nep-eec New Economics Papers
on European Economics
Issue of 2011‒02‒26
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. European Financial Linkages: A New Look at Imbalances By Claire Waysand; John C De Guzman; Kevin Ross
  2. Non-positive scaling factor in probability quantification methods: deriving consumer inflation perceptions and expectations in the whole euro area and Ireland By Lyziak, Tomasz
  3. Accession to the European Union, Interest Rates and Indebtedness: Greece and Portugal By Pedro Bação; António Portugal Duarte
  4. Government Debt Issuance in the Euro Area:The Impact of the Financial Crisis By Anastasia Guscina; Mark de Broeck
  5. Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces By Markus Kirchner; Jacopo Cimadomo; Sebastian Hauptmeier
  6. The 2007-? financial crisis: a money market perspective By Nuno Cassola; Claudio Morana
  7. Real Output of Bank Services: What Counts Is What Banks Do, Not What They Own By Wang, J. Christina; Inklaar, Robert Christiaan
  8. The Effects of Housing Prices and Monetary Policy in a Currency Union By Pau Rabanal; Oriol Aspachs-Bracons
  9. Immigrant Welfare Receipt across Europe By Barrett, Alan; Maitre, Bertrand
  11. Unemployment hysteresis, structural changes, non-linearities and fractional integration in European transition economies By Juan Carlos Cuestas; Luis A. Gil-Alana
  12. Estimating monetary policy reaction functions : A discrete choice approach By Jef Boeckx
  13. Inventory investment and production in Europe: Is there a pattern? By Yngve Abrahamsen; Jochen Hartwig
  14. Does Anti-Competitive Regulation Matter for Productivity? Evidence from European Firms By Arnold, Jens; Nicoletti, Giuseppe; Scarpetta, Stefano
  15. The Spanish Labor Market in a Cross-Country Perspective By Florence Jaumotte
  16. The Financial Trilemma By Dirk Schoenmaker
  17. Regional Clusters of Innovative Activity in Europe: Are Social Capital and Geographical Proximity the Key Determinants? By Laura de Dominicis; Raymond J.G.M. Florax; Henri L.F. de Groot

  1. By: Claire Waysand; John C De Guzman; Kevin Ross
    Abstract: We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.
    Keywords: Balance of payments , Cross country analysis , Current account balances , Data collection , Databases , Economic integration , Euro Area , Europe ,
    Date: 2010–12–21
  2. By: Lyziak, Tomasz
    Abstract: There are problems with using probability quantification methods when the scaling factor applied in those methods becomes non-positive. The way of adjusting them proposed in this note and verified empirically allows using them in such circumstances. The results for the euro area and Ireland suggest that the recent financial crisis made consumer inflation perception and expectations go down, however it did not create deflationary expectations in this groups of economic agents.
    Keywords: Inflation Expectations; Survey Data; Euro Area
    JEL: D84 C46
    Date: 2011–02–14
  3. By: Pedro Bação (Faculdade de Economia Universidade de Coimbra / GEMF); António Portugal Duarte (Faculdade de Economia Universidade de Coimbra / GEMF)
    Abstract: The increase in both public and private indebtedness has been one of the main macroeconomic developments in recent years. This trend has been accompanied by large current account deficits, especially in smaller countries, such as Greece and Portugal. One possible explanation for this behaviour is the reduction in interest rates that convergence to the European single currency produced. At the same time as interest rates declined, these countries experienced a strong increase in domestic demand and a real exchange rate appreciation. Adoption of the euro implied that the appreciation of the real exchange rate could not be compensated by means of nominal devaluations, resulting in reduced competitiveness. In this paper we study the macroeconomic performance of Greece and Portugal during the process of convergence to the single currency and their prospects, in the light of the current financial crisis. To this end we make use of a consumption model developed by Gabriel Fagan and Vítor Gaspar. The experience of these two countries may give important lessons for candidate countries.
    Keywords: consumption, euro, interest rates, indebtedness, exchange rates
    JEL: F36 E21 F32
    Date: 2010–12
  4. By: Anastasia Guscina; Mark de Broeck
    Abstract: This paper documents and analyzes crisis-related changes in government debt issuance practices in the 16 euro zone countries and Denmark. Using a newly constructed database on primary market debt issuance during 2007-09, we find evidence of a shift away from pre-crisis standards of best funding practices competitive auctions of debt instruments with a fixed coupon, long maturity and local currency denomination (DLTF). Exploiting the cross-country panel data dimension of the data, we conclude that the crisis and related changes in the macroeconomic environment and investor sentiment can account for a significant proportion of the deviation. The negative effect of the crisis on DLTF debt issuance was especially pronounced in high deficit and high debt euro area countries, and has forced governments to assume additional risk.
    Keywords: Bond issues , Cross country analysis , Debt refinancing , Euro Area , Financial crisis , Global Financial Crisis 2008-2009 , Sovereign debt ,
    Date: 2011–01–28
  5. By: Markus Kirchner (University of Amsterdam); Jacopo Cimadomo (European Central Bank); Sebastian Hauptmeier (European Central Bank)
    Abstract: This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.
    Keywords: Government spending shocks; Fiscal transmission mechanism; Structural change; Bayesian analysis; Structural vector autoregressions; Time-varying parameter models
    JEL: C32 E62 H30 H50
    Date: 2010–02–12
  6. By: Nuno Cassola (ECB); Claudio Morana (Università del Piemonte Orientale and CeRP)
    Abstract: The evolution of the spreads between unsecured money market rates of various maturities and central banks’ key policy rates has been subject to considerable debate and controversy in relation to the worldwide financial market turbulence that started in August 2007. Our contribution to the ongoing debate on the dynamics of money market spreads is empirical and methodological, motivated by the “shocking” evidence of non-stationary behaviour of money market spreads. In fact, in our view, empirical work assessing the effectiveness of central bank policies has largely overlooked the complexity of the market environment and its implications for the statistical properties of the data. Thus, our main goal is to carefully document both the economic and statistical “fingerprint” of money market turbulence, in the framework of a new econometric framework, carefully accounting for the persistence properties of the data.
    Keywords: money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractionally integrated heteroskedastic factor vector autoregressive model
    JEL: C32 E43 E50 E58 G15
    Date: 2010–11
  7. By: Wang, J. Christina; Inklaar, Robert Christiaan (Groningen University)
    Abstract: The measurement of bank output, a difficult and contentious issue, has become even more important in the aftermath of the devastating financial crisis of recent years. In this paper, we argue that models of banks as processors of information and transactions imply a quantity measure of bank service output based on transaction counts instead of balances of loans and deposits. Compiling new and comparable output measures for the United States and a range of European countries, we show that our counts?based output series exhibit significantly different growth patterns than our balances?based output series over the years 1997 to 2009. Since the U.S. official statistics rely on counts while European statistics rely on balances, this implies a potentially considerable bias in the estimate of bank output growth in Europe vis?à?vis that in the United States.
    Date: 2011
  8. By: Pau Rabanal; Oriol Aspachs-Bracons
    Abstract: The recent boom-and-bust cycle in housing prices has refreshed the debate on the drivers of housing cycles as well as the appropriate policy response. We analyze the case of Spain, where housing prices have soared since it joined the EMU. We present evidence based on a VAR model, and we calibrate a New Keynesian model of a currency area with durable goods to explain it. We find that labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do. Finally, we show that when the central bank reacts to house prices, the non-durable sector suffers an important contraction. As a result, the boom-and-bust cycle would not have been avoided if Spain had remained outside the EMU during the 1996-2007 period.
    Keywords: Demand , Economic models , European Economic and Monetary Union , External shocks , Housing , Housing prices , Interest rates , Labor markets , Monetary policy , Spain ,
    Date: 2011–01–07
  9. By: Barrett, Alan (ESRI, Dublin); Maitre, Bertrand (ESRI, Dublin)
    Abstract: The issue of welfare receipt by immigrants is highly controversial across Europe. In this paper, we assess whether immigrants are more likely to receive welfare payments relative to natives across a range of European countries. Using the European Union Survey on Income and Living Conditions for 2007, we find very little evidence that immigrants are indeed more likely to receive such payments when all payments are considered together. This is true whether we use raw data or regression analysis in which we control for relevant characteristics. We do find evidence of higher rates of poverty among immigrants. When combined with the results on welfare receipt, this raises a question over the effectiveness of welfare systems in protecting immigrants from poverty across Europe.
    Keywords: welfare, immigrants, Europe
    JEL: I38 J61
    Date: 2011–02
  10. By: Jean Pisani-Ferry; Adam Posen
    Abstract: The response in 2008-09 to the global financial crisis was inmany ways a high water mark for transatlantic policy coordination.The major economies of the EU and the US rapidly agreedon a series of measures to limit the crisis. However, the commonapproach has since unraveled. This paper explores why the'London consensus? has not survived for much more than a year.? We identify four non-competing explanations: (a) divergence ineconomic developments, especially the productivity responseto the recession; (b) domestic political economy factors, notablythe pressure to act against unemployment in the US; (c) differencesin beliefs as regards the nature of the recovery fromthe common shock, about which there is much more supplysideoptimism in the US ; (d) institutional factors such as thelack of a central fiscal authority in the EU.? In response to this situation we suggest a critical quantum ofcoordination. Key measures include a commitment to avoidingdeliberate currency depreciation and unilateral intervention;agreement to give the IMF an enhanced monitoring role; theadoption by parliaments of medium-term fiscal plans ; and cooperationon the issue of Chinese undervaluation.
    Date: 2011–02
  11. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Luis A. Gil-Alana
    Abstract: In this paper we aim to analyse the dynamics of unemployment in a group of Central and Eastern European Countries (CEECs). The CEECs are of special importance for the future of the European Union, given that most of them have recently become member states, and labour flows have been seen to rise with their accession. By means of unit root tests incorporating structural changes and nonlinearities, as well as fractional integration, we find that the unemployment rates for the CEECs are mean reverting processes, which is consistent with the NAIRU hypothesis, although shocks tend to be highly persistent.
    Keywords: Unemployment, NAIRU, hysteresis, unit roots, fractional integration
    JEL: C32 E24
    Date: 2011–02
  12. By: Jef Boeckx (National Bank of Belgium, Research Department)
    Abstract: I propose a discrete choice method for estimating monetary policy reaction functions based on research by Hu and Phillips (2004). This method distinguishes between determining the underlying desired rate which drives policy rate changes and actually implementing interest rate changes. The method is applied to ECB rate setting between 1999 and 2010 by estimating a forward-looking Taylor rule on a monthly basis using real-time data drawn from the Survey of Professional Forecasters. All parameters are estimated significantly and with the expected sign. Including the period of financial turmoil in the sample delivers a less aggressive policy rule as the ECB was constrained by the lower bound on nominal interest rates. The ECB's non-standard measures helped to circumvent that constraint on monetary policy, however. For the pre-turmoil sample, the discrete choice model's estimated desired policy rate is more aggressive and less gradual than least squares estimates of the same rule specification. This is explained by the fact that the discrete choice model takes account of the fact that central banks change interest rates by discrete amounts. An advantage of using discrete choice models is that probabilities are attached to the different outcomes of every interest rate setting meeting. These probabilities correlate fairly well with the probabilities derived from surveys among commercial bank economists.
    Keywords: monetary policy reaction functions, discrete choice models, interest rate setting, ECB
    JEL: C25 E52 E58
    Date: 2011–02
  13. By: Yngve Abrahamsen (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The paper investigates the nexus between inventory investment and the change in aggregate production for 29 European countries over the period 2000-2009. A special interest is taken in the “Great Recession” of 2008/09. For most countries, a fairly uniform pattern emerges. Inventory investment is positively correlated with changes in production and follows the latter with a time-lag of two to three quarters. Therefore, there is no evidence that inventory investment either drives or smoothes the business cycle. Very few countries – Austria, Greece, Spain, and Switzerland – diverge from the typical pattern. This might hint to problems with respect to data quality.
    Keywords: Inventory investment, production, business cycle, “Great Recession” in Europe
    JEL: E22 E32 O52
    Date: 2011–02
  14. By: Arnold, Jens (OECD); Nicoletti, Giuseppe (OECD); Scarpetta, Stefano (OECD)
    Abstract: Using firm-level data for a sample of European countries, we focus on the effects that product-market regulations have on firm-level TFP growth. We proxy regulatory burdens using the OECD indicators of sectoral non-manufacturing regulations. These allow accounting for both the direct effects of sectoral regulation on within-sector performance and the indirect effects of sectoral regulation on firms in other sectors through intersectoral input-output linkages. Our econometric specification of TFP is based on a "neo-Schumpeterian" empirical specification in which productivity improvements depend on growth at the global technological frontier and a catch up term. We assume that regulation can affect productivity growth both directly and by slowing down the rate of catch up. We find that product market regulations that curb competitive pressures tend to reduce the productivity performance of firms. The negative effect is particularly strong on firms characterised by an above-average productivity growth. Domestic regulations that affect all regulated firms in the same way seem to be more important than border regulations in this context.
    Keywords: total factor productivity, firm-level data, product market regulation
    JEL: D24 L11 L51
    Date: 2011–02
  15. By: Florence Jaumotte
    Abstract: The Spanish labor market is not working: the unemployment rate is structurally very high; wages are not very responsive to labor market conditions, causing a high cyclicality of unemployment; and the labor market is highly dual. Compared with the EU15, Spanish labor market institutions and policies stand out by the structure of its collective bargaining, which occurs mostly at an intermediate level, and by very high severance payments for permanent workers. Based on a quantitative analysis, the paper shows that moving away from the intermediate level of bargaining would go a long way toward bringing the unemployment rate closer to the EU15 average. The key reform needed to reduce the share of temporary workers is reducing employment protection of permanent workers. Substantially reforming the collective bargaining system and reducing the protection of permanent workers are likely to be highly complementary to secure a substantial reduction in the unemployment rate. The recent 2010 labor market reform attempts to address these issues, although its effects are still to materialize.
    Keywords: Cross country analysis , Economic models , European Economic and Monetary Union , Labor costs , Labor markets , Spain , Unemployment , Wage bargaining , Wages ,
    Date: 2011–01–12
  16. By: Dirk Schoenmaker (Duisenberg School of Finance and VU University Amsterdam)
    Abstract: The financial trilemma states that financial stability, financial integration and national financial policies are incompatible. Any two of the three objectives can be combined but not all three; one has to give. This paper develops a model to underpin the financial trilemma. Our findings for financial integration suggest that the financial trilemma is in particular at work in Europe.
    Keywords: Financial Stability; Public Good
    JEL: F33 G28 H41
    Date: 2011–01–31
  17. By: Laura de Dominicis (European Commission, Seville); Raymond J.G.M. Florax (Purdue University, W. Lafayette, and VU University Amsterdam); Henri L.F. de Groot (VU University Amsterdam)
    Abstract: Finding proper policy instruments to promote productivity growth features prominently on the Lisbon agenda and is central in many national as well as European policy debates. In view of the increased mobility of high-skilled workers in Europe, ongoing globalization and increased interregional and international co-operation, location patterns of innovative activity may be subject to drastic changes. A proper understanding of location patterns of innovative outputs can enhance the effectiveness and efficiency of national and European innovation policies. Building on the literature on the knowledge production function the aim of this paper is to explain the observed differences in the production of innovative output across European regions. Our main research question is whether geographical proximity and social capital are important vehicles of knowledge transmission for the production of innovative output in Europe. Several other variables are used to control for structural differences across European regions. We find support for the hypothesis that both social capital and geographical proximity are important factors in explaining the differences in the production of innovative output across European regions.
    Keywords: innovation; knowledge production function; social capital; spatial econometrics; European regions
    JEL: C21 I23 O18 O31
    Date: 2011–01–13

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