nep-eec New Economics Papers
on European Economics
Issue of 2012‒05‒15
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Lessons from Reforms in Central and Eastern Europe in the Wake of the Global Financial Crisis By Anders Aslund
  2. Nothing learned from the crisis? Some remarks on the Stability Programmes 2011-2014 of the Euro area governments By Gregor Semieniuk; Till van Treeck; Achim Truger
  3. Are the current account imbalances between EMU countries sustainable? By Christian Schoder; Christian R. Proaño; Willi Semmler
  4. The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective By Eckhard Hein; Achim Truger; Till van Treeck
  5. After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area? By Catherine Prettner; Klaus Prettner
  6. New evidence of heterogeneous bank interest rate pass-through in the euro area By Dominik Bernhofer; Till van Treeck
  7. Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions By Zsolt Darvas
  8. Developing countries’ financial vulnerability to the euro crisis: An event study of equity and bond markets By Joshua Aizenman; Yothin Jinjarak; Minsoo Lee; Donghyun Park
  9. International Stock Market Integration: Central and South Eastern Europe Compared By Roman Horvath; Dragan Petrovski
  10. Interregional Cooperation in the Framework Programme: A Gravity Model By Grazia Cecere; Nicoletta Corrocher
  11. Bank credit, asset prices and financial stability: Evidence from French banks By Cyril Pouvelle
  12. The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic? By Daniela Federici; Giancarlo Gandolfo
  13. Driving forces behind the sectoral wage costs differentials in Europe By Camille Logeay; Sabine Stephan; Rudolf Zwiener
  14. Technological Dynamics and Social Capability: Comparing U.S. States and European Nations By Jan Fagerberg; Maryann Feldman; Martin Srholec

  1. By: Anders Aslund (Peterson Institute for International Economics)
    Abstract: The response of the ten new eastern members of the European Union to the global financial crisis has valuable lessons of crisis resolution for the euro area. These countries were severely hit by the crisis in the fall of 2008 and responded with extensive reforms. Crisis made the unthinkable possible. This paper outlines the main reform measures that the ten Central and East European (CEE) countries carried out. It then quantifies to what extent the CEE countries resolved the macroeconomic crisis and explores the effects of the reforms on future growth prospects. The fourth and major section discusses how the political economy of the crisis resolution actually worked. Finally, the author examines what lessons euro area countries can learn from the crisis resolution of the newest members of the European Union.
    Keywords: Financial Crises, Central and Eastern Europe, Policy
    JEL: P16 G01 E61 E62 F30 H0
    Date: 2012–04
  2. By: Gregor Semieniuk; Till van Treeck (IMK at the Hans Boeckler Foundation); Achim Truger
    Abstract: We analyse the newly updated Stability Programmes of the Euro area governments by applying the simple accounting identity by which the financial balances of the government, the private sector and the foreign sector always sum to zero. While the focus of the old Stability and Growth Pact was solely on the government balance, the current euro crisis has shown that this narrow focus was wrong and that macroeconomic stability within the monetary union requires reducing imbalances between all three sectors of individual member states. While the need for overcoming these imbalances is now increasingly recognised by economists and policymakers, we argue that the projections for achieving stability in the current Stability Programmes are very likely too optimistic. We show that, individually, the Stability Programmes rely on optimistic assumptions about GDP growth; collectively, they require an improvement of the Euro area's current account with the rest of the world, the continuation of significant current account imbalances within the Euro area, and a steep drop of private balances in some countries. Based on some simple counterfactual simulations, we conclude that a symmetric effort at rebalancing current accounts would most likely require a slowdown of fiscal consolidation (in the current account surplus countries) but would be required to successfully address the euro area's macroeconomic challenges and thereby not only allow for consolidation in the medium term but also lead to the desired stability.
    Date: 2011
  3. By: Christian Schoder; Christian R. Proaño; Willi Semmler
    Abstract: Using parametric and non-parametric estimation techniques, we analyze the sustainability of the recently growing current account imbalances in the euro area and test whether the European Monetary Union has aggravated these imbalances. Two alternative criteria for the as-sessment of external debt sustainability are considered: One based on the Transversality Condition of intertemporal optimization, and the other based on the stationarity properties of the stochastic process of the debt-GDP ratio. Econometric sustainability tests are performed using the pooled mean-group estimator and panel unit root tests, respectively. Variants of both test procedures with varying coefficients using penalized splines estimation are applied. We find empirical evidence suggesting that the introduction of the euro is associated with a regime shift from sustainability to unsustainability of external debt accumulation for the euro area.
    Date: 2012
  4. By: Eckhard Hein; Achim Truger; Till van Treeck (Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation)
    Abstract: The financial and economic crisis in the Euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the Euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilisation have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the Euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilising wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-Euro area policy coordination.
    Date: 2011
  5. By: Catherine Prettner (Department of Economics, Vienna University of Economics and Business); Klaus Prettner (Harvard University, Center for Population and Development Studies)
    Abstract: This article investigates the interrelations between the initial members of the Euro area and five important Central and Eastern European economies. We set up a theoretical open economy model to derive the Purchasing Power Parity, the Interest Rate Parity, the Fisher Inflation Parity, and an output gap relation. After taking convergence into account, they are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates on the respective other area as well as the implications of shocks in the exchange rate and in relative prices on both areas. The results show a high degree of interconnectedness between the two economies. There are strong positive spillovers in output to the respective other region with the magnitude of the impact being similarly strong in both areas. Furthermore, we find a multiplier effect being present in Eastern Europe and some evidence for the European Central Banks’ desire towards price stability.
    Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis
    JEL: C11 C32 F41
    Date: 2012–03
  6. By: Dominik Bernhofer; Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: We analyse the bank interest rate pass-through in the euro area for the period 1999:1 - 2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run passthrough. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the existence of the European Monetary Union.
    Date: 2011
  7. By: Zsolt Darvas
    Abstract: We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a timevarying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.
    Date: 2012–05
  8. By: Joshua Aizenman; Yothin Jinjarak; Minsoo Lee; Donghyun Park
    Abstract: The global crisis highlights the continued vulnerability of developing countries to shocks from advanced economies. Just a few years after the global crisis, the eurozone sovereign debt crisis has emerged as the single biggest threat to the global outlook. In this paper, we apply the event study methodology to gauge the scope for financial contagion from the EU to developing countries. More specifically, we estimate the responsiveness of equity and bond markets in developing countries to global crisis news and euro crisis news. Overall, we find that whereas global crisis news had a consistently negative effect on returns of equity and bond markets in developing countries, the effect of euro crisis news was more mixed and limited.
    JEL: F30 F32 G15
    Date: 2012–05
  9. By: Roman Horvath; Dragan Petrovski
    Abstract: We examine the international stock market comovements betweenWestern Europe vis-à-vis Central (the Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in 2006-2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. The exemption to this regularity is Croatia with its stock market displaying a greater degree of integration towards Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global fi- nancial crisis and we do not find that the crisis altered the degree of stock market integration between this group of countries.
    Keywords: stock market comovements, Central and South Eastern Europe, GARCH
    JEL: C22 C32 G15
    Date: 2012–02–01
  10. By: Grazia Cecere; Nicoletta Corrocher
    Abstract: The cohesion across European member states and regions has been constantly promoted by EU science policy. Research networks and collaborations have for long constituted one of the most important vehicles of EU research integration. The presence of EU research funding can influence the collaborative behaviour among member states and, potentially, the integration of Eastern European countries in the European Research Area. However, the efforts of the EU policy to increase the internationalisation of research go hand in hand with strong interactions at the regional level. We estimate the intensity of interregional cooperation of ICT R&D projects by means of a gravity model, examining the variables affecting the strength of bilateral collaborations between different EU regions (NUTS 2 level). The dataset includes 245 NUTS-2 regions and 1635 FP research projects in the domain of the ICT. We compute all the bilateral ties for the 245 regions and we use indicators for the interregional collaboration in research projects that are coherent with the principle of fractional counting. Using the information on the budget allocation of each project by partner/region, we can provide a better account of the strength of the relationship. Geographical distance between the two regions reduces the strength of cooperation, while the individual regions‘ involvement in research projects has a positive effect, as well as the ICT capabilities of the regions in terms of employee and patents in the ICT sector. Interestingly, cooperation between regions belonging to different tiers of EU member states (EU15 and EU27) is weak.
    Date: 2011–09
  11. By: Cyril Pouvelle
    Abstract: This paper analyses the effect of asset prices on credit growth in France and tries to disentangle credit demand and supply factors, both for the whole 1993-2010 period and during periods of financial instability. Using bank-level panel data at a quarterly frequency, stock price growth is shown to have a significant effect on lending growth over the whole period, but without credit supply factors being singled out. By contrast, housing price growth has a significant effect during periods of financial instability only, even after controlling for credit demand effects. These results show that credit demand factors do play a large role but also provide evidence of tighter credit constraints on households in financial instability periods.
    Keywords: Asset prices , Bank credit , Banks , Corporate sector , Credit demand , Credit expansion , Economic models , Financial stability , Household credit , Housing prices ,
    Date: 2012–04–24
  12. By: Daniela Federici; Giancarlo Gandolfo
    Abstract: The aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents' beliefs, in order to explore non-linearities and possible chaotic behaviour. The theoretical model contains an intrinsic non-linearity that gives rise to a jerk differential equation, which is in principle capable of generating chaos. The model is econometrically estimated in continuous time with Euro/Dollar data and examined for the possible presence of chaotic motion. Our results indicate that the possibility of chaotic dynamics has to be rejected.
    Keywords: Exchange rate, chaos, jerk equation, continuous time econometrics
    JEL: F31 F37 C49 C61
    Date: 2011–09
  13. By: Camille Logeay; Sabine Stephan (IMK at the Hans Boeckler Foundation); Rudolf Zwiener (IMK at the Hans Boeckler Foundation)
    Abstract: In 2004, Eurostat starts publishing new figures on hourly wage costs for all European countries. These figures are new in several respects: It is the first time that internationally comparable hourly figures on wage costs are available covering a quite important time period (1995-2005), so that not only cross-country comparisons but also dynamic analyzes are possible. Furthermore, these figures are fairly detailed at the sectoral level, therefore allowing for inter-sectoral comparisons. Concerning Germany, the Eurostat statistics provide quite unexpected insights; the gap between wage costs in the manufacturing sector and the (private and business) services sector is much larger than in other countries. This study aims at giving some explanations. According to theory, various explanations are possible. First, the neo-classical theory emphasizes factors affecting or indicating the level of individual productivity, as well as firm or sectoral productivity; indicators corresponding to this approach are tested. Second, dropping the assumption of perfect competition on both labor and goods markets allows for other factors (mark-up, market power) to influence the wage costs levels; these potential determinants are also tested. Finally, we think that the structure of demand (driven by domestic or foreign demand) could also have a major impact on wages in the industry and the services sector and indeed this factor seems to play an important role. This paper is structured as follows: First, the new Eurostat statistics is presented focussing on some interesting descriptive results. In the second section, we present a list of potential determinants of wage differentials between the industry and the services sector derived from theory and literature. A bivariate analysis (correlation) is then performed and conclusions are drawn. In a third step, a multivariate analysis (panel estimation) is performed. The final section concludes.
    Date: 2011
  14. By: Jan Fagerberg; Maryann Feldman; Martin Srholec
    Abstract: This paper analyzes factors that shape the technological capabilities of individual U.S. states and European countries, which are arguably comparable policy units. The analysis demonstrates convergence in technological capabilities from 2000 to 2007. The results indicate that social capabilities, such as a highly educated labor force, an egalitarian distribution of income, a participatory democracy and prevalence of public safety, condition the growth of technological capability. The analysis also considers other aspects of territorial dynamics, such as the possible effects of spatial agglomeration, urbanization economies, and differences in industrial specialization and knowledge spillovers from neighboring regions.
    Keywords: innovation; technological capabilities; European Union; United States;
    JEL: R11 R12 O32 O33
    Date: 2012–03

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