nep-eec New Economics Papers
on European Economics
Issue of 2011‒06‒18
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Till Labor Cost Do Us Part A Vecm Model of Unit Labor Cost Convergence in the Euro Area By F. Pancotto; F. Pericoli
  2. Financial Integration at Times of Financial Instability By Jan Babecky; Lubos Komarek; Zlatuse Komarkova
  3. Consumer confidence as a predictor of consumption spending: evidence for the United States and the euro area By Stéphane Dées; Pedro Soares Brinca
  4. The Euro Sovereign Debt Crisis, Determinants of Default Probabilities and Implied Ratings in the CDS Market: An Econometric Analysis By Carlos Santos
  5. The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management By Ulrich Bindseil; Juliusz Jabłecki
  6. Nonlinear Expectations in Speculative Markets - Evidence from the ECB Survey of Professional Forecasters By Stefan Reitz; Jan-Christoph Rülke; Georg Stadtmann
  7. Need for Speed: Is Faster Trade in the EU Trade-Creating? By Cecília Hornok
  8. Challenges of Nordic labour markets: A polarization of working life? By Rita Asplund; Erling Barth; Per Lundborg; Kjersti Misje Nilsen
  9. Trade in Intermediate Products and EU Manufacturing Supply Chains By Jyrki Ali-Yrkkö; Petri Rouvinen; Timo Seppälä; Pekka Ylä-Anttila; Robert Stehrer; Roman Stöllinger; Doris Hanzl-Weiss; Neil Foster
  10. The Export Promoting Effect of Emigration: Evidence from Denmark By Sanne Hiller
  11. Common factors of the exchange risk premium in emerging European markets By Byrne, Joseph P; Nagayasu, Jun

  1. By: F. Pancotto; F. Pericoli
    Abstract: A sustainable path of relative competitiveness among the EMU countries is a key factor for the survivorship of the currency union in the long run. We analyze unit labor costs in the European Union with VECM methodology to evaluate relative competitiveness of euro area countries, controlling for exchange rate on the adjustment dynamics, for the economy as a whole and for the manufacturing sector, considered as a proxy of the tradable sector. Results show a lack of convergence of member countries, which is more pronounced for the tradable sector. Persisting idiosyncratic dynamics may be driven by different bargaining policies and institutional structures of national labor markets, and by differential path of technological advance deterring convergence of long run productivity.
    JEL: E31 O47 C32
    Date: 2011–06
  2. By: Jan Babecky; Lubos Komarek; Zlatuse Komarkova
    Abstract: This article analyzes the phenomenon of financial integration on both the theoretical and empirical levels, focusing primarily on assessing the impacts of the current financial crisis. In the theoretical section we first look at the definition of financial integration and summarize the benefits and costs associated with this process. We go on to examine the relationship between financial integration and financial instability, emphasizing the priority role of financial innovation. The subsequent empirical section provides an analysis of the speed and level of integration of the Czech financial market and the markets of selected inflation-targeting Central European economies (Hungary and Poland) and advanced Western European economies (Sweden and the United Kingdom) with the euro area. The results for the Czech Republic reveal that a process of increasing financial integration has been going on steadily since the end of the 1990s and also that the financial crisis caused only temporary price divergence of the Czech financial market from the euro area market.
    Keywords: Beta-convergence, financial crisis, financial integration, gamma-convergence, new EU Member States, propagation of shocks, sigma-convergence.
    JEL: C23 G12 G15
    Date: 2010–12
  3. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Pedro Soares Brinca (Stockholm University, Sweden.)
    Abstract: For most academics and policy makers, the depth of the 2007-09 financial crisis, its longevity and its impacts on the real economy resulted from an erosion of confidence. This paper proposes to assess empirically the link between consumer sentiment and consumption expenditures for the United States and the euro area. It shows under which circumstances confidence indicators can be a good predictor of household consumption even after controlling for information in economic fundamentals. Overall, the results show that the consumer confidence index can be in certain circumstances a good predictor of consumption. In particular, out-of-sample evidence shows that the contribution of confidence in explaining consumption expenditures increases when household survey indicators feature large changes, so that confidence indicators can have some increasing predictive power during such episodes. Moreover, there is some evidence of a "confidence channel" in the international transmission of shocks, as U.S. confidence indices lead consumer sentiment in the euro area. JEL Classification: C32, E17, F37, F42.
    Keywords: Consumer Confidence, Consumption, International Linkages, Non-linear modeling.
    Date: 2011–06
  4. By: Carlos Santos (Faculdade de Economia e Gestão - Universidade Católica Portuguesa - Porto)
    Abstract: In this paper we take an innovative econometric look at the Euro Zone Sovereign Debt Crisis. We are particularly interested in understanding which determinants have led investors to ask for higher yields on sovereign debt from the Euro shatter belt. We dismiss the definition of speculation previously used in the literature, on the basis of the irrelevance of Granger Causality as an operational tool for this purpose. Instead, we suggest that speculative behavior would only exist if market assessment would be unrelated to economic fundamentals of such countries. Using a cross section of countries, we improve on the scarce literature on the Econometrics of Credit Default Swap Markets on sovereign debt. Firstly, we use an ordered probit model to determine whether economic fundamentals are driving the implied rating assessments. Secondly, we provide a pioneering application of quantile regression to this domain, to determine which variables matter at different conditional quantiles of the implied default probability distribution. Finally, Fisher’s Z statistic is used to relate bond markets to domestic saving rates. Overall, the different methodologies support the conclusion that the domestic savings rate is lenders’ main concern. Economies with worse saving habits are penalized both in the CDS market, and in the sovereign bonds markets. Notwithstanding, for countries on the top quantiles of the implied default probabilities, public debt and external debt also play a significant role, increasing the likelihood of higher insurance premium in the derivatives market. When looking at the Portuguese Case it seems clear that public policies that fail to take savings into proper account shall always be deemed to fail, as the country had the lowest net savings rate in the EU27 in 2008, followed closely by Greece.
    Keywords: sovereign debt; Euro Area; Credit Default Swaps; Quantile Regression; Ordered Probit; savings rate
    JEL: C21 C25 E21 G12 H63
    Date: 2011–05
  5. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juliusz Jabłecki (National Bank of Poland and Faculty of Economic Sciences, Warsaw University.)
    Abstract: Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007. JEL Classification: E4, E5.
    Keywords: standing facilities, money market, liquidity management.
    Date: 2011–06
  6. By: Stefan Reitz; Jan-Christoph Rülke; Georg Stadtmann
    Abstract: Chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets. In general, this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups. This paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics. The empirical results are based on a new data set from the European Central Bank Survey of Professional Forecasters on oil price expectations. In particular, we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value, whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment
    Keywords: agent based models, nonlinear expectations, survey data
    JEL: F31 D84 C33
    Date: 2011–06
  7. By: Cecília Hornok
    Abstract: Timeliness has gained growing importance in international trade. This paper provides empirical evidence on the significant cost of time in trade by exploiting the quasi-experimental nature of the European Union (EU) enlargement in 2004. It applies a difference-in-difference-in-differences econometric strategy on a European industry-level database of bilateral trade barriers, where industries are differentiated according to their time sensitivity. The use of a treatment intensity indicator that captures the decline in the waiting time at borders supports the identification. Results are cross-checked on subsamples defined along transport mode choice probabilities, where intra-EU transport mode choice projections are obtained from an estimated discrete choice model on extra-EU trade. Robustness checks experiment with alternative definitions of treatment sensitivity and treatment intensity.
    Keywords: time cost of trade, difference-in-difference-in-differences estimation, treatment intensity, EU enlargement, transport mode choice
    JEL: F13 F14 F15
    Date: 2011–04
  8. By: Rita Asplund; Erling Barth; Per Lundborg; Kjersti Misje Nilsen
    Abstract: Labour-market polarization is characterized by increased employment in occupations at the top but also at the bottom of the skills and wage distributions, followed by a relative decline in ‘middling’ occupations. This paper documents a polarization trend also in the Nordic labour markets and contrasts it to comparative findings for the USA. Employment growth in the top-paying occupations is found to have been dominated by a large increase in the category of ‘Engineering professionals and other professionals’, whereas the growth at the bottom end stems mainly from increased employment in ‘Personal and protective services’. The drop in the middle has been driven by a marked relative decline in the category ‘Office clerks’. Analysis of the extent to which differences in wage development across skill groups have enhanced or attenuated this process of polarization in employment patterns suggests that the U-shaped pattern of employment change prevails also after controlling for concomitant changes in relative occupational wages. Hence, it seems that also the Nordic countries have experienced a shift from skill-biased technological change to non-routine-biased technological change – or, more likely, a combination of the two – and that this process has not been particularly dampened by compressed wage structures or relatively more rigid wages.
    Keywords: labour market, polarization, occupation, relative wages
    JEL: J21 J23 J31
    Date: 2011–06–08
  9. By: Jyrki Ali-Yrkkö; Petri Rouvinen; Timo Seppälä; Pekka Ylä-Anttila; Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Neil Foster (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Where is your mobile coming from? This simple question is not easy to answer as the mobile has been assembled using components from different countries (including the domestic) and by using services from the domestic and foreign economies. This multi-country nature of products is not only a feature of more complex high-tech products (such as mobile phones, cars, etc.) but in almost all cases a product is not made up entirely of components or inputs from the country where it is finally assembled or sold. At least some of the components and services (e.g. transport services) necessary to bring the final product to the customer are sourced abroad. This is the case for direct inputs in the way that firms purchase intermediate inputs for production domestically and abroad but even more so in an indirect way: A component from a particular country may already embody other inputs from other countries which are thus used indirectly when using this component for production purposes. The other way round, companies may ship high-tech components to other countries where assembly of the final product takes place. Based on this background of the importance of the multi-country nature of products, the report provides a detailed analysis of the structure of the international production process and trade in intermediates with respect to EU countries at various levels. Using information gathered from detailed trade statistics, the report analyses the relative importance of trade in intermediate products in overall trade, the respective changes over time and the important differences among the EU-27 countries. Here the importance of considering both exports and imports of trade in intermediates is emphasized. The study investigates the geographic structure of sourcing and provision of intermediates, pointing out important regional shifts, specialization patterns, the significance of two-way trade in intermediates, extensive and intensive margins by use categories and other characteristics such as quality aspects. The report then continues providing information on the using side of imported intermediates and its role in inter-industry linkages. This is further exemplified at a very detailed level – at the level of a single product, the Nokia N95 – analysing the complexity of international production processes for a high-tech product. Finally, the study provides insights into the effects of the crisis on trade in intermediates – whether being a cause or consequence of the trade collapse – and potential implications for future developments.
    Keywords: intermediates trade, supply chain, trade collapse
    JEL: F14
    Date: 2011–02
  10. By: Sanne Hiller
    Abstract: The theoretical claim that ethnic networks encourage trade has found broad empirical support in the literature on migration, business networks and international trade. Ethnic networks matter for the exporting firm, as they exhibit the potential to lower fixed and variable cost of exporting. This paper provides a first attempt to identify the export-promoting effect of emigration on the firm level. Using detailed Danish firm-level data, we can parsimoniously control for export determinants other than emigration, unobserved heterogeneity at the firm level, as well as for self-selection of firms into exporting. Additionally accounting for taste similarity between Denmark and its trade partners, our findings suggest a positive effect of emigration on Danish manufacturing trade within Europe, thereby corroborating preceding studies on aggregate data. Nevertheless, as a novel insight, our analysis reveals that the only beneficiaries of emigration are small enterprises.
    Keywords: Emigration, Brain Drain, Small Businesses, International Trade, Firmlevel analysis
    JEL: F22 F16
    Date: 2011–06
  11. By: Byrne, Joseph P; Nagayasu, Jun
    Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
    Keywords: Uncovered Interest Rate Parity; Emerging Economies; Exchange Risk Premiums; Common Factors
    JEL: F41
    Date: 2011–05

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