nep-eec New Economics Papers
on European Economics
Issue of 2013‒12‒06
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Linkages between the euro zone and the south-eastern European countries: a global VAR analysis By Minoas Koukouritakis; Athanasios P. Papadopoulos; Andreas Yannopoulos
  2. Determinants of Sovereign Bond Yield Spreads in the EMU. An Optimal Currency Area Perspective By Costantini, M.; Fragetta, M.; Melina, G.
  3. How many factors and shocks cause financial stress? By Kappler, Marcus; Schleer, Frauke
  4. House price cycles in Europe By Corradin, Stefano; Fontana, Alessandro
  5. Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects By Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
  6. The Balassa-Samuelson effect and the channels of its absorption in the Central and Eastern European Countries By Karolina Konopczak
  7. Unemployment Benefits in EU Member States By Palme, Joakim
  8. The Centre Matters for the Periphery of Europe: The Predictive Ability of a GZ-Type Spread for Economic Activity in Europe By Alfred V Guender; Bernard Tolan
  9. Is a fiscal capacity really necessary to complete EMU? By Feld, Lars P.; Osterloh, Steffen
  10. The German labour market reforms in a European context: A DSGE analysis By Busl, Claudia; Seymen, Atılım
  11. Can structural reforms help Europe? By Gauti Eggertsson; Andrea Ferrero; Andrea Raffo
  12. Panel data evidence on the effects of fiscal impulses in the EU New Member States By Paweł Borys; Piotr Ciżkowicz; Andrzej Rzońca
  13. Who decides? Resolving failed banks in a European framework By Christopher Gandrud; Mark Hallerberg
  14. The distribution of debt across euro area countries: the role of individual characteristics, institutions and credit conditions By Olympia Bover; Jose Maria Casado; Ernesto Villanueva; Sonia Costa; Philip Du Caju; Yvonne McCarthy; Eva Sierminska; Panagiota Tzamourani; Tibor Zavadil
  15. Wage Flexibility and the Great Recession: The Response of the Irish Labour Market By Aedin Doris; Donal O'Neill; Olive Sweetman
  16. Immigration in Europe: Trends, Policies and Empirical Evidence By Sara de la Rica; Albretch Glitz; Francesc Ortega

  1. By: Minoas Koukouritakis (University of Crete); Athanasios P. Papadopoulos (University of Crete); Andreas Yannopoulos (University of Crete)
    Abstract: In the present paper we assess the impact of the Eurozone’s economic policies on specific South-Eastern European countries, namely Bulgaria, Croatia, Cyprus, Greece, Romania, Slovenia and Turkey. Since these countries are connected to the EU or the Eurozone and economic interdependence among them is continuously evolving, we implemented a Global VAR model. Our results indicate that all sample countries, except Turkey, react in a similar manner to changes (a) in the macroeconomic policies of the Eurozone, and (b) in the nominal exchange rate of the euro against the US dollar. There is evidence of linkages among the EU or Eurozone members of the region, and between each of them and the Eurozone.
    Keywords: Monetary Transmission; Global VAR Model; Weak Exogeneity; Impact Elasticities; Generalised Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–10
  2. By: Costantini, M.; Fragetta, M.; Melina, G.
    Abstract: In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. While we find evidence for a level break in the cointegrating relationship, we do not find empirical support for a regime shift and hence for a change in the pricing of the determinants of sovereign spreads. Moreover, results show that (i) fiscal imbalances (namely expected government debt-to-GDP differentials) are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.
    Keywords: European monetary union; sovereign bond yield spreads; optimal currency areas; competitiveness gaps; euro area
    Date: 2013
  3. By: Kappler, Marcus; Schleer, Frauke
    Abstract: The aim of this paper is to assess the dimension of factors and shocks that drive financial conditions, and in particular financial stress in the euro area. A second aim is to construct summary indices on the conditions and level of stress in financial markets with the aid of a dynamic factor model. By analysing 149 newly compiled monthly time series on financial market conditions in the euro area, our results suggest that the data respond quite differently to fundamental shocks to financial markets but the dimension of these shocks is rather limited. Consequently, countries or segments of the financial sector in the euro area react fairly heterogonously to such shocks. We estimate several common factors and by means of an exploratory analysis we give them an economic interpretation. We find that the existence of a Periphery Banking Crisis factor, a Stress factor and a Yield Curve factor explains the bulk of variation in recent euro area financial sector data. --
    Keywords: Financial Stress,Dynamic Factor Models,Financial Crisis,Euro Area
    JEL: C38 G01
    Date: 2013
  4. By: Corradin, Stefano; Fontana, Alessandro
    Abstract: This paper examines the house price dynamics for thirteen European countries. A Markov-switching error correction model is estimated on house price returns at the country level, with deviations between house prices and fundamentals feeding into the short-run dynamics. The system is assumed to be in either a stable regime, in which deviations from the long-run equilibrium tend to vanish over time, or in an unstable regime, in which no such correction takes place. The analysis yields three sets of results. First, house price returns in Europe are generally characterized by three (high, medium and low) phases; growth rates within regimes differ largely across countries. Second, for some European countries the observed high growth phases are associated with a stable regime. Third, European housing markets have been more in sync with each other since 2000 following a growing trend in the time-span 2002-2006 and a dramatic downturn after the Lehman collapse in 2008 and during the Euro area sovereign debt crisis. JEL Classification: G12, R11, R31
    Keywords: house prices, Markov-switching and error-correction models
    Date: 2013–11
  5. By: Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
    Abstract: In 2007, countries in the euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level.
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–11
  6. By: Karolina Konopczak (Warsaw School of Economics and Institute for Market, Consumption and Business Cycles Research)
    Abstract: The aim of the study is to estimate the magnitude of the Balassa-Samuleson effect as well as the effectiveness of the labour and the product market in its absorption in Poland, the Czech Republic, Hungary and Slovakia. The obtained results allowed to determine the magnitude of the systematic component of inflation differentials relative to the euro area, hence to assess the risk of common monetary policy inadequacy with respect to these economies. The obtained estimates suggest that the catching-up driven inflationary pressure is a non-negligible issue in the context of the CEECs integration with the euro area, since the systematic inflation differentials were comparable in size to those experienced by the so-called peripheral member states in the first decade after the introduction of the euro. Moreover, in the case of Poland none of the potential absorption mechanisms of the Balassa-Samuelson effect seemed to mitigate the convergence-induced inflationary pressure over the sample period. The outcomes suggest that ignoring the non-fulfilment of theoretical model assumptions regarding wages and markups, which is common in the literature, distorts estimation results.
    Keywords: Balassa-Samuelson hypothesis, monetary integration, real convergence, panel cointegration
    JEL: F41 E31 C33
    Date: 2013
  7. By: Palme, Joakim (Uppsala Center for Labor Studies)
    Abstract: The background to this report is the growing variation between EU Member States' economic and social situation, which has been reinforced by the economic recession and subsequent fiscal consolidation measures. It is increasingly recognized that economic and social responses to the crisis will require strengthened solidarity between Member States, in the first place within the Eurozone but also beyond. While most decisions about taxes and spending remain at national level within the EU, it can equally be argued that continued successful European integration needs an elaborate risk-sharing system where various forms of automatic fiscal transfer mechanisms may have a key role, particularly in Eurozone countries. One strategy is to set up EU- or Eurozone wide unemployment provisions where resources are transferred to areas particularly hit by asymmetric shocks.
    Keywords: unemployment benefits; unemployment assistance
    JEL: J65 J68
    Date: 2013–11–29
  8. By: Alfred V Guender (University of Canterbury); Bernard Tolan
    Abstract: This paper examines whether information from bond markets provides a reliable signal for future economic activity in Europe. It evaluates the marginal predictive content and economic significance of a risk-adjusted yield credit spread in five European countries from the early 1990s to the recent past. The inclusion of this bond yield spread improves markedly the goodness of fit of the forecasting equation for economic activity in countries on the European periphery. The within-sample forecasting ability of the GZ-spread is remarkable, both over the whole sample period and a sub-sample period marking the effective beginning of the Economic and Monetary Union of Europe in 1999. Its effect on economic activity is felt particularly during the 2007-12 Crisis period.
    JEL: E3 E4 G1
    Date: 2013–09–01
  9. By: Feld, Lars P.; Osterloh, Steffen
    Abstract: [Conclusion] The necessity of establishing a fiscal capacity at the European level in order to smooth asymmetric shocks in EMU is largely based on the theory of optimum currency areas. If countries do not have the possibility to align exchange rates, the effects of asymmetric shocks on a countrys income must be absorbed by other mechanisms. In an economy with sticky wages and prices as well as with low factor mobility, only a transfer mechanism between countries provides for a compensation of such adverse cyclical effects and thus serves as an insurance against the risk of asymmetric shocks. This rationale is based on many assumptions regarding the economic conditions in a country. Instead of a fiscal capacity for risk-sharing an increase in factor mobility or a higher wage and price flexibility also allow for an absorption of shocks. Indeed, a monetary union requires economies to become more flexible. The analysis in this paper shows that the contribution of a fiscal capacity to absorb shocks in federations in which a fiscal union is established is relatively low. This holds for the US, Germany and Canada alike. More important according to empirical studies are capital markets. The more integrated capital markets are, the better they serve as an interregional risk-sharing mechanism. Thus, the creation of a banking union along the lines proposed by Buch et al. (2013) in the EU will be the best way of insuring EMU member countries against adverse asymmetric shocks. In addition, higher labor mobility and higher wage and price flexibility will help to accommodate future shocks. Moreover, if member countries consolidate their budgets following the rules of the fiscal compact and the six pack regulations, their ability to smooth shocks by national fiscal policy will be increased. It should be noted that the establishment of a fiscal capacity does not only provide for at best a rather small risk-sharing mechanism. It also induces negative incentives for member countries to reduce the probability of being affected by economic shocks adversely. Reforms of labor and products markets aiming at higher wage and price flexibility will be postponed. Consolidation efforts will wane. Moral hazard occurs. Given this downside of a fiscal capacity, its introduction cannot be advised. --
    Date: 2013
  10. By: Busl, Claudia; Seymen, Atılım
    Abstract: While a widespread consensus exists among macroeconomists that the German labour market reforms in 2003-2005 have successfully contributed to the decline of the unemployment rate, critics claim that the reforms led to wage restraint and consequently consumption dampening accompanied by beggar-thy-neighbour effects, harming Germany's trade partners. We check up on the validity of these arguments by means of a two-country DSGE model featuring intra-industry trade and labour market frictions. Our results suggest that the disproportional growth of GDP (labour productivity) in comparison to consumption (wages) are only partially driven by the reforms. However, we do not find that the reforms contribute to Germany's trade surplus and cause negative spillovers to trading partners in terms of output and employment. --
    Keywords: labour market reforms,search and matching,spillover,dynamic stochastic general equilibrium models
    JEL: E24 E61 E65 F42 J38 J63
    Date: 2013
  11. By: Gauti Eggertsson; Andrea Ferrero; Andrea Raffo
    Abstract: Structural reforms that increase competition in product and labor markets are often indicated as the main policy option available for peripheral Europe to regain competitiveness and boost output. We show that, in a crisis that pushes the nominal interest rate to its lower bound, these reforms do not support economic activity in the short run, and may well be contractionary. Absent the appropriate monetary stimulus, reforms fuel expectations of prolonged deation, increase the real interest rate, and depress aggregate demand. Our findings carry important implications for the current debate on the timing and the design of structural reforms in Europe.
    Date: 2013
  12. By: Paweł Borys (Warsaw School of Economics); Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics and Monetary Policy Council in Narodowy Bank Polski)
    Abstract: We identify fiscal impulses in the EU New Member States using four different methods and apply econometric panel data techniques to determine what is the response of the output and its components to those impulses. We also directly test the effects of fiscal impulses on labour costs and housholds’ expectations. The results confirm that the composition of impulses matters for output and its components’ response. Notably, we find evidence that investment and export growth accelerates after fiscal adjustment and decelerates after fiscal stimulus when the impulses are expenditure-based. In turn, private consumption seems not to respond to fiscal impulses regardless of their size. The analysis confirms that expenditure-based fiscal adjustments enhance wage moderation and thereby competitiveness of domestic enterprises, while expenditure-based fiscal stimuli weaken it. By contrast, we do not find evidence that fiscal impulses have an effect on households’ confidence.
    Keywords: fiscal consolidation, non-Keynesian effects, New Member States, panel data
    JEL: C23 D22 D81 E23 E32 E44 E62
    Date: 2013
  13. By: Christopher Gandrud; Mark Hallerberg
    Abstract: As the basis for a European regime for resolving failing and failed banks, the European Commission has proposed the Bank Resolution and Recovery Directive (BRRD) and a regulation establishing a European Single Resolution Mechanism (SRM) and a Single Bank Resolution Fund (SBRF). There is a debate about which parts of the proposed SRM-SBRF to add to the BRRD. The BRRD sets out a resolution toolkit that can be used by national resolution authorities. The SRM would involve European institutions more at the expense of national resolution authorities. This change could affect resolution outcomes. Domestic resolution authorities might be more generous than supranational authorities in providing assistance to banks. A supranational approach might be more effective in minimising costs for taxpayers. But regardless of the final design, more attention is needed to ensure that resolution authorities are politically independent from governments. When public support is provided to failed institutions it should come from a bankfunded resolution fund. This would reduce taxpayersâ?? direct costs, and would make banks less likely to take risks and advocate for bailouts
    Date: 2013–11
  14. By: Olympia Bover (Banco de España); Jose Maria Casado (Banco de España); Ernesto Villanueva (Banco de España); Sonia Costa (Banco de Portugal); Philip Du Caju (Banque Nationale de Belgique); Yvonne McCarthy (Central Bank of Ireland); Eva Sierminska (CEPS / Instead Research Institute); Panagiota Tzamourani (Bank of Greece and Deutsche Bundesbank); Tibor Zavadil (National Bank of Slovakia)
    Abstract: The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, it is the length of asset repossession periods that best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results
    Keywords: household debt and interest rate distributions, time to foreclosure, taxation, loan-to-value ratios, fixed rate mortgages, financial literacy
    JEL: D14 G21 G28 K35
    Date: 2013–11
  15. By: Aedin Doris (Economics,Finance and Accounting National University of Ireland, Maynooth); Donal O'Neill (Economics,Finance and Accounting National University of Ireland,); Olive Sweetman (Economics,Finance and Accounting National University of Ireland,)
    Abstract: There is considerable debate about the role of wage rigidity in explaining unemployment. Despite a large body of empirical work, no consensus has emerged on the extent of wage rigidity. Previous attempts to empirically examine wage rigidity have been hampered by small samples and measurement error. In this paper we examine nominal wage flexibility in Ireland both in the build up to, and during the Great Recession. The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. Our main analysis is based on earnings data for the entire population of workers in Ireland taken from tax returns, which are free of reporting error. We find a substantial degree of downward wage flexibility in the pre-crisis period. We also observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than doubled and the proportion receiving wage freezes increased substantially. However, there is considerable heterogeneity in wage changes, with a significant proportion of workers continuing to receive pay rises at the same time as other were receiving pay cuts.
    Keywords: Wage Flexibility, Great Recession
    JEL: J31 J38 D31
    Date: 2013
  16. By: Sara de la Rica; Albretch Glitz; Francesc Ortega
    Abstract: This chapter summarizes the main trends, policies and empirical evidence regarding immigration in Europe. We start by providing descriptive evidence on long-term immigration trends and current characteristics of the immigrant populations in various important European destination countries and Europe as a whole. We then discuss key policy issues in the European context, focusing on access to citizenship, asylum seeking, border enforcement, amnesties and policies to attract talent. In the second part of the chapter, we provide a survey of the large and growing literature on the recent European immigration experience, focusing on two key questions: what has been the socio-economic performance of immigrants in their destination countries and how has immigration impacted these countries’ economies and native populations. We find large and highly persistent gaps in the economic performance of immigrants relative to natives in most destination countries, with only few instances of encouraging progress. Overall, there is little evidence of a detrimental effect of immigration on the economies of the host countries, which appear to respond to immigrant inflows through mechanisms more complex than simple factor price adjustments.
    Date: 2013–11

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