nep-eec New Economics Papers
on European Economics
Issue of 2014‒03‒22
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter? By Aurélien Leroy; Yannick Lucotte
  2. European Monetary Policy in the Heterogeneous Currency Area and the Open Question of Convergence By Afflatet, Nicolas
  3. Inflation Expectations Spillovers between the United States and Euro Area By Aleksei Netšunajev; Lars Winkelmann; ;
  4. Effects of ECB balance sheet policy announcements on inflation expectations By Richhild Moessner
  5. Migration as an adjustment mechanism in the crisis? A comparison of Europe and the United States. By Julia Jauer; Thomas Liebig; John P. Martin; Patrick A. Puhani
  6. European Integration: Partisan Motives or Economic Benefits? By Esteve, Patrícia; Theilen, Bernd, 1965-
  7. A re-examination of real interest parity in CEECs using old and new generations of panel unit root tests By Claudiu Tiberiu Albulescu; Dominique Pepin; Aviral Kumar Tiwari
  8. Implementation of the fiscal compact in the Euro area member states: Expertise on the behalf of the German Council of Economic Experts By Burret, Heiko T.; Schnellenbach, Jan
  9. Do Large Governments Decrease Happiness? By Sequeira, Tiago; Minas, Tiago; Ferreira-Lopes, Alexandra
  10. International Financial Flows and the Irish Crisis By Philip R. Lane
  11. Predictions vs. preliminary sample estimates: the case of eurozone quarterly GDP By Enrico D'Elia
  12. Fiscal rules and government size in the European Union By Suari Andreu, Eduard; Mierau, Jochen O.
  13. The Development of EU and EU Member States' External Competitiveness By Angela Cheptea; Charlotte Emlinger; Lionel Fontagné; Gianluca Orefice; Olga Pindyuk
  14. Topics in Fiscal Policy: Evidence from a Representative Survey of the German Population By Bernd Hayo; Matthias Uhl
  15. Fiscal devaluation scenarios: a quantitative assessment for the Italian economy By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici

  1. By: Aurélien Leroy (Laboratoire d’Economie d’Orléans); Yannick Lucotte (ESG Management School; Department of Economics,)
    Abstract: This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.
    Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model
    JEL: C23 D4 E43 E52 G21 L10
    Date: 2014
  2. By: Afflatet, Nicolas
    Abstract: Divergent macro-economic developments within a currency area can lead to undesired distortions. That is why in the Eurozone much attention was drawn to the homogeneity of the currency area. However, at the beginning the Eurozone seemed to be too heterogeneous for a common currency. So many hopes relied on a convergent development under the common currency so that the single monetary policy would meet the needs of all member countries. Based on the Taylor rule this article shows that these needs differ a lot within the currency union. Stationarity tests investigate whether the differences in inflation and growth rates have diminished. In this case, the single monetary policy would rather meet the monetary needs of the member countries. On the one hand, (partially small) hints for convergence can be found for several countries. On the other hand divergent developments can be assessed for others. These results lead to the conclusion that the single monetary policy will not meet the needs of all member countries in the foreseeable future. This should cause some concerns. As a result, the member countries should orientate their policies on measures which contribute to the efficiency of the currency area. --
    Keywords: Taylor rule,convergence,divergence,time series tests,stationarity,currency area,single monetary policy
    Date: 2014–03
  3. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: We quantify spillovers of inflation expectations between the United States (US) and Euro Area (EA) based on break-even inflation (BEI) rates. In contrast to previous studies, we model US and EA BEI rates jointly in a structural vector autoregressive (SVAR) model. The SVAR approach allows to identify US and EA specific inflation expectations shocks. By modeling the heteroscedasticity of the data, we are able to test the identifying restrictions of structural shocks and analyze time-varying spillovers. Adjusted for BEI risk premia, our main result suggests that spillovers of inflation expectations increase during times of macroeconomic stress. We document a significant impact of the European sovereign debt crisis on US expectations. The finding contributes to the discussion about a weakening of inflation control by national central banks and speaks in favor of internationally coordinated policy actions, especially during crisis times.
    Keywords: International transmissions, break-even inflation, credibility of monetary policy, structural vector autoregressive (SVAR) analysis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2014–03
  4. By: Richhild Moessner
    Abstract: We investigate whether ECB balance sheet policy announcements in the wake of the global financial crisis have affected the ECB.s monetary policy credibility as measured by long-term inflation expectations, by looking at their effects on euro area inflation swap rates of maturities up to 10 years. We consider asset purchase programmes and long-term refinancing operations with maturities above 6 months. We find that these announcements only led to a slight increase in long-term inflation expectations. We therefore find no strong evidence to suggest that ECB balance sheet policy announcements have led to much higher long-term inflation expectations, suggesting that the monetary policy credibility of the ECB has not been harmed by these policies.
    Keywords: Monetary policy; central bank communication; balance sheet policies; inflation expectations
    JEL: E52 E58
    Date: 2014–03
  5. By: Julia Jauer (OECD Paris); Thomas Liebig (OECD Paris); John P. Martin (OECD Paris); Patrick A. Puhani (Leibniz Universität Hannover)
    Abstract: The question of whether migration can be an equilibrating force in the labour market is an important criterion for an optimal currency area. It is of particular interest currently in the context of high and rising levels of labour market disparities, in particular within the Eurozone where there is no exchange-rate mechanism available to play this role. We shed some new light on this question by comparing pre- and post-crisis migration movements at the regional level in both Europe and the United States, and their association with asymmetric labour market shocks. We find that recent migration flows have reacted quite significantly to the EU enlargements in 2004 and 2007 and to changes in labour market conditions,particularly in Europe. Indeed, in contrast to the pre-crisis situation and the findings of previous empirical studies, there is tentative evidence that the migration response to the crisis has been considerable in Europe, in contrast to the United States where the crisis and subsequent sluggish recovery were not accompanied by greater interregional labour mobility in reaction to labour market shocks. Our estimates suggest that, if all measured population changes in Europe were due to migration for employment purposes – i.e. an upper-bound estimate – up to about a quarter of the asymmetric labour market shock would be absorbed by migration within a year. However, in the Eurozone the reaction mainly stems from migration of third-country nationals. Even within the group of Eurozone nationals, a significant part of the free mobility stems from immigrants from third countries who have taken on the nationality of their Eurozone host country.
    Keywords: Free mobility, migration, economic crisis, labour market adjustment, Eurozone, Europe, United States
    JEL: F15 F16 F22 J61
    Date: 2014–03
  6. By: Esteve, Patrícia; Theilen, Bernd, 1965-
    Abstract: In this paper we examine the influence of economic factors to explain partisan support for European integration over the last three decades. We find that partisan support is larger in `poorer' countries with direct economic bene fits from EU membership. On the contrary, parties in countries aff ected by the Maastricht criteria are more Euro-sceptical. Moreover, we find weak evidence for larger partisan support in countries with more developed welfare states, and that the support for European integration fluctuates in parallel with the business cycle. Finally, our results indicate that the importance of economic factors in determining partisan support for European integration has grown in recent periods. JEL classi fication: F15, F42, F53, F55, H60. Key words: European Integration; Partisan Ideology; Maastricht Criteria; European Budget; Benefi ts from Trade.
    Keywords: Europa -- Integració econòmica, Pressupost -- Comunitat Europea, Països de la, 339 - Comerç. Relacions econòmiques internacionals. Economia mundial. Màrqueting,
    Date: 2014
  7. By: Claudiu Tiberiu Albulescu (CRIEF); Dominique Pepin (CRIEF); Aviral Kumar Tiwari
    Abstract: This study applies old and new generations of panel unit root tests to test the validity of long-run real interest rate parity (RIP) hypothesis for ten Central and Eastern European Countries (CEECs) with respect to the Euro area and an average of the CEECs' real interest rates, respectively. When the panel unit root tests are carried out with respect to the Euro area rate, we confirm the results of previous studies which support the RIP hypothesis. Nevertheless, when the test is performed using the average of the CEECs' rate, our results are mitigated, revealing that the hypothesis of CEECs' interest rates convergence cannot be taken for granted. From a robustness analysis perspective, our findings indicate that the RIP hypothesis for CEECs should be considered with cautions, being sensitive to the benchmark.
    Date: 2014–03
  8. By: Burret, Heiko T.; Schnellenbach, Jan
    Abstract: [Conclusion] The overall picture of the current status of implementation of the Fiscal Compact into national law is rather ambiguous. On the one side, there are countries like Spain and Portugal, which have been severely affected by the Euro crisis, and appeared to have learned a lesson and implemented promising and strong fiscal rules. On the other side, it is worrisome that Greece, of all countries, has not put forward any draft bill so far and failed to meet the deadlines set by the MoU. The overall picture is also somewhat ambiguous because many countries have not anchored their budget rules into their constitution, but rely on simple laws instead. While the vast majority of countries have created the legal basis for the creation of an independent fiscal council, only some have already appointed the members. There seems to be a general tendency towards staffing the councils with members who are rather not involved in politics but are academic economists, and in some cases even are recruited from other countries. This finding fuels the expectation that the fiscal councils are not only de jure but also de facto independent in their work. However, one also has to note that the appointing process for fiscal councils is still a much politicized procedure, with the parliament and the government being the key players. Thus, the question to what extent the independence of the fiscal councils will also be ensured in the long run, remains unanswered for the moment. In some countries the independence is not institutionally secured, for instance, by explicitly prohibiting the appointment of active (or recently active) politicians for the fiscal council. --
    Date: 2014
  9. By: Sequeira, Tiago; Minas, Tiago; Ferreira-Lopes, Alexandra
    Abstract: Until now there was little evidence of the influence of large governments on happiness and when it existed, it was positive. We show that structural government consumption and other measures of long-term government imbalances significantly decrease happiness and life satisfaction in European countries. In some cases there is evidence of an inverted U-shaped relationship between the Government burden and happiness, for which the negative relationship begin just before the median. This evidence may lead European politicians to reject the idea that bigger Governments lead to higher people satisfaction and to win elections. This result is consistent with people valuing (negatively) expectations for future tax increases, macroeconomic imbalances, and austerity.
    Keywords: Happiness; Life Satisfaction; Government Size; Fiscal Deficits; Public Debt; Europe
    JEL: C21 D60 H30 I31 O52
    Date: 2014
  10. By: Philip R. Lane (Trinity College Dublin)
    Abstract: This paper explores the contribution of international financial flows to the boom-bust-recovery cycle in Ireland. It finds that a nuanced interpretation is required, in that bank-intermediated debt inflows certainly contributed to the amplification of the property boom during 2003-2007 but that other types of international flows have played a stabilising role through a variety of mechanisms, with a new wave of inflows a key component of the current recovery phase.
    Keywords: international capital flows, euro crisis, Irish crisis
    JEL: E42 E60 F32 F33
  11. By: Enrico D'Elia
    Abstract: Economic agents are aware to incur in a loss basing their decisions on their own extrapolations instead of sound statistical data, but the loss could be smaller than the one related to waiting for the dissemination of final data. A broad guidance in deciding when statistical offices should release preliminary and final estimates of the key statistics may come from comparing the loss attached to users’ predictions to the loss associated to possible preliminary estimates from incomplete samples provides. Also the cost of delaying decisions for many economic agents may support the dissemination of very early estimates of economic indicators even if their accuracy is not fully satisfactory from a strict statistical viewpoint. Analysing the vintages of releases of quarterly Euro area GDP supports the view that even very inefficient predictions may beat some official preliminary releases of GDP, suggesting that the current calendar of data dissemination deserves some adjustment. In particular, actual “flash” estimates could be anticipated, while some later intermediate releases are likely less informative for the users.
    Keywords: Accuracy, data dissemination, eurozone GDP, forecast, preliminary estimates, timeliness
    JEL: C44 C49 C82 C83
    Date: 2014–03
  12. By: Suari Andreu, Eduard; Mierau, Jochen O. (Groningen University)
    Abstract: This paper studies the impact of national fiscal rules on government size as measured by the ratio of government expenditures to gross domestic product. We develop a model of the budgetary process and show that a common pool problem may arise which can be mitigated through fiscal rules. We test the model?s predictions using a novel time-series cross-section dataset of 27 European Union members for the period between 1990 and 2011. Corroborating the model, we find that fiscal rules have a negative impact on government size. Contrasting the model, their impact becomes smaller as the number of ministers increases.
    Date: 2014
  13. By: Angela Cheptea; Charlotte Emlinger; Lionel Fontagné; Gianluca Orefice; Olga Pindyuk
    Abstract: We revisit competitiveness issues using recent data and show that the global financial crisis has taken a toll on European producers that before 2007 were maintaining their market positions. The EU competitiveness in goods has recently deteriorated, even in the upper and high-tech segments of the world market. The decline recorded by European exporters is attributable purely to performance and not to adverse orientation of their exports. However, European exports are predominantly "Made in Europe" and include an increasing share of services. The within Europe advantages in manufacturing seem to have been exhausted and further gains imply moves outside the EU with an enhanced focus on the competitiveness in services as an important determinant of future European industry.
    Keywords: Competitiveness;trade in value added
    JEL: F14 F15
    Date: 2014–03
  14. By: Bernd Hayo (University of Marburg); Matthias Uhl (University of Marburg)
    Abstract: Using a representative survey of the German population, this paper studies individual consumption responses to a recent payroll tax reduction. Our results show that 55% of the respondents spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic determinants of consumption responses suggests that temporary and permanent tax changes have a similar impact, that interest rates are an important determinant of consumption responses to tax changes, and that households with higher income have a higher propensity to consume.
    Keywords: Survey evidence Fiscal policy Public debt Public preferences Consumption Labour supply
    JEL: E21 E62 H30 J22
    Date: 2014
  15. By: Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
    Abstract: We study the potential impact of fiscal devaluation policies on the Italian economy using IGEM, a dynamic general equilibrium model for the Italian economy developed at the Department of Treasury of the Italian Ministry of the Economy and Finance. The simulations show that fiscal devaluation policies are likely to produce slight improvements on the external position of the economy only in the short run, while the output gains seem to persist in the long run. Non-negligible distributional effects across households are also observed, since taxation on consumption tends to be regressive.
    Keywords: Fiscal devaluation, DGE, structural reforms, Italy
    JEL: E10 C50 E60
    Date: 2014–02

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