nep-eec New Economics Papers
on European Economics
Issue of 2011‒05‒30
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates By Theoharry Grammatikos; Robert Vermeulen
  2. Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe By Juan Carlos Cuestas; Karsten Steahr
  3. The competitiveness of regions. A comparison between Belgian and German regions By Joep Konings; Luca Marcolin
  4. Economic crisis and taxation in Europe By Luigi, Bernardi
  5. More Alike than Different: The Spanish and Irish Labour Markets Before and After the Crisis By Agnese, Pablo; Salvador, Pablo F.
  6. Adentification Through Heteroscedasticity in a Multicountry and Multimarket Framework By Bernd Hayo; Britta Niehof
  7. Human capital investment strategies in Europe By Pfeiffer, Friedhelm; Reuß, Karsten
  8. Évaluation de la politique monétaire dans un modèle DSGE pour la zone euro By Adjemian, Stéphane; Devulder, Antoine
  9. Labor Market Policy in the Great Recession: Some Lessons from Denmark and Germany By John Schmitt
  10. A Flexicurity Labour Market in the Great Recession: The Case of Denmark By Andersen, Torben
  11. Inflation in the G7: mind the gap(s)? By James Morley; Jeremy M. Piger; Robert H. Rasche

  1. By: Theoharry Grammatikos (Luxembourg School of Finance, University of Luxembourg); Robert Vermeulen (De Nederlandsche Bank, The Netherlands)
    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 euro-dollar 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: 2010
  2. By: Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Karsten Steahr
    Abstract: This paper analyses the time series properties of the fiscal balance in the 10 EU countries from Central and Eastern Europe. The persistence of shocks in the variable has been analysed by means of unit root tests that account for the possibility of non-linearities and structural changes. The results of the linear and non-linear unit root tests find only mild evidence in favour of the stationarity hypothesis, with asymmetric effects present in a few cases. After controlling for structural changes in the data generation process, the results point to stochastic stationarity of the series. Thus, in spite relatively steady headline figures, the public balance processes exhibit substantial instability in the EU countries from Central and Eastern Europe.
    Keywords: Unit roots, structural breaks, budget balance, EU
    JEL: C32 E24
    Date: 2011–05
  3. By: Joep Konings; Luca Marcolin
    Abstract: This paper uses firm level data to analyze the regional competitiveness of two federal Euro area countries, Belgium and Germany. Competitiveness is defined as the labor cost per unit of output and hence takes into account productivity differences. Analyzing regional competitiveness is important because of the regional concentration in economic activity, the unequal spatial development of regions within countries and the increased importance of regional policy both at the EU as at the national level.
    Date: 2011
  4. By: Luigi, Bernardi
    Abstract: The recent economic crisis and taxation in the advanced countries - especially in the European nations - are linked in several ways. The tax systems may have exacerbated the crisis, and this raises the question of the need for a better system of taxation in certain economic sectors, especially in the banking sector. It is worthwhile examining the various different effects of the crisis on different kinds of tax revenue, as a result of both the automatic stabilizers and the discretional measures which were adopted to sustain the economies. We are going to show that while the former have had a relatively substantial impact, the latter have been of negligible effect. The paper initially offers a critical overview of the just mentioned topics. The European countries are now faced with a difficult trade - off between further tax reductions to sustain economic recovery, and the raising of taxes in order to help stabilize public budgets and debts. Broadly speaking, the most suggested solution consists in the idea of raising taxes whilst making them more growth - friendly. With this in mind, the paper then reconsiders and compares the latest, authoritative proposals for tax reform which in recent years have been proposed not only by international economic organizations, but also by studies in the field. The longstanding principles of broadening the tax base, reducing rates and simplifying the tax system still appear to be at the order of the day. The idea of shifting the tax burden away from labour and capital, whilst increasing taxes on consumption, properties and environmental resources, has also received large support. It is again suggested that efficiency - induced neutrality should characterize the design of the main taxes. While those political factors that have impeded reforms in recent years are still at work, we should remember that tax systems also have other targets than that of favouring neutrality - efficiency, and that in some countries (including Italy) the most urgent, radical reform required is the downsizing of an abnormal level of tax evasion.
    Keywords: Economic Crisis; Taxation; Europe
    JEL: H20 H25 H24
    Date: 2011–05–18
  5. By: Agnese, Pablo (IESE Business School); Salvador, Pablo F. (Universidad Nacional de Cuyo)
    Abstract: This paper analyses the labour markets of Spain and Ireland, which have experienced a severe downturn in the recent global crisis as reflected by the largest increases in their unemployment rates among other developed economies. Spain and Ireland might seem at first to feature very different labour markets, which go from very tight to very flexible labour conditions. Our analysis, however, goes beyond this simplistic argument and brings to light the strong commonalities that seem to have been hidden underground. We estimate a dynamic multi-equation structural model for each country, and then offer two sets of dynamic simulations which account for the swings of the unemployment rates before and after the 2007 crisis. Our results suggest looking beyond the degree of flexibility of both labour markets, just to focus instead on other variables usually neglected by more conventional approaches. In particular, such variables as the growth of capital stock, the growth of labour productivity, and demographics, succeed in explaining a great part of the changes in unemployment in both countries.
    Keywords: unemployment dynamics, structural multi-equation models, chain reaction theory, simulations, PIGS
    JEL: E24 J21 E22 C32
    Date: 2011–05
  6. By: Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg)
    Abstract: This paper formally proves that Rigobon and Sack (2004)'s approach of identifying monetary policy shocks through heteroscedasticity can be extended to a multimarket and multicountry framework. Applying our multivariate framework allows deriving consistent estimators of monetary policy effects. The advantage of our extended approach is illustrated by applying it to European nancial markets. We analyse monetary policy actions of the European Central Bank (ECB), the Bank of England, the Swiss National Bank, and the Swedish Riksbank on major stock indices. First, in line with the Rigobon and Sack (2004) approach, we nd an increase in the variance of European stock and money market returns on days when monetary policy committee meetings are held. Second, monetary policy actions have a significant impact on nancial markets. Third, we discover that ECB monetary policy moves have spillover eects on the British and Swiss financial markets, but find no evidence of reverse causality.
    Keywords: Financial markets, instrumental variable estimation, identification through heteroscedasticity, spillover effects
    JEL: E44 E52 G15
    Date: 2011
  7. By: Pfeiffer, Friedhelm; Reuß, Karsten
    Abstract: The paper analyses alternative investment policies and their consequences for the evolution of human capital in Europe based on a model of age dependent skill formation where the life span depends on investments during childhood. What makes the approach special is the analysis of the returns to education of alternative educational policies targeted at certain ages, countries, or productivity levels for two counterfactual policy regimes, one regime assuming the actual state of diversity and the other a unified Europe. Our results indicate that investments need to be directed more generally to people of younger ages in Europe. If equality is important enough additional investment should specifically be directed to disadvantaged individuals during childhood. Furthermore, high levels of life cycle income inequality and a high skill level increase the optimal amount of investments during younger adulthood. In a unified Europe, the effectiveness of policies to reduce inequality would be higher. --
    Keywords: human capital investment,life cycle skill formation,welfare function,Europe
    JEL: D87 I12 I21 J13
    Date: 2011
  8. By: Adjemian, Stéphane; Devulder, Antoine
    Abstract: Dans cet article nous présentons de façon détaillée un modèle DSGE canonique et montrons comment celui-ci peut être simulé puis estimé. Nous proposons deux applications sur la base du modèle estimé. Dans la première nous évaluons les conséquences sur le bien être social de la forme de la politique monétaire. On montre que le bien être social est significativement dégradé si la Banque Centrale ne prend pas en compte l’écart de production. Dans la seconde, nous interrogeons le modèle sur la publicité que la Banque Centrale doit faire autour de sa politique. Nous montrons que face à un choc de productivité négatif il est préférable de ne pas annoncer une politique monétaire accommodante, afin de limiter l’ampleur des tensions inflationnistes.
    Date: 2011–05
  9. By: John Schmitt
    Abstract: This paper reviews the recent labor-market performance of 21 rich countries, with a focus on Denmark and Germany. Denmark, which was widely seen as one of the world's most successful labor markets before the downturn, has struggled in recent years. Germany, however, has outperformed the rest of the world's rich countries since 2007, despite earlier labor-market difficulties. Labor-market institutions seem to explain the different developments in the two economies. Danish institutions – which include extensive opportunities for education, training, and placement of unemployed workers – appear to perform well when the economy is at or near full employment, but have not been effective during the downturn. German labor-market institutions, which emphasize job security by keeping workers connected to their current employers, may have drawbacks when the economy is operating at or near full employment, but have performed well in the Great Recession. The paper also discusses lessons for U.S. labor-market policy.
    Keywords: Great Recession, recession, labor, labor policy,
    JEL: E E2 E24 E3 E6 E65 J J2 J21 J3 J31 J33 J38 J6 J62 J65 J68 J8
    Date: 2011–05
  10. By: Andersen, Torben (University of Aarhus)
    Abstract: Flexicurity labour markets are characterised by flexible hiring/firing rules, generous social safety net, and active labour market policies. How can such labour markets cope with the consequences of the Great Recession? Larger labour shedding is to be expected and this strains the social safety net and increases the demands on active labour market policies. This paper takes a closer look at the labour market consequences of the crisis for Denmark. It is found that employment adjustment is not particularly large in international comparison, although it has more weight on the extensive (number of employees) than the intensive (hours) margin. The level of job creation remains high, although job creation is pro-cyclical and job-separation counter-cyclical. As a consequence most unemployment spells remain short. This is critical since a persistent increase in unemployment will affect the financial balance of the model severely. Comparative evidence does not, however, indicate that flexicurity markets are more prone to persistence. Crucial for this is the design of the social safety net and in particular the active labour market policy. However, the larger inflow into activation raises questions concerning the possibility of maintaining the efficiency of the system.
    Keywords: flexicurity, employment protection, unemployment insurance, active labour market policy
    JEL: J01
    Date: 2011–05
  11. By: James Morley; Jeremy M. Piger; Robert H. Rasche
    Abstract: We investigate the importance of trend inflation and the real-activity gap for explaining observed inflation variation in G7 countries since 1960. Our results are based on a bivariate unobserved-components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap”, that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. Even when allowing for changes in the contributions of trend inflation and the inflation gap, we find that both are important determinants of inflation variation at business cycle horizons for all G7 countries throughout much of the past 50 years. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country, both historically and in recent years. Taken together, the results suggest the New Keynesian Phillips Curve, once augmented to include trend inflation, is an empirically relevant model for the G7 countries. We also provide new estimates of trend inflation for the G7 that incorporate information in the real-activity gap for identification and, through formal model comparisons, new statistical evidence regarding structural breaks in the variability of trend inflation and the inflation gap.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2011

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