nep-eec New Economics Papers
on European Economics
Issue of 2011‒10‒15
twelve papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Synchronization of Economic Sentiment Cycles in the Euro Area: a time-frequency analysis By Luís Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  2. "Causality and contagion in peripheral EMU public debt markets: a dynamic approach" By Marta Gómez-Puig; Simón Sosvilla-Rivero
  3. Trend-cycle decomposition of output and euro area inflation forecasts: a real-time approach based on model combination By Pierre Guérin; Laurent Maurin; Matthias Mohr
  4. Did the Euro Crisis Affect Non-financial Firm Stock Prices through a Financial or Trade Channel? By Stijn Claessens; Hui Tong; Igor Zuccardi
  5. Rules and risk in the euro area By Anna Iara; Guntram B. Wolff
  6. The Effect of Emigration on Unemployment: Evidence from the Central and Eastern European EU Member States By Pryymachenko, Yana; Fregert, Klas; Andersson, Fredrik N. G.
  7. Growth Spillover Dynamics from Crisis to Recovery By Sebastian Weber; Hélène Poirson
  8. Europe as a convergence engine -- heterogeneity and investment opportunities in emerging Europe By Stojkov, Aleksandar; Zalduendo, Juan
  9. Fiscal policy, eurobonds and economic recovery: some heterodox policy recipes against financial instability and sovereign debt crisis. By alberto, botta
  10. Sustainability of Greek Public Debt By William R. Cline
  11. Wage spillovers across sectors in Eastern Europe By Gaetano D’Adamo
  12. Are defined contribution pension schemes socially sustainable? A conceptual map from a macroprudential perspective By Giuseppe Marotta

  1. By: Luís Aguiar-Conraria (Universidade do Minho, NIPE, and Escola de Economia e Gestão); Manuel M. F. Martins (Cef.up, Faculdade de Economia, Universidade do Porto); Maria Joana Soares (Universidade do Minho, NIPE, and Departmento de Matemática)
    Abstract: We use wavelet tools and Economic Sentiment Indicators to study the synchronization of economic cycles in the Euro Area. We assess the time-varying and frequency-varying pattern of business cycles synchronization in the Area and test the impact of the creation of the European Monetary Union in 1999. Among several results, we find that (a) the EMU is associated with a significant increase in synchronization of economic sentiment in the Euro Area; (b) the hard-peg of its currency to the Euro led to a comparable synchronization of Denmark's economic sentiment after 1999, differently from what happened in the case of the UK.
    Keywords: Business cycle synchronization; Economic sentiment; Euro Area; Continuous wavelet transform; Wavelet coherency; Wavelet distance; Phase-difference.
    JEL: C32 C49 E32
    Date: 2011–10
  2. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Universidad Complutense de Madrid)
    Abstract: Our research aims to analyze the causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of contagion between yields on bonds issued by different countries. In the second step, we study the determinants of these contagion episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.
    Keywords: Sovereign bond yields, causality, time-varying contagion, euro area, peripheral EMU countries. JEL classification:E44, F36, G15
    Date: 2011–09
  3. By: Pierre Guérin (International Economic Analysis Department, Bank of Canada, 234 Wellington Street, Ottawa, Canada, K1A 0G9 and European University Institute); Laurent Maurin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.); Matthias Mohr (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany.)
    Abstract: The paper focuses on the estimation of the euro area output gap. We construct model-averaged measures of the output gap in order to cope with both model uncertainty and parameter instability that are inherent to trend-cycle decomposition models of GDP. We first estimate nine models of trend-cycle decomposition of euro area GDP, both univariate and multivariate, some of them allowing for changes in the slope of trend GDP and/or its error variance using Markov-switching specifications, or including a Phillips curve. We then pool the estimates using three weighting schemes. We compute both ex-post and real-time estimates to check the stability of the estimates to GDP revisions. We finally run a forecasting experiment to evaluate the predictive power of the output gap for inflation in the euro area. We find evidence of changes in trend growth around the recessions. We also find support for model averaging techniques in order to improve the reliability of the potential output estimates in real time. Our measures help forecasting inflation over most of our evaluation sample (2001-2010) but fail dramatically over the last recession. JEL Classification: C53, E32, E37.
    Keywords: Trend-cycle decomposition, Phillips curve, unobserved components model, Kalman Filter, Markov-switching, auxiliary information, model averaging, inflation forecast, real-time analysis.
    Date: 2011–10
  4. By: Stijn Claessens; Hui Tong; Igor Zuccardi
    Abstract: This paper analyzes through what channels the euro crisis has affected firm valuations globally. It examines stock price responses over the past year for 3045 non-financial firms in 16 countries to three key crisis events. Using pre-crisis benchmarks, it separates effects arising from changes in external financing and trade conditions and examines how bank and trade linkages propagated effects across borders. It finds that policy measures announced impacted financially-constrained firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries. Trade linkages with peripheral countries also played a role, with euro exchange rate movements causing differential effects.
    Keywords: Capital markets , Corporate sector , Euro Area , Europe , Financial crisis , Sovereign debt , Spillovers , Stock prices , Trade ,
    Date: 2011–09–29
  5. By: Anna Iara; Guntram B. Wolff
    Abstract: In this working paper, with a unique data set summarising the quality of rules-based fiscal governance in European Union member states, the authors show that stronger fiscal rules in euro-area members reduce sovereign risk premia, in particular in times of market stress. Anna Iara and Guntram Wolff develop a model of sovereign spreads that are determined by the probability of default in interaction with the level of risk aversion. Estimation of the model confirms the central predictions. The legal basis for the rules, and mechanisms for enforcing them, are the most important dimensions of rulesbased fiscal governance.
    Date: 2011–10
  6. By: Pryymachenko, Yana (Department of Economics, Lund University); Fregert, Klas (Department of Economics, Lund University); Andersson, Fredrik N. G. (Department of Economics, Lund University)
    Abstract: This paper contributes to the scant empirical literature on the effects of emigration on source countries’ labour markets. Using a novel dataset by Brücker et al. (2009), we investigate whether emigration from the Central and Eastern European (CEE) members of European Union (EU) during the period 2000 to 2007 has contributed to the decline in unemployment observed in these countries. We find that along with structural changes that occurred in the CEE economies during the last decade, emigration indeed had a strong negative effect on unemployment in these countries. A 10 per cent increase in emigration rate leads to around 5 per cent decrease in unemployment rate. Given the minor effect of immigration on host countries’ unemployment found in the literature (including the studies examining the East-West European migration), this paper’s results indicate that the opening up of labour markets following the enlargement of EU in 2004 mainly has had positive effects.
    Keywords: emigration; unemployment; Central and Eastern Europe
    JEL: J21 J31 J61
    Date: 2011–10–06
  7. By: Sebastian Weber; Hélène Poirson
    Abstract: Can positive growth shocks from the faster-growing countries in Europe spill over to the slower growing countries, providing useful tailwinds to their recovery process? This study investigates the potential relevance of growth spillovers in the context of the crisis and the recovery process. Based on a VAR framework, our analysis suggests that the U.S. and Japan remain the key source of growth spillovers in this recovery, with France also playing an important role for the European crisis countries. Notwithstanding the current export-led cyclical upswing, Germany generates relatively small outward spillovers compared to other systemic countries, but likely plays a key role in transmitting and amplifying external growth shocks to the rest of Europe given its more direct exposure to foreign shocks compared to other European countries. Positive spillovers from Spain were important prior to the 2008 - 09 crisis, however Spain is generating negative spillovers in this recovery due to a depressed domestic demand. Negative spillovers from the European crisis countries appear limited, consistent with their modest size.
    Keywords: Cross country analysis , Economic growth , Economic recovery , Euro Area , Europe , Financial crisis , Germany , Global Financial Crisis 2008-2009 , Spillovers ,
    Date: 2011–09–19
  8. By: Stojkov, Aleksandar; Zalduendo, Juan
    Abstract: This paper provides empirical evidence that countries in emerging Europe reaped the benefits of international financial integration over the past 12 years by attracting sizeable foreign capital inflows and accelerating medium-term growth. But the aggregate pattern masks substantial heterogeneity across countries; namely, new European Union member states and the European Union candidate countries are different from the European Union neighborhood. The growth benefits are supported from both a flow and a stock perspective in terms of the link between foreign savings and growth. While foreign savings might in part substitute for national savings, the analysis finds that the channel to high growth in these countries is, primarily, through making possible the pursuit of investment opportunities that would otherwise remain unfunded; in turn, this seems to be intimately linked to the opportunities created by European Union membership. Although this conclusion does not disappear if the outlier observations of the credit boom period that preceded the financial crisis are dropped from the sample, it does suggest that these excesses did not play as positive a role for growth.
    Keywords: Economic Theory&Research,Currencies and Exchange Rates,Achieving Shared Growth,Emerging Markets,Access to Finance
    Date: 2011–10–01
  9. By: alberto, botta
    Abstract: In this paper, we propose a simple post-Keynesian model on the linkages between the financial and real side of an economy. We show how, according to the Minskyan instability hypothesis, financial variables, credit availability and asset prices in particular, may feedback each other and affect economic activity, possibly giving rise to intrinsically unstable economic processes. Through these destabilizing mechanisms, we also explain why governments intervention in the aftermath of the 2007 financial meltdown has been largely useless to restore financial tranquility and economic growth, but transformed a private debt crisis into a sovereign debt one. The paper ends up by looking at the long-run and to the interaction between long-term growth potential and public debt sustainability. We explicitly consider the Euro-zone economic context and the difficulties several EU members currently face to simultaneously support economic recovery and consolidate fiscal imbalances. We stress that: (i) financial turbulences may trigger permanent reductions in long-term growth potential and unsustainable public debt dynamics; (ii) strong institutional discontinuity such as Eurobond issuances may prove to be the only way to restore growth and ensure long-run public debt sustainability.
    Keywords: post-Keynesian models; financial instability; debt sustainability; Eurobonds
    JEL: E12 E44 H63
    Date: 2011–09
  10. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: On July 21, 2011, the heads of government of the euro area announced a new plan to address the Greek debt crisis. This policy brief presents a simulation exercise that examines whether the new arrangements are likely to provide a sustainable solution. The analysis focuses on four key measures: gross debt relative to GDP; net debt relative to GDP; net interest payments relative to GDP; and amortization of medium- and long-term debt coming due during the year in question, relative to GDP. The new Greek package shows prospective future progress on all four measures, and Greek debt looks much more sustainable after the package than before. In the central baseline through 2020 after the July 2011 package, gross debt peaks at 175 percent of GDP in 2012, then falls to 113 percent by 2020; net debt falls from 121 percent of GDP in 2011 to 69 percent by 2020; purchase of private-sector involvement (PSI) collateral boosts assets from €76 billion in 2010 to about €150 billion by 2015; the interest burden falls from 7.2 percent of GDP in 2011 to 5.2 percent by 2020; amortization falls from 12 percent of GDP in 2011 to 6.5 percent by 2015, 0.5 percent in 2020; the primary surplus rises from –0.8 percent of GDP in 2011 to +6.4 percent by 2014 and after; and the average interest rate on public debt plateaus in a manageable range of about 4.5 percent. These results suggest that Greece can manage its sovereign debt under the new package so long as it meets the fiscal adjustment targets. So far the evidence is that Greek political leaders are willing to take the extensive and unpopular measures necessary to do so.
    Date: 2011–10
  11. By: Gaetano D’Adamo (Department of Economic Structure, University of Valencia, Spain)
    Abstract: This paper studies the interactions between wages in the public sector, the traded private sector and the closed sector in ten EU Transition Countries during the period 2000-2010. The theoretical literature on wage spillovers, as well as the Balassa-Samuelson hypothesis, suggest that the internationally traded sector should be the leader in wage setting, with sheltered and public sector wages adjusting. Using a Cointegrated VAR approach we show that a large heterogeneity across countries is present, and non-traded and public sector wages are often leaders in wage determination or at least affect traded sector wages in the short run. In some countries, public sector wages are weakly exogenous, with the private sectors adjusting. This result is relevant from a policy perspective since wage spillovers, leading to costs growing faster than productivity, may affect the international cost competitiveness of the traded sector and thus the catching-up process may be accompanied by accumulation of large international imbalances.
    Keywords: Cointegrated VAR, wage setting, public sector
    JEL: C32 E62 J31
    Date: 2011–09
  12. By: Giuseppe Marotta
    Abstract: If the combined retirement income, provided by public and private defined contribution (DC) pension schemes, falls below socially acceptable standards, there is a political risk that consensus seeker policymakers could yield to pressures to commit future fiscal revenues. These contingent liabilities, when incorporated in markets’ expectations, are bound to create spillovers on sovereign risk, with negative feedback loops on the capital adequacy of banks and of other intermediaries, owing to losses on their government paper. Among the causes of reduced annuities out of the final assets in DC pension funds is an equity risk premium much lower than the commonly values advertised by the industry and by policymakers. From a macroprudential perspective, this political risk should be taken into account in stress tests assessing banks’ resilience to financial shocks.
    Keywords: pensions, equity risk premium, political risk, sovereign risk, stress test
    JEL: D10 G23 H55 J14
    Date: 2011–10

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