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on European Economics |
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Issue of 2015‒01‒14
fourteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Tatiana Cesaroni (Bank of Italy); Roberta De Santis (ISTAT) |
| Abstract: | Current account (CA) dispersion within European Union (EU) member states has been increasing progressively since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process able to stimulate a log run rebalancing as neoclassical theory predicts. To shed light on the issue this paper investigates the determinants of Eurozone CA imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries, three time horizons corresponding to various steps in European integration, different control variables and several panel econometric methods. The results suggest that within the OECD and EU groups financial integration contributed to explain CA deterioration in the peripheral countries especially in the post-EMU period. The business cycle seems to have played a growing role over time, whereas the role of competiveness seems to have diminished with respect to the past. |
| Keywords: | current account imbalances, financial integration, EMU, core-periphery countries, panel econometric models |
| JEL: | F36 F43 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_996_14&r=eec |
| By: | Niels Gilbert; Jasper de Jong |
| Abstract: | Enforcement of European fiscal rules, to a large extent, hinges on the fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesise that the EC's forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC's fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3% of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3% threshold. |
| Keywords: | Forecast errors; Stability and Growth Pact; fiscal policy; political economy |
| JEL: | C53 H3 H68 E62 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:451&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 technique following Cecchetti and Rich (2001) and, secondly, one by Ball (1994) based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between –1 and 2 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios. |
| Keywords: | Sacrifice ratio; structural adjustment; Euro area; VAR; episode method; Phillips curve |
| JEL: | E31 F49 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0520&r=eec |
| By: | Fabrizio Balassone (Bank of Italy); Sandro Momigliano (Bank of Italy); Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy) |
| Abstract: | The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing though to a limited extent elements of cross-country risk sharing. Nevertheless, further steps are probably needed. Proposals to create a sort of rainy-day fund present major practical difficulties associated, inter alia, to the uncertainty characterizing the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be centralizing specific public functions (for instance, by introducing a common unemployment benefit scheme). We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme. |
| Keywords: | fiscal union, intergovernmental transfers, risk sharing |
| JEL: | E42 E62 F15 F42 H77 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_245_14&r=eec |
| By: | Hamza Bennani; Matthias Neuenkirch |
| Abstract: | Speeches are an important vehicle for central bankers to convey individual views on the preferred policy stance. In this paper, we employ an automated text linguistic approach to create an indicator that measures the tone of the 1,618 speeches delivered by members of the Governing Council (GC) during the period 1999M1-2014M4. We then relate this variable to euro-area and national macroeconomic forecasts. Our key findings are as follows. First, inflation and growth expectations have a positive and significant impact on the hawkishness of a speech. Second, the voiced preferences of national central bankers largely coincide with the level of independence their banks had at the time of the Maastricht Treaty. Third, country-specific macroeconomic conditions matter for speeches delivered inside the central banker's home country but not for those made abroad. Fourth, differences in central banker preferences are the key source of variation in their speeches before the financial crisis, whereas divergent national economic conditions are the main factor in the second part of the sample. |
| Keywords: | Central Bank Communication, European Central Bank, Governing Council, Monetary Policy, National Interests, Speeches |
| JEL: | E52 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:201416&r=eec |
| By: | De Santis, Roberto A.; Stein, Michael |
| Abstract: | We use a Smooth Transition Conditional Correlation GARCH (STCC-GARCH) model applied to the euro area monetary policy rates and sovereign yields of Italy, Spain and Germany at 5-year maturity to estimate the threshold level of the signals above which the sovereign bond market moves to a crisis regime. We show that the threshold to a crisis regime for Italy and Spain is reached when (i) their 5-year sovereign yield spreads amount to 80-90 basis points; (ii) their 5-year CDS spreads amount to 120-130 basis points or (iii) the 5-year spread between the Kreditanstalt für Wiederaufbau (KfW) bond and the German Bund amounts to 25 basis points. Using impulse responses, we find that the STCC-GARCH with the KfW-Bund spread has leading properties, a feature corroborated by the fact that this indicator suggested a shift to a crisis regime already in August 2007 and has been signalling an improvement of the situation already in the autumn of 2012. An out-of-sample forecast of the STCC-GARCH model is also provided, which is both a novelty and a further robustness check for the stability of the model. JEL Classification: G12, G15, F36 |
| Keywords: | correlation breakdowns, government bonds, monetary policy, multivariate GARCH, regime changes |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141746&r=eec |
| By: | Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | This paper evaluates the macroeconomic effects of simultaneously implementing fiscal consolidation and competition-friendly reforms in a country of the euro area by simulating a large-scale dynamic general equilibrium model. We find, first, that the joint implementation of reforms has additional expansionary effects on long-run economic activity. Increasing competition in the service sector favors a higher income tax base. Given the targeted public debt-to-GDP ratio, labor and capital income tax rates can be reduced more than with fiscal consolidation alone. Second, fiscal consolidation has non-negligible medium-run costs; however, they are reduced by joint implementation with the services reform. The results are robust to alternative assumptions that capture the impact of financial crisis on the financing conditions of households. |
| Keywords: | competition, fiscal policy, markups, monetary policy, public debt, spread. |
| JEL: | C51 E30 E63 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_997_14&r=eec |
| By: | Angana Banerji; Sergejs Saksonovs; Hannah Huidan Lin; Rodolphe Blavy |
| Abstract: | The SDN will assess the youth unemployment problem in advanced European countries, with a special focus on the euro area. It will document the main trends in youth and adult unemployment in 22 European countries before and after the global financial crisis. It will identify the main drivers of youth and adult unemployment, focusing in particular on the role of the business cycle and structural characteristics of the labor market. It will outline the main elements of a comprehensive strategy to address the problem. |
| Keywords: | Unemployment;Europe;Euro Area;Labor markets;Labor market characteristics;Business cycles;Labor market policy;Developed countries;Youth employment, Okun’s law, business cycle, labor market factors |
| Date: | 2014–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfsdn:14/11&r=eec |
| By: | Selim Elekdag; Dirk Muir |
| Abstract: | Given the backdrop of pressing infrastructure needs, this paper argues that higher German public investment would not only stimulate domestic demand in the near term and reduce the current account surplus, but would also raise output over the longer-run as well as generate beneficial regional spillovers. While time-to-build delays can weaken the impact of the stimulus in the short-run, the expansionary effects of higher public investment are substantially strengthened with an accommodative monetary policy stance—as is typical during periods of economic slack. The current low-interest rate environment presents a window of opportunity to finance higher public investment at historically favorable rates. |
| Keywords: | Public investment;Germany;Euro Area;Demand;Economic growth;Capital productivity;Fiscal policy;Monetary policy;Econometric models;Fiscal policy, monetary policy accommodation, Germany, euro area, time-to-build delays |
| Date: | 2014–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/227&r=eec |
| By: | Marek Antosiewicz; Piotr Lewandowski |
| Abstract: | In this paper we utilize an open economy DSGE model to analyse factors behind the Great Recession and its transmission into labour markets of selected Southern European countries. We introduce a number of shocks which form potential sources of macroeconomic disturbances, in particular: foreign demand, productivity, bargaining power, labour demand, labour supply, government spending, and job destruction shocks. Using quarterly data for the 1995-2013 period, we estimate the model for Germany, Greece, Italy, Portugal and Spain. We identify shocks determining macroeconomic and labour market fluctuations in each of the countries studied. We also conduct experiments allowing us to assess to what extent differences between countries with regard to macroeconomic and labour market fluctuations resulted from different shocks affecting them, and to what extent from different resilience of particular economies. |
| Keywords: | Unemployment, Rigidities, Great Recession, DSGE |
| JEL: | E32 J20 J60 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ibt:wpaper:wp012014&r=eec |
| By: | Cimadomo, Jacopo; Claeys, Peter; Poplawski Ribeiro, Marcos |
| Abstract: | This paper assesses how financial market participants form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the UK between January 1993 and December 2011, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—as significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. Overall, the findings suggest that credible fiscal plans affect expectations of market experts, reducing the pressure on sovereign bond markets. JEL Classification: E62, G10, H30 |
| Keywords: | Consensus Economics Forecast, market expectations, sovereign bond spreads, survey data |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141750&r=eec |
| By: | Fabio Busetti (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia); Andrea Gerali (Banca d'Italia); Alberto Locarno (Banca d'Italia) |
| Abstract: | A prolonged period of low inflation, particularly in a situation of monetary policy rates near the zero lower bound, can heighten the risk of inflation expectations de-anchoring from the central bank objective. The purpose of this paper is to assess the effects of a sequence of deflationary shocks, such as those that hit the euro area in 2013-14, on expected/realized inflation and output. To do so we consider a simple New Keynesian model where agents, rather than being endowed with rational expectations, have incomplete information about the working of the economy and form expectations through an adaptive learning process (in the sense that they behave like econometricians, using regressions to anticipate the future value of the variables of interest). The model is simulated with euro area data over the period 2014-16 under the assumption both of rational expectations and of learning. The main findings are the followings: (i) under learning, price dynamics in 2015-16 is on average 0.6 percentage points lower than in the case of fully rational agents, as inflation expectations are strongly affected by the repeated deflationary shocks; (ii) the learning process implies a (data-driven) de-anchoring of inflation expectations from the central bank target, which would be perceived by economic agents to fall to 0.8% at the end of 2016; (iii) output expectations would also be lower in the case of learning, resulting in a slower recovery of economic activity. |
| Keywords: | expected inflation, incomplete information, learning |
| JEL: | C51 E31 E52 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_252_14&r=eec |
| By: | Amzallag, Adrien; Kapp, Daniel; Kok, Christoffer |
| Abstract: | This study examines the European Commission’s 2011 call for advice to the European Insurance and Occupational Pensions Authority (EIOPA) on the improvement of the Institutions for Occupational Retirement Provision (IORP) Directive (the “IORP Directive”). Specifically, it uses both the EIOPA final advice to the Commission and its quantitative impact study as a basis for answering the following questions: first, what would be the likely impact of the changes proposed to the IORP Directive, in particular minimum solvency requirements, the introduction of risk-based solvency capital requirements, on IORP investment strategies in the short and long term? Second, what would be the impact, if any, of these proposals on financial stability, in particular as regards possible pro-cyclical IORP investment behaviour? The main findings of the study are that the proposed solvency capital requirement framework could lead to IORPs shifting their investment allocations towards a greater proportion of “low-risk” asset classes. However, the impact is likely to vary extensively across EU countries, in line with national pension legislation, demographic profiles, the macro-financial situation and cultural preferences. Nevertheless, the study finds some empirical support to suggest that even the announcement of the proposed revisions, which have in the meantime been deferred, may already have led to some de-risking of some IORPs. Furthermore, some pro-cyclicality of IORPs’ investment strategies could be expected should these proposals be adopted, although the exact outcomes will depend on their precise calibration, especially regarding counter-cyclical adjustments. JEL Classification: F41, F31, E50 |
| Keywords: | financial regulation, financial stability, Institutions for Occupational Retirement Provision |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2014154&r=eec |
| By: | Schwarz, Claudia; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner |
| Abstract: | This paper analyses how accounting frameworks can affect three important areas of responsibility of many central banks, namely monetary policy, financial stability and banking supervision. The identified effects of accounting rules and accounting information on the activities of a central bank are manifold. First, the effectiveness of monetary policy crucially hinges on the financial independence of a central bank, which can be evidenced, inter alia, by its financial strength. Using a new simulation of the financial results of the European Central Bank (ECB), this paper shows that the reported annual profit and financial buffers of a central bank can be significantly affected by accounting, profit distribution and loss coverage rules. Second, in respect of financial stability, the accounting frameworks applied by commercial banks can not only affect their behaviour, but also that of financial markets. Indeed, there is evidence that accounting frameworks amplified pro-cyclicality during the recent crisis, and thus posed risks to the stability of the financial system. This being so, the accounting frameworks of credit institutions have obvious implications for central banks’ analyses with regard to promoting financial stability. Finally, as regards banking supervision, regulatory reporting and key supervisory ratios are based on accounting data. Under the new regulatory framework for banks in the European Union (EU), bank supervisors are highly reliant on accounting data. This means that central banks, in their role as bank supervisors, need to understand the underlying accounting rules and should directly support the development and application of high-quality accounting frameworks. JEL Classification: E23, E25 |
| Keywords: | accounting standards, banking supervision, central bank balance sheet, financial reporting, financial stability |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2014153&r=eec |