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on European Economics |
| By: | Gildas Lamé (INSEE - CREST) |
| Abstract: | This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use a Near-Cointegrated VAR-like approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone’s sovereign yield curve. I then look for notable episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum". At least three "conundra" episodes can be singled out in the Eurozone between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena. |
| Keywords: | Affine term structure models, Unspanned macro risks, Monetary policy, Expectation Hypothesis, Term Premium, Macroeconomy |
| JEL: | C51 E43 E44 E47 E52 G12 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2013-07&r=eec |
| By: | DREZE, Jacques (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); DURRE, Alain (IESEG-School of Management (Lille Catholic University) and LEM-CNRS) |
| Abstract: | With the current sovereign debt crisis, the incompleteness of economic integration in the Economic and Monetary Union (EMU) has become patent leading to an intense debate among academics and policy makers. Most of the debate focuses on the needs to strengthen fiscal rules and to restore fiscal imbalances through austerity measures which weigh on growth prospects. In this paper we analyse current economic developments within the euro area through the lens of general equilibrium theory. We address two issues (international sharing of macroeconomics risks and coordinated growth stimulation) which are essential to guarantee the sustainability of the EMU. More specifically, we propose mechanisms to cope with intergenerational and interregional risks while focusing on (fiscally neutral) investments meeting social needs and apt to break the vicious circle between fiscal imbalances and stagnation. |
| Keywords: | pgeneral equilibrium model, risk sharing, growth stimulation, fiscal integration, EMU, indexed bonds |
| JEL: | E24 E63 H63 |
| Date: | 2013–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013013&r=eec |
| By: | Rumen Dobrinsky |
| Abstract: | SummaryThe paper undertakes an empirical analytical assessment of some of the determinants of economic growth in the EU during the past decade, with a specific focus on the Central and Eastern European (CEE) members of the EU. The methodology is based on a combination of different statistical methods and techniques including descriptive statistics and stylised facts as well as some widely used empirical models of growth, including the testing of convergence hypotheses and running panel growth regressions. During the decade prior to the global economic and financial crisis, the growth model in the EU was disproportionately skewed towards the attraction and mobilisation of additional resources as compared to the reliance on structural supply-side factors. In particular, EU growth on average was extremely finance-dependent and debt-intensive. The ensuing debt crisis in the euro area rejected this growth model on the grounds of its unsustainability. The current debt overhang implies that countries (both governments and businesses) will have to learn to live with less resources (in the first place financial) at their disposal. Thus one of the key factors for invigorating future growth could be raising the efficiency of resource utilisation, including the utilisation of public funds. Growth in the CEE countries was also finance-dependent and debt-intensive but, on average, not to the extent observed in the older EU Member States. CEE economies relied on improvements in structural supply-side factors such as productivity, innovation and competitiveness to a larger degree than was the case in the older EU members. Thus CEE countries may have a larger degree of policy freedom to deal with the implications of the crisis.The paper also addresses some policy issues related to the possible invigoration of economic growth in the EU and, in particular, in CEE. It suggests that one of the areas of policy reforms that could invigorate growth is that targeting improvements in the efficiency of financial intermediation and more efficient allocation of financial resources. The paper also discusses some supply-side structural measures that appear to be especially pertinent to the CEE economies. |
| Keywords: | economic growth, growth determinants, real convergence, global economic and financial crisis, European Union, Central and Eastern Europe |
| JEL: | C21 C23 O40 O52 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:wii:rpaper:rr:385&r=eec |
| By: | Guido Baldi; Karsten Staehr |
| Abstract: | After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001-2008 and for the post-crisis period 2009-2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems. |
| Keywords: | Fiscal reaction function, global financial crisis, debt crisis, structural break |
| JEL: | E61 E62 H62 H63 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1295&r=eec |
| By: | Niels Gilbert; Jeroen Hessel; Silvie Verkaart |
| Abstract: | This paper investigates the role that Eurobonds could play in making EMU stable in the long run. We establish that EMU’s budgetary problems are not only caused by lack of budgetary discipline, but also by the large and sudden fiscal deterioration during the financial crisis. This type of shock can never be fully ruled out. EMU member states appear more vulnerable in this situation than countries with their own currency, and risk getting caught in a self-fulfilling spiral of increasing interest rates. This presents a strong case for some type of rescue mechanism. We establish that neither the EFSF/ ESM nor the ECB form the ideal backstop, and that Eurobonds potentially offer a more stable solution, but at the price of important moral hazard problems. All existing Eurobond proposals therefore seek a balance between stabilisation and moral hazard, typically through retaining some degree of market discipline. Our Eurobond proposal improves the trade-off between stabilisation and moral hazard by using Eurobonds themselves to further enforce budgetary discipline. Even then, however, EMU governance has to be strengthened substantially and debt levels have to converge before Eurobonds can be introduced. Therefore, our Eurobond proposal could only serve as the capstone of EMU. |
| Keywords: | Eurobonds; sovereign bond spreads; fiscal risk-sharing; Economic and Monetary Union |
| JEL: | E44 E61 H63 H77 F33 F36 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:379&r=eec |
| By: | Jan Kregel |
| Abstract: | In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:13-04&r=eec |
| By: | Barbara Annicchiarico (University of Rome "Tor Vergata"); Fabio Di Dio (Consip SpA); Francesco Felici (Italian Ministry of Economy and Finance); Francesco Nucci (Università di Roma “La Sapienza) |
| Abstract: | In this paper we assess the implications of policy reforms for the Italian economy by jointly using the Italian Treasury Econometric Model (ITEM) and QUEST III, the endogenous growth dynamic general equilibrium (DGE) model of the European Commission (DG ECFIN) in the version calibrated for Italy. We point out some of the key differences between the two models, highlighting some policy insights that DGE models can provide compared to those of traditional macro-econometric models. Their structural characteristics and the results of simulations are analyzed by using an array of shocks commonly examined in the evaluation of possible reforms. We show that two elements incorporated into the QUEST model play a key role in explaining the qualitative and quantitative differences among the two models in the dynamic responses to structural shifts, namely: the role of expectations in the transmission of reforms and the endogenous growth mechanism. We conclude that the joint consideration of the two models can improve our understanding of how the assessment of policy interventions is likely to be affected by the uncertainty surrounding model-based evaluation. |
| Keywords: | Economic Modelling, DGE, Structural Reforms, Italy |
| JEL: | E10 C50 E60 |
| Date: | 2013–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:280&r=eec |
| By: | Pierre Noël |
| Abstract: | Four years after the gas supply crisis of January 2009, this paper looks at the market and policy changes that have changed the European gas situation, and their implications in terms of security of supply. Several positive developments are identified, including the byapssing of Ukraine by Gazprom-sponsored pipelines; the acceleration of import diversification in large markets of western Europe; the process of ‘commoditisation’ of natural gas in north-west Europe. The lack of meaningful progress in market integration between western and eastern-central Europe, however, leaves in place one of the main factors that made the 2009 crisis possible and conferred it its political significance. Overall, the European gas security situation has evolved in a positive direction mainly because of external forces, not EU policies. |
| Keywords: | Natural Gas; European Union; Public Policy; Security of Supply. |
| JEL: | O13 P28 Q48 |
| Date: | 2013–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1312&r=eec |
| By: | Philip Arestis; Ana Rosa Gonzalez |
| Abstract: | Recent episodes of housing bubbles, which occurred in several economies after the burst of the United States housing market, suggest studying the evolution of housing prices from a global perspective. We utilize a theoretical model for the purposes of this contribution, which identifies the main drivers of housing price appreciation—for example, income, residential investment, financial elements, fiscal policy, and demographics. In the second stage of our analysis, we test our theoretical hypothesis by means of a sample of 18 Organisation for Economic Co-operation and Development (OECD) countries from 1970 to 2011. We employ the vector error correction econometric technique in terms of our empirical analysis. This allows us to model the long-run equilibrium relationship and the short-run dynamics, which also helps to account for endogeneity and reverse-causality problems. |
| Keywords: | Empirical Modeling; Housing Market; Vector Error Correction Modeling; OECD Countries |
| JEL: | C22 R31 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_764&r=eec |
| By: | Sfakianakis E.; Freitag L. (GSBE) |
| Abstract: | We investigate empirically the behavior of Credit Rating Agencies (CRAs) when assessing sovereign solvency for European countries. Using probit regressions we find that although controlling for macroeconomic factors, CRAs take the business cycle and past ratings into account when determin- ing the investment grade of a country. These results are robust to a number of different specifications. We argue that the current overreliance on ratings is in the light of these results is problematic and needs to be addressed by the regulatory bodies. |
| Keywords: | International Financial Markets; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013023&r=eec |