nep-eec New Economics Papers
on European Economics
Issue of 2011‒03‒19
ten papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Monetary Union Stability: The Need for a Government Banker and the Case for a European Public Finance Authority By Thomas I. Palley
  2. How do inflation expectations form? New insights from a high-frequency survey By Gabriele Galati; Peter Heemeijer; Richhild Moessner
  3. Volatility and correlations for stock markets in the emerging economies By David E Allen; Anna Golab; Robert Powell
  4. Testing for East-West contagion in the European banking sector during the financial crisis By Emidio Cocozza; Paolo Piselli
  5. The role of monetary policy in managing the euro - dollar exchange rate By Mylonidis, Nikolaos; Stamopoulou, Ioanna
  6. Price dispersion in Europe: Does the business cycle matter? By Marco Hoeberichts; Ad Stokman
  7. Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments By Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice
  8. Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain By Jerger, Jürgen; Röhe, Oke
  9. Defence Spending and Economic Growth in the EU15 By J Paul Dunne; Eftychia Nikolaidou
  10. Vulnerability and Bargaining Power in EU-Russia Gas Relations By Edward Hunter Christie; Pavel K. Bev; Volodymyr Golovko

  1. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper argues monetary union stability requires a government banker that manages the bond market and it offers a specific proposal for stabilizing the euro that does not violate the “no country bail-out” clause. There is accumulating evidence that the euro’s current architecture is unstable. The source of instability is high interest rates on highly indebted countries which creates unsustainable debt burdens. Remedying this problem requires a central bank that acts as government banker and pushes down government bond interest rates to sustainable levels. That can be accomplished by creation of a European Public Finance Authority (EPFA) that issues public debt which the European Central Bank (ECB) is allowed to trade. The debate over the euro’s financial architecture also has significant political implications. That is because the current neoliberal inspired architecture, which imposes a complete separation between the central bank and public finances, puts governments under continuous financial pressures. Over time, that pressure makes it difficult to maintain the European social democratic welfare state. This gives a political reason for reforming the euro and creating an EPFA that supplements the economic case for reform.
    Keywords: monetary union, stability, government banker, euro.
    Date: 2011
  2. By: Gabriele Galati; Peter Heemeijer; Richhild Moessner
    Abstract: We provide new insights on the formation of inflation expectations – in particular at a time of great financial and economic turmoil – by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB’s definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and mediumterm inflation expectations but had only a very small impact on long-term expectations. By contrast, long-term expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of time-variant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.
    Keywords: Inflation expectations; monetary policy; crisis
    JEL: E31 E32 E37 E52 C53
    Date: 2011–03
  3. By: David E Allen (School of Accounting Finance & Economics, Edith Cowan University); Anna Golab (School of Accounting Finance & Economics, Edith Cowan University); Robert Powell (School of Accounting Finance & Economics, Edith Cowan University)
    Abstract: This paper examines the European investment implications of the recent European Union (EU) expansion to encompass former Eastern bloc economies. What are the risk and return characteristics of these markets pre- and post-EU? What are the implications for investors within the Euro zone? Should investors diversify outside the Central and Eastern Europe (CEE)? The former Eastern bloc economies constitute emerging markets which typically offer attractive risk-adjusted returns for international investors. In this paper, we explore a number of aspects of this important issue and their implications for CEE based investors, culminating in a Markowitz efficient frontier analysis of these markets pre- and post-EU expansion.
    Keywords: Emerging Markets; European Union; Portfolio investment
    Date: 2010–06
  4. By: Emidio Cocozza (Bank of Italy); Paolo Piselli (Bank of Italy)
    Abstract: Large and growing international financial linkages between East and West have altered the nature of the stability risks faced by European banking systems, increasing susceptibility to contagion. This paper aims to identify potential risks of cross-border contagion using a sample of large Western and Eastern European banks. We assume that contagion risk is associated with extreme co-movements in a market-based measure of bank soundness, controlling for common underlying factors. We also find evidence that contagion risk across European banks heightened significantly during the recent crisis. Contagion among Western European banks with the highest market share in Eastern Europe and from this group to Eastern European banks shows the largest increase in our sample. We find also evidence of contagion spreading from Eastern European banks, but this effect seems to reflect a broader phenomenon of contagion from emerging markets to banks in advanced countries exposed to these markets. Finally, our findings offer only mixed evidence of the existence of a direct ownership channel in the transmission of contagion.
    Keywords: Banking contagion, Distance to default, Testing hypothesis, Logit model
    JEL: C12 G15 G21
    Date: 2011–02
  5. By: Mylonidis, Nikolaos; Stamopoulou, Ioanna
    Abstract: The US Federal Reserve’s new relaxed monetary policy (the so-called quantitative easing) has triggered controversy among economists and policy makers about its effectiveness. This paper investigates the role of monetary policy in managing the euro – dollar exchange rate via alternative cointegration tests and impulse response functions. It is found that monetary fundamentals have neither long- nor short-run impact on the exchange rate. This implies that the Fed’s quantitative easing schemes are unlikely to have any significant impact on the euro – dollar rate.
    Keywords: Exchange rates; Monetary model; Cointegration; Impulse response functions
    JEL: E52 F31
    Date: 2011–03–01
  6. By: Marco Hoeberichts; Ad Stokman
    Abstract: We analyze the effect of the business cycle on price dispersion in Europe . Five decades of price level dispersion data for Europe enable us to distinguish short-term influences from long-term influences like market integration. We find that at the business cycle frequency, price dispersion across EMU member countries over the 1960 - 2009 period is significantly lower during economic downturns. This confirms on a macroeconomic level the evidence from micro and survey studies that markets become more competitive with falling demand, reducing deviations from the Law of One Price. Our model replicates most of the major drops in price level dispersion during severe economic recessions of the early 1970s, 1980s and 1990s, as well as the small change during the recent financial crisis.
    Keywords: economic integration; price level convergence; Law of One Price; EMU; business cycle
    JEL: E31 E50 F15 F41
    Date: 2011–03
  7. By: Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice
    Abstract: We document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from outflows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income outflows (18 percent for the EMU and 16 percent for the EU). Factor income outflows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income outflows provide insurance against negative output shocks. In terms of the determinants of income smoothing, results indicate that an increase in foreign equity and debt liabilities positively affect the extent of smoothing via factor income outflows. Whereas, contrary to the current literature, an increase in foreign assets holding does not have a positive impact on smoothing via factor income inflows. The tendency of European investors' in allocating a sizeable portion of their assets within the Euro zone is shown to undermine income smoothing.
    Keywords: Factor income flows; Consumption smoothing; Income smoothing; International portfolio diversification.
    JEL: F36
    Date: 2011–02–13
  8. By: Jerger, Jürgen; Röhe, Oke
    Abstract: We estimate a New Keynesian DSGE model on French, German and Spanish data. The main aim of this paper is to check for the respective sets of parameters that are stable over time, making use of the ESS procedure ( â€Estimate of Set of Stable parameters“) developed by Inoue and Rossi (2011). This new econometric technique allows to address the stability properties of each single parameter in a DSGE model separately. In the case of France and Germany our results point to structural breaks after the beginning of the second stage of EMU in the mid-nineties, while the estimates for Spain show a significant break just before the start of the third stage in 1998. Specifically, there are significant changes in monetary policy behavior for France and Spain, while monetary policy in Germany seems to be stable over time.
    Keywords: DSGE; EMU; Monetary Policy; Structural Breaks
    JEL: E31 E32 E52
    Date: 2011–03–07
  9. By: J Paul Dunne (University of the West of England and University of Cape Town); Eftychia Nikolaidou (CITY College, Thessaloniki, Greece)
    Abstract: Over the last 30 years there has been an impressive amount of empirical work on the defence-growth nexus, using different methodologies, models and econometric techniques and focusing on individual case studies, cross-country studies or panel data studies. Despite the number and the variety of studies, the evidence on the defence-growth relationship is still far from conclusive. Rather surprisingly, very limited work has been published in the relevant literature for the European Union despite the continuous discussions for a Common European Defence Policy that would require an assessment of the economic effects of defence in this region. To fill in the gap in the literature, this paper employs an augmented Solow-Swan model and estimates it both with panel and time series methods to provide empirical evidence on the economic effects of defence spending in the EU15 over the period 1961-2007. Overall, evidence derived from both panel and time series methods is consistent and suggests that military burden does not promote economic growth in this region.
    Keywords: Defence Spending, Economic Growth, Panel data, time series, EU15
    JEL: H56 O40
    Date: 2011–03
  10. By: Edward Hunter Christie; Pavel K. Bev; Volodymyr Golovko
    Abstract: This report contains three separate papers, each addressing selected issues concerning natural gas policy and security of gas supply in Europe. The over-arching themes are vulnerability (to supply disruptions, to supplier pricing power) and fragmentation; and measures designed to overcome them, namely interconnection and consolidation of bargaining power. The first paper contains a review of some of the economic effects of, and subsequent policy reactions to, the January 2009 cut of Russian gas supplies through the Ukraine Corridor, with a particular focus on Bulgaria and on EU policy. The second paper provides an analysis of the current state of gas relations between Ukraine and the Russian Federation, with a focus on the Ukrainian perspective and on recent political developments in that country. The third paper provides an analysis of the case for consolidating buyer power in line with the concept of an EU Gas Purchasing Agency.
    Keywords: Natural gas, security of supply, supply disruption, interconnector, Russia, Ukraine, Bulgaria, European Union, energy policy, fragmentation, bargaining power, countervailing power, gas purchasing agency
    JEL: C78 L11 Q34 Q48
    Date: 2011–03

This nep-eec issue is ©2011 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.