nep-eec New Economics Papers
on European Economics
Issue of 2011‒04‒16
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Household sector borrowing in the euro area - a micro data perspective By Ramon Gomez-Salvador; Adriana Lojschova; Thomas Westermann
  2. Imperfect information, real-time data and monetary policy in the euro area By Stefano Neri; Tiziano Ropele
  3. The ECB's New Multi-Country Model for the euro area: NMCM - simulated with rational expectations By Alistair Dieppe; Alberto González Pandiella; Alpo Willman
  4. The US Dollar-Euro exchange rate and US-EMU bond yield differentials: A Causality Analysis By Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  5. Fiscal developments and financial stress: a threshold VAR analysis By António Afonso; Jaromír Baxa; Michal Slavík
  6. Mediterranean business cycles: structure and characteristics By Fabio Canova; Alain Schlaepfer
  7. The ECB's New Multi-Country Model for the euro area: NMCM - with boundedly rational learning expectations By Alistair Dieppe; Alberto González Pandiella; Stephen Hall; Alpo Willman
  8. The new rules of the Stability and Growth Pact. Threats from heterogeneity and interdependence By Roberto Tamborini
  9. Fiscal policy, pricing frictions and monetary accommodation By Fabio Canova; Evi Pappa
  10. Lisbon strategy and EU countries’ performance: social inclusion and sustainability By Paola Bertolini; Francesco Pagliacci
  11. How big is the 'German locomotive'? A perpective from Central and Eastern Europen countries' unemployment rates By Juan Carlos Cuestas; Mercedes Monfort; Javier Ordóñez
  12. Perspectives on Fulfilling the Nominal and Real Convergence Criteria by Romania for the Adoption of Euro Currency By Geza, Paula; Giurca Vasilescu, Laura
  13. The Transatlantic Productivity Gap: Is R&D the Main Culprit? By Raquel Ortega-Argilés; Mariacristina Piva; Marco Vivarelli
  14. What lies beneath? A time-varying FAVAR model for the UK transmission mechanism By Haroon Mumtaz; Pawel Zabczyk; Colin Ellis

  1. By: Ramon Gomez-Salvador (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Adriana Lojschova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Thomas Westermann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper uses micro data from the European Union Statistics on Income and Living Conditions (EU-SILC) to generate structural information for the euro area on the incidence of household indebtedness and the debt service burden. It breaks down incidence by characteristics such as income, age and employment status, all features that can be cross-referenced in the light of theories such as the life-cycle hypothesis. Overall, income appears to be the dominant feature determining the debt status of a household. The paper also examines the evolution of indebtedness and debt service burdens over time and compares the situation in the euro area with that in the United States. In general, the results suggest that the macroeconomic implications of indebtedness for monetary transmission and fi nancial stability are not associated with the mean but with the tails of the distribution. JEL Classification: C42, D12, D14, G21
    Keywords: Household indebtedness, financial vulnerability, micro survey data, monetary transmission.
    Date: 2011–04
  2. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB is confronted with a more severe trade-off in the stabilization of inflation and the output gap.
    Keywords: monetary policy, imperfect information, real-time data
    JEL: E47 E52 E58
    Date: 2011–03
  3. By: Alistair Dieppe (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alberto González Pandiella (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alpo Willman (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The model presented here is a New estimated medium-scale Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenarios analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elastiticites of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions. We assume agents optimise under limited information where each agent knows only the parameters related to his/her optimization problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depends strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible. JEL Classification: C51, C6, E5.
    Keywords: Macro model, Open-economy macroeconomics, Rational expectations.
    Date: 2011–04
  4. By: Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
    Abstract: This paper test for causality between the US Dollar-Euro exchange rate and US-EMU bond yield differentials. To that end, we apply Hsiao (1981)’s sequential procedure to daily data covering the 1999-2011 period. Our results suggest the existence of statistically significant Granger causality running one-way from bond yield differentials to the exchange rate, but not the other way around.
    Keywords: Causality, Exchange rate, Long-term interest rates, Rolling regression
    JEL: C32 F31 F33 G15
    Date: 2011–03
  5. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábřeží 6, 111 01 Prague 1, Czech Republic.); Michal Slavík (European Central Bank, Fiscal Policies Division, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    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. JEL Classification: E62, G15, H60.
    Keywords: fiscal policy, financial markets, threshold VAR.
    Date: 2011–04
  6. By: Fabio Canova; Alain Schlaepfer
    Abstract: We date turning points of the reference cycle for 19 countries in the Mediterranean, for selected regions, and for the area. Cycles phases are asymmetric, with expansions lasting, on average, much longer than recessions. Cyclical fluctuations are volatile and not highly correlated across countries. Recessions are not very deep and output losses limited. Heterogeneities across countries and regions are substantial. There are time variations in features of Mediterranean business cycles not clearly linked with the Euro-Mediterranean partnership process. The concordance of cyclical fluctuations in the region is poorly linked to trade as is its evolution over time.
    Keywords: Turning point dates, Reference cycle, Euro Mediterranean partnership, Trade interdependences
    JEL: E32 C32
    Date: 2011–02
  7. By: Alistair Dieppe (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alberto González Pandiella (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Stephen Hall (National Institute of Economic and Social Research and University of Leicester.); Alpo Willman (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Rational expectations has been the dominant way to model expectations, but the literature has quickly moved to a more realistic assumption of boundedly rational learning where agents are assumed to use only a limited set of information to form their expectations. A standard assumption is that agents form expectations by using the correctly specified reduced form model of the economy, the minimal state variable solution (MSV), but they do not know the parameters. However, with medium-sized and large models the closed-form MSV solutions are difficult to attain given the large number of variables that could be included. Therefore, agents base expectations on a misspecified MSV solution. In contrast, we assume agents know the deep parameters of their own optimising frameworks. However, they are not assumed to know the structure nor the parameterisation of the rest of the economy, nor do they know the stochastic processes generating shocks hitting the economy. In addition, agents are assumed to know that the changes (or the growth rates) of fundament variables can be modelled as stationary ARMA(p,q) processes, the exact form of which is not, however, known by agents. This approach avoids the complexities of dealing with a potential vast multitude of alternative mis-specified MSVs. Using a new Multi-country Euro area Model with Boundedly Estimated Rationality we show this approach is compatible with the same limited information assumption that was used in deriving and estimating the behavioral equations of different optimizing agents. We find that there are strong differences in the adjustment path to the shocks to the economy when agent form expectations using our learning approach compared to expectations formed under the assumption of strong rationality. Furthermore, we find that some variation in expansionary fiscal policy in periods of downturns compared to boom periods. JEL Classification: C51, D83, D84, E17, E32.
    Keywords: Expectation, bounded rationality, learning, imperfect information, heterogeneity, macro modelling, open-economy macroeconomics.
    Date: 2011–04
  8. By: Roberto Tamborini
    Abstract: This paper examines the new SGP rules that should govern fiscal policies of the EMU member countries by means of dynamic models of the debt/GDP ratio. The focus is on factors of heterogeneity and interdependence in the three key variables that may affect the debt/GDP evolution in a multi-country setup like a monetary union: the real growth rate, the inflation rate and the nominal interest rate on the sovereign debt stock. These factors are almost ignored in the SGP intellectual and institutional framework, but they can jeopardize the main goal of fostering convergence and keeping debt/GDP ratios equalized and stable over time. Even the return of growth, inflation and interest rates to their pre-crisis tendential values, a not so likely and imminent event, will probably be insufficient to create a favourable environment for smooth debt/GDP convergence across EMU countries.
    Keywords: Stability and Growth Pact, Public debt management
    JEL: E6
    Date: 2011
  9. By: Fabio Canova; Evi Pappa
    Abstract: We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.
    Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics
    JEL: C32 E62 E63
    Date: 2011–03
  10. By: Paola Bertolini; Francesco Pagliacci
    Abstract: In 2010, the Lisbon Strategy came to its end. Even if many targets have not been fully reached by each of the 27 EU Members, a new and more ambitious reform strategy has been launched: the Europe 2020 Strategy. In order to evaluate the results of the Lisbon Strategy and of Europe 2020 Strategy, many indicators are yearly collected and published by EUROSTAT. From the analysis of these indicators, the work analyses how different European countries perform in economic, social and environmental issues. The paper moves from the works of Sapir [2006], who has already underlined –among the EU-15 – the existence of four different European social models (Nordic, Anglo-Saxon, Continental, Mediterranean), sharing different combinations of economic efficiency and social equity. This work tries to go further. First, it also underlines the role of the environmental issues in defining a sustainable European social model. Then, the analysis includes also Eastern countries, trying to identify the existence of possible Eastern social models. Therefore, in order to identify different European social models, we use a multivariate statistics methodology, i.e. the Principal Component Analysis (PCA), applied to a set of 20 variables (all the variables included in the short list of indicators from EU plus other environmental indicators) collected for all the European countries. The obtained results are among the expected ones. Sapir’s results are largely confirmed. In particular the supremacy of the Nordic model is straightforward. On the opposite side, when including environmental indicators, the Anglo-Saxon model seems to perform worse than Mediterranean one. Finally, referring to Eastern countries, a single social model does not emerge.
    Keywords: European policies; Lisbon Strategy; social models; sustainability;
    JEL: R11 R58
    Date: 2010–03
  11. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Mercedes Monfort (Department of Economics, Jaume I University); Javier Ordóñez (Department of Economics, Jaume I University)
    Abstract: Countries from Central and Eastern Europe have undergone a process of transition from communism to markets economies. The economic convergence, in terms of income, that these countries have achieved in recent years has been one of the cornerstones in the economic integration with Western Europe. In this paper we aim to analyze the degree of co-movement of unemployment rates in a sample of Central and Eastern European transition economies, and the role of German as the 'locomotive' in this process. We intend to test two hypotheses; first, is it possible to identify common patterns that are possibly linked to the economic convergence process in the unemployment rates cycles for this group of countries? And, second, is it possible to identify one of the main economic fundamentals that has acted as an attractor towards economic convergence? By means of nonlinear logistic smooth transition autoregressions and co-movement analysis we found that the German business cycle has acted as a common factor affecting the cyclical behavior of the unemployment rates in these countries.
    JEL: C32 E22 F15
    Date: 2011–04
  12. By: Geza, Paula; Giurca Vasilescu, Laura
    Abstract: In the present, Romania is considered a fragile state. While the lowest point of recession seems to have been exceed, the instability continues to characterize for a period all efforts and steps taken for economic recovery. Regarding the real convergence criteria, on December 2010 Romania presently continues to meet only the criterion regarding the sustainability of fiscal position while the assessment of the criterion related to the stability of the exchange rate cannot be performed accurately as long as the national currency – Leu - does not participate to the Exchange Rate Mechanism II (ERM II).
    Keywords: Real convergence criteria; Nominal convergence criteria; Euro adoption; Romania
    JEL: E42 F36
    Date: 2011–04–01
  13. By: Raquel Ortega-Argilés (Faculty of Economics, University of Barcelona); Mariacristina Piva (-); Marco Vivarelli (-)
    Abstract: The literature has pointed to different causes to explain the productivity gap between Europe and United States in the last decades. This paper tests the hypothesis that the lower European productivity performance in comparison with the US can be explained not only by a lower level of corporate R&D investment, but also by a lower capacity to translate R&D investment into productivity gains. The proposed microeconometric estimates are based on a unique longitudinal database covering the period 1990-2008 and comprising 1,809 US and European companies for a total of 16,079 observations. Consistent with previous literature, we find robust evidence of a significant impact of R&D on productivity; however – using different estimation techniques - the R&D coefficients for the US firms always turn out to be significantly higher. To see to what extent these transatlantic differences may be related to the different sectoral structures in the US and the EU, we differentiated the analysis by sectors. The result is that both in manufacturing, services and high-tech sectors US firms are more efficient in translating their R&D investments into productivity increases.
    Keywords: R&D, productivity, embodied technological change, US, EU. JEL classification:O33
    Date: 2011–03
  14. By: Haroon Mumtaz (Centre for Central Banking Studies, Bank of England.); Pawel Zabczyk (Bank of England and European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Colin Ellis (University of Birmingham and BVCA.)
    Abstract: This paper uses a time-varying Factor Augmented VAR to investigate the evolving transmission of monetary policy and demand shocks in the UK. Simultaneous estimation of time-varying impulse responses of a large set of macroeconomic variables and disaggregated prices suggest that the response of inflation, money supply and asset prices to monetary policy and demand shocks has changed over the sample period. In particular, during the post-1992 inflation targeting period, monetary policy shocks started having a bigger impact on prices, a smaller impact on activity and began contributing more to overall volatility. In contrast, demand shocks had the largest impact on these variables before the 1990s. We also document changes in the response of disaggregated prices, with the median reaction to contractionary policy shocks becoming more negative and the distribution more dispersed post-1992. JEL Classification: C38, E44, E52.
    Keywords: Transmission mechanism, monetary policy, Factor Augmented VAR, timevarying coefficients, sign restrictions.
    Date: 2011–04

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