nep-eec New Economics Papers
on European Economics
Issue of 2014‒03‒30
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Are All Sovereigns Equal? A Test of the Common Determination of Sovereign Spreads in the Euro Area By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  2. How to switch off the cypriot financial crisis without weakening durably Europe ? By Jean Messiha; Bruno-Laurent Moschetto; Frederic Teulon
  3. Debt Redemption Fund: Conditio Sine Qua Non? Government Bonds in the Euro Area Crisis By Silke Tober
  4. Growth Effects of Structural Reforms in Southern Europe: The case of Greece, Italy, Spain and Portugal By Janos Varga; Werner Roeger; Jan in 't Veld
  5. Monetary and macroprudential policy in an estimated DSGE model of the Euro Area By Quint, Dominic; Rabanal, Pau
  6. Wealth shocks, credit-supply shocks, and asset allocation: Evidence from household and firm portfolios By Kick, Thomas; Ruprecht, Benedikt; Onali, Enrico; Schaeck, Klaus
  7. OECD Forecasts During and After the Financial Crisis: A Post Mortem By Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
  8. Fiscal austerity and income distribution in Italy By Massimo Baldini
  9. Exit Strategies and Their Impact on the Euro Area - A Model Based View By Ansgar Belke
  10. Labor market reforms and unemployment dynamics By Fabrice Murtin; Jean-Marc Robin
  11. Investment to the Rescue By Vasily Astrov; Rumen Dobrinsky; Vladimir Gligorov; Doris Hanzl-Weiss; Peter Havlik; Mario Holzner; Gabor Hunya; Michael Landesmann; Sebastian Leitner; Olga Pindyuk; Leon Podkaminer; Sandor Richter; Hermine Vidovic
  12. The bilateral trade balance of the EU in the presence of structural breaks By Ketenci, Natalya
  13. The Service Sector and Female Market Work: Europe vs the US By Michelle Rendall

  1. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. In a F-test of the pooling assumptions suggests that Greece, Ireland and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
    Keywords: euro area financial crisis, sovereign spreads, panel data tests
    JEL: C33 G12 E63
    Date: 2014–03
  2. By: Jean Messiha; Bruno-Laurent Moschetto; Frederic Teulon
    Abstract: The two major banks in Cyprus - Bank of Cyprus and Laiki Popular Bank - have lost more than 4 billion EUR because of their exposure to the Greek bond market. In this paper, we look at how the European Union has responded to banking and financial problems that have affected Cyprus since the end of 2011. Although the financial crisis is minor in absolute terms, it showed that even the failure of a small country can generate systemic risk throughout the euro area. The rescue plan drawn up by the European Commission, the European Central Bank and the IMF (Troika) was adopted later. Taxation of deposits and the establishment of exchange controls is an unprecedented situation that could affect investor confidence in the euro area. Furthermore the tutelage of Cyprus gives authorities very small margins of action and may jeopardize the future of this country.
    Keywords: Crise financière, Chypre, Dette publique, Mécanisme Européen de Solidarité, Zone euro.
    JEL: E50 G15 G21
    Date: 2014–02–25
  3. By: Silke Tober
    Abstract: Fiscal austerity has not led to a return of confidence and it is not at all certain that the current crisis strategy can be sustained politically and will eventually succeed. Government bonds of crisis-hit countries have lost their safe asset status and high risk premiums are impairing monetary transmission. Within its mandate the ECB is in principal able to do what it takes to put an end to this crisis, but only if euro area governments tow the same line. A well-designed debt redemption fund could restore confidence and enhance growth by repairing the monetary transmission mechanism and allowing the expansionary monetary policy of the ECB to reach the crisis-hit countries. Combined with additional policies to foster growth and rebalancing in the euro area, a temporary debt redemption fund could be instrumental in engineering an economic turn-around. The paper touches upon the recent OMT-decision of the German Federal Constitutional Court, euro(basket)bonds and eurobills.
    Keywords: Debt Redemption Fund, OMT, safe assets, TARGET2, constitutional court, current account imbalances
    Date: 2014
  4. By: Janos Varga; Werner Roeger; Jan in 't Veld
    Abstract: This paper develops a semi-endogenous growth model for analysing the intertemporal effects of structural reforms in Southern European countries (Italy, Spain, Portugal and Greece). The model follows the product variety paradigm in a semi-endogenous setting, and includes a disaggregation of labour into different skill groups. We use a comprehensive set of structural indicators in order to calibrate the model to important macroeconomic ratios and levels of productivity and employment. Our results show that structural reforms yield significant economic gains in the medium and long run. The results point to the importance of product market reforms and labour market related education and tax reforms as the most promising areas of structural policy interventions. This paper also argues for placing more emphasis on education policy which is key in upgrading the labour force, especially in these countries where the share of low skilled labour is among the highest in the euro area.
    JEL: E10 O20 O30 O41
    Date: 2013–12
  5. By: Quint, Dominic; Rabanal, Pau
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and ?nancial frictions, and hence both monetary and macroprudential policy can play a role. We ?nd that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their e¤ects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. --
    Keywords: Monetary Policy,EMU,Basel III,Financial Frictions
    JEL: C51 E44 E52
    Date: 2014
  6. By: Kick, Thomas; Ruprecht, Benedikt; Onali, Enrico; Schaeck, Klaus
    Abstract: We use a unique dataset with bank clients' security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Eurozone, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. We document heterogeneous responses to these two types of shocks. While households with large holdings of securities from stressed Eurozone countries (Greece, Ireland, Italy, Portugal, and Spain) decrease the degree of concentration in their security portfolio as a result of the Eurozone crisis, non-financial firms with similar levels of holdings from stressed Eurozone countries do not. Credit-supply shocks at the bank level (caused by bank distress) result in lower concentration, for both households and non-financial corporations. We also show that only shocks to corporate credit bear ramifications on bank clients' portfolio concentration, while shocks in retail credit are inconsequential. Our results are robust to falsification tests, propensity score matching techniques, and instrumental variables estimation. --
    Keywords: asset allocation,sovereign debt crisis,credit-supply shocks,bank distress
    JEL: D12 D13 G11 G21
    Date: 2014
  7. By: Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
    Abstract: This paper assesses the OECD’s projections for GDP growth and inflation during the global financial crisis and recovery, focussing on lessons that can be learned. The projections repeatedly over-estimated growth, failing to anticipate the extent of the slowdown and later the weak pace of the recovery – errors made by many other forecasters. At the same time, inflation was stronger than expected on average. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. In the recovery, there is little evidence that an underestimate of the impact of fiscal consolidation contributed significantly to forecast errors. Instead, the repeated conditioning assumption that the euro area crisis would stabilise or ease played an important role, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. But placing these errors in a historical context illustrates that the errors were not without precedent: similar-sized errors were made in the first oil price shock of the 1970s. In response to the challenges encountered in forecasting in recent years and the lessons learnt, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, to improve their ability to monitor near-term developments and to better account for international linkages and financial market developments. Prévisions de l'OCDE pendant et après la crise financière : Post mortem Ce document évalue les projections de l'OCDE relatives à la croissance du PIB et à l'inflation durant la crise financière mondiale et lors de la reprise, tout en mettant l'accent sur les leçons qui peuvent être tirées. Les projections ont surestimé la croissance de façon répétée, à défaut d'anticiper l'ampleur du ralentissement puis, plus tard, le faible rythme de la reprise — des erreurs commises par de nombreux autres prévisionnistes. Simultanément, l'inflation a été, en moyenne, plus forte que prévu. L'analyse des erreurs relatives à la croissance montre que les prévisions de l'OCDE durant les années de crise économiques ont été plus importantes dans les pays dotés d'une plus grande ouverture au commerce international et d'une plus grande présence de banques étrangères. Durant la reprise, il y a peu d'évidences qu'une sous-estimation de l'impact de la consolidation budgétaire ait conduit de manière significative aux erreurs. Au lieu de cela, l'hypothèse de conditionnement répétée que la crise de la zone euro devrait se stabiliser ou a joué un rôle important, avec une croissance plus faible que prévu dans les pays européens où les écarts de rendement des obligations étaient plus élevés que ce qui avait été supposé. Mais placer ces erreurs dans un contexte historique montre que les erreurs ne sont pas sans précédent: des erreurs de taille similaire ont été faites lors du premier choc des prix du pétrole dans les années 70. En réponse aux difficultés rencontrées dans les prévisions au cours des dernières années et les leçons apprises, l'OCDE et d'autres organisations internationales ont cherché à améliorer leurs techniques et procédures de prévision, afin d'améliorer leur capacité à surveiller l'évolution à court terme et à mieux appréhender les liens internationaux et l'évolution du marché financier
    Keywords: fiscal policy, inflation, forecasting, economic fluctuations, economic outlook, performance économique, prévisions, fluctuations économiques, inflation, politique budgétaire
    JEL: E17 E27 E31 E32 E37 E62 E66 F47 G01
    Date: 2014–03–17
  8. By: Massimo Baldini
    Abstract: The aim of this chapter is to evaluate the main effects on the incomes of Italian households of the fiscal consolidation measures that the government has introduced after the start of the great recession in 2008, with the objective of reducing the deficit of the public budget. The questions addressed in this chapter can be summarised as follows: a) What is the overall distributive impact of austerity measures on the income distribution of Italian households? b) Which social and economic groups have been more affected? c) What is the relationship between the changes in income distribution in the last decade in Italy and the changes produced by the policy measures? d) When designing which measures to introduce, did the government take into account the underlying changes in income distribution during the crisis? The second section describes the evolution of income inequality and poverty before and after the onset of the great recession, while the third provides some details of the simulation method and presents the distributive effects of the austerity package on Italian households. Finally, the fourth section discusses these results and puts them in a more general context.
    Keywords: income distribution, fiscal austerity, Italy, tax-benefit system
    JEL: I32 H2
    Date: 2014–03
  9. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyses exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: Federal funds rate; exit strategies; global spillovers; international policy coordination; sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–01
  10. By: Fabrice Murtin; Jean-Marc Robin (Institute for Fiscal Studies and Sciences Po)
    Abstract: In this paper, we quantify the contribution of labor market reforms to unemployment dynamics in nine OECD countries (Australia, France, Germany, Japan, Portugal, Spain, Sweden, the United Kingdom and the United States). We build and estimate a dynamic stochastic search-matching model with heterogeneous workers, where aggregate shocks to productivity fuel up the cycle, and unanticipated policy interventions shift structural parameters and displace the long-term equilibrium. We show that the heterogeneous-worker mechanism proposed by Robin (2011) to explain unemployment volatility by productivity shocks works well in all countries. The amount of resources injected into placement and employment services, the reduction of UI benefits and product market deregulation stand out as the most prominent policy levers for unemployment reduction. All other LMPs have a significant but lesser impact. We also find that business cycle shocks and LMPs explain about the same share of unemployment volatility (except for Japan, Portugal and the US).
    Date: 2014–03
  11. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Vladimir Gligorov (The Vienna Institute for International Economic Studies, wiiw); Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sebastian Leitner (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw); Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw); Sandor Richter (The Vienna Institute for International Economic Studies, wiiw); Hermine Vidovic (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The Vienna Institute for International Economic Studies (wiiw) expects GDP in Central, East and Southeast Europe (CESEE) to pick up speed and grow on average by 2-3% over the forecast period 2014-2016 a major driving force rooted in an upward reversal of public and private investment. The question remains, however, whether investment-led growth in the CESEE countries is merely a statistical base effect of a few replacement investments or an indication of a profound paradigmatic shift. Increasing evidence suggests the latter for a number of reasons. During the ongoing economic crisis, public investment was severely reduced. However, in times of extreme uncertainty, the private sector is hesitant to invest. Hence, the public sector has to take the lead. It seems that the time for action has now come. This holds especially true for the New Member States, where towards the end of the previous year additional efforts were made to raise the absorption rate of the funds allocated within the context of the EU multiannual financial framework for 2007-2013 that was about to come to a close. Over the remaining disbursement period of the biennium 2014-2015 substantially higher amounts of EU-funded investment are to be expected. Given that, in practically all cases, national co-financing is also required, CESEE public capital investment will increase, with private investors likely following in its slipstream. Apart from a number of transport infrastructure projects, a host of thermal power plant projects are in the pipeline, as are several major investments in the construction and expansion of nuclear power plants across the region. Apart from public and semi-public infrastructure investment initiatives that have the potential to spur subsequent private investment, improving growth prospects in the euro area, the CESEE economies’ main trading partner, are likely to encourage export industries in the region to modernise and increase their capital stock. This should help avert a lapse into a deflationary spiral and foster a shift towards better equilibrium with lower unemployment rates over the medium term. However, substantial downward risks include possible effects from the current Russia-Ukraine conflict; in particular the interruption of energy supplies, potential trade embargoes or additional interest rate risk premia. All this could adversely affect investment-led growth in CESEE.
    Keywords: Central and East European new EU Member States, Southeast Europe, financial crisis, Balkans, Russia, Ukraine, Kazakhstan, Turkey, economic forecasts, employment, foreign trade, competitiveness, debt, deleveraging, exchange rates, fiscal consolidation
    JEL: C33 C50 E20 E29 F34 G01 G18 O52 O57 P24 P27 P33 P52
    Date: 2014–03
  12. By: Ketenci, Natalya
    Abstract: This paper examines the bilateral trade dynamics of the EU with its major trade partners. Previous studies on the bilateral trade dynamics of the EU have been based on estimations without the consideration of the presence of structural breaks. This paper examines the impacts of the real exchange rate and real income on the trade balance of the EU with its major trade partners in the presence of structural breaks. The empirical analysis includes ten major trade partners of the EU for 1980-2012, on a quarterly basis. The paper applies the Bai and Perron (1998) structural break test to determine the presence of structural breaks in series. In order to test the cointegration relationships of series, three different cointegration techniques were applied to the data. First, the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift; then, for cases where two breaks were detected, the Hatemi-J (2008) cointegration test was employed. Finally, for countries where more than two breaks are detected, the Maki (2012) cointegration test was applied, which allows for an unknown number of breaks. The parameters of the model were estimated using the Bai and Perron (1998) procedure, which allows for structural breaks, and the OLS procedure without consideration of structural breaks. The paper investigates how the different dynamics of the bilateral trade balance of the EU appear after possible structural breaks consideration.
    Keywords: Bilateral trade balance, J-curve, cointegration, structural breaks, EU.
    JEL: F14 F31
    Date: 2014
  13. By: Michelle Rendall (University of Zurich)
    Abstract: This paper studies cross-country differences in female employment and aggregate labor market hours over time, by quantifying the role of structural transformation and gender differences in sectoral labor productivity. Some countries have developed large service sectors, while others have not. These sectoral patterns can explain a large part of the cross-country differences in female employment and aggregate hours worked. Empirical evidence on why women predominately work in the service sector is provided. Consistent with previous studies, labor and consumption tax differences are able to explain large sectoral differences across countries. The key is households can produce a substitute for market services and women are, on average, less productive in sectors requiring more brawn, such as industry, giving them a comparative advantage to stay at home and work in the service sector. Therefore, an economy that imposes high taxes does not facilitate the movement of women into the labor market, causing service production to remain at home. This reduces the demand for market services, which feeds back into low total hours worked by women (and the total economy). Subsidies to female employment can circumvent the high tax effect, but lead to welfare loses.
    Date: 2013

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