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on European Economics |
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Issue of 2014‒11‒22
twelve papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Mariarosaria Comunale; Jeroen Hessel |
| Abstract: | The current account imbalances that are at the heart of the European sovereign debt crisis are often attributed to differences in price competitiveness. However, recent research suggests that domestic demand booms related to the financial cycle may have been more important. As this would have very different policy implications, this paper aims to investigate the relative role of price competitiveness and domestic demand as drivers of the current account imbalances in the euro area. We estimate panel error-correction models for exports, imports and the trade balance. We specifically look at fluctuations in domestic demand at the frequency of the financial cycle. We conclude that although differences in price competitiveness have an influence, differences in domestic demand are more important than is often realized. Fluctuations at the frequency of the financial cycle are more suitable to explain the trade balance than fluctuations at the frequency of the normal business cycle. Our results call for more emphasis on credit growth and macro prudential policy, in addition to the current attention for competitiveness and structural reforms. |
| Keywords: | Current account deficits; Economic and Monetary Union; competitiveness; domestic boom; financial cycle |
| JEL: | E32 F32 F41 F44 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:443&r=eec |
| By: | Ansgar Belke; Tobias Böing |
| Abstract: | The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a Structural Vector Autoregressive (SVAR) technique following Cecchetti and Rich and, secondly, an episode-based procedure proposed by Ball based on historical disinflationary episodes. The estimation results do generally not support empirical evidence of overly high sacrifice ratios and hence, on average, indicate relatively modest costs of structural adjustments in the Euro area. |
| Keywords: | Sacrifice ratio, structural adjustment, Euro Area, VAR, episode method, Phillips curve |
| JEL: | E31 F49 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:rmn:wpaper:201411&r=eec |
| By: | João Amador; Rita Cappariello; Robert Stehrer |
| Abstract: | This paper describes the main features of Global Value Chains (GVCs) in the euro area taken as a whole and compares with other large trade players like the US, China and Japan. In addition, the perspective of individual euro area countries is considered, with a focus on intra euro area linkages. The analysis relies primarily on the concept of foreign value added in exports, as a way to assess the pervasiveness of GVCs, it covers the period 2000-2011 and bases on the World Input-Output Database (WIOD). The paper finds that GVCs are important for the euro area as whole and they have rebounded after the great trade collapse. Moreover, there is a strong relevance of regional production linkages in Europe, with Germany playing a key role. |
| JEL: | F1 F14 F15 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201412&r=eec |
| By: | Yasin Mimir |
| Abstract: | This paper investigates the empirical link between international consumption risk sharing, financial integration, and financial development for a group of twenty-nine developed and developing countries in the G7, the Euro area and the OECD. We first compute the degree of consumption risk sharing of these countries using an average risk sharing measure. We then relate the average risk sharing measure of these countries to their level of financial integration and financial development. We find that (i) the average consumption risk sharing in the Euro area is higher than those in the G-7 and the OECD, and (ii) a higher degree of international consumption risk sharing is associated with a greater degree of financial integration and a lower level of financial development. Based on these results, we argue that more financially integrated countries with more developed financial markets are better able and less in need to insure themselves against idiosyncratic income shocks. Inclusion of per capita income, output risk and trade openness as additional control variables reduces the effects of financial integration and financial development on consumption risk sharing. Holding financial integration and financial development equal, countries in the Euro area engage in significantly more consumption risk sharing than the ones in the G7 and the OECD. |
| Keywords: | Consumption Risk Sharing, Financial Integration, Financial Development |
| JEL: | E21 F15 F36 G15 O1 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1436&r=eec |
| By: | Comunale, Mariarosaria |
| Abstract: | Exchange rate assessment is becoming increasingly relevant for economic surveillance in the EU. The persistence of different wage and productivity dynamics among EMU countries or EU members with a fixed exchange regime with euro, coupled with the impossibility of correcting competitiveness differentials via the adjustment of nominal rates, have resulted into divergent dynamics in Real Effective Exchange Rates. This paper explores the role of economic fundamentals in explaining medium/long-run movements in the Real Effective Exchange Rates in the European Union over the period 1994-2012 by using heterogeneous, cointegrated panel frameworks in static and dynamic terms. In addition, the paper provides an analysis of the misalignments of the rate for each member state based on the “equilibrium†measure calculated from the permanent component of the fundamentals (BEER). The misalignments in EU28 are huge and the patterns differ significantly among groups. Therefore, despite the influence of the fundamentals is quite similar, the differences in the transfer variable (which affect the BEER) and in the actual Real Effective Exchange Rate are key. The core countries have been undervalued for almost the whole period, which entails from an important increase in competitiveness for those countries. Instead the periphery has experienced high rates, especially in Portugal. In addition, the behavior of CEECs is driven, as expected, by the transition process and influenced by the criteria to the accession to the EU. The misalignments in this case are still extremely wide and reflect these phenomena. |
| Keywords: | real effective exchange rate, European Union, behavioral effective exchange rate,transfer problem, panel cointegration |
| JEL: | C23 F31 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59571&r=eec |
| By: | Nicolò Pecora (Università Cattolica del Sacro Cuore); Alessandro Spelta (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | Analyzing the topological properties of the network of shareholding relationships among the Euro Area banks we evaluate the relevance of a bank in the ?nancial system respect to ownership and control of other banks. We ?nd that the degree distribution of the European banking network displays power laws in both the binary and the weighted case. We also ?nd that the exponents are linked by a scaling relation revealing a direct connection between an increase of control diversi?cation and an increase of market power. Results also reveal Single Supervisory Mechanism, recently introduced by the European Central Bank and based on banks? total assets is a good proxy for the systemic risk associated to a particular ?nancial institution. Moreover we study how control and wealth are structured and concentrated within the banking system. Interestingly, our analysis reveals that control is highly concentrated at banking level, namely, lying in the hands of very few important shareholders that have weak relationships between them. This means that each main holder controls approximately a separate subset of banks. |
| Keywords: | Shareholding network, European banking system, Weighted graph, Power law |
| JEL: | D85 E58 L14 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def14&r=eec |
| By: | Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski |
| Abstract: | This report provides estimates of the VAT Gap for 26 EU Member States for 2012, as well as revised estimates for the period 2009-2011. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”,1 published in September 2013. This update incorporates the NACE Rev. 2 classification of economic activities into the calculation of the theoretical liability. The year 2012 saw overall unfavourable economic developments, as the GDP of the European Union shrank by 0.4 percent. These developments contributed to a slowdown of nominal final consumption and of other economic activities that form the basis of the Value Added Tax.A few countries applied changes to standard or reduced rates, but on the whole the structure of VAT rates was relatively stable compared to the numerouschanges in the wake of the onset of the Great Recession in 2008-2009. For the EU-26 as a whole, VAT revenues grew by slightly over 2 percent, from Euro 904 billion in 2011 to Euro 922 billion in 2012; and the theoretical VAT liability (VTTL) also grew by a similar percentage. The overall VAT Gap, as estimated according to the refined methodology, for the EU-26 saw a slight increase in absolute numbers (of about Euro 6 billion) between 2011 and 2012, to reach Euro 177 billion, but remained essentially stable as a percentage of the overall VTTL, at 16 percent. The estimates for 2009-2011 have been revised because of the switch to NACE-2 classification and refinements in the methodology, and are slightly lower compared to those discussed in the 2013 VAT Gap report.2 In 2012, Member States’ estimated VAT Gaps ranged from the lo of 5 percent in the Netherlands and Finland, to the high of 44 percent in Romania. The median absolute change in the VAT Gap of the individual Member States from 2011 to 2012 was 1.1 percent, with a number of countries registering considerably higher changes. Overall, 11 Member States decreased their VAT Gap, with the largest improvements noted in Greece, despite the depth of its recession, and Bulgaria. However, 15 Member States saw an increase in the VAT Gap, ranging from virtually nil (e.g., Slovenia) to a substantial deterioration (e.g., Slovakia, Poland). This report also provides estimates of the Policy Gap for the EU-26. This is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied uniform taxation to all consumption. Estimates of the Policy Gap confirm the finding that in most countries the loss of revenue compared to an “ideal” system with no reduced rates and no exemptions, is due to a greater extent to policy decisions than to non-compliance and weak enforcement. |
| Keywords: | Optimal Taxation, Efficiency, Incidence, Externalities, Redistributive Effects, Environmental Taxes and Subsidies, Personal Income and Other Nonbusiness Taxes and Subsidies, Business Taxes and Subsidies, Tax Evasion, Other Sources of Revenue, Other |
| JEL: | H20 H24 H25 H26 H62 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:sec:cnrepo:0120&r=eec |
| By: | Virkola, Tuomo |
| Abstract: | This paper studies real-time measures of the output gap and fiscal policy stance estimates for EU countries. We construct a comprehensive real-time data set on fiscal forecasts and study whether there are systematic differences between the European Commission and IMF estimates of the output gap and structural budget balance. We argue that differences in the EC and the IMF estimates should provide a lower bound for the potential heterogeneity that is likely to emerge when national governments begin to release their estimates of the output gap and structural budget balance as required by the new fiscal rules in the EU. We find evidence that while the two institutions are likely to agree on cyclical conditions and fiscal policy measures in EU countries after the fact, there are statistically significant differences in their real-time estimates of the output gap and structural budget balance. |
| Keywords: | business cycles, fiscal policy, forecasting |
| JEL: | E32 E62 H68 |
| Date: | 2014–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:37&r=eec |
| By: | F. Langot; M. Lemoine |
| Abstract: | Most European countries suffer from a structural weakness of employment and competitiveness. Can an optimal tax system reinforce European countries in this respect? If so, does this long-term policy act as a devaluation or a revaluation? In this paper, we show that fiscal devaluation can be an optimal policy only if the labor wedge is sufficiently large. Indeed, whereas the terms-of-trade externality calls for a fiscal revaluation, i.e. the use of tariffs by "strategic" countries for extracting a rent from their trade partners, a sufficiently large labor wedge calls for employment subsidies, at the heart of a fiscal devaluation. We show that these subsidies must be financed by VAT instead of tariffs, which are less efficient. Finally, in a multi-country world, we show that, if several countries adopt a similar strategy, the impact of this policy is magnified. |
| Keywords: | Optimal taxation, international trade, labor wedge, general equilibrium model. |
| JEL: | D51 F42 H21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:516&r=eec |
| By: | Alonso-Ortiz, Jorge; Colla, Esteban; Da-Rocha, Jose-Maria |
| Abstract: | Interest rate spreads on sovereign debt were negatively correlated with the evolution of stock prices during The European Sovereign Debt Crisis. In particular, for a sample of 9 european countries there was a year (between 2009 and 2012) in which the correlation between stock prices and spreads was almost -1. We use this fact to estimate the upper bound of productivity default shocks using a continuous time structural model of default. At every instant the government maximizes expected tax revenues, where the only source of uncertainty is TFP, which follows a regime switching brownian motion. By estimating TFP regimes, to match interest rate spreads on sovereign debt and stock prices, we compute the ratio of the productivity if there was a default relative to the no default benchmark. This is a measure on how much productivity could countries loose at default. We found a robust negative relation between the costs of default and the probability of default. That is, financial markets incorporate into prices the risk of default immediately. |
| Keywords: | Default, Sovereign Debt, Financial Markets, Productivity |
| JEL: | E30 E44 G15 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59617&r=eec |
| By: | Thomas Jobert (University of Nice Sophia Antipolis, France; GREDEG CNRS); Alexandru Monahov (University of Nice Sophia Antipolis, France; GREDEG CNRS); Anna Tykhonenko (University of Nice Sophia Antipolis, France; GREDEG CNRS) |
| Abstract: | We study the impact of prudential supervision on domestic credit in 27 countries throughout 1999-2012. We use the Empirical Iterative Bayes’ estimator to account for country heterogeneity. We find: (i) the interest rate not to be a fundamental variable in explaining domestic credit, (ii) negative relations between credit sensitivity to past investment and to financial dependence, (iii) the effects of supervision on credit differ by country, but (iv) without systematic negative impact of increased supervisory stringency. Our results are coherent with two interpretations: one encouraging regulatory set-ups where increased supervision positively affects credit, and another cautioning about the associated risks. |
| Keywords: | Prudential supervision, Supervision in the EU, Banking system supervision, Financial institution regulation, Bayesian shrinkage estimator |
| JEL: | C51 E65 G28 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2014-30&r=eec |
| By: | Gerdie Everaert (Sherppa, Ghent University); Freddy Heylen (Sherppa, Ghent University); Ruben Schoonackers (Research Department, NBB) |
| Abstract: | This paper analyzes the direct and indirect effects of fiscal policy on total factor productivity (TFP) in a panel of OECD countries over the period 1970-2012. Our contribution is twofold. First, when estimating the impact of fiscal policy on TFP from a production function approach, we identify the worldwide available level of technology by exploiting the observed strong cross-sectional dependence between countries instead of using ad hoc proxies for technology. Second, next to direct effects, we allow for indirect effects of fiscal policy by modelling the access of countries to worldwide available technology as a function of fiscal policy and other variables. Empirically, we propose and implement a non-linear version of the Common Correlated Effects Pooled (CCEP) estimator of Pesaran (2006). The estimation results show that through the direct channel budget deficits harm TFP. A shift towards productive expenditures has a strong positive impact on TFP, whereas a shift towards social transfers reduces TFP. Through the indirect channel, significant positive effects on a country's access to global technology come from reducing the statutory corporate tax rate and from reducing barriers to trade. |
| Keywords: | Fiscal policy, TFP, Unobserved Common Factors, Panel Data |
| JEL: | C31 C33 E62 O38 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201411-274&r=eec |