisation. The lack of foreign funding and recent exchange rate volatility has tilted borrower incentives towards local currency borrowing. If disinflationary macroeconomic policies gain credibility, with the possible support of regulatory options, euroisation could drop sharply.
    JEL: O1 P2 P5
    Date: 2010–10

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