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on European Economics |
| By: | Davide Furceri; Aleksandra Zdzienicka |
| Abstract: | The aim of this paper is to assess the effectiveness of risk sharing mechanisms in the euro area and whether a supranational fiscal risk sharing mechanism could insure countries against very severe downturns. Using an unbalanced panel of 15 euro area countries over the period 1979-2010, the results of the paper show that: (i) the effectiveness of risk sharing mechanisms in the euro area is significantly lower than in existing federations (such as the U.S. and Germany) and (ii) it falls sharply in severe downturns just when it is needed most; (iii) a supranational fiscal stabilization mechanism, financed by a relatively small contribution, would be able to fully insure euro area countries against very severe, persistent and unanticipated downturns. |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/198&r=eec |
| By: | Avouyi-Dovi, Sanvi; Ano Sujithan, Kuhanathan |
| Abstract: | Emerging economies and especially the BRICS countries have strong economic ties with the euro area. In addition, the financial crisis in the euro area may have effects on other markets or areas, especially those of the main emerging markets. Credit default swap (CDS) spreads are relevant indicators of credit risks. After identifying a set of fundamental determinants for sovereign CDS spreads, including euro area financial factors and computing Markov switching unit root test, we estimate Markov switching models over the period from January 2002 to August 2012, in order to examine the behaviour of sovereign CDS spreads in the BRICS countries. , i) We detect two different regimes for the BRICS, that finding is backed by conventional robustness checks and economic events; ii) most of the explanatory variables are involved in the determining theses regimes. Thus both financial and real factors have an impact on the relations defining each regime, except for Russia which is only impacted by financial ones. Especially, euro area financial indicators are largely involved in the BRICS sovereign CDS spreads’ dynamics. Besides, the robustness check supports the use of euro area variables as determinants of BRICS sovereign CDS spreads. |
| Keywords: | Credit default swap; BRICS; emerging markets; euro area financial markets indicators; Markov switching; |
| JEL: | C13 G12 G15 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/11721&r=eec |
| By: | Céline Allard; Petya Koeva Brooks; John C Bluedorn; Fabian Bornhorst; Franziska Ohnsorge; Katharine M Christopherson Puh |
| Abstract: | This is on a highly topical issue and addresses a key policy issue for Europe—namely, reinforcing EMU institutional architecture along with the Banking Union. Some proposals have emerged in Europe, and it will be important to put out staff views on this issue. In that context, publication as an SDN is appropriate, given the high profile nature and relevance of the topic—much like the Banking Union paper done a few months ago. |
| Keywords: | Fiscal policy;Euro Area;Economic integration;European Economic and Monetary Union;Fiscal union, Euro Area |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfsdn:13/9&r=eec |
| By: | D'Adamo, Gaetano (Universidad de Valencia); Rovelli, Riccardo (University of Bologna) |
| Abstract: | During the last decade, economists have intensively searched for evidence on the importance of the Balassa-Samuelson (B-S) hypothesis in explaining nominal convergence. One general result is that B-S can at best explain only part of the excess inflation observed in the European catching-up countries, which suggests that other factors may be at play. In these and related studies, however, the potential role of the exchange rate regime in affecting price convergence in Europe has been overlooked. In this respect, we claim that the choice of the exchange rate regime has decisively affected the path of nominal convergence. To show this, we first model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a B-S type of regression for each regime. Our results show that, for countries which pegged to or adopted the euro, the effect of the same increase in the dual productivity growth (that is, the difference in productivity growth between the traded and non-traded sectors) on the dual inflation differential is more than twice as large as that in the "flexible" countries. We conclude that, in a catching-up country, premature euro adoption may foster excess inflation, beyond that which is to be expected as a consequence of productivity convergence on the basis of the B-S effect. |
| Keywords: | exchange rate regimes, Balassa-Samuelson effect, inflation, euro adoption |
| JEL: | C34 E52 F31 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7627&r=eec |
| By: | Christophe Andre (Economics Department, Organisation for Economic Co-operation and Development (OECD)); Luis A. Gil-Alana (University of Navarra, Faculty of Economics, Edificio Biblioteca, Entrada Este, E-31080 Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | This paper analyses comovement in housing prices across the euro area. We use techniques based on the concepts of fractional integration and cointegration. Our results indicate that all the individual log-real price indices series display orders of integration which are above one, implying long memory in their corresponding growth rates. Further, looking at the cointegration relationships, we observe that the data for the euro area are cointegrated with Belgium, Germany and France, and the first two countries seem to be cointegrated with the majority of other countries in pairwise comparisons. Finally, prices in Germany seem to move in the opposite direction from other countries, which may be related to capital flows associated with current account imbalances. |
| Keywords: | prices, euro area, Fractional cointegration, Persistence, Long memory |
| JEL: | C22 E39 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201359&r=eec |
| By: | Mancini, Loreano; Ranaldo, Angelo; Wrampelmeyer, Jan |
| Abstract: | The market for repurchase agreements (repos) is an important part of the shadow banking system. Using a novel and comprehensive dataset, we provide the first systematic study of the euro interbank repo market. We document the evolution of repo market activity and identify risk and central bank liquidity provisions as the main state variables. In contrast to repo markets in the United States, we find that the bilateral central counterparty-based segment was resilient during 2006{13, which includes severe crisis periods. An increase in risk significantly increases repo trading volume, but has virtually no effect on repo rates, average maturity, and haircuts. Moreover, volume in the unsecured market is negatively related to repo volume. This suggests that, under certain conditions, banks use the repo market as a means of liquidity hoarding. We identify the distinguishing characteristics that render the euro interbank repo market resilient during the crisis, namely its infrastructure, including anonymous trading via a central counterparty, the exclusive reliance on safe collateral, and the reusability of collateral. |
| Keywords: | Repo market, secured funding, liquidity hoarding, shadow banking system, financial crisis, unconventional monetary policy |
| JEL: | G01 G21 G28 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2013:16&r=eec |
| By: | Samuel Brazys (School of Politics and International Relations, University College Dublin); Niamh Hardiman (School of Politics and International Relations, University College Dublin, UCD Geary Institute) |
| Abstract: | Acronyms for groups of countries provide an often useful shorthand to capture emergent similarities, and terms such as PIIGS, BRICs and LDCs pervade the lexicon of international and comparative political economy. But they can also lead to misleading narratives, since the grounds for use of these terms as heuristic devices are usually not well elaborated. This can become problematic when the use of such heuristics drives market responses in areas such as risk perception and changes in interest rates. In this paper we look at the narrative construction of the group of countries that has been grouped as ‘PIIGS’ (Portugal, Ireland, Italy, Greece, and Spain). We examine the process whereby the group came into being, trace how Ireland became a member of this grouping, and assess the merits of classifying these countries together. Our contention is that the repetition of the acronym in public debate shaped the behaviour of market actors toward these countries. We find evidence of Granger causality, such that increased media usage of the term ‘PIIGS’ is followed by converging interest rate correlations between Ireland and the other PIIGS, compared to the interest rate correlations between Ireland and the ‘northern’ Eurozone economies. We argue that this is a pointer toward the independent effect of perceptions and discourse over economic fundamentals. We conclude with more general thoughts and cautions on the use of heuristics in comparative political economy. |
| Keywords: | PIIGS, interest rates, ratings agencies, media, financial crisis |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201316&r=eec |
| By: | Cecilia Frale (Ministry of the Economy and Finance); Stefano Grassi (University of kent and CREATES); Massimiliano Marcellino (EUI Florence); Gianluigi Mazzi (EUROSTAT); Tommaso Proietti (University of Rome "Tor Vergata") |
| Abstract: | The paper deals with the estimation of monthly indicators of economic activity for the Euro area and its largest member countries that possess the following attributes: relevance, representativeness and timeliness. Relevance is obtained by referring our monthly indicators to gross domestic product at chained volumes, the most important measure of the level of economic activity. Representativeness is achieved by entertaining a very large number of (timely) time series on monthly indicators relating to the level of economic activity, providing a more or less complete coverage. The indicators are modelled with a large scale parametric factor model. We discuss its specification and provide details on the statistical treatment. Computational efficiency is crucial to estimate a large scale parametric factor model of the dimension considered in our application (considering about 170 series). To achieve it we apply state of the art state space methods that can handle temporal aggregation, and any pattern of missing values. |
| Keywords: | Index of coincident indicators,Temporal Disaggregation,Multivariate State Space Models,Dynamic factor Models,Quarterly National accounts |
| JEL: | E32 E37 C53 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:287&r=eec |
| By: | Fertig, Michael (ISG, Cologne); Kahanec, Martin (Central European University) |
| Abstract: | This study evaluates potential migration flows to the European Union from its eastern neighbors and Croatia. We perform out-of-sample forecasts using an adaption of the model of Hatton (1995) to time series cross-sectional data about post-enlargement migration flows following the EU's 2004 enlargement. We consider two baseline policy scenarios, with and without accession of sending countries to the EU. Our results show that migration flows are driven by migration costs and economic conditions, but the largest effects accrue to policy variables. In terms of the predicted flows: (i) we can expect modest migration flows in case of no liberalization of labor markets and only moderately increased migration flows under liberalization; (ii) after an initial increase following liberalization, migration flows will subside to long run steady state; (iii) Ukraine will send the most migrants; and (iv) the largest inflows in absolute terms are predicted for Germany, Italy and Austria, whereas Ireland, Denmark, Finland and again Austria are the main receiving countries relative to their population. |
| Keywords: | migration, free movement of workers, European Union, Eastern Partnership, EU enlargement, migration potential, out-of-sample forecasting |
| JEL: | F22 C23 C53 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7634&r=eec |
| By: | Richard Frensch; Jan Hanousek; Evzen Kocenda |
| Abstract: | By combining and extending the previous literature, we develop and test a gravity specification that views bilateral gravity equations rooted in a Heckscher-Ohlin framework as statistical relationships constrained on countries’ multilateral specialization patterns. According to our results, Heckscher- Ohlin specialization incentives do not seem to play much of a role in the average European bilateral final goods trade relationship. However, this aggregate view conceals that trade in final goods between Western and Eastern Europe is driven by countries’ multilateral specialization incentives, as expressed by supply-side country differences relative to the rest of the world, fully compatible with the incomplete specialization version of Heckscher-Ohlin. This indicates that many of the final goods traded between Western and Eastern Europe are still different, rather than differentiated, products. |
| Keywords: | international trade, gravity models, panel data, European Union |
| JEL: | F14 F16 L24 |
| Date: | 2013–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2013-1054&r=eec |