nep-eec New Economics Papers
on European Economics
Issue of 2014‒03‒08
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. On the Relationship between Public and Private Investment in the Euro Area By Christian Dreger; Hans-Eggert Reimers
  2. Is the European Central Bank Failing Its Price Stability Mandate? By Angel Ubide
  3. The causal linkages between sovereign CDS prices for the BRICS and major European economies By Stolbov, Mikhail
  4. Measuring too-big-to-fail funding advantages from small banks’ CDS spreads By Michiel Bijlsma; Jasper Lukkezen; Kristina Marinova
  5. Why is Germany's manufacturing industry so competitive? By Foders, Federico; Vogelsang, Manuel Molina
  6. The Slump and Immigration Policy in Europe By Hatton, Timothy J.
  7. TFP estimation and productivity drivers in the European Union By Gehringer, Agnieszka; Martínez-Zarzoso, Inmaculada; Nowak-Lehmann Danzinger, Felicitas
  8. The relationship between GDP and the size of the informal economy: Empirical evidence for Spain By Duarte, Pablo
  9. The cost of firms’ debt financing and the global financial crisis By Daniele Pianeselli; Andrea Zaghini

  1. By: Christian Dreger; Hans-Eggert Reimers
    Abstract: This paper explores the long run relationship between public and private investment in the euro area in terms of capital stocks and gross investment flows. Panel techniques accounting for international spillovers are employed. While private and public capital stocks are cointegrated, the evidence is quite fragile for public and private investment flows. They enter a long run relationship only after fundamental drivers of private investment, such as demand and financing costs are included. According to the impulse response analysis, private investment reacts to shocks in public investment both in terms of stock and flow variables. In contrast, public investment is rather exogenous. Therefore, the lack of public investment might have restricted private investment and GDP growth in the euro area. The results have strong implications for the future direction of fiscal austerity programs to combat the euro area debt crisis.
    Keywords: Public and private investment, fiscal austerity, panel VAR
    JEL: C23 E22 E62
    Date: 2014
  2. By: Angel Ubide (Peterson Institute for International Economics)
    Abstract: Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth.
    Date: 2014–02
  3. By: Stolbov, Mikhail
    Abstract: The article examines causal relationships between sovereign credit default swaps (CDS) prices for the BRICS and most important EU economies (Germany, France, the UK, Italy, Spain) during the European debt crisis. The cross-correlation function (CCF) approach used in the research distinguishes between causality-in-mean and causality-in-variance. In both causality dimensions, the BRICS CDS prices tend to Granger cause those of the EU counterparts with the exception of Germany. Italy and Spain exhibit the highest dependence on the BRICS, whereas only India has a negative balance of outgoing and incoming causal linkages among the BRICS. Thus, the paper underscores the signs of decoupling effects in the sovereign CDS market and also supports the view that the European debt crisis has so far had a limited non-EU impact in this market. --
    Keywords: sovereign credit default swaps (CDS),causality-in-mean,causality-in-variance,European debt crisis,BRICS,decoupling
    JEL: C50 G10 G15
    Date: 2014
  4. By: Michiel Bijlsma; Jasper Lukkezen; Kristina Marinova
    Abstract: Large banks derive a funding advantage from being too-big-to-fail, while small banks do not. To estimate the funding advantage we explain the CDS spreads of small banks in six major European countries during the crisis by market fundamentals and bank-specific characteristics. Next, we extrapolate and predict the CDS spreads of large banks. The difference between the predicted and the observed spread is then interpreted as the funding advantage and amounts to 67 basis points for large banks and 121 for GSIFIs.
    JEL: G01 G21 G24 G28 H12
    Date: 2014–02
  5. By: Foders, Federico; Vogelsang, Manuel Molina
    Abstract: The German economy has been outperforming other member countries of the European Union during the recent Great Recession and the still ongoing European debt crisis. What are the determinants of this outcome? This paper sets out to empirically analyze the trade and technology specialization and the price/cost performance of the German economy over the period 1990 - 2011. Furthermore, we apply the unit value approach to determine whether the competitiveness of German manufacturing products is related to price or quality advantage. Also, we estimate the degree of vertical specialization characterizing the German export sector in order to assess the role global value chains play in strengthening Germany's position in manufacturing. All indicators are calculated for Germany, the Republic of Korea, the People's Republic of China, Japan and the United States. Our results confirm that Germany is specialized in medium-range technology products and show that quality is the main driver of Germany's international success, that price and cost advantage determines competitiveness in some product groups and that R&D efforts have contributed to develop and maintain German competitiveness in manufactured products. --
    Date: 2014
  6. By: Hatton, Timothy J. (University of Essex)
    Abstract: Historical experience suggests that when a period of rising immigration is followed by a sudden slump, this can trigger a policy backlash. This has not occurred in the current recession. This paper examines three links in the chain between the slump and immigration policy. First, although immigration flows have responded to the slump, and immigrants have borne more than their share of the burden, this has done little to protect the employment of non-immigrants. Second, despite the recession for Europe as a whole, attitudes to immigration have not changed very much, and they have been influenced more by fiscal concerns than by rising unemployment. Third, while far right parties have used the recession to renew the political pressure for tougher immigration policies, governments have been constrained by the composition of immigration and by EU regulation.
    Keywords: European immigration, recession, immigration policy
    JEL: F22 F52 J15
    Date: 2014–02
  7. By: Gehringer, Agnieszka; Martínez-Zarzoso, Inmaculada; Nowak-Lehmann Danzinger, Felicitas
    Abstract: This paper examines the development and drivers of total factor productivity (TFP) in the manufacturing sector for a panel of 17 EU countries over the period of 1995-2007. Recent panel data estimation techniques are used in a twofold approach. First, we estimate aggregated and sectoral TFP for 17 EU countries by means of the augmented mean group estimator to control for endogeneity, cross-section dependence and heterogeneous production technology. Second, we investigate the relative importance of the drivers of predicted TFP, namely Foreign Direct Investment (FDI), investment in Information and Communication Technologies (ICT), human capital, R&D, trade openness and rationalization efforts. The results confirm that rationalization, human capital and ICT are the main drivers of TFP. --
    Keywords: sectoral TFP,heterogeneous production functions,common dynamic process,European Union
    JEL: C26 F43 O47
    Date: 2014
  8. By: Duarte, Pablo
    Abstract: The empirical evidence on the linkage of the informal economy and GDP is ambiguous. It depends on the method used to estimate the size of the informal economy. I propose a common factor of four different approximations of the size of the informal economy as an alternative. Using Spain as an example I find that GDP Granger-causes informality, but not the other way around. I also find that positive GDP shocks induce positive and statistically significant responses of the size of the informal economy. --
    Keywords: informal economy,dynamic factor model
    JEL: C38 O17
    Date: 2014
  9. By: Daniele Pianeselli (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5,500 issues in the period 2005-2012, we find that the turbulence in the sovereign debt market has been a major driver of corporate risk in recent years. Compared with 2005-07, the three years preceding the global financial crisis, in 2010-12 Italian, Spanish and Portuguese firms paid an additional premium of between 70 and 120 basis points on average due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.
    Keywords: corporate bonds, risk-premium, too-big-to-fail, sovereign debt crisis
    JEL: G38 G32
    Date: 2014–02

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