nep-eec New Economics Papers
on European Economics
Issue of 2013‒01‒19
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Economic forecasts and sovereign yields* By António Afonso; Ana Sofia Nunes
  2. Monetary Transmission Mechanism and Time Variation in the Euro Area By Kemal Bagzibagli
  3. Eurozone: The Untold Economics By John Hatgioannides; Marika Karanassou; Hector Sala
  4. Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach By Mariam Camarero; Josep Lluís Carrion-i-Silvestre; Cecilio Tamarit
  5. Consumption and Wealth in the US, the UK and the Euro Area:A Nonlinear Investigation By Fredj Jawadi; Ricardo M. Sousa
  6. Money Demand in the euro area, the US and the UK:Assessing the Role of Nonlinearity By Fredj Jawadi; Ricardo M. Sousa
  7. Forecasting and nowcasting real GDP: Comparing statistical models and subjective forecasts By Jos Jansen; Xiaowen Jin; Jasper de Winter
  8. Interest Rates Determination and Crisis Puzzle (Empirical Evidence from the European Transition Economies) By Mirdala, Rajmund
  9. An early-detection index of fiscal stress for EU countries By Katia Berti; Matteo Salto; Matthieu Lequien
  10. What determines the duration of a fiscal consolidation program? By Luca Agnello; Vítor Castro; Ricardo M. Sousa
  11. Market Discipline during Crisis: Evidence from Bank Depositors in Transition Countries By Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozłowski, Łukasz
  12. Labour Shares and Employment Protection in European Economies By Mirella Damiani; Fabrizio Pompei; Andrea Ricci
  13. Comparing Labor Supply Elasticities in Europe and the US: New Results By Olivier Bargain; Kristian Orsini; Andreas Peichl
  14. Joint macro/micro evaluations of accrued-to-date pension liabilities: an application to French reforms By D. BLANCHET; S. LE MINEZ

  1. By: António Afonso; Ana Sofia Nunes
    Abstract: The European Commission releases twice a year economic forecasts for some macro and fiscal variables (GDP growth rate, inflation, budget balance, among others). In our research we will try to understand if the corrections made to these forecasts have an impact in sovereign yields. We will perform an econometric analysis in a panel of 15 EU countries (Austria, Belgium, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Sweden), covering the period from 1999:1 until 2012:1, and after we analyse each country individually, on the basis of a SUR analysis. We find that corrections in the EC’s forecasts do impinge on the 10-year sovereign bond yields, particularly corrections in fiscal variables, but this impact is different across countries, being more pronounced in countries with less favourable economic conditions.
    Keywords: macro forecasts, fiscal forecasts, sovereign yields.
    JEL: C23 E44 H68
    Date: 2013–01
  2. By: Kemal Bagzibagli
    Abstract: This paper examines the monetary transmission mechanism in the euro area for the period of single monetary policy using factor-augmented vector autoregressive (FAVAR) techniques. The contributions of the paper are fourfold. First, a novel dataset consisting of 120 disaggregated macroeconomic time series spanning the period 1999: M1 through 2011: M12 is gathered for the euro area as an aggregate. Second, Bayesian joint estimation technique of FAVARs is applied to the European data. Third, time variation in the transmission mechanism and the impact of the global financial crisis is investigated in the FAVAR context using a rolling windows technique. Fourth, we tried to contribute to the question of whether more data are always better for factor analysis as well as the estimation of structural FAVAR models. We find that there are considerable gains from the implementation of the Bayesian technique such as smoother impulse response functions and statistical significance of the estimates. According to our rolling estimations, consumer prices and monetary aggregates display the most time variant responses to the monetary policy shocks. The pre-screening technique considered, elimination of almost half of the dataset seems to do no worse, and in some cases, better in a structural context.
    Keywords: Monetary Policy Shocks, FAVAR, Bayesian Methods, Rolling Windows, Euro Area
    JEL: C11 C32 C33 E5
    Date: 2012–11
  3. By: John Hatgioannides (City University); Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: This paper dwells on the Eurozone woes and addresses the origins of the transition from a fictitious boom to a painful bust by unravelling (i) the supply-side structural imbalances that formed the core-periphery economic divide, and (ii) the necessity of the periphery’s sovereign debt to finance imports from the export-led core. Within our macroeconomic setup, we challenge the cliché that countries of the core have funded the sovereign debts of the periphery and demonstrate that the commonly held view that the periphery countries have lived beyond their means (due to wages growing beyond what is justified by productivity gains) is in stark contrast to the trajectories followed by the wage shares. We argue against the tyrannical neoliberal policies of austerianism and we propose the rebooting of central and private banking. We present a fresh vision for the future of the Eurozone that will halt the tearing of the social fabric of its member states.
    Keywords: Eurozone crisis, Structural imbalances, Sovereign debt, Austerity, Neoliberal policies, Banking/credit system
    JEL: E50 E62 E65 G01
    Date: 2013–01
  4. By: Mariam Camarero (Department of Economics, Jaume I University); Josep Lluís Carrion-i-Silvestre (Department of Econometrics, Statistics and Spanish Economy, University of Barcelona); Cecilio Tamarit (Department of Applied Economics II, University of Valencia)
    Abstract: This paper analyzes the external solvency of a group of 23 OECD countries for the period 1970-2012 The empirical strategy adopted underlines the increasing importance of the ?nancial channel for the external adjustment as proposed in Gourinchas and Rey (2007). We unify the traditional approaches to testing for external sustainability considering the stock-?ow system created by the variables representing the external relationships of an open economy. External sustainability is tested using several types of cointegration and multicointegration tests. The results obtained point to weak sustainability in the ?ows analysis, whereas some degree of strong sustainability is found for up to six countries in the stock ?ow approach. Among these countries we ?nd both non-European economies, such as Japan and New Zealand, and Euro-area members especially those with more restricted access to ?nancing in the international markets.
    Keywords: Current account, net foreign assets, multicointegration, structural breaks
    JEL: F32 F36 F37 C22
    Date: 2013–01
  5. By: Fredj Jawadi (University of Evry Val d’Essone & Amiens School of Management); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper assesses the importance of nonlinearity in estimating the wealth effects on consumption for the US, the UK and the Euro area. We look at the impact of both (i) aggregate wealth and (ii) disaggregate wealth, namely, by comparing financial wealth effects with housing wealth effects. We also assess the magnitude of the response of consumption using both a linear model and two nonlinear approaches (a quantile regression and a smooth transition regression). We find that the elasticity of consumption with respect to aggregate wealth is largest for the UK and housing wealth effects do not seem to be relevant in the Euro area. As for the quantile regression, it shows that the sensitivity of consumption with respect to wealth and income variation is larger when consumption growth is abnormally high, i.e. during periods of economic booms. The smooth transition regression model is able to track reasonably well the consumption patterns during periods of economic downturn, financial instability and housing market corrections. Our approaches uncover a more complex dynamics of the relationship between consumption and wealth than previous results in the literature, whilst being in accordance with the theoretical background underlying the wealth effects on consumption.
    Keywords: consumption, wealth, dynamic OLS, quantile regression, smooth transition.
    JEL: E21 E44 D12
    Date: 2012
  6. By: Fredj Jawadi (University of Evry Val d’Essone & Amiens School of Management); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper estimates money demand equations for the euro area, the US and the UK using three different econometric methodologies: (i) a linear model based on a dynamic ordinary least squares (DOLS); (ii) a nonlinear technique based on a quantile regression framework; and (iii) a nonlinear model relying on a smooth-transition regression. The linear model shows that the elasticity of money demand with respect to income is positive and large in magnitude, while the elasticity of money demand with respect to the interest rate is negative and generally small. The quantile regression technique highlights that: (i) the income and the interest rate semi-elasticities are significantly different from the OLS estimates at the tails of the distribution of real money holdings; and (ii) the sensitivity of money demand with respect to inflation tends to be larger when real money holdings are extremely low. Finally, the smooth transition model provides two interesting findings. On the one hand, they capture reasonably well the dynamics of the money demand function. On the other hand, they show that the elasticity of money demand with respect to inflation rate, interest rate and GDP varies not only in accordance with the regime considered, but also across the countries under consideration.
    Keywords: money demand, dynamic OLS, smooth transition, quantile regression.
    JEL: C2 E21 E44 D12
    Date: 2012
  7. By: Jos Jansen; Xiaowen Jin; Jasper de Winter
    Abstract: We conduct a systematic comparison of the short-term forecasting abilities of eleven statistical models and professional analysts in a pseudo-real time setting, using a large set of monthly indicators. Our analysis covers the euro area and its five largest countries over the years 1996-2011. We find that summarizing the available monthly information in a few factors is a more promising forecasting strategy than averaging a large number of indicator-based forecasts. The dynamic and static factor model outperform other models, especially during the crisis period. Judgmental forecasts by professional analysts often embody valuable information that could be used to enhance forecasts derived from purely mechanical procedures.
    Keywords: nowcasting; professional forecasters; factor model; judgment; forecasting
    JEL: E52 C53 C33
    Date: 2012–12
  8. By: Mirdala, Rajmund
    Abstract: Economic theory provides clear suggestions in fixed versus flexible exchange rates dilemma in fighting high inflation pressures. However, relative diversity in exchange rate regimes in the European transition economies revealed uncertain and spurious conclusions about the exchange rate regime choice during last two decades. Moreover, eurozone membership perspective (de jure pegging to euro) realizes uncertain consequences of exchange rate regime switching especially in the group of large floaters. Successful anti-inflationary policy associated with stabilization of inflation expectations in the European transition economies at the end of 1990s significantly increased the role of short-term interest rates in the monetary policy strategies. At the same time, so called qualitative approach to the monetary policy decision-making performed in the low inflation environment, gradually enhanced the role of real interest rates expectations in the process of nominal interest rates determination. However, economic crisis increased uncertainty on the markets and thus worsen expectations of agents. In the paper we analyze sources of nominal interest rates volatility in ten European transition by estimating the structural vector autoregression (SVAR) model. Variance decomposition and impulse-response functions are computed to estimate the relative contribution of inflation expectations and expected real exchange rates to the conditional variability of short-term money market interest rates as well as responses of nominal interest rates to one standard deviation inflation expectations and expected real interest rates shocks. Effects of economic crisis are considered by estimation of two models for every single economy from the group of the European transition economies using data for time periods 2000-2007 and 2000-2011.
    Keywords: interest rates; inflation expectations; expected real interest rates; SVAR; variance decomposition; impulse-response function
    JEL: E43 C32 E31 E52
    Date: 2012–12
  9. By: Katia Berti; Matteo Salto; Matthieu Lequien
    Abstract: The financial and economic crisis has generated renewed interest, especially among policy-makers, in early-warning systems that could help identifying fiscal and macro-financial vulnerabilities potentially triggering risks. Against this background, this paper presents an early-warning index of fiscal stress, incorporating fiscal, financial and competitiveness variables, some of which are common to the scoreboard used in the EU for the surveillance of macroeconomic imbalances. Thresholds of fiscal risk are determined, based on the non-parametric signals approach, for the overall index, the two sub-indexes grouping fiscal and financial-competitiveness variables and each individual variable used in the analysis. Values of the overall index beyond its critical threshold pinpoint to potential risks of fiscal stress in the short run, while the analysis at individual variable level allows identifying possible sources of vulnerabilities, which is key to design appropriate risk-mitigating policies. The results obtained highlight the importance of incorporating financial-competitiveness variables in an early-warning system for fiscal stress, as such variables appear to be better "leading indicators" of fiscal stress than fiscal variables are. The results also speak in favour of using an early-warning composite indicator of fiscal stress, rather than looking at the individual variables taken in isolation. Results obtained by applying the proposed methodology to EU countries are presented in the last part of the paper.
    JEL: E62 E65 E66 H62 H63 E21 F32 F34
    Date: 2012–12
  10. By: Luca Agnello (University of Palermo, Department of Economics, Business and Finance); Vítor Castro (Universidade de Coimbra - NIPE); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: This paper assesses the determinants of the length of fiscal consolidation using annual data for 17 industrial countries over the period 1978-2009. Relying on a narrative approach to identify fiscal consolidation episodes, we show that fiscal variables (such as the budget deficit and the level of public debt) and economic factors (such as the degree of openness, the inflation rate, the interest rate and per capita GDP) are crucial for the fiscal consolidation process. Additionally, we employ duration analysis over a set of consolidation spells and find that, as time goes by, the likelihood of a fiscal consolidation ending is higher. However, the hazard function is not monotonic: indeed, it increases until the eighth or ninth year and starts decreasing afterwards. We also find that: (i) spending-driven consolidations are shorter than tax-driven consolidations; (ii) both types of consolidation are longer in Non-European countries than for European countries; and (iii) the size of the consolidation program (in percentage of GDP) does not significantly affect duration. All in all, our results support the importance of cuts in government spending as a way of bringing economies into a sustainable path for a public debt. Moreover, they highlight the role played by a fiscal framework that imposes discipline in governments as a device of credibly shorten the length of a fiscal consolidation episodes.
    Keywords: Fiscal Consolidation, Duration Analysis, Weibull Model, cubic splines.
    JEL: C41 E62
    Date: 2012
  11. By: Hasan, Iftekhar; Jackowicz, Krzysztof; Kowalewski, Oskar; Kozłowski, Łukasz
    Abstract: The Central European banking industry is dominated by foreign-owned banks. During the recent crisis, for the first time since the transition, foreign parent companies were frequently in worse financial conditions than their subsidiaries. This situation created a unique opportunity to study new aspects of depositor discipline. In this article, we investigate whether depositors flexibly accommodated to the changing sources of risk. We also analyse the informational foundations of depositors’ decisions. Using a comprehensive data set, we find that the recent crisis did not change the sensitivity of deposit growth rates to accounting risk measures. We establish that depositors’ actions were much more strongly influenced by press rumours concerning parent companies than by fundamentals, and that the impact of rumours on deposit growth rates was highly economically significant. Additionally, we document that public aid announcements were interpreted by depositors primarily as a confirmation of a parent company’s financial distress. Our results have important policy implications, as depositor discipline is usually the only viable and universal source of market discipline for banks in emerging economies.
    Keywords: depositor behaviour; market discipline; crisis; emerging markets
    JEL: G28 G21
    Date: 2012–07–13
  12. By: Mirella Damiani; Fabrizio Pompei; Andrea Ricci
    Abstract: Liberalisation of temporary contracts has become an important component of recent labour reforms but up to now available research has not paid attention to the impacts of these institutional changes on functional income distribution. The present paper intends to fill this gap by focussing on the reduction in strictness of employment protection of temporary jobs and analysing its effects on factor shares. We have estimated labour share, as well as its components, worker pays and employment, by considering country-sector evidence for 14 EU economies and the sample period 1995-2007. We have found that these legislative changes, that have favoured the extensive use of temporary contracts, have contributed to instability of working conditions and caused negative effects on workers’ pays. These impacts have more than counterbalanced the scanty positive effects on employment (due to greater access to the labour market of additional workers, likely young and women), thus leading to a decrease in income share accruing to workers.
    Keywords: factor income distribution, labour regulation.
    JEL: E25 J50
    Date: 2012–11–05
  13. By: Olivier Bargain; Kristian Orsini; Andreas Peichl
    Abstract: We suggest the first large-scale international comparison of labor supply elasticities for 17 European countries and the US, separately by gender and marital status. Measurement differences are netted out by using a harmonized empirical approach and comparable data sources. We find that own-wage elasticities are relatively small and much more uniform across countries than previously thought. Differences exist nonetheless and are found not to arise from different tax-benefit systems or demographic compositions across countries. Thus, we cannot reject that countries have genuinely different preferences. Three other results, important for welfare analysis, are consistent over all countries: the extensive (participation) margin dominates the intensive (hours) margin; for singles, this leads to larger labor supply responses in low-income groups; income elasticities are extremely small everywhere. Finally, the results for cross-wage elasticities in couples are opposed between regions, consistent with complementarity in spouses’ leisure in the US versus substitution in spouses’ household production in Europe.
    Keywords: household labor supply, elasticity, taxation, Europe, US
    JEL: C25 C52 H31 J22
    Date: 2012
  14. By: D. BLANCHET (Insee); S. LE MINEZ (Insee)
    Abstract: Accrued-to-date liabilities (ADLs) could soon add to the set of regular statistics on public pensions, in compliance with updated SNA provisions. This raises two questions: how can this indicator be produced, and what for? Microsimulation is shown to constitute a relevant answer to the first question. Despite its stochastic nature, it displays results that seem stable enough for accounting purposes. Concerning the what for question, it is well-known that ADLs are not an indicator of global financial sustainability. Their message is more interesting from the household perspective and especially at the micro level. This fosters the case for microsimulation that automatically produces consistent micro/macro results. All these macro and micro properties are illustrated in the French case, with applications to the assessment of the successive 1993, 2003 and 2010 reforms that have modified entitlements in rather complex ways, differentiated across cohorts and skill levels.
    Keywords: Accrued-to-date liabilities, microsimulation, pension reforms
    JEL: C53 H55 J26
    Date: 2012

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