nep-eec New Economics Papers
on European Economics
Issue of 2015‒01‒09
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-Euro Area imbalances? By Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
  2. An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area By Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
  3. International Banking: the Isolation of the Euro Area By Bouvatier, Vincent; Delatte, Anne-Laure
  4. Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies during the Global Financial Crisis: A Comparison By Cukierman, Alex
  5. In search of the transmission mechanism of fiscal policy in the Euro area By Fève, Patrick; Sahuc, Jean-Guillaume
  6. European Integration and the Feldstein-Horioka Puzzle By Margarita Katsimi; Gylfi Zoega
  7. Portugal : tackling the jobs crisis in Portugal By International Labour Office
  8. Money growth and consumer price inflation in the euro area: A wavelet analysis By Mandler, Martin; Scharnagl, Michael
  9. Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model By Chen, Xiaoshan; MacDonald, Ronald
  10. Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies By Mendoza, Enrique G.; Tesar, Linda L.; Zhang, Jing
  11. Fiscal Consolidation and Sovereign Risk in the Euro-zone Periphery By Elton Beqiraj; Massimiliano Tancioni
  12. How much of bank credit risk is sovereign risk? Evidence from the eurozone By Junye Li; Gabriele Zinna
  13. The Economic Impact of Civil Justice Reforms By Dimitri Lorenzani; Federico Lucidi
  14. MIDAS and bridge equations By Schumacher, Christian
  15. The Confidence Effects of Fiscal Consolidations By Beetsma, Roel; Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
  16. Another Quiet Revolution? By Ludovit Odor
  17. Economic Impact of Late Payments By William Connell
  18. Convergence of European Business Cycles: A Complex Networks Approach By Theophilos Papadimitriou; Periklis Gogas; Georgios-Antonios Sarantitis
  19. Monetary disunion: The domestic politics of Euroland By Streeck, Wolfgang; Elsässer, Lea
  20. Future Directions for the Irish Economy. Conference Proceedings By Graham Stull

  1. By: Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
    Abstract: In this paper,we assess the impact ofmajor German structural reforms from1999 to 2008 on key macroeconomic variables within a two-country monetary union DSGE model. Bymany, these reforms, especially the Hartz reforms on the labormarket, are considered to be the root of thereafter observed imbalances in the Euro Area. We find that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German trade balance and the current account was onlyminor. Most importantly, the rest of the Euro Area benefited frompositive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area.
    Keywords: Fiscal Policy,Labor Market Reforms,DSGE modeling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2014
  2. By: Xiaoshan Chen; Tatiana Kirsanova; Campbell Leith
    Abstract: We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.
    Keywords: Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion, Zero Lower Bound, Financial Crisis, Great Recession
    JEL: E58 E32 C11 C51 C52 C54
    Date: 2014–11
  3. By: Bouvatier, Vincent; Delatte, Anne-Laure
    Abstract: We assess the evolution of international banking integration at the light of gravity equations on banks’ bilateral consolidated foreign claims data. Our estimates on a panel of 14 reporting countries and their 186 partners between 1999 and 2012 reveal: 1) the forward march of banking integration has reversed only as far as euro area countries are concerned as source or destination countries. 2) Euro area banks have reduced their international exposure inside and outside the euro area to a similar extent. 3) This decline is not a correction of previous overshooting but a marked desintegration. 4) In the rest of the world, the banking integration has strengthened since the financial crisis.
    Keywords: banking integration; gravity model; international banking
    JEL: F34 F36
    Date: 2014–11
  4. By: Cukierman, Alex
    Abstract: This paper compares the behavior of Euro-Area (EA) banks’ credit and reserves with those of US banks following respective major crisis triggers (Lehman’s collapse in the US and the 2009 admission by Papandreou, that Greece’s deficit was substantially higher than previously believed, in the EA). The paper shows that, although the behavior of banks’ credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different. In particular, while US banks’ reserves have been on an uninterrupted upward trend since Lehman’s collapse, those of EA banks fluctuated markedly in both directions. The paper argues that, at the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed.
    Keywords: credit; crisis; Euro Area; monetary policy; reserves; US
    JEL: E51 E52 E58 G1
    Date: 2014–12
  5. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.
    Keywords: Fiscal multipliers, DSGE Models, Hand-to-Mouth, Edgeworth Complementarity, Euro Area, Bayesian Econometrics.
    JEL: C32 E32 E62
    Date: 2014–11–07
  6. By: Margarita Katsimi (Athens University of Economics and Business; CESifo, Munich); Gylfi Zoega (Department of Economics, Mathematics & Statistics, Birkbeck; University of Iceland)
    Abstract: We estimate the Feldstein-Horioka equation for the period 1960-2012 and find structural breaks that coincide with the introduction of the European single market in 1993, the introduction of the euro in 1999 and the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, we find that the pattern of capital flows within the euro zone reflect differences in output per capita, the rate of growth of output per capita and budget balances.
    Keywords: Feldstein-Horioka puzzle, European integration.
    JEL: E2
    Date: 2014–11
  7. By: International Labour Office
    Abstract: This report analyses employment and social trends in Portugal in the wake of the financial assistance programme agreed with the European Commission, the European Central Bank and the IMF. It also discusses international best practices available to inspire Portugal in its efforts towards cutting unemployment and boosting economic recovery.
    Keywords: unemployment, economic recession, economic recovery, employment policy, social policy, role of ILO, Portugal, chômage, récession économique, reprise économique, politique de l'emploi, politique sociale, rôle de l'OIT, Portugal, desempleo, recesión económica, recuperación económica, política de empleo, política social, papel de la OIT, Portugal
    Date: 2014
  8. By: Mandler, Martin; Scharnagl, Michael
    Abstract: Our paper studies the relationship between money growth and consumer price inflation in the euro area using wavelet analysis. Wavelet analysis allows to account for variations in the money growth-inflation relationship both across the frequency spectrum and across time. We find evidence of strong comovements between money growth and inflation at low frequencies with money growth as the leading variable. However, our analysis of time variation at medium-to-long-run frequencies indicates a weakening of the relationship after the mid 1990s which also reflects in a deterioration of the leading indicator property and a decline in the cross wavelet gain. In contrast, most of the literature, by failing to account for the effects of time variation, estimated stable long-run relationships between money growth and inflation well into the 2000s.
    Keywords: money growth,inflation,wavelet analysis
    JEL: C30 E31 E40
    Date: 2014
  9. By: Chen, Xiaoshan; MacDonald, Ronald
    Abstract: This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro-Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro-Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the years immediately before and after the introduction of the single European currency. The forecasting exercise shows that incorporating economic fundamentals provides a better long-run exchange rate forecasting performance than a random walk process.
    Keywords: Exchange rate forecasting; Unobserved Components Model; Permanent Equilibrium Exchange Rate
    Date: 2014–11
  10. By: Mendoza, Enrique G. (University of Pennsylvania); Tesar, Linda L. (University of Michigan); Zhang, Jing (Federal Reserve Bank of Chicago)
    Abstract: What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a “race to the bottom” in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.
    Keywords: European debt crisis; tax competition; capacity utilization; fiscal austerity
    JEL: E61 E62 E66 F34 F42
    Date: 2014–10–06
  11. By: Elton Beqiraj; Massimiliano Tancioni
    Abstract: Sovereign and private sector default probabilities are introduced in a monetary model to evaluate whether the consideration of a sovereign risk channel can affect the size and sign of fiÂ…scal multipliers, an hypothesis recently appeared in the literature. The model is estimated using data of EZ peripheral countries. From posterior estimates and simulations we show that i) the relation between fundamentals, sovereign risk and interest rate spreads is weak; ii) in the short term, the risk channel operates in a pro- cyclical direction, amplifying the effects of Â…fiscal contractions; iii) the consideration of a liquidity trap does not reverse this result.
    Keywords: default risk, interest rates, Â…fiscal policy, monetary policy, liquidity trap, Bayesian estimation
    JEL: E52 E62 E63 C11
    Date: 2014–11
  12. By: Junye Li (ESSEC Business School); Gabriele Zinna (Bank of Italy)
    Abstract: We develop a multivariate credit risk model for the term structures of sovereign and bank credit default swaps. First, we separate the probability of joint defaults of large Eurozone sovereigns (systemic risk) from that of sovereign-specific defaults (country risk). Then, we quantify individual banks' exposures to each type of sovereign risk, as well as bank-specific credit risk. Banks� sovereign risk exposures vary with banks� size, their holdings of sovereign debt, and expected government support. On average, 45% of French and Spanish banks' credit risk consists in sovereign risk, compared with only 30% for Italian and 23% for German banks. Furthermore, short- to medium-term contracts are particularly informative on sovereign systemic risk.
    Keywords: Sovereign and Bank Credit Risk; Credit Default Swaps; Distress Risk Premia; Bayesian Estimation.
    JEL: F34 G12 G15
    Date: 2014–10
  13. By: Dimitri Lorenzani; Federico Lucidi
    Abstract: Quality, independence and efficiency are the key components of effective justice systems, a crucial condition to ensure the proper functioning of important drivers of growth in the EU. This paper focuses on judicial efficiency and investigates the impact of certain structural reforms affecting the civil justice system on selected economic outcomes, such as business dynamics and foreign direct investments (FDI). In doing so, the role of efficiency of justice systems (measured by disposition time and the ratio of pending cases to population, both referred to litigious civil and commercial disputes) is highlighted as a transmission channel linking judicial reforms to economic variables. The work draws upon a dataset based on the reports by the Council of Europe's European Commission for the Efficiency of Justice (CEPEJ). The results support the growth potential of judicial reforms rationalising the organisation of courts, fostering investment in in-court ICT and introducing incentives to reduce excessive litigation rates (for instance by enhancing the use of alternative disputes resolution methods), which are all found to positively affect the efficiency of civil justice. By increasing the efficiency of the justice system, these reforms can enhance entrepreneurial activity (as measured by firms' entry rates) and FDI.
    JEL: K40 K41 D02 C36
    Date: 2014–09
  14. By: Schumacher, Christian
    Abstract: This paper compares two single-equation approaches from the recent nowcast literature: Mixed-data sampling (MIDAS) regressions and bridge equations. Both approach are used to nowcast a low-frequency variable such as quarterly GDP growth by higher-frequency business cycle indicators. Three differences between the approaches are discussed: 1) MIDAS is a direct multi-step nowcasting tool, whereas bridge equations are based on iterated forecasts; 2) MIDAS equations employ empirical weighting of high-frequency predictor observations with functional lag polynomials, whereas the weights of indicator observations in bridge equations are partly fixed stemming from time aggregation. 3) MIDAS equations can consider current-quarter leads of high-frequency indicators in the regression, whereas bridge equations typically do not. However, the conditioning set for nowcasting includes the most recent indicator observations in both approaches. To discuss the differences between the approaches in isolation, intermediate specifications between MIDAS and bridge equations are provided. The alternative models are compared in an empirical application to nowcasting GDP growth in the Euro area given a large set of business cycle indicators.
    Keywords: mixed-data sampling (MIDAS),bridge equations,GDP nowcasting
    JEL: C51 C53 E37
    Date: 2014
  15. By: Beetsma, Roel; Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
    Abstract: We explore how fiscal consolidations affect private sector confidence, a possible channel for the fiscal transmission that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis. Panel regressions based on the action-based datasets of De Vries et al. (2011) and Alesina et al. (2014) show that consolidations, and in particular their unanticipated components affect confidence negatively. The effects are stronger for revenue-based measures and when institutional arrangements, such as fiscal rules, are weak. To obtain a more accurate picture of how consolidations affect confidence, we construct a monthly dataset of consolidation announcements based on the aforementioned datasets, so that we can study the confidence effects in real time using an event study. Consumer confidence falls around announcements of consolidation measures, an effect driven by revenue-based measures. Moreover, the effects are most relevant for European countries with weak institutional arrangements, as measured by the tightness of fiscal rules or budgetary transparency. The effects on producer confidence are generally similar, but weaker than for consumer confidence. Long-term interest rates, as a measure of confidence in the sovereign, tend to fall around spending-based consolidation announcements that take place in slump periods. Overall, if confidence is a concern and consolidation is unavoidable, spending-based measures seem preferable. Slump periods are not necessarily bad moments for such measures, while strengthening institutional arrangements may help in mitigating adverse confidence effects.
    Keywords: announcements; consolidation plans; consumer- and business confidence; event study; institutional quality; long-term interest rates; revenues; spending
    JEL: H60 H61 H62
    Date: 2014–10
  16. By: Ludovit Odor (Council for Budget Responsibility)
    Abstract: There seems to be a fair degree of consensus that synergies between fiscal rules and independent fiscal institutions can be more effective in fighting the deficit bias or to follow more closely optimal policies. More and more fiscal councils are being created each year, especially in the European Union, where important changes to the basic fiscal architecture shook up the whole institutional set-up. Several amendments to the Stability and Growth Pact together with the adoption of the Fiscal Compact made the existence of functionally independent bodies a legal requirement. Although the parallels between the delegation of monetary policy to independent central banks and creation of fiscal councils are far from perfect, we may well be witnessing another “quiet revolution”, the term coined by Alan Blinder in his book about important changes in central banking in last decades. In this paper we argue that in order to complete the revolution, further changes to the European fiscal framework are necessary to eliminate the sometimes deep inconsistencies that might occur between various fiscal rules, monitoring procedures and communication of basic policy messages. We propose a new institutional framework, where national and supranational responsibilities are separated and the first line of defense against the deficit bias is at the national level. In this model, the community level would be responsible for checking compliance with minimum standards defined for local fiscal frameworks and for EU-wide coordination of policies instead of yearly fine-tuning of national budgets
    Keywords: fiscal rules, independent fiscal institutions
    JEL: H1 H6
    Date: 2014–10
  17. By: William Connell
    Abstract: Delays in payments in Business to Business (B2B) and Government to Business (G2B) transactions generally have an adverse effect on the cash-flow of firm and can cause firms, particularly small ones, to seek extensions of their overdraft facilities and increase their borrowing. Late payment of commercial debt can play a significant role in the survival of firms as their liquidity can be severely affected, even forcing some firms to exit the market. This has been particularly important during the economic and financial crisis as access to credit has been more restricted. This note addresses the economic effect of late payments by approximating the possible financial cost for firms and by estimating the empirical link between late payments and the exit rate of firms. Both payment delays in G2B and B2B transactions are considered. The note focuses on four EU countries where late payments are a serious problem (Italy, Spain, Portugal and Greece), but the econometric analysis linking late payments with exit rates uses a broader set of Member States and thus the results can be easily extended to other countries. This work was carried out in the context of an ECFIN project which main findings are presented in the report: European Commission (2014) "Market reforms at work in Italy, Spain, Portugal and Greece", European Economy 5|2014
    JEL: D02 D21 D22 H50
    Date: 2014–09
  18. By: Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Centre for Economic Analysis, Italy); Georgios-Antonios Sarantitis (Department of Economics, Democritus University of Thrace, Greece)
    Abstract: We examine the co-movement patterns of European business cycles during the period 1986-2011, with an obvious focal point the year 1999 that marked the introduction of the common currency, the euro. The empirical analysis is performed within the context of Graph Theory where we apply a rolling window approach in order to dynamically analyze the evolution of the network that corresponds to the GDP growth rate cross-correlations of 22 European economies. The main innovation of our study is that the analysis is performed by introducing what we call the Threshold-Minimum Dominating Set (T-MDS). We provide evidence at the network level and analyze its structure and evolution by the metrics of total network edges, network density, isolated nodes and the cardinality of the T-MDS set. Next, focusing on the country level, we analyze each individual country's neighborhood set (economies with similar growth patterns) in the pre- and post-euro era in order to assess the degree of convergence to the rest of the economies in the network. Our empirical results indicate that despite few economies' idiosyncratic behavior, the business cycles of the European countries display an overall increased degree of synchronization and convergence in the single currency era.
    Date: 2014–11
  19. By: Streeck, Wolfgang; Elsässer, Lea
    Abstract: Regional disparities within the European Union have always been perceived as an impediment to monetary integration. This is why discussions on a joint currency, from their very beginning, were linked to compensatory payments in the form of regional policy payments. Structural assistance to poor regions and member states increased sharply at the end of the 1980s. Today, however, fiscal support has to be shared with the new member states in the East. Moreover, due to the financial crisis, the cheap credit that poor EMU member countries enjoyed as a result of interest rate convergence is no longer available. We predict that in the future, some sort of financial aid will have to be provided by rich member countries to poor ones, if only to prevent a further increase in economic disparities and related political instability. We also expect long-lasting distributional conflict between payer and recipient countries far beyond current rescue packages, together with disagreement on the extent of aid required and the political control to be conceded by receiving countries to giving countries. We illustrate the dimension of the distributional conflict by comparing income gaps and relative population size between the center and the periphery of Europe on the one hand and on the other, between rich and poor regions in two European nation-states characterized by large regional disparities, Germany and Italy. While income gaps and population structures are similar in the two countries to those between Northern Europe and the Mediterranean periphery, regional redistribution is much more extensive in the two nation-states. We conclude that this presages a difficult future for the domestic politics of Euroland.
    Abstract: Regionale Disparitäten in der Europäischen Union galten immer als Hindernis für den währungspolitischen Integrationsprozess. Aus diesem Grund waren die Verhandlungen über eine zukünftige Währungsunion von Anfang an mit Forderungen nach Ausgleichszahlungen in Form von regionalpolitischen Hilfsprogrammen verknüpft. Strukturhilfen an arme Regionen und Mitgliedsstaaten wurden Ende der 1980er-Jahre erhöht. Heute müssen die entsprechenden Mittel allerdings mit den neuen Mitgliedsstaaten im Osten geteilt werden. Zudem können die ärmeren EWU-Mitglieder seit der Finanzkrise keine günstigen Kredite mehr aufnehmen. Wir gehen davon aus, dass es auch in Zukunft finanzielle Transfers von den reichen zu den armen Mitgliedsstaaten wird geben müssen, selbst wenn sie nur dazu dienen, stärkere wirtschaftliche Disparitäten und damit einhergehende politische Instabilität zu verhindern. Zudem können über die gegenwärtigen Rettungsmaßnahmen hinaus lang anhaltende zwischenstaatliche Verteilungskonflikte zwischen Geber- und Empfängerländern erwartet werden, in welchen es vor allem um den Umfang der Finanzhilfen und die im Gegenzug verlangte Abgabe politischer Kontrolle durch die Empfänger von Transfers gehen wird. Um die Dimension des Verteilungskonflikts zu veranschaulichen, vergleicht der Aufsatz Einkommenslücken und relative Bevölkerungsgrößen zwischen Peripherie und Zentrum der EU mit denen zwischen armen und reichen Regionen zweier Nationalstaaten mit starken regionalen Disparitäten, Italien und Deutschland. Während Einkommenslücken und Bevölkerungsstruktur in den beiden Nationalstaaten denen innerhalb der EWU ähneln, ist die regionale Umverteilung in den Nationalstaaten weitaus höher. Wir schließen daraus, dass die Innenpolitik der Eurozone konfliktreich sein wird.
    Date: 2014
  20. By: Graham Stull
    Abstract: Ireland's successful conclusion of the financial assistance programme provides an important opportunity to assess the prospects of the Irish economy to achieve good growth, to prevent future banking crises and to lock in budgetary and fiscal improvements that were achieved over the course of the Programme. It is also a natural opportunity to assess the adjustment undertaken under the programme, with a view to identifying lessons learned that can contribute to the academic debate, or that can serve as policy guidance for other countries facing similar economic challenges.
    JEL: E62 G21 G28 G30 L52 N14 O52
    Date: 2014–07

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