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on European Economics |
| By: | Theoharry Grammatikos; Robert Vermeulen |
| Abstract: | This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the Eurodollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse. |
| Keywords: | financial crisis; euro exchange rate; EMU; equity markets; sovereign debt |
| JEL: | F31 G15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:287&r=eec |
| By: | Massimiliano Marzo (Department of Economics, Università di Bologna); Paolo Zagaglia (Department of Economics, Università di Bologna) |
| Abstract: | We investigate the relation between aggregate trading imbalances and interest rates in the Euro money market. We use data for OTC contracts as well as information from the major electronic trading platform in Europe to study the presence of cointegration between trading pressures and money market rates. We report strong evidence of a long-term linear relation between trading imbalances and liquidity prices for Euro interbank deposits. |
| Keywords: | Euro money market, order flow, interest rates |
| JEL: | G14 E52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:20_11&r=eec |
| By: | Jesús Crespo-Cuaresma; Michael Pfaffermayr; Octavio Fernández Amador; Catherine Keppel |
| Abstract: | We analyze the role of fiscal policy and intra-European trade in business cycle synchronization in the EU for the period 1995-2008. There is a broad consensus that the relationship between fiscal policy and business cycle comovements and between trade integration and cyclical synchronization are subject to endogeneity problems. We instrument fiscal budget surplus by means of (exogenous) political determinants of fiscal policy acknowledged by the literature, while trade integration is instrumented using covariates which summarize the integration status of countries in the sample, GDP per capita differences with respect to the EU and trade specialization within the EU framework. Our results show that both fiscal policy and trade integration are important determinants of cyclical synchronization. We can conclude that once a high degree of trade integration is reached by countries involved in the European integration process, the role of fiscal policy is particularly relevant and differences in fiscal shocks should be analyzed in detail as a source of coherence in cyclical comovements in Europe. Furthermore, fiscal deficits are shown to be an important potential source of idiosyncratic macroeconomic fluctuations, especially in the eurozone. Our results confirm the rationale of monitoring fiscal developments to assess the adequacy of potential future EMU countries and the need for a broad agreement concerning fiscal policy at the EU level. |
| Keywords: | Monetary union, business cycles, synchronization, trade integration, fiscal policy |
| JEL: | E32 E62 F15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:ecbook:2011:i:iii-004&r=eec |
| By: | Paolo Zagaglia (Department of Economics, University of Bologna) |
| Abstract: | This paper studies the forecasting performance of the general equilibrium model of bond yields of Marzo, Söderström and Zagaglia (2008), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I compare the out-of-sample predictive performance of the model against a variety of competing specifications, including that of De Graeve, Emiris and Wouters (2009). Forecast accuracy is evaluated through both univariate and multivariate measures. I also control the statistical significance of the forecast differences using the tests of Diebold and Mariano (1995), Hansen (2005) and White (1980). I show that taking into account the impact of the term structure of interest rates on the macroeconomy generates superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields. |
| Keywords: | Yield curve, general equilibrium models, Bayesian estimation, forecasting |
| JEL: | E43 E44 E52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:19_11&r=eec |
| By: | Sushanta K. Mallick (Queen Mary University of London); Ricardo M. Sousa (Universidade do Minho - NIPE) |
| Abstract: | Using two identification strategies based on a Bayesian Structural VAR and a Sign-Restriction VAR, we examine the real effects of financial stress in the Eurozone. In particular, we assess the macroeconomic impact of: (i) a monetary policy shock; and (ii ) a financial stress shock. We find that a monetary policy contraction strongly deteriorates financial stress conditions. In addition, unexpected variation in the Financial Stress Index (FSI) plays an important role in explaining output fluctuations, and also demands an aggressive response by the monetary authority to stabilise output indicating a preference shift from targeting inflation as it is currently happening in major economies. Therefore, our paper reveals the importance of adopting a vigilant posture towards financial stress conditions, as well as the urgency of macro-prudential risk management. |
| Keywords: | monetary policy, financial stress, Bayesian Structural VAR, Sign-Restrictions, Euro-zone. |
| JEL: | E37 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:12/2011&r=eec |
| By: | John Cotter |
| Abstract: | This paper empirically analyses risk in the Euro relative to other currencies. Comparisons are made between a sub period encompassing the final transitional stage to full monetary union with a sub period prior to this. Stability in the face of speculative attack is examined using Extreme Value Theory to obtain estimates of tail exchange rate changes. The findings are encouraging. The Euro's common risk measures do not deviate substantially from other currencies. Also, the Euro is stable in the face of speculative pressure. For example, the findings consistently show the Euro being less risky than the Yen, and having similar inherent risk to the Deutsche Mark, the currency that it is essentially replacing. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.5418&r=eec |
| By: | Pedro Leao; Alfonso Palacio-Vera |
| Abstract: | The creation of the Economic and Monetary Union (EMU) has not brought significant gains to the Portuguese economy in terms of real convergence with wealthier eurozone countries. We analyze the causes of the underperformance of the Portuguese economy in the last decade, discuss its growth prospects within the EMU, and make two proposals for urgent institutional reform of the EMU. We argue that, under the prevailing institutional framework, Portugal faces a long period of stagnation, high unemployment, and painful structural reform, and conclude that, in the absence of institutional reform of the EMU, getting out of the eurozone represents a serious political option for Portugal. |
| Keywords: | Nominal Wage Cuts; Eurozone; Relative Unit Labor Costs; Zero-sum Game |
| JEL: | E32 E65 F32 F41 J50 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_664&r=eec |
| By: | Fernanda Llussa; Jose Mario Lopes |
| Abstract: | We conduct a systematic study of the impact of European Union (EU) regional policies on regional economic growth that controls for national policies and geographic characteristics. Special care is taken in distinguishing between the impact of EU policies and of national policies on economic growth. Our empirical study tries to answer two different questions. First, is there convergence across EU regions, and if so, do regions converge to a common European steady-state or to a national one? Second, how do European and national policies affect regional growth? We find evidence of regional convergence at the national level but not at the European level. In addition we find that trade openness at the national level is associated with regional convergence while European regional policies contribute, though weakly, to regional convergence. Our results suggest that policies that foster market integration – and convergence to a common steady-state - such as the promotion of labour and capital movements across countries and common regulatory policies are as important for European-wide regional convergence as regional structural funds. JEL codes: D30, R11 |
| Keywords: | National Policies, European Union Policies, regional growth |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp554&r=eec |
| By: | Ester Gomes da Silva (Faculdade de Letras/ISFLUP, CEF.UP, Universidade do Porto) |
| Abstract: | A number of studies in the literature have recently explored the causes behind the European productivity slowdown from the mid-1990s onwards and the correlative increase in the productivity gap between Europe and the United States (e.g., van Ark et al, 2008; Maudos et al, 2008; van Ark and Inklaar, 2005). Much less attention has been given, however, to the specific role of the EU peripheral countries in the process. In this paper we focus on the growth performances of two of such countries: Portugal and Spain. After a period of successful catch-up relative to the EU core, the two countries, which have a number of historical and economic features in common, have recently faced increasing difficulties in closing the gap to the EU. In the last decade, Spain has shown one of the worst productivity growth records among EU-members, whereas Portugal remained quite distant from European average productivity levels, and has increased the gap in per capita income levels. In this paper an attempt is made to shed light on the causes behind the overall disappointing performance of both countries, by focusing on the role of structural change on the process. An extensive literature, from both mainstream and more heterodox streams of research, suggests that sectoral specialization may have a major impact on productivity growth, by influencing the extent to which innovation and technological progress can be achieved. In order to account for these effects, an analysis of productivity trends both at the macroeconomic and industry levels of analysis is undertaken, using growth accounting and shiftshare techniques. The analysis is based on data from the EU-KLEMS database for Spain and the EU-core, and on an update and refinement of Silva´s (2010) labor and multifactor productivity estimates for Portugal. By investigating the different sources of productivity growth between 1980 and 2007, it is argued that an important factor explaining the growth difficulties in both countries is related to their difficulties in promoting important changes in their economic structures. In particular, the recent deterioration of economic growth may be seen as reflecting their incapacity in making a strong leap towards a more ‘modern’ industry structure. |
| Keywords: | Productivity, Economic growth, Structural change, Technology |
| JEL: | O47 O14 O57 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:409&r=eec |
| By: | António Afonso; Jaromír Baxa; Michal Slavík |
| Abstract: | We use a threshold VAR analysis to study whether the effects of fiscal policy on economic activity differ depending on financial market conditions. In particular, we investigate the possibility of a non-linear propagation of fiscal developments according to different financial market stress regimes. More specifically we employ a quarterly dataset, for the U.S., the U.K., Germany and Italy, for the period 1980:4-2009:4, encompassing macro, fiscal and financial variables. The results show that (i) the use of a nonlinear framework with regime switches is corroborated by nonlinearity tests; (ii) the responses of economic growth to a fiscal shock are mostly positive in both financial stress regimes; (iii) financial stress has a negative effect on output growth and worsens the fiscal position; (iv) the nonlinearity in the response of output growth to a fiscal shock is mainly associated with different behaviour across regimes; (v) the size of the fiscal multipliers is higher than average in the last crisis. |
| Keywords: | fiscal policy, financial markets, threshold VAR. |
| JEL: | E62 G15 H60 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp112011&r=eec |
| By: | Bank, Alexander |
| Abstract: | This paper analyses the effects of discretionary fiscal policy by presenting new empirical evidence for Germany within a structural vector autoregression (SVAR) framework. Following Blanchard and Perotti (2002), the SVAR model is identified by applying institutional information. We find no compelling evidence for the effectiveness of discretionary fiscal policy. Cutting taxes does not tend to stabilise the business cycle. Increasing government expenditure has an ambiguous effect on GDP for the basic specification. However, by controlling for the influence of inflation, higher government expenditure does not either tend to stabilise economic activity. The results are robust to various modifications. |
| Keywords: | Discretionary fiscal policy, Germany, structural vector autoregression |
| JEL: | C32 E62 H30 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-470&r=eec |
| By: | Joseph Francois; Mario Holzner; Olga Pindyuk |
| Abstract: | Like most of the global economy, Austria suffered from recession in 2008-2009. In this paper we deconstruct the pattern of recession, and the transmission of the global recession to Austria’s economy. We provide a new a new breakdown of the value added in Austrian exports, tracing both upstream and downstream linkages and their role in the recession. We also employ a multi-region computable general equilibrium (CGE) model, focused on Austria and its major trading partners. We estimate the combined impacts of the crisis, as implemented through stylized shocks to investment and household demand across major trading partners. These are based on the actual global demand shocks that occurred in 2008-2009. As we are focused on recession, we work with a short-run version of the model, where labor markers are modeled with unemployment and sticky wages, and where industry structure (number of varieties and allocation of capital stock across industries) is fixed. We introduce demand shocks (changes) to global investment demand calibrated from actual investment demand changes during the recession. We also calibrate output shocks based on actual changes in GDP in this period. The focus on backward and forward linkages provides new insight into the transmission channels for focused demand shocks at the border into more diffuse shocks within the broader Austrian economy. While the drop in global demand during the recent recession was focused on sectors producing heavy investment goods, the actual pressure this placed on the Austrian economy also hinged on the linkages of these sectors to other elements of the Austrian economy. |
| Keywords: | economic crisis, transmission mechanisms, Austria, Europe, CGE |
| JEL: | F14 F47 C68 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:ecbook:2011:i:iii-006&r=eec |