nep-eec New Economics Papers
on European Economics
Issue of 2013‒08‒05
seven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Inflation persistence in Central and Eastern European countries By Zsolt Darvas; Balázs Varga
  2. Fiscal multipliers in a small euro area economy: How big can they get in crisis times? By Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
  3. Coordination in place of integration? Economic governance in a non-federal EU By Renaud Thillaye
  4. The financial content of inflation risks in the euro area. By Andrade, P.; Fourel, V.; Ghysels, E.; Idier, I.
  5. Time Varying NAIRU Estimates in Central Europe By Balázs Varga
  6. European Debt Crisis: How a Public debt Restructuring Can Solve a Public Debt issue By David Cayla
  7. Why could Northern labor market flexibility save the eurozone? By Amélie Barbier-Gauchard; Francesco de Palma; Giuseppe Diana

  1. By: Zsolt Darvas; Balázs Varga
    Abstract: This paper studies inflation persistence with time-varying coefficient autoregressions for twelve central European countries,in comparison with the United States and the euro area. Inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the US and euro-area. In most central and eastern European countries, for which our study covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable.
    Date: 2013–07
  2. By: Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
    Abstract: Using PESSOA, a small open economy DSGE model, we analyze the size of short-runfiscal multipliers associated with fiscal consolidation under two distinct alternative scenarios, viz "normal times" and "crisis times." The crisis times scenario embodies a higher share of hand-to-mouth households, stronger nominal rigidities, and more severe financial frictions, which purportedly better refflect the underlying economic environment during the "Great Recession." Results show that fiscal multipliers can be twice as large in crisis times, being approximately 2 for a government consumptionbased fiscal consolidation in the first year. One-year ahead effects are also substantially larger if this type of consolidation is performed in crisis times. Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced.
    JEL: E62 F41 H62
    Date: 2013
  3. By: Renaud Thillaye
    Abstract: The most commonly held opinion about the eurozone crisis is that it should lead to greater EU integration. Yet despite all the talk about fundamental design flaws and the need for a federal ‘leap forward’, EU governments and citizens are not ready to pool further sovereignty and resources as a way to strengthen the common currency and to improve the EU’s delivering capacity. Blueprints and roadmaps for completing the Economic and Monetary Union have been dealt with contempt by national leaders. As a result, more attention ought to be focused on how the imbalances threatening the EU’s cohesion and stability could be addressed within the existing boundaries of EU treaties. Improving the current set-up of policy coordination should be the priority of the next few years. This policy paper suggests ways to improve the institutions and scope of policy coordination in the EU. In terms of substance, the experience accumulated before and after the crisis has shown that a narrow approach in terms of fiscal and macroeconomic discipline is not enough. If EU member states do not want markets to impose adjustments in their own terms, they must embrace a broader approach to convergence and improve the conditions in which they adjust to each other. Wage and social developments should be included in EU supervision frameworks. As regards institutions, more reflection should be devoted to the innovations that would increase the impact of mutual commitments. This paper analyses the increasing contractual approach to EU governance, and argues that a stronger sense of reciprocity could arise from ad hoc cooperations on a smaller scale for the euro area and voluntary countries. One should nevertheless be clear about the limits of what coordination can achieve. Greater ambition in terms of EU cohesion and democratic legitimacy would require a more substantial rethink of EU policy-making in the long term.
    Keywords: EU integration, European economic policy, European governance, European Monetary Union, good governance, multi-level governance, policy options, political economy of policy reform
    JEL: E02
    Date: 2013–07
  4. By: Andrade, P.; Fourel, V.; Ghysels, E.; Idier, I.
    Abstract: Recent studies emphasize that survey-based inflation risk measures are informative about future inflation and thus useful for monetary authorities. However, these data are typically available at a quarterly frequency whereas monetary policy decisions require a more frequent monitoring of such risks. Using the ECB survey of professional forecasters, we show that high-frequency financial market data have predictive power for the low-frequency survey-based inflation risk indicators observed at the end of a quarter. We rely on MIDAS regressions to handle the problem of mixing data with different frequencies that such an analysis implies. We also illustrate that upside and downside risks react differently to financial indicators.
    Keywords: inflation forecasts, inflation risk, survey data, financial data, MIDAS regression.
    JEL: E31 E37 C53 C83
    Date: 2013
  5. By: Balázs Varga (OTP Fund Management and Corvinus University of Budapest)
    Abstract: This paper estimates Phillips curve relationships for the data of four Central European countries, the Czech Republic, Hungary, Poland and Slovakia, using a sample period from the mid-1990s till 2012. For the estimation Gordon’s triangle model is used with the Kalman filter, where the time-varying NAIRU is described as a latent variable following a random walk, and its deviation from the actual unemployment rate affects inflation, among other factors. The inclusion of inflation expectations is found to be statistically significant, albeit it significantly reduces the size and significance of the unemployment gap coefficient. The results show that so far only the Czech Republic and Hungary exhibit a significant inflation-unemployment trade-off, while the results for Poland and Slovakia do not support such a relationship.
    Keywords: unemployment, Phillips curve, time varying NAIRU, Kalman filter
    JEL: C32 E24
    Date: 2013–06–20
  6. By: David Cayla (GRANEM - Groupe de Recherche Angevin en Economie et Management - Université d'Angers)
    Abstract: The political and economic crisis in Europe is often viewed as an indirect consequence of the global financial and economic breakdowns caused by the US "subprime" crisis. European governments themselves tend to underestimate Europe's responsibility for the crisis and seem to prefer to manage the symptoms of the crisis rather than pursue a real recovery from it. This paper argues that the enforced policies are far from achieving an appropriate economic solution for the Eurozone. Moreover, it suggests that, although the European domestic debt situation is very close to the American one, their most recent evolutions and their main causes differ. If the growth of the American debt can partly be explained by macroeconomics imbalances, the causes of the growth of the European domestic debt must be found in a change in the behavior of the financial sector agents. The conclusion advocates for a more radical European policy to solve the debt bubble.
    Keywords: european economy, financial crisis, macroeconomic imbalances, debt structure, debt bubble, macroeconomic policies
    Date: 2013–06–01
  7. By: Amélie Barbier-Gauchard; Francesco de Palma; Giuseppe Diana (LaRGE Research Center, Université de Strasbourg)
    Abstract: We consider a heterogeneous labor market in a two-country monetary union. The domestic economy is characterized by a dual labor market with formal and informal sectors as observed in most Southern EMU economies. Among formal workers, wage-levels result from efficiency considerations. In the foreign economy, with reference to Northern EMU economies, we assume another type of wage rigidity explained by the presence of unions. More precisely, only wages are bargained between firms and employees as in the right-to-manage model. These rigidities lead to inefficient allocations of workers in each country: a misallocation of workers among sectors in the domestic country and unemployment in the foreign one. In this context, the labor market flexibilization may appear as a relevant option for improving the situation of activity and employment in the monetary union. This is the reason why we investigate the overall effects of a decrease in trade union bargaining power in the foreign (Northern) economy. We show that, at the new equilibrium, a lower bargaining power in the foreign economy leads to a decrease in all prices and the effects are positive overall. In the foreign economy, the equilibrium level of production is higher, unemployment decreases and wages are lower. In the domestic one, the production also increases, the labor market benefits from a better allocation of workers between formal and informal sectors, and all wages are higher.
    Keywords: efficiency wage, dualism, EMU, trade unions, bargaining.
    JEL: E60 F16 F41 J31
    Date: 2013

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