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on European Economics |
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Issue of 2011‒06‒25
fifteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Elke Hahn (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper explores the role of oil prices in the euro area economy since the 1970s by applying a VAR framework with time varying parameters and stochastic volatility in which oil supply and global demand shocks are identified. Our results show that both types of shock contributed substantially to the oil price surges during historical oil crises and likewise to those over the past decade. Counterfactual histories of the price and activity variables, moreover, reveal much larger adverse contributions of both shocks to HICP inflation and GDP in the first half of the sample than in the second, which suggests that changes related to these shocks have contributed to the Great Moderation. Impulse responses, moreover, show that a decline in the pass through of the two shocks has added to the moderating contribution over time, while variance decompositions indicate no change in the relative importance of the two shocks over time. JEL Classification: E3. |
| Keywords: | Oil prices, Great Moderation, time varying parameter VAR model, stochastic volatility, euro area. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111356&r=eec |
| By: | Ulrich Bindseil; Philipp Johann König |
| Abstract: | It has recently been argued that intra-eurosystem claims and liabilities in the form of TARGET2 balances would raise fundamental issues within the European monetary union. This article provides a framework for the economic analysis of TARGET2 balances and discusses the key arguments behind this recent debate. The analysis is conducted within a system of financial accounts in which TARGET2 balances can arise either due to current account transactions or cross-border capital flows. It is argued that the recent volatility of TARGET2 balances reflects capital flow movements, while the previously prevailing current account positions did not find a strong reflection in TARGET2 balances. Some recent statements regarding TARGET2 appear to be due to a failure to distinguish between the monetary base (a central bank liability concept) and the liquidity deficit of the banking system vis-à-vis the central bank (a central bank asset concept). Furthermore, the article highlights the importance of TARGET2 for the stability of the euro area and points out that the proposal to limit the size of TARGET2 liabilities essentially contradicts the idea of a monetary union. |
| Keywords: | TARGET2, central bank balance sheet, liquidity deficit, financial crisis |
| JEL: | E58 F33 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-035&r=eec |
| By: | Barthélemy, J.; Cléaud, G. |
| Abstract: | We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0.7%, and on the 3-Month interest rate to an average of -1.4%. |
| Keywords: | Global Imbalances, Disinflation, Business Fluctuations, Open Economy Macroeconomics. |
| JEL: | E32 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:329&r=eec |
| By: | António Afonso (European Central Bank, Directorate General Economics, Frankfurt am Main); Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Slavík (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| 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. |
| Keywords: | fiscal policy, financial markets, threshold VAR |
| JEL: | E62 G15 H60 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_16&r=eec |
| By: | Christian Dreger; Jürgen Wolters |
| Abstract: | This paper explores the stability of the relation between money demand for M3 and inflation in the euro area by including the recent period of the financial crisis. Evidence is based on a cointegration analysis, where inflation and asset prices are allowed to enter the long run relationship. By restricting the cointegrating space, equations for money and inflation are identified. The results indicate that the equilibrium evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Excess liquidity plays an important role for inflation dynamics. While the hypothesis of weak exogeneity is rejected for real money balances and inflation, real income, real asset prices and the term structure do not respond to deviations from the long run equilibria. A single equation analysis derived from this system still provides reliable information for the conduct of monetary policy in real time, since the error correction terms are very similar to those obtained by the system approach. To monitor the monetary development, a single money demand equation is sufficient, at least as a rough indication. |
| Keywords: | Money demand, inflation, excess liquidity, cointegration analysis |
| JEL: | C22 C52 E41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1131&r=eec |
| By: | Viral V. Acharya; Itamar Drechsler; Philipp Schnabl |
| Abstract: | We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness. This deterioration feeds back onto the financial sector, reducing the value of its guarantees and existing bond holdings and increasing its sensitivity to future sovereign shocks. We provide empirical evidence for this two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS) of the Eurozone countries for 2007-10. We show that the announcement of financial sector bailouts was associated with an immediate, unprecedented widening of sovereign CDS spreads and narrowing of bank CDS spreads; however, post-bailouts there emerged a significant co-movement between bank CDS and sovereign CDS, even after controlling for banks' equity performance, the latter being consistent with an effect of the quality of sovereign guarantees on bank credit risk. |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17136&r=eec |
| By: | Thomas Windberger; Achim Zeileis |
| Abstract: | To assess the effects of the EMU on inflation rate dynamics of its member states, the inflation rate series for 21 European countries are investigated for structural changes. To capture changes in mean, variance, and skewness of inflation rates, a generalized logistic model is adopted and complemented with structural break tests and breakpoint estimation techniques. These reveal considerable differences in the patterns of inflation dynamics and the structural changes therein. Overall, there is a convergence towards a lower mean inflation rate with reduced skewness, but it is accompanied by an increase in variance. |
| Keywords: | inflation rate, structural break, EMU, generalized logistic distribution |
| JEL: | E31 C22 C52 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2011-12&r=eec |
| By: | Silvia Fabiani (Banca d'Italia); Roberto Sabbatini (Banca d'Italia) |
| Abstract: | The study analyses wage adjustment by Italian firms on the basis of information collected through a coordinated survey carried out in 17 European countries in two waves (at the beginning of 2008 and in the summer of 2009). The pre-crisis evidence indicates that the degree of wage rigidity is relatively high in Italy: wages remain unchanged on average for about two years, against an average of just over one year in the other countries. Italian firms hardly cut nominal wages, reflecting not only institutional constraints, but also an attempt to avoid a negative impact on their productivity. During the economic recession the firms most severely affected by the fall in demand reduced their costs mainly by adjusting the input of labour (in terms of both employment and hours worked). A higher incidence of skilled and white-collar workers was accompanied by greater recourse to strategies aimed at containing non-labour costs, presumably in order to preserve the human capital accumulated. |
| Keywords: | survey, wage rigidity, economic recession |
| JEL: | D21 E30 J31 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_94_11&r=eec |
| By: | Andrés Erosa (IMDEA Social Sciences Institute); Luisa Fuster (IMDEA Social Sciences Institute); Gueorgui Kambourov (University of Toronto) |
| Abstract: | There are substantial cross-country differences in labor supply late in the life cycle (age 50+). A theory of labor supply and retirement decisions is developed to quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle across European countries and the United States. The findings support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle in the European countries relatively to the United States, with social security rules accounting for the bulk of these effects. |
| Keywords: | social security; disability insurance; labor supply; heterogeneity; life cycle |
| JEL: | D9 E2 E6 H2 H3 H5 J2 |
| Date: | 2011–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2011-08&r=eec |
| By: | Le Coq, Chloé (Stockholm Institute of Transition Economics); Paltseva, Elena (Department of Economics, University of Copenhagen) |
| Abstract: | This paper proposes a Transit Risk Index (TRI) designed to assess the riskiness of pipeline gas imports and to study the effect of introducing new gas routes. TRI controls for gas dependency, transit route diversification, political risks of transit, pipeline rupture probability, and the balance of power between supplying and consuming countries along the transit route. Evaluating TRI for the EU-Russia gas trade, we show that the introduction of the Nord Stream pipeline would further widen already large disparities in gas risk exposure across the EU Member States. The gas risk exposure of the Member States served by Nord Stream would decline. In contrast, EU countries not connected to Nord Stream, but sharing other Russian gas transit routes with the Nord Stream countries, would face greater gas risk exposure. We discuss the implications of our analysis for the design of the common energy policy in the EU. |
| Keywords: | Gas transit risk; Index; Security of supply; Nord Stream; Common Energy Policy |
| JEL: | C80 Q40 Q48 |
| Date: | 2011–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hasite:0012&r=eec |
| By: | Brenke, Karl (DIW Berlin); Rinne, Ulf (IZA); Zimmermann, Klaus F. (IZA and University of Bonn) |
| Abstract: | Short-time work was the "German answer" to the economic crisis. The number of short-time workers strongly increased in the recession and peaked at more than 1.5 million. Without the extensive use of short-time work, unemployment would have risen by approximately twice as much as it actually did. Short-time work has certainly contributed to the mild response of the German labor market to the crisis, but this is likely due to the country-specific context. Although the crisis has been overcome and employment is strongly expanding, modified regulations governing short-time work are still in place. This leads to undesired side effects. |
| Keywords: | labor market policy, partially unemployed workers, short-time work compensation, economic crisis |
| JEL: | J65 J68 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5780&r=eec |
| By: | Klaus Nowotny (WIFO) |
| Abstract: | Migrants are among the groups most vulnerable to economic fluctuations. As predicted by the "welfare magnet" hypothesis, migrants can therefore be expected to – ceteris paribus – prefer countries with more generous welfare provisions to insure themselves against labour market risks. This paper analyses the role of the welfare magnet hypothesis for migrants to the EU 15 at the regional level. The empirical analysis based on a random parameters logit model shows that the regional location decisions of migrants are mostly governed by income opportunities, labour market conditions, ethnic networks and a common language. There is no strong evidence for the welfare magnet hypothesis in the EU, but the empirical model shows that the income tax system has a large and consistent effect on locational choice. |
| Keywords: | welfare magnet hypothesis, migration, random parameters logit model |
| Date: | 2011–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2011:i:393&r=eec |
| By: | Francesco D'Amuri; Giovanni Peri |
| Abstract: | In this paper we analyze the effect of immigrants on native jobs in fourteen Western European countries. We test whether the inflow of immigrants in the period 1996-2007 decreased employment rates and/or if it altered the occupational distribution of natives with similar education and age. We find no evidence of the first but significant evidence of the second: immigrants took "simple" (manual-routine) type of occupations and natives moved, in response, toward more "complex" (abstract-communication) jobs. The results are robust to the use of an IV strategy based on past settlement of different nationalities of immigrants across European countries. We also document the labor market flows through which such a positive reallocation took place: immigration stimulated job creation, and the complexity of jobs offered to new native hires was higher relative to the complexity of destructed native jobs. Finally, we find evidence that the occupation reallocation of natives was significantly larger in countries with more flexible labor laws. This tendency was particularly strong for less educated workers. |
| JEL: | J24 J61 J62 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17139&r=eec |
| By: | Kazi, Irfan Akbar; Guesmi, Khaled; Kaabia, Olfa |
| Abstract: | In this paper we investigate the contagion effect between stock markets of U.S and sixteen OECD countries due to Global Financial Crisis (2007-2009). We apply Dynamic Conditional Correlation GARCH model Engle (2002) to daily stock price data (2002-2009). In order to recognize the contagion effect, we test whether the mean of the DCC coefficients in crisis period differs from that in the pre-crisis period. The identification of break point due to the crisis is made by Bai-Perron (1998, 2003) structural break test. We find a significant increase in the mean of dynamic conditional correlation coefficient between U.S and OECD stock markets under study during the crisis period for most of the countries. This proves the existence of contagion between the US and the OECD stock markets. -- |
| Keywords: | Financial crisis,integration,contagion,multivariate GARCH-DCC model |
| JEL: | E44 F15 F36 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201115&r=eec |
| By: | Casadio, Paolo; Paradiso, Antonio; Rao, B. Bhaskara |
| Abstract: | This paper estimates the steady state growth rate for Scandinavian countries with a “knowledge economy” approach. We shall use an extended version of the Solow (1956) growth model, in which total factor productivity is assumed to be a function of human capital (measured by average years of education), trade openness and investment ratio. Using this framework we show that these factors, and in particular the education variable, have played an important role to determine the long run growth rates of the Scandinavian countries. Some policy measures are identified to improve the long-run growth rates for these countries. |
| Keywords: | Endogenous growth models; Trade openness; human capital; investment ratio; Steady state growth rate; Scandinavian countr |
| JEL: | C22 O52 O40 |
| Date: | 2011–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:31606&r=eec |