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on European Economics |
| By: | Daniel Gros; Cinzia Alcidi; Ansgar Belke; Leonor Coutinho; Alessandro Giovannini |
| Abstract: | Two of the four macroeconomic adjustment programmes, Portugal and Ireland’s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound. |
| Keywords: | Current account imbalance; Euro area; fiscal multiplier; investment; macroeconomic adjustment programme |
| JEL: | E22 E62 F32 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0482&r=eec |
| By: | Jean-Michel Sahut; Medhi Mili; Frédéric Teulon |
| Abstract: | This paper deals with transition/transmission mechanisms through which world financial market conditions indicators affect real economic growth in the Euro area. The informational content of financial variables for predicting real economic growth is assessed, allowing for asymmetric responses to shocks. A nonlinear framework is developed based on a smooth transition model for which the effects of shocks can vary across business cycles when financial indicators modify both the endogenous and state variables. Global financial variables are shown to significantly affect real economic growth in the Euro area. |
| Keywords: | Euro area, economic growth, financial markets. |
| Date: | 2014–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-324&r=eec |
| By: | Stephen McKnight (Centro de Estudios Económicos, El Colegio de México); Alexander Mihailov (Department of Economics, University of Reading); Kerry Patterson (Department of Economics, University of Reading); Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | Does theory aid inflation forecasting? To date, the evidence suggests that there is no systematic advantage of theory-based models of inflation dynamics over their astructural counterparts. This study reconsiders the issue by developing a “semi-structural” forecasting procedure comprised of two key ingredients. First, a prediction for the cyclical component of inflation is obtained employing the concept of “fundamental inflation”. The latter is computed from a canonical two-country monetary model, either via estimation of the reduced-form parameters of the New Keynesian Phillips Curve by the generalized methods of moments, or via calibration of its structural parameters. The computation of fundamental inflation requires multistep forecasts for the model-implied cyclical inflation drivers, which we generate via respective auxiliary vector autoregressions. Second, a driftless random walk prediction is employed for the trend component of inflation, on which theory has little to say. Using quarterly data for both the United States and the Euro Area for the period 1970-2010, and rolling window re-estimation to accommodate gradual structural change, we find that such semi-structural inflation forecasts outperform conventional univariate forecasts at all examined horizons. Our results thus suggest that theory can indeed play an important role in forecasting inflation, when appropriately combined with relevant data-driven features. |
| Keywords: | fundamental inflation, New Keynesian Phillips Curve, inflation dynamics, predictive accuracy, money in the open economy, semi-structural forecasting |
| JEL: | C52 C53 E31 E37 F41 F47 |
| Date: | 2014–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2014-03&r=eec |
| By: | Schmid, Günther (WZB - Social Science Research Center Berlin) |
| Abstract: | This essay starts, after a short introduction on the importance and dimensions of “inclusive growth”, with a brief empirical sketch on to what extent Europe has already succeeded with respect to this ambitious goal. The result is quite sobering and gives rise to the question: why is it so? The main part of this paper is devoted to answering this question by presenting a model based on the trade-off between comparable productive capacity (CPC) and flexibility. After the introduction of the monetary union, this trade-off sharpened for many EU member states whose CPC now falls below the fair level playing field. To compensate for the lack of comparable productive capacities, flexibility measures would be necessary (e.g. downward wage flexibility, regional mobility and cuts in social expenditures) to an extent which is unrealistic or would erode social cohesion and democracy. As alternative, the possible future role of the European Social Model could consist of the implementation of four strategies: First, investive social transfers, in particular by establishing a European Fund for Employment and Income Security (EIS) to strengthen the inclusive function and stabilisation impact of national unemployment insurance systems; second, protected flexibility, in particular the promotion of an internal functional flexibility through work sharing; third, investing in people, in particular by strengthening dual learning systems and by inducing mobility chains (making transitions pay); and fourth, efficient labour market regulation for better utilising existing capacities and restraining inefficient forms of flexibility. Examples for each strategy are presented to illustrate and stimulate the debate. |
| Keywords: | Europe, social policy, labour market policy, growth, inclusion, unemployment insurance |
| JEL: | E24 I31 J65 J83 O43 P16 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp82&r=eec |
| By: | Inske Pirschel; Maik Wolters |
| Abstract: | We study the forecasting performance of three alternative large scale approaches using a dataset for Germany that consists of 123 variables in quarterly frequency. These three approaches handle the dimensionality problem evoked by such a large dataset by aggregating information, yet on different levels. We consider different factor models, a large Bayesian vector autoregression and model averaging techniques, where aggregation takes place before, during and after the estimation of the different models, respectively. We find that overall the large Bayesian VAR and the Bayesian factor augmented VAR provide the most precise forecasts for a set of eleven core macroeconomic variables, including GDP growth and CPI inflation, and that the performance of these two models is relatively robust to model misspecification. However, our results also indicate that in many cases the gains in forecasting accuracy relative to a simple univariate autoregression are only moderate and none of the models would have been able to predict the Great Recession |
| Keywords: | Large Bayesian VAR, Model averaging, Factor models, Great Recession |
| JEL: | C53 E31 E32 E37 E47 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1925&r=eec |
| By: | Laurence M. Ball |
| Abstract: | This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time. |
| JEL: | E32 E65 E66 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20185&r=eec |