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on European Economics |
| By: | Schilirò, Daniele |
| Abstract: | The EMU governance has showed to be incapable of an effective crisis management following the global downturn. The recent decisions by European Council taken in March 2011, named the ‘Pact of the Euro’, to design a new governance of the EMU can be considered a significant attempt to give new and effective national budgetary rules, crisis management and resolution principles and procedures, economic policy framework to the Member States of the euro area, although several questions remain open. The present work seeks to investigate the causes of the crisis of the euro area and review the debate about the future of the EMU. Moreover this contribution evaluates critically the new governance of the EMU and the economic policy framework established by the Pact of the Euro underlying the need of adequate institutions, greater cooperative attitude and political coherence. |
| Keywords: | EMU; Global crisis; European integration; Pact of the Euro |
| JEL: | F15 F33 O52 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30237&r=eec |
| By: | Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Matthias Mohr (European Central Bank, Directorate General of Economics, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects. JEL Classification: C53, E52, F47. |
| Keywords: | Economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups, monetary policy. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111323&r=eec |
| By: | Heather D. Gibson; Stephan G. Hall; George S. Tavlas |
| Abstract: | We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants, and compare the spreads predicted by this estimated relationship with actual spreads. We find periods of both undershooting and overshooting of spreads compared to what is predicted by the economic fundamentals. |
| Keywords: | Greek financial crisis; sovereign spreads |
| JEL: | E63 G12 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:11/25&r=eec |
| By: | Lejour, Arjan; Lukkezen, Jasper; Veenendaal, Paul |
| Abstract: | This paper addresses the sustainability of government debt in Europe and is motivated by the recent debt increases following the crisis. We evaluate the sustainability in a time frame of ten years in which governments will be able to implement budget rules to get budget deficits under control. We develop a fiscal sustainability model for selected EMU member states that uses stochastic inputs based on historic data, closely following van Wijnbergen’s (van Wijnbergen and Budina, 2008) approach. We simulate the development of government debt as a percentage of GDP and show its expectation value including a confidence interval for a member state conditional on deficit reduction scenarios and the behaviour of other EMU member states. Using OECD projections as a baseline, we find that without additional fiscal consolidation and taking into account the public costs of ageing until the end of the projection period, budget deficits in all selected EMU countries will rise and sovereign debt is not sustainable, apart from Belgium. Even ignoring the cost of ageing, consolidation of sovereign debt is necessary for nearly all EMU countries. The consolidation proposed by the OECD would eliminate the doubts on sustainability of Belgium, Dutch, German, Italian, Portuguese and French bonds. For Ireland, Greece and Spain additional actions are required on top of the consolidation in the OECD projections. Together with a review of spillovers and stress-tests performed with our model we conclude that coordination of fiscal policies in the EMU is necessary. |
| Keywords: | EU; government debt; cross border spillovers; euro |
| JEL: | E52 E6 H71 H63 |
| Date: | 2010–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30139&r=eec |
| By: | Alistair Dieppe; Alberto González Pandiella; Stephen Hall; Alpo Willman |
| 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 optimizing frameworks. However, they are not assumed to know the structure nor the parameterization 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 modeled 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. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:11/27&r=eec |
| By: | Stähler, Nikolai; Thomas, Carlos |
| Abstract: | This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existingmodels of this type, our model incorporates a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. We also provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. Finally, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment. -- |
| Keywords: | General Equilibrium,Fiscal Policy Simulations,Labor Market Search |
| JEL: | E24 E32 E62 H20 H50 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201106&r=eec |
| By: | Kari E.O. Alho |
| Abstract: | The paper considers whether Sweden should join the EMU as based on general equilibrium (GE) effects through reduced trade barriers linked to the single cur-rency. We use in this evaluation a gravity model for trade in Europe derived and estimated in the paper, and the estimates of trade barriers linked to EMU reached in the literature. First, we present an alternative derivation of the gravity equation for foreign trade, which is explicitly based on monopolistic competition in the export markets. In contrast to the usual specification, our model allows for the realistic assumption of asymmetry in mutual trade flows. We then present a straightforward methodology how to carry out a simulation, based on the estimated model, of GE effects related to a change in a trade barrier. Numeri-cally, we apply this to analyse the effects of a possible Swedish entrance into EMU. The effects are quite clearly in favour of EMU enlargement, and do not indicate a trade diver-sion effect either for the incumbent EMU countries or the rest of the European countries. However, a stochastic simulation of the effects reveals that there is a substantial uncer-tainty related to the effects of such a change in policies. |
| Keywords: | EMU, Sweden, gravity model, general equilibrium effects, trade barriers |
| JEL: | F12 F15 |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:rif:dpaper:1245&r=eec |
| By: | Kaminska, Iryna (Bank of England); Meldrum, Andrew (University of Cambridge); Smith, James (Bank of England) |
| Abstract: | This paper extends a popular no-arbitrage affine term structure model to model jointly bond markets and exchange rates across the United Kingdom, United States and euro area. Using a monthly data set of forward rates from 1992, we first demonstrate that two global factors account for a significant proportion in the variation of bond yields across countries. We also show that, in order to explain country-specific movements in yield curves, local factors are required. Although we implement a very general factor structure, we find that our global factors are related to global inflation and global economic activity, while local factors are closely linked to monetary policy rates. In this respect our results are similar to previous work. But an important advantage of our joint international model is that we are able to decompose interest rates into risk-free rates and risk premia. Additionally, we are able to study the implications for exchange rates. We show that while differences in risk-free rates matter, to a large extent changes in the exchange rate are determined by time-varying exchange rate risk premia. |
| Keywords: | Term structure models; exchange rates. |
| JEL: | C33 E43 F31 |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0419&r=eec |
| By: | Bruzda, Joanna |
| Abstract: | The paper considers some of the problems emerging from discrete wavelet analysis of popular bivariate spectral quantities like the coherence and phase spectra and the frequency-dependent time delay. The approach taken here, introduced by Whitcher and Craigmile (2004), is based on the maximal overlap discrete Hilbert wavelet transform (MODHWT). Firstly, we point at a deficiency in the implementation of the MODHWT and suggest using a modified implementation scheme resembling the one applied in the context of the dual-tree complex wavelet transform of Kingsbury (see Selesnick et al., 2005). Secondly, via a broad set of simulation experiments we examine small and large sample properties of two wavelet estimators of the scale-dependent time delay. The estimators are: the wavelet cross-correlator and the wavelet phase angle-based estimator. Our results provide some practical guidelines for empirical examination of short- and medium-term lead-lag relations for octave frequency bands. Besides, we show how the MODHWT-based wavelet quantities can serve to approximate the Fourier bivariate spectra and discuss certain issues connected with building confidence intervals for them. The discrete wavelet analysis of coherence and phase angle is illustrated with a scale-dependent examination of business cycle synchronization between 11 euro zone member countries. The study is supplemented with wavelet analysis of variance and covariance of the euro zone business cycles. The empirical examination underlines good localization properties and high computational efficiency of the wavelet transformations applied, and provides new arguments in favour of the endogeneity hypothesis of the optimum currency area criteria as well as a wavelet evidence on dating the Great Moderation in the euro zone. -- |
| Keywords: | Hilbert wavelet pair,MODHWT,wavelet coherence,wavelet phase angle,business cycle synchronization |
| JEL: | C19 E32 E58 O52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:20115&r=eec |