nep-eec New Economics Papers
on European Economics
Issue of 2011‒05‒14
nineteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Convergence of Euro Area Inflation Rates By Lopez, C.; Papell, David H.
  2. Financial Conditions Indexes for the United States and Euro Area By Troy Matheson
  3. Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment By Sandra Gomes; P. Jacquinot; M. Mohr; M. Pisani
  4. Real Unit Labor Costs Differentials in EMU: How Big, How Benign and How Reversible? By Igor Lebrun; Esther Perez Ruiz
  5. A monetary policy strategy in good and bad times: lessons from the recent past By Stephan Fahr; Roberto Motto; Massimo Rostagno; Frank Smets; Oreste Tristani
  6. Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis By Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
  7. Eurobonds: The blue bond concept and its implications By Jacques Delpla; Jakob von Weizsäcker
  8. Volatility in EMU sovereign bond yields: Permanent and transitory components By Simón Sosvilla-Rivero; Amalia Morales-Zumaquero
  9. Varieties of Capitalism and Responses to the Financial Crisis: the European Social Model versus the US Model By Pasquale Tridico
  10. A European fund for economic revival in crisis countries By Benedicta Marzinotto
  11. On the importance of sectoral and regional shocks for price-setting By Guenter W. Beck; Kirstin Hubrich; Massimiliano Marcellino
  12. Assessing monetary policy in the euro area: a factor-augmented VAR approach By Rita Soares
  13. Capital Flows to EU New Member States: Does Sector Destination Matter? By Pritha Mitra
  14. Europe Agreements and Trade Balance: Evidence form Four New EU Members By Caporale, Guglielmo Maria; Rault, Christophe; Sova, Robert; Sova, Anamaria
  15. The effect of monetary policy on investors’ risk perception: Evidence from the UK and Germany By Dan Luo; Iris Biefang-Frisancho Mariscal; Peter Howells
  16. Determinants of the EONIA spread and the financial crisis By Carla Soares; Paulo M.M. Rodrigues
  17. Youth Unemployment in Europe and the United States By Bell, David N.F.; Blanchflower, David G.
  18. Does Globalization affect Regional Growth? Evidence for NUTS-2 Regions in EU-27 By Wolfgang Polasek; Richard Sellner
  19. The Crisis, Policy Reactions and Attitudes to Globalization and Jobs By Bell, David N.F.; Blanchflower, David G.

  1. By: Lopez, C.; Papell, David H.
    Abstract: We study the behavior of inflation rates among the 12 initial Euro countries in order to test whether and when the group convergence initially dictated by the Maastricht treaty and now by the ECB, occurs. We also assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. After the 2008 crisis, Euro area inflation rates follow the ECB’s price stability benchmark, although Greece reports relatively higher inflation.
    Keywords: groupwise convergence, inflation, Euro area, 2008 crisis.
    JEL: C32 E31
    Date: 2011
  2. By: Troy Matheson
    Abstract: Financial conditions indexes are developed for the United States and euro area using a wide range of financial indicators and a dynamic factor model. The financial conditions indexes are shown to be useful for forecasting economic activity and have good revision properties.
    Keywords: Economic conditions , Economic forecasting , Euro Area , Forecasting models , United States ,
    Date: 2011–04–27
  3. By: Sandra Gomes; P. Jacquinot; M. Mohr; M. Pisani
    Abstract: We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating a large scale 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: C53 E52 F47
    Date: 2011
  4. By: Igor Lebrun; Esther Perez Ruiz
    Abstract: Real unit labor costs (RULC) growth differentials between euro area members have persisted since EMU began and even widened out in the run-up to the crisis. This paper focuses on the causes underlying such dispersion. According to our empirical findings, persistent RULC growth differentials can be attributed to divergent evolutions in capital-output ratios, nominal effective exchange rates and country-specific institutional features, coupled with an increased sensitivity of RULC to fundamentals following the shift in the monetary regime. Because these RULC growth discrepancies in EMU partly result from heterogeneous structural characteristics, policy action seeking more homogenous regulation across the euro area can make a significant contribution to reduce them.
    Date: 2011–05–06
  5. By: Stephan Fahr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We evaluate the ECB’s monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECB’s monetary policy strategy – the monetary pillar – was instrumental in avoiding more volatile and less predictable patterns of inflation and growth. After the collapse of financial intermediation in late 2008, the strategy of the ECB was to preserve the integrity of the monetary policy transmission mechanism by adopting a comprehensive package of non-standard policy measures. According to our quantitative evaluation of the impact of the non-standard policy package, which notably did not include entering commitments regarding the future path of the policy rate, the liquidity interventions decided in October 2008 and in May 2009 were critical to preserving price stability and forestalling a more disruptive collapse of the macro-economy. JEL Classification: E31, E44, E51, E58.
    Keywords: Monetary Policy, Monetary transmission, Credit, Supply factors, Financial crisis, Non-standard policy measures.
    Date: 2011–05
  6. By: Rabah Arezki; Bertrand Candelon; Amadou N. R. Sy
    Abstract: This paper examines the spillover effects of sovereign rating news on European financial markets during the period 2007-2010. Our main finding is that sovereign rating downgrades have statistically and economically significant spillover effects both across countries and financial markets. The sign and magnitude of the spillover effects depend both on the type of announcements, the source country experiencing the downgrade and the rating agency from which the announcements originates. However, we also find evidence that downgrades to near speculative grade ratings for relatively large economies such as Greece have a systematic spillover effects across Euro zone countries. Rating-based triggers used in banking regulation, CDS contracts, and investment mandates may help explain these results.
    Keywords: Announcements , Bonds , Capital markets , Credit , Cross country analysis , Eastern Europe , Financial crisis , Public information notices , Sovereign debt , Spillovers , Press Releases ,
    Date: 2011–03–29
  7. By: Jacques Delpla; Jakob von Weizsäcker
    Abstract: The Blue Bond proposal, published in May 2010 (Bruegel Policy Brief2010/03) suggests that sovereign debt in euro-area countries be split intotwo parts. The first part, the senior â??Blueâ?? tranche of up to 60 percent of GDP, would be pooled among participating countries and jointly and severally guaranteed. The second part, the junior â??Redâ?? tranche, would keep debt inexcess of 60 percent of GDP as a purely national responsibility. This paperrevisits the proposal, discusses its implications and addresses some of thecomments and criticisms received in response to the proposal.This paper was prepared for the European Parliamentâ??s Economic and Monetary Affairs Committee, session of 21 March 2011 on the interaction between bank and sovereign debt resolution. Copyright remains with the European Parliament at all times
    Date: 2011–03
  8. By: Simón Sosvilla-Rivero (Departmento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid); Amalia Morales-Zumaquero (Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga)
    Abstract: This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries (EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee (1999)´s component-GARCH model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further support our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.
    Keywords: Conditional variance, Component model, Cluster analysis, Sovereign bond yields, Economic and Monetary Union
    JEL: C32 F33 G12 G13
    Date: 2011–04
  9. By: Pasquale Tridico
    Abstract: The objective of this paper is to show how European Union (EU), which employs different varieties of capitalism, and US, which operates based on a competitive capitalist model, are coping with the current economic crisis. Although EU is fragmented and needs to work towards better and deeper integration among member states, the main features of the European Social Model (ESM) allows for a more sustainable recovery and lessens the social costs. A new index was developed in this paper: the Synthetic Vulnerability Index; which shows that the US position is worse than the Eurozone position in terms of recovery from the current crisis and of exposure to further crises. Nevertheless, current financial reforms, both in the US and EU seem to be insufficient and the recent fiscal austerity measures seem to be moving the economies in the wrong direction.
    Keywords: Financial crisis, Varieties of capitalism, EU social model
    JEL: I31 P51
    Date: 2011–05
  10. By: Benedicta Marzinotto
    Abstract: Significant volumes of Structural and Cohesion Funds have been pre-allocated but remain undisbursed or uncommitted. In Portugal, unused funds amount to 9.3 percent of GDP, in Greece close to 7 percent, and in central and eastern European countries about 15 percent. These funds should be part of a temporary European Fund for Economic Revival (EFER) for 2011-13, which would promote economic growth in crisis-hit countries and facilitate structural reforms. For countries under financial assistance in particular, the European Commission has a role to play in identifying the â??rightâ?? objectives for which the funds should be used. The Commission could decide to manage the funds directly with the support of an executive agency. Greater efforts should be made to exploit synergies between EU grants andEuropean Investment Bank loans, allowing EIB loans to finance the totalcosts of a project or programme in small countries, and leveraging the whole EU budget to attract private investment.
    Date: 2011–03
  11. By: Guenter W. Beck (University of Siegen, Hölderlinstr. 3, 57076 Siegen, Germany and CFS.); Kirstin Hubrich (Research Department, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Massimiliano Marcellino (European University Institute, Via Roccettini, 9, I-50014 Fiesole, Florenz, Italy; Bocconi University and CEPR.)
    Abstract: We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes. JEL Classification: E31, C38, D4, F4.
    Keywords: Disaggregated prices, euro area regional and sectoral inflation, common factor models.
    Date: 2011–05
  12. By: Rita Soares
    Abstract: In order to overcome the omitted information problem of small-scale vector autoregression (VAR) models, this study combines the VAR methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy. Using the factor-augmented vector auto-regressive (FAVAR) approach of Bernanke et al. (2005), we summarise the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive VARs to evaluate the impact of the non-systematic component of the ECB’s actions. Overall, our results suggest that the inclusion of factors in the VAR allows us to obtain a more coherent picture of the effects of monetary policy innovations, both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses. Moreover, this framework allows us to compute impulse-response functions for all the variables included in the panel, thereby providing a more complete and accurate depiction of the effects of policy disturbances. However, the extra information generated by the FAVAR also delivers some puzzling responses, in particular those relating to exchange rates.  
    JEL: C32 E52 E58
    Date: 2011
  13. By: Pritha Mitra
    Abstract: The recent boom-bust episode in Emerging Europe was largely the product of surges and sudden stops in capital inflows. This paper empirically argues that the sectors into which capital flows determines their impact on GDP growth. Applying data from EU New Member States, it is found that capital flows into real estate have a greater impact on swings in GDP than other sectors, irrespective of a country's exchange rate or fiscal policy. Consequently, as new waves of capital inflows spread to emerging markets, policies may usefully focus on supporting capital inflows towards economic sectors that minimize large swings in GDP.
    Keywords: Bank credit , Capital flows , Capital inflows , Eastern Europe , Economic growth , Emerging markets , European Economic and Monetary Union , Foreign direct investment , Real estate prices ,
    Date: 2011–03–28
  14. By: Caporale, Guglielmo Maria (Brunel University); Rault, Christophe (University of Orléans); Sova, Robert (CREST & University of Paris 1 Panthéon-Sorbonne); Sova, Anamaria (E.B.R.C. Bucharest)
    Abstract: This paper analyses the trade balance effects of Europe agreements (EA) between the EU-15 and four new EU members from Central and Eastern Europe (CEEC-4) using both static and dynamic panel data approaches. Specifically, the system Generalized Method of Moments (GMM, Blundell and Bond, 1998) and recently developed econometric methods such as the Correlated Common Estimation Pooled - Hausman-Taylor (CCEPHT, Serlenga and Shin, 2007) are applied to analyse the effects of the agreement variable. Our estimation results indicate a positive and significant impact of EA on trade flows. However, there is an asymmetric impact of the agreement variable on the trade balance, exports and imports being affected in different ways, which results in a trade balance deficit in the CEEC-4.
    Keywords: regionalisation, trade flows, trade balance, panel data methods
    JEL: E61 F13 F15 C25
    Date: 2011–04
  15. By: Dan Luo (University of Nottingham); Iris Biefang-Frisancho Mariscal (University of the West of England); Peter Howells (University of the West of England)
    Abstract: We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies.
    Keywords: Monetary policy, Risk aversion, impulse responses
    JEL: G12 E43 E44
    Date: 2011–05
  16. By: Carla Soares; Paulo M.M. Rodrigues
    Abstract: The financial markets turmoil of 2007-09 impacted on the overnight segment, which is the first step of monetary policy implementation. We model the volatility of the EONIA spread as an EGARCH. However, the nature of the EGARCH considered will be different in the period before the fixed rate full allotment policy of the ECB (2004 - 2008) where we follow the approach of Hamilton (1996) and in the period afterwards (2008 - 2009) where a conventional EGARCH seems sufficient to capture the behaviour of volatility. The results suggest a greater difficulty during the turmoil for the ECB to steer the level of the EONIA spread relative to the main reference rate. The liquidity effect has been reduced since 2007 and in particular since the full allotment policy at the refinancing operations. On the other hand, the liquidity policy and especially the provision of long-term liquidity followed was effective in reducing market volatility. Liquidity provision conditions were also found to have influenced the EONIA spread only since the financial market turmoil. Fine-tuning operations contributed to stabilize money market conditions, especially during the turmoil. The EGARCH parameter estimates also suggest a structural change in the behaviour of the EONIA spread in reaction to shocks.
    JEL: E43 E52 G21
    Date: 2011
  17. By: Bell, David N.F. (University of Stirling); Blanchflower, David G. (Dartmouth College)
    Abstract: This paper focuses particularly on youth unemployment, why we should be concerned about it, why it is increasing again, how the present difficulties of young people entering the labour market differ from those of the past and what useful lessons have been learned that may guide future policy. We focus on Europe and USA, but introduce evidence from other countries where appropriate. Our analysis of the UK NCDS birth cohort data provides evidence supporting the notion that early adulthood unemployment creates long lasting scars which affect labour market outcomes much later in life. Our chosen variables are weekly wages and happiness. Our results show significant effects at age 50 from early adulthood unemployment. These affects are stronger than more recent unemployment experiences.
    Keywords: scarring effects, youth unemployment, happiness
    JEL: J31 J64
    Date: 2011–04
  18. By: Wolfgang Polasek (Institute for Advanced Studies, Austria; The Rimini Centre for Economic Analysis (RCEA), Italy); Richard Sellner (Institute for Advanced Studies, Austria)
    Abstract: We analyze the influence of newly constructed globalization measures on regional growth for the EU-27 countries between 2001 and 2006. The spatial Chow-Lin procedure, a method constructed by the authors, was used to construct on a NUTS-2 level a complete regional data for exports, imports and FDI inward stocks, which serve as indicators for the in uence of globalization, integration and technology transfers on European regions. The results suggest that most regions have significantly benefited from globalization measured by increasing trade openness and FDI. In a non-linear growth convergence model the growth elasticities for globalization and technology transfers decrease with increasing GDP per capita. Furthermore, the estimated elasticity for FDI decreases when the model includes a higher human capital premium for CEE countries and a small significant growth enhancing effect accrues from the structural funds expenditures in the EU.
    Keywords: Regional Globalization Measures, EU Integration (Structural Funds), Regional Growth Convergence Models, Foreign Direct Investment (FDI)
    JEL: C11 C15 C51 R12
    Date: 2011–05
  19. By: Bell, David N.F. (University of Stirling); Blanchflower, David G. (Dartmouth College)
    Abstract: We consider the effects of the financial crisis and subsequent recession on world labour markets. It begins by cataloguing the adverse effects on output of the sudden collapse in demand brought about by the financial crisis in what has come to be called the Great Recession. Next we look at the labour market and how employment and unemployment have been impacted and document the very different responses by country. We then move on to look at attitudinal indicators of the impact of the rising levels of joblessness we observe across most OECD countries. We examine data on well-being and on attitudes to employment. We also examine a number of questions about the impact of globalization that respondents across many European countries were asked in the Spring of 2010. Finally, we examine the policy responses of governments, and consider what lessons might be learned from the marked differences in labour market outcomes following the recession.
    Keywords: globalization, jobs
    JEL: J31 J64
    Date: 2011–04

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