nep-eec New Economics Papers
on European Economics
Issue of 2012‒06‒05
ten papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Arithmetic is absolute: euro area adjustment By Guntram B. Wolff
  2. EMU and intra-European trade. Long-run evidence using gravity equations. By Mariam Camarero; Estrella Gómez; Cecilio Tamarit
  3. Estimating Phillips Curves in Turbulent Times using the ECB’s Survey of Professional Forecasters By Koop, Gary; Onorante, Luca
  4. The euro impact on trade. Long run evidence with structural breaks By Mariam Camarero; Estrella Gómez; Cecilio Tamarit
  5. Andrzej Torój - Poland and Slovakia during the crisis: would the euro (non-)adoption matter? By Andrzej Torój
  6. EMU impact of on third countries’ exports. A gravity approach By Estrella Gómez; Juliette Milgram Baleix
  7. "The Mediterranean Conundrum: The Link between the State and the Macroeconomy, and the Disastrous Effects of the European Policy of Austerity" By C. J. Polychroniou
  8. The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe? By Maria J. Nieto; Gillian G. Garcia
  9. Future perspectives of EU Cohesion Policy By Gerhard Untiedt; John Bradley
  10. The impact of fiscal consolidation on economic growth. An illustration for the Spanish economy based on a general equilibrium model By Pablo Hernández de Cos; Carlos Thomas

  1. By: Guntram B. Wolff
    Abstract: The European Central Bankâ??s monetary policy targets the euro-area average inflation rate. By setting conditions for the area as a whole it should ensure symmetric price adjustment. Indeed, consumer price inflation rates provide little evidence of asymmetricadjustment during 2009-11. Only Ireland, which is too small to trigger a symmetric reaction, had significantly lower inflation rates than the average. Some asymmetry is visible in total economy unit labour costs (ULC) during 2009- 11, whereas wages appear to develop more symmetrically. ULC adjustment has been largely disconnected from consumer price developments. This makes it difficult for the monetary transmission channel to operate fully and ensure consumer price adjustments. Structural reforms to remove price rigidities are key. The forecast is worrying. While the European Commission forecasts that Greek inflation rates will fall, German and Italian inflation rates will not adjust in the right direction during 2012-13. Less inflation in Italy and more inflation in Germany are urgently needed to achieve rebalancing in the euro area."
    Date: 2012–05
  2. By: Mariam Camarero (Universitat Jaume I, Departament d'Economia); Estrella Gómez (Universidad de Granada, Departamento de Teoría e Historia Económica); Cecilio Tamarit (Universidad de Valencia, Departamento de Economía Aplicada II.)
    Abstract: In this article we present evidence of the long-run effect of the euro on exports for the twelve initial EMU countries for the period 1967-2008 from a double perspective. First, we pool all the bilateral combinations of export flows among the EMU countries in a panel cointegration gravity specification. Second, we estimate a gravity equation for each of the EMU-members vis-à-vis the other eleven partners. Whereas the joint gravity equation provides evidence on the aggregate effect of the euro on intra-European exports, by isolating the individual countries we assess which of them have obtained a larger benefit from the euro. Moreover, this strategy permits to check the robustness of the aggregate results and to find possible asymmetries. Finally, we repeat both the aggregated and individual analysis for the bilateral exports of EMU members to third countries. From an econometric point of view, we apply panel cointegration techniques based on factor models that account for cross-dependence and structural breaks.
    Keywords: Gravity models; exports; euro; panel cointegration; structural breaks; crosssection dependence.
    Date: 2012–05–25
  3. By: Koop, Gary; Onorante, Luca
    Abstract: This paper uses forecasts from the European Central Bank's Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work. Given the relatively short data span of the Survey of Professional Forecasters and the need to control for many explanatory variables, we use dynamic model averaging in order to ensure a parsimonious econometric speci cation. We use both regression-based and VAR-based methods. We find no support for the backward looking behavior embedded in the Neo-classical Phillips curve. Much more support is found for the forward looking behavior of the New Keynesian Phillips curve, but most of this support is found after the beginning of the financial crisis.
    Keywords: inflation expectations, survey of professional forecasters, Phillips curve, Bayesian,
    Date: 2011
  4. By: Mariam Camarero (Universitat Jaume I, Departament d'Economia); Estrella Gómez (Universidad de Granada, Departamento de Teoría e Historia Económica); Cecilio Tamarit (Universidad de Valencia, Departamento de Economía Aplicada II.)
    Abstract: In this paper we present new evidence on the euro effect on trade. We use a data set containing all bilateral combinations in a panel of 26 OECD countries during the period 1967-2008. From a methodological point of view, we implement a new generation of tests that allow solving some of the problems derived from the non-stationary nature of the data. To this aim we apply panel tests that account for the presence of cross-section dependence as well as discontinuities in the non-stationary panel data. We test for cointegration between the variables using panel cointegration tests, especially the ones proposed by Banerjee and Carrióni- Silvestre (2010). We also efficiently estimate the long-run relationships using the CUP-BC and CUP-FM estimators proposed in Bai et al. (2009). We argue that, after controlling for cross-section dependence and deterministic trends and breaks in trade integration, the euro appears to generate lower trade effects than predicted in previous studies.
    Keywords: Gravity models; trade; panel cointegration; common factors; structural breaks; cross-section dependence.
    Date: 2012–05–25
  5. By: Andrzej Torój (Ministry of Finance, Poland)
    Abstract: It is commonly argued that Poland avoided a massive drop in output during the 2008/2009 economic crisis in part thanks to substantial nominal zloty's depreciation against the euro. The Polish case is often contrasted with Slovakia that adopted the euro in January 2009 and, since the Ecofin Council decision in summer 2008, exhibited virtually no nominal exchange rate volatility while facing deep losses in output. In this paper we attempt to validate this contrast by reversing the roles, i.e. checking if Poland really would have faced the same drop -- and Slovakia the same boost -- if it had been Poland, not Slovakia, that adopted the euro at that point. Our counterfactual simulations based on a New Keynesian DSGE model indicate that, indeed, the Polish tradable output could have been 10-15 percent lower than actually observed in 2009, while the Slovak one -- approximately 20 percent higher. This asymmetry results mainly from structural differences between the two economies, such as size, openness, share of nontradable sector and foreign trade elasticities. The difference of this size would have been short-lived (3-4 quarters), and the difference of the nontradable output would have been of much lower magnitude.
    Keywords: euro adoption, Poland, Slovakia, DSGE, counterfactual simulations
    JEL: C54 E42
    Date: 2012–05–23
  6. By: Estrella Gómez (Universidad de Granada, Departamento de Teoría e Historia Económica); Juliette Milgram Baleix (Universidad de Granada, Departamento de Teoría e Historia Económica)
    Abstract: In this article we explore the impact of the euro adoption and the effect of the volatility of the real exchange rate on trade both on intra EMU trade and on EMU trade with third countries. To this end, we use a large database covering 93% of world trade that includes 80 countries during the period 1980-2009. We estimate a gravity equation using one of the most complete specifications in the literature to isolate the euro effect from other factors affecting trade, as regional trade agreements or exchange rate volatility. Our results show that the elimination of the volatility boosted export per se especially before 1999 and therefore, the possibility to peg to the euro could boost trade of third countries and between these third countries.
    Keywords: Gravity equation, International trade, Exchange rate
    Date: 2012–05–25
  7. By: C. J. Polychroniou
    Abstract: Conventional wisdom has calcified around the belief that the countries in the eurozone periphery are in trouble primarily because of their governments' allegedly profligate ways. For most of these nations, however, the facts suggest otherwise. Apart from the case of Greece, the outbreak of the eurozone crisis largely preceded dramatic increases in public debt ratios, and as has been emphasized in previous Levy Institute publications, the roots of the crisis lie far more in the flawed design of the European Monetary Union and the imbalances it has generated. But as Research Associate and Policy Fellow C. J. Polychroniou demonstrates in this policy brief, domestic political developments should not be written out of the recent history of the eurozone's stumbles toward crisis and possible dissolution. However, the part in this tale played by southern European political regimes is quite the opposite of that which is commonly claimed or implied in the press. Instead of out-of-control, overly generous progressive agendas, the countries at the core of the crisis in southern Europe-Greece, Spain, and Portugal-have seen their macroeconomic environments shaped by the dominance of regressive political regimes and an embrace of neoliberal policies; an embrace, says Polychroniou, that helped contribute to the unenviable position their economies find themselves in today.
    Date: 2012–05
  8. By: Maria J. Nieto; Gillian G. Garcia
    Abstract: This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. As compared to pure micro and macro prudential regulation, BRRF’s objective is to limit losses given financial institutions´ default while allowing for a balanced share of costs between private investors and tax payers. Most important, BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.
    Date: 2012–05
  9. By: Gerhard Untiedt (GEFRA - Gesellschaft fuer Finanz- und Regionalanalysen); John Bradley (EMDS - Economic Modelling and Development Strategies)
    Abstract: Unlike the single European market and the single currency, EU cohesion policy – although the subject of major reforms at the end of the 1980s - has never been ex-posed to as rigorous investigation and research about its objectives and impact evaluation as the other two policy initiatives. As a result, the cohesion policy cycle consisting of design, implementation, monitoring and impact evaluation shows weaknesses at all of its stages, but especially at the microeconomic and macroeco-nomic level. In this paper we look at the different issues that influence approaches to EU cohesion policy, critique the way the policy cycle is implemented in practice, and conclude that a more rigorous and systematic approach is necessary and feasi-ble in order to justify the interventions in terms of returns to the investments.
    Date: 2012–05
  10. By: Pablo Hernández de Cos (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This study illustrates the effects of different fiscal consolidation measures on economic activity through simulations performed with a general equilibrium model calibrated to the Spanish economy. Overall, our results show that fiscal consolidation has short-run costs but sizable long-run benefits in terms of growth. Regarding the short-run costs, their magnitude depends crucially on the presence of confidence effects due to the consolidation process, which tend to reduce the value of fiscal multipliers
    Keywords: Fiscal consolidation, general equilibrium, fiscal multipliers, confidence effects
    JEL: E62 C68
    Date: 2012–05

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