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on European Economics |
| By: | Bayoumi, Tamim; Vitek, Francis |
| Abstract: | This paper analyzes past and possible future spillovers from the Euro Area Sovereign Debt Crisis, both within the Euro Area and to the rest of the world. This analysis is based on a structural macroeconometric model of the world economy, disaggregated into fifteen national economies. We find that macroeconomic and financial market spillovers have been small outside of countries with high trade or financial exposures, but that they could become large if severe financial stress were to spread beyond Greece, Ireland and Portugal. |
| Keywords: | Contagion; Euro Area Sovereign Debt Crisis; Panel unobserved components model; Spillovers |
| JEL: | E44 F41 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8497&r=eec |
| By: | Marián Dinga (CERGE-EI); Vilma Dingová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper studies the effect of the euro introduction on international FDI flows. Using country-pair data on 35 OECD economies during 1997-2008 and adopting the propensity score matching as identification strategy, we investigate the impact of the euro on capital reallocation. In general, the euro exhibits no significant impact on FDI. However, the effect becomes significant on the subset of EU countries, increasing FDI flows by 14.3 to 42.5 percent. Furthermore, we find that the EU membership fosters FDI flows much more than the euro, increasing FDI flows by 55 to 166 percent. Among other FDI determinants, high gross domestic product, low distance between countries and low unit labor costs in target country have a positive effect on FDI. On the contrary, long-term exchange rate volatility deters FDI flows. |
| Keywords: | monetary union, foreign direct investment, common currency area, euro |
| JEL: | E42 F15 F21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_25&r=eec |
| By: | Katrin Forster (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Melina Vasardani (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short-term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of cross-border financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in cross-border financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources. JEL Classification: E44, E58, F33, F42 |
| Keywords: | Global financial crisis, euro area, capital flows. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20110126&r=eec |
| By: | João Sousa; Ricardo M. Sousa |
| Abstract: | The goal of this paper is to analyze predictability of future asset returns in the context of modeluncertainty. Using data for the Euro Area, the US and the U.K., we show that one can improve the forecasts of stock returns using a Bayesian Model Averaging (BMA) approach, and there is a large amount of model uncertainty.<br>The empirical evidence for the Euro Area suggests that several macroeconomic, financial and macro-financial variables are consistently among the most prominent determinants of risk premium.As for the US, only a few number of predictors play an important role. In the case UK, future stock returns are better forecasted by financial variables. These results are corroborated for both the M-open and the M-closed perspectives and in the context of "in-sample" and out-of-sample" forecasting. Finally, we highlight that the predictive ability of the BMA framework is stronger at longer periods, and clearly outperforms the constant expected returns and the autoregressive benchmark models. |
| JEL: | E21 G11 E44 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201119&r=eec |
| By: | Peter Boone (Peterson Institute for International Economics); Simon Johnson (Peterson Institute for International Economics) |
| Abstract: | Europe’s efforts to stabilize its finances are failing, and the region needs to prepare for widespread restructuring of sovereign and bank debt. Peter Boone and Simon Johnson argue that Europe’s financial system has relied on a policy of protecting creditors from default and has thus spread pervasive moral hazard—a presumption by creditors that they will not take losses on their loans to Greece and other ailing countries. The authors argue that this situation is no longer tenable and examine three possible scenarios for the coming months as the sovereign debt crisis evolves. Under the first scenario, the euro area would try to reassert its commitment to avoid defaults and inflation. This continuation of the moral hazard regime would require severe austerity for Greece and other countries on the periphery of the euro area. The second scenario involves elimination of the moral hazard regime. The euro area would admit that some sovereigns have too much debt. A series of debt restructurings would follow. The final scenario would be for policymakers to continue to contradict themselves by promising selective defaults or restructurings of some countries’ debts while maintaining that they can ensure the stability of the rest of the euro area. But the authors argue that it is an illusion to believe that selective restructuring would not introduce contagion. Such an approach would result in panic, massive capital flight, and disorderly defaults. The ensuing chaos would in turn lead to a negatively charged political atmosphere that would make consensus nearly impossible. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb11-13&r=eec |
| By: | Benedicta Marzinotto; Jean Pisani-Ferry; Guntram B. Wolff |
| Abstract: | At the extraordinary EU Council of 21 July European leaders have to accomplish a triple-mission. First, they should pave the way to restoring solvency in Greece by initiating debt reduction. Softening the Greek debt burden implies i) reducing the interest rate on official lending, ii) requesting from the EFSF support for an immediate bond buy-back programme, and iii) asking the ESRB for an immediate evaluation of the risks to financial stability involved in a future restructuring of the sovereign debts in the euro area. Second, they should promote immediate growth-enhancing measures to be financed through unused EU structural funds and EIB loans (â?¬16bn). The available funds shall be used to i) raise the quality of higher education, ii) finance wage subsidies in manufacturing and tourism so as to generate an internal devaluation at contained domestic-demand costs; and ii) create research laboratories (i.e. lighthouse innovation projects) that would support an upgrading of the Greek value chain. Third, they should address risks to financial stability in the euro zone by breaking the vicious circle between sovereign debt and banking risk. The EFSF should be able to guarantee national deposit insurance schemes; at the same time, the European Banking Authority should assume stronger supervisory powers. This is an immediate action plans but of course more ambitious reforms are necessary down the road. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:582&r=eec |
| By: | Vitor M. Carvalho (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto); Manuel M. F. Martins (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto) |
| Abstract: | We develop a new-Keynesian DSGE model with an extended fiscal policy block to assess the conditions for expansionary fiscal consolidations. In addition to several taxes, we consider public employment expenditures and government spending, which may have different degrees of productivity. We calibrate the model for the Euro Area and use it to simulate alternative fiscal consolidations with changes in the budget composition. Among the main conclusions we find that: (i) if conducted with a cut in weaklyproductive spending and a symmetric increase in highly-productive spending, fiscal consolidations have expansionary effects on investment and output; (ii) if consolidation is pursued through a pure reduction in weaklyproductive public employment, the effects on output decrease with the degree of labor market competition and turn out to be positive under perfect competition. |
| Keywords: | fiscal policy, fiscal consolidation, new-Keynesian DSGE model |
| JEL: | E12 E62 H63 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:421&r=eec |
| By: | Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II) |
| Abstract: | This paper studies the impact of the main external shocks which the eurozone and member states have undergone since the start of the 2000s. Such shocks have been monetary (drop in global interest rates), financial (two stock market crises) and real (rising oil prices and an accumulation of global current account imbalances). We have used a structural VAR (SVAR) methodology, on the basis of which we have defined four structural shocks: external, supply, demand and monetary. The estimates obtained using SVAR models enabled us to determine the impact of these shocks on the eurozone and its member countries. The study highlights the diversity of reactions inside the eurozone. The repercussions of the oil and monetary shocks were fairly similar in all eurozone countries - excepting the Netherlands and the United Kingdom - but financial crises and global imbalances have had very different effects. External shocks explain one-fifth of the growth differential and current account balance variance and about one-third of fluctuations in the real effective exchange rate in Europe. The impact of the oil crisis was particularly large, but it pushed the euro down. Global imbalances explain a large proportion of exchange rate fluctuations but drove the euro up. Furthermore the response functions to financial and monetary crises are similar, except for current account functions. A financial crisis seems to result in the withdrawal of larger volumes of assets than a monetary crisis. The study thus highlights the diversity of the reactions in the eurozone and shows that external shocks do more to explain variations in the real effective exchange rate than in the growth differential or current account, while underlining the particularly important part played by global imbalances in European exchange rate fluctuations. |
| Keywords: | global imbalances, current account, eurozone, structural VAR model, contemporary and long-term restrictions, external shock, exogeneity hypothesis. |
| Date: | 2011–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-00610024&r=eec |
| By: | Anders Aslund (Peterson Institute for International Economics) |
| Abstract: | In the fall of 2008, Central and Eastern Europe became a flashpoint in the global financial crisis. The positive surprise, however, is that after about two years, the crisis in the region had more or less abated. Public attention moved from Latvia, Estonia, and Lithuania to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The issue was no longer why Latvia must devalue but what Greece could learn from Latvia. What lessons can be drawn from the resolution of the financial crisis in Eastern Europe for the rest of the European Union and the world at large? |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb11-09&r=eec |
| By: | António Brandão Moniz (IET, Universidade Nova de Lisboa, Faculdade de Ciências e Tecnologia) |
| Abstract: | The majority of papers published in the last decades on European Union policy strongly stress the importance of the so-called Lisbon Strategy approved in the year 2000. The same applies to studies and reports on the shift of the European countries towards modernisation and restructuring policy in recent years. This EU development strategy defines a new direction for the coordination of national policies. But why has it become so important? One of the reasons is the fact that many of the papers are based on the concept of “knowledge society” as the key driver for an increased competitiveness of all political and economic regions of Europe. In this context, the term “knowledge” means the inter-linkage of education (including training, qualification, skills) and innovation (including research, information and communication). The use of the concept represents an important shift in the European strategy: further development would not only be based on investment in material infrastructures, but also more on the immaterial ground. However, this Lisbon Strategy was criticised by many politicians and opinion-makers in the first years of this century because the European structures were not prepared for such a quick change. At the same time, the focus for investment moved away from the traditional support of industrial sectors (manufacturing, agriculture and fisheries, construction) towards the “new economy” sectors. The vision of a knowledge society remained appealing also in a changing international context: the Middle East wars (Afghanistan, Iraq and Israel-Palestine) and the fast growth of the Chinese economy. However, the shadows of new recessions have strongly questioned the options made by the European Council. New challenges have emerged with the need to redefine collective strategies in terms of European development as set by the Lisbon strategy. “Europe 2020” is one more attempt to define a new strategy. But at present no clear path has been identified. Whether the programme will bring about progress for the European economies, or is again an illusion, is not yet clear. This shows, however, that new paths and common strategies are still needed in Europe. |
| Keywords: | European Union, Lisbon Strategy, knowledge society, innovation |
| JEL: | E61 H5 O38 O47 O52 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ieu:wpaper:32&r=eec |
| By: | Szarowska, Irena |
| Abstract: | The aim of the paper is to analyze changes in taxation and their impact on economic growth in the European Union. The analysis is performed on adjusted annual panel data of 24 European Union countries in a period 1995–2008. Panel regression with fixed effects is used as a basic method of research. The panel regression is based on analysis the effect of total tax quota changes on GDP growth in model 1, of changes in its components (social contribution, direct and indirect tax quotas) in model 2 and of personal and corporate income tax quota changes in model 3. Results of empirical tests verify statistically significant negative effect of tax burden on GDP growth. Total tax quota increased by 1% decreases the GDP growth rate by 0.29% in the same year. Estimations confirm a statistically significant negative effect of direct taxes on GDP growth as well. A cut in the direct tax quota by 1% raises the GDP growth rate by 0.43%. The model also presents a high negative impact of an increase in the corporate income tax quota on GDP growth (a value of the regression coefficient is minus 1.28%) expresses the high negative. The effect of social contribution quota on GDP growth is not statistically significant in any estimation. |
| Keywords: | taxation; tax burden; economic growth; panel regression |
| JEL: | E62 C23 H25 |
| Date: | 2010–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32354&r=eec |