nep-eec New Economics Papers
on European Economics
Issue of 2012‒09‒09
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The endogenous money hypothesis and securitization: the Euro area case (1999-2010). By M. Lopreite
  2. Intra-euro rebalancing is inevitable but insufficient By Zsolt Darvas
  3. Heterogeneous distribution of money supply across the euro area By Jitka Pomenkova; Svatopluk Kapounek
  4. Fiscal and Financial Determinants of Eurozone Sovereign Spreads By Giovanni Caggiano; Luciano Greco
  5. Central Banking for Financial Stability: Some Lessons from the Recent Instability in the United States and Euro Area By Wall, Larry D.
  6. The costs of rebalancing the Euro area By Engelbert Stockhammer; Dimitris P. Sotiropoulos
  7. A model of the euro-area yield curve with discrete policy rates. By Renne, J-P.
  8. Pushing the Limit? Fiscal Policy in the European Monetary Union By Betty Daniel; Christos Shiamptanis
  9. European Export Performance. By Cheptea, A.; Fontagné, L.; Zignago, S.
  10. Drivers of convergence in eleven eastern European countries By Cuaresma, Jesus Crespo; Oberhofer, Harald; Smits, Karlis; Vincelette, Gallina A
  11. Systemic Risk and the European Banking Sector By Nicola Borri; Marianna Caccavaio; Giorgio Di Giorgio; Alberto Maria Sorrentino
  12. Taxation and Labor Supply of Married Women across Countries: A Macroeconomic Analysis By Bick, Alexander; Fuchs-Schündeln, Nicola
  13. Continuing Integration in Europe? Some empirical evidence on European industrial production cycle By Petr Rozmahel; Nikola Najman
  14. Granger-causal analysis of VARMA-GARCH models By Tomasz Wozniaka
  15. Targets, Models and Policies: A Quantitative Approach to Raising the EU Employment Rate By Kari E.O. Alho

  1. By: M. Lopreite
    JEL: E12 E51 E52
    Date: 2012
  2. By: Zsolt Darvas
    Abstract: Greece, Portugal and Spain face a serious risk of external solvency due to their close to minus 100 percent of GDP net negative international investment positions, which are largely composed of debt. The perceived inability of these countries to rebalance their external positions is a major root of the euro crisis. Intra-euro rebalancing through declines in unit labour costs (ULC) in southern Europe, and ULC increases in northern Europe should continue, but has limits because: The share of intra-euro trade has declined. Intra-euro trade balances have already adjusted to a great extent. The intra-euro real exchange rates of Greece, Portugal and Spain have also either already adjusted or do not indicate significant appreciations since 2000. There are only two main current account surplus countries, Germany and the Netherlands. A purely intra-euro adjustment strategy would require too-significant wage increases in northern countries and wage declines in southern countries, which do not seem to be feasible. Before the crisis, the euro was significantly overvalued despite the close-to balanced current account position. The euro has depreciated recently, but more is needed to support the extra-euro trade of southern euro-area members. A weaker euro would also boost exports, growth, inflation and wage increases in Germany, thereby helping further intra-euro adjustment and the survival of the euro.
    Date: 2012–08
  3. By: Jitka Pomenkova (Department of National Economy, Faculty of Economics, VÅ B-Technical University of Ostrava); Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel university in Brno)
    Abstract: The recent economic crisis is regarded as symmetric shock which negatively affects all Eurozone member countries. Even if the whole euro area is in recession the probability of asymmetric shock arises on the monetary side of the economy. The issue is that money supply is unevenly distributed across the euro area. Different credit money creation increases inflationary pressures not only in long run but also in short-term, especially in house prices. The combination of credit money creation and increases in asset prices contributes to financial instability. The empirical part of the paper is based on the analysis in time-frequency domain. The authors apply wavelet analysis to identify increasing differences of co-movements in money supply between the selected old Eurozone member states and peripheral countries. The authors use the contribution of different member countries to the monetary aggregate M3 as the proxy of money supply distribution across the euro area.
    Keywords: wavelet analysis, financial stability, asset prices, monetary aggregates
    JEL: E51 F36
    Date: 2012–09
  4. By: Giovanni Caggiano (University of Padova); Luciano Greco (University of Padova)
    Abstract: The relationship between fiscal and financial euro area indicators and sovereign yield spreads has changed after the start of the financial crisis. Increased financial volatility has magnified the impact of fiscal conditions as drivers of sovereign risk, has widened the set of macroeconomic determinants, and has caused substantial interactions between fiscal and financial variables.
    Keywords: Fiscal policy, Financial Crisis, Refinancing risk, Regime switch, Cross-country Panel.
    JEL: E43 E62 F32 H60
    Date: 2012–07
  5. By: Wall, Larry D. (Asian Development Bank Institute)
    Abstract: Central banks have had an important role in maintaining financial stability through their lender of last resort role. As lender of last resort, the central bank is given enormous power which is normally tempered by a variety of limits. In the most recent crises in both the United States and euro area, the Federal Reserve and European Central Bank (ECB) have come under enormous pressure to take lender of last resort actions that exceed these normal bounds. This paper reviews the experience of these two central banks and draws some implications for future policy.
    Keywords: central banking; financial stability; united states; euro area; federal reserve; european central bank
    JEL: E50 E58 G28
    Date: 2012–09–04
  6. By: Engelbert Stockhammer (Kingston University); Dimitris P. Sotiropoulos (Kingston University)
    Abstract: This paper investigates the economic costs of Euro area rebalancing. Based on an old Keynesian model we estimate a current account equation, a wage-Phillips curve and an Okun’s Law equation. All estimations are carried out for a panel of eleven Euro area members (excluding Luxembourg). From the estimation results we calculate the output costs of reducing current account deficits. Greece, Ireland, Italy, Portugal and Spain (GIIPS) had, on average, current account deficits of 8.4% of GDP in 2007. To eliminate these current account deficits, it would necessitate a reduction of GPD by some 47%. These are staggering amounts and, indeed we think that such a reduction of GDP should not be imposed in the GIIPS group. Moreover, we doubt whether it would be politically feasible. In principle there are two ways that trade imbalances could be resolved: deflationary adjustment in the deficit countries or inflationary adjustment in the surplus countries. Presently, the burden of adjustment is exclusively on the deficit countries. Our results indicate that the economic costs of this adjustment to those countries are equivalent to the output loss of the Great Depression. An adjustment of the surplus countries would increase growth and it would come with higher inflation, but it would allow rebalancing without a Great Depression in parts of Europe.
    Keywords: Rebalancing, Euro area, current account, Phillips curve, Okun’s law
    JEL: E12 E6 F4
    Date: 2012–06
  7. By: Renne, J-P.
    Abstract: This paper presents a no-arbitrage model of the yield curve that explicitly incorporates the central-bank policy rate. After having estimated the model using daily euro-area data, I explore the behaviour of risk premia at the short end of the yield curve. These risk premia are neglected by the widely-used practice that consists in backing out market forecasts of future policy-rate moves from money-market forward rates. The results suggest that this practice is valid in terms of sign of the expected target moves, but that it tends to overestimate their size. As an additional contribution, the model is exploited to simulate forward-guidance measures. A credible commitment of the central bank to keep its policy rate unchanged for a given period of time can result in substantial declines in yields. For instance, a central-bank commitment to keep the policy rate at 1% over the next 2 years would imply a decline in the 5-year rate of about 25 basis points.
    Keywords: affine term-structure models; zero lower bound; regime switching; forward policy guidance.
    JEL: E43 E44 E47 E52 G12
    Date: 2012
  8. By: Betty Daniel (Department of Economics, University at Albany, Albany, New York, US); Christos Shiamptanis (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: Governments are facing increasing scrutiny over debt and deficits following the worldwide recession and financial crisis which began in 2007. Additionally, policy makers are confronted with the growing realization that they face fiscal limits on the size of debt and deficits relative to GDP. These fiscal limits invalidate Bohn's criterion for fiscal sustainability since it allows explosive debt relative to GDP, eventually violating any fiscal limit. The purpose of this paper is to derive restrictions on a fiscal rule, necessary for the government to eliminate explosive behavior. We show that the restrictions require that the response of the primary surplus to debt be relatively strong. Additionally, since fiscal limits rule out explosive behavior, they imply cointegration between debt and the primary surplus, and between the primary surplus and output. We test these two empirical implications for a panel of eleven EMU countries, and find that fiscal policy is responsible, in the sense that governments rule out explosive behavior.
    Keywords: European Monetary Union, monetary policy, fiscal policy, fiscal limits, panel cointegration, error correction
    JEL: C32 C33 E42 E62 F33
    Date: 2012–06
  9. By: Cheptea, A.; Fontagné, L.; Zignago, S.
    Abstract: Competitiveness has come to the forefront of the policy debate within the European Union, focusing on price competitiveness and intra-EU imbalances. But how to measure properly competitiveness, beyond price or cost competitiveness, remains an open methodological issue; and what is the resilience of producers located in the EU to the competition of emerging economies is disregarded. We analyze the redistribution of world market shares at the level of product variety, as countries no longer specialize in sectors or even products, but in varieties of the same product, sold at different prices. We decompose changes in market shares into structural effects (geographic and sectoral) and a pure performance effect. Our method is based on an econometric shift-share decomposition and we consider the EU-27 as an integrated economy, excluding intra-EU trade. Revisiting the competitiveness issue in such perspective sheds new light on the ongoing debate. From 1995 to 2009 the EU-27 withstood the competition of emerging countries better than the US and Japan. The EU market shares in the upper price range of the market proved quite resilient, by cumulating good performance and favorable structure effects, contrary to the US and Japan. Finally, while most developed countries lose market shares in high-technology products to developing countries, the EU is slightly gaining, benefiting of a favorable structure effect.
    Keywords: International Trade, Export Performance, Competitiveness, Market Shares, Shift-Share, European Union.
    JEL: F12 F15
    Date: 2012
  10. By: Cuaresma, Jesus Crespo; Oberhofer, Harald; Smits, Karlis; Vincelette, Gallina A
    Abstract: This paper investigates the drivers of growth and prosperity in a group of eleven European countries -- Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, and Slovakia (the EU11). Since the EU11 began the transformation process, this group of emerging countries has made impressive strides as developing market economies and is anchoring development in European Union institutions. There are reasons to believe that the convergence of EU11 income per capita to Western European levels will continue, but will proceed more slowly. The paper concludes that trade and financial integration have sped along at a spectacular pace in the EU11 in the recent past, although trade in modern services and the integration of government bond and equity markets are somewhat behind. As in the rest of Europe, demographic developments will pose huge challenges for the sustainability of public finance in the EU11 economies. In the next several decades, the EU11 labor force is expected to contract more than labor forces in the rest of the European Union, making it even more urgent that countries in the region reform pension systems, change migration policy, and find incentives to attract talent to the region. Closing the gap with the rest of the European Union in educational attainment levels and improving education quality might significantly soften the constraints imposed by the demographic threats and produce sizable returns in terms of additional income convergence.
    Keywords: Labor Policies,Banks&Banking Reform,Emerging Markets,Economic Theory&Research,Environmental Economics&Policies
    Date: 2012–08–01
  11. By: Nicola Borri (LUISS Guido Carli University, Department of Economics and Finance and CASMEF); Marianna Caccavaio (LUISS Guido Carli University, Department of Economics and Finance and CASMEF); Giorgio Di Giorgio (LUISS Guido Carli University, Department of Economics and Finance and CASMEF); Alberto Maria Sorrentino (University of Rome Tor Vergata and CASMEF)
    Abstract: Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, large and interconnected financial institutions. In this paper we estimate the systemic risk contribution of each financial institution in a large sample of European banks. We follow a recent methodology first proposed by Adrian and Brunnermeier (2011) based on the CoVaR and find that size is a predictor of a bank contribution to systemic risk, but it is not the only one. Leverage is important as well. Also, banks that have their headquarters in countries with a more concentrated banking system tend to contribute more to European wide systemic risk, even after controlling for their size. Therefore, any financial regulation designed only to curb banksÕ size would not completely eliminate systemic risk. On average, balance sheet variables are very weak predictors of banksÕ contribution to systemic risk, if compared to market based variables. Accounting rules provide enough degrees of freedom to make balance sheet less informative than market prices. As a result, measures of risk based on higher frequency market prices are more likely to anticipate systemic risk.
    Keywords: Systemic Risk, SIFIs, European Banking System, CoVaR.
    JEL: G01 G18 G21 G32
    Date: 2012
  12. By: Bick, Alexander; Fuchs-Schündeln, Nicola
    Abstract: We document contemporaneous differences in the aggregate labor supply of married couples across 19 OECD countries. We quantify the contribution of international differences in non-linear labor income taxes and consumption taxes, as well as male and female wages, to the international differences in the data. Our model replicates the comparatively small differences of married men's hours worked very well. Moreover, taxes and wages account for a large part of the observed substantial differences in married women's labor supply between the US and Western, Eastern, and Northern Europe, but cannot explain the low labor supply of married women in Southern Europe.
    Keywords: Hours Worked; Taxation; Two-Earner Households
    JEL: E60 H20 H31 J12 J22
    Date: 2012–09
  13. By: Petr Rozmahel (Department of Economics, Faculty of Business and Economics, Mendel University in Brno); Nikola Najman (Department of Economics, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: The paper deals with assessing the common trends in business cycle similarity and convergence in Europe. The main goal of the paper is to identify common cyclical co-movements and trends in convergence among the European countries so that the emerging European business cycle could be identified. Concerning the factors of business cycle, the research question of the paper is based on assumption that the integration effects are so dominant to bring the European cycle into existence. Also a potential influence of a global crisis on European and world business cycles is examined in the paper. The industrial production index is used to approximate business cycles. Hodrick-Prescott filter, Christiano-Fitzgerald filter and first differencing were used to dissect the cyclical components and identified the cycles in the data. The common co-movements, trends of convergence and divergence are identified using correlation analysis. Particularly, actual cross correlation and historical correlation in separated subsequent periods is applied in the analysis. The results do not provide an evidence of emerging European business cycle contrary to US cycle. The global economic crises was identified as a kind of negative symmetric shock pushing all major economies towards the recession phase of the cycle und thus increasing similarity. The results also shed some light on an influence of different detrending techniques when dissecting the cycles from the input macroeconomic time series.
    Keywords: business cycle, correlation, convergence, Eurozone, industrial production
    JEL: E32 F15 F44
    Date: 2012–09
  14. By: Tomasz Wozniaka
    Abstract: Recent economic developments have shown the importance of spillover and contagion effects in financial markets. Such effects are not limited to relations between the levels of financial variables but also impact on their volatility. I investigate Granger causality in conditional mean and conditional variances of time series. For this purpose a VARMA-GARCH model is used. I derive parametric restrictions for the hypothesis of noncausality in conditional variances between two groups of variables, when there are other variables in the system as well. These novel conditions are convenient for the analysis of potentially large systems of economic variables. Such systems should be considered in order to avoid the problem of omitted variable bias. Further, I propose a Bayesian Lindley-type testing procedure in order to evaluate hypotheses of noncausality. It avoids the singularity problem that may appear in the Wald test. Also, it relaxes the assumption of the existence of higher-order moments of the residuals required for the derivation of asymptotic results of the classical tests. In the empirical example, I find that the dollar-to-Euro exchange rate does not second-order cause the pound-to-Euro exchange rate, in the system of variables containing also the Swiss frank-to-Euro exchange rate, which confirms the meteor shower hypothesis of Engle, Ito & Lin (1990).
    Keywords: Granger causality, second-order noncausality, VARMA-GARCH models, Bayesian testing
    JEL: C11 C12 C32 C53
    Date: 2012
  15. By: Kari E.O. Alho
    Abstract: The EU 2020 process has the key headline target of raising the average employment rate in the EU to 75 from the present 69 per cent. In this paper, we first derive a new result for optimal policymaking under uncertainty. It consists of two components : one of a unilateral policy reaction under certainty, which is then multiplied by a scale factor, reflecting the uncertainty over the impact coefficient concerned with respect to those of the other policy variables. Based on this finding, we use a large multi-country labour market model, estimated in Bassanini and Duval (2006), to derive and discuss the various employment policy interventions and relevant labour market indicators to be monitored in the EU’s Joint Assessment Framework (JAF). As the derived optimal labour market policy entails streamlining welfare benefits and may thus jeopardise the other target of inclusion in the EU 2020 process, we then discuss and evaluate how the distributional consequences of such a policy can be mitigated through transfer and tax changes. It turns out that compensation of the losers is possible in such a way that all will gain, and employment, GDP and aggregate labour supply will all rise. Tiivistelmä. EU :n 2020-prosessilla on yhtenä päätavoitteena nostaa keskimääräinen työllisyysaste 75 prosenttiin nykyisestä 69 prosentista. Tässä tutkimuksessa johdamme ensin uuden tuloksen koskien optimaalista politiikkaa, joka muodostuu kahdesta komponentista : ensinnäkin yksittäisestä politiikasta varmuuden vallitessa, joka toiseksi kerrotaan skaalatekijällä, joka on yhden ja nollan välillä ja joka kuvaa kyseisen politiikan vaikutuskertoimen epävarmuutta suhteessa muiden politiikkamuuttujien kertoimien epävarmuuteen. Tähän tulokseen perustuen hyödynnämme laajaa useita maita kattavaa työmarkkinamallia, jonka ovat rakentaneet Bassanini ja Duval (2006) ja jonka avulla ratkaistaan optimaalinen työllisyyspolitiikka. Koska johdettu politiikka merkitsee mm. hyvinvointietuuksien karsintaa, tarkastelemme, kuinka tällaisen politiikan tulonjakovaikutuksia voidaan lieventää verotuksen ja tulonsiirtojen välityksellä. Saamme tuloksen, jonka mukaan häviäjien kompensointi on siten mahdollista, että työllisyys, BKT ja työn tarjonta nousevat verrattuna tilanteeseen ennen politiikkaa.
    JEL: J08 J20 J30
    Date: 2012–08–29

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