nep-eec New Economics Papers
on European Economics
Issue of 2015‒05‒09
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Current account “Core-periphery dualism” in the EMU By Tatiana Cesaroni; Roberta De Santis
  2. The formation of European inflation expectations: One learning rule does not fit all By Christina Strobach; Carin van der Cruijsen
  3. Assessing Time-Varying Stock Market Integration in EMU for Normal and Crisis Periods By Sehgal, Sanjay; Gupta, Priyanshi; Deisting, Florent
  4. Employment and the “Investment Gap”: An Econometric Model of European Imbalances By Campiglio, Luigi Pierfranco
  5. Downgrades of sovereign credit ratings and impact on banks CDS spread: does disclosure by banks improve stability? By Guillemin, François; Alexandre, Hervé; Refait-Alexandre, Catherine
  6. Sovereign debt spread and default in a model with self fullfilling prophecies ans asymmetric information By Christophe Blot; Bruno Ducoudre; Xavier Timbeau
  7. The Eurosystem’s asset purchase programmes for monetary policy purposes By Pietro Cova; Giuseppe Ferrero
  8. Policy autonomy, coordination or harmonization in the persistently heterogeneous European Union? By Ludek Kouba; Michal Mádr; Danuše Nerudová; Petr Rozmahel
  9. Back to fiscal consolidation in Europe and its dual tradeoff : now or later, through spending cuts or tax hikes ? By Christophe Blot; Jérôme Creel; Bruno Ducoudre; Xavier Timbeau
  10. Fiscal targets. A guide to forecasters? By Paredes-Lodeiro, Joan; Pérez, Javier J; Pérez-Quirós, Gabriel
  11. The Beveridge Curve in the OECD Before and After the Crisis By Sergio Destefanis; Giuseppe Mastromatteo
  12. Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  13. A case of ritual compliance? The role of European Structural Funds in the shaping of the Greek employment policy (1995‐2008) By Ioannidis, Yiorgos

  1. By: Tatiana Cesaroni; Roberta De Santis
    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 long 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: 2015–03
  2. By: Christina Strobach; Carin van der Cruijsen
    Abstract: We empirically investigate how well different learning rules manage to explain the formation of household inflation expectations in six key member countries of the euro area. Our findings reveal a pronounced heterogeneity in the learning rules employed on the country level. While the expectation formation process in some countries can be best explained by rules that incorporate forward-looking elements (Germany, Italy, the Netherlands), households in other countries employ information on energy prices (France) or form their expectations by means of more traditional learning rules (Belgium, Spain). Moreover, our findings suggest that least squares based algorithms significantly outperform their stochastic gradient counterparts, not only in replicating inflation expectation data but also in forecasting actual inflation rates.
    Keywords: Inflation expectations; adaptive learning algorithms; household survey
    JEL: E31 E37 D84 C53
    Date: 2015–04
  3. By: Sehgal, Sanjay; Gupta, Priyanshi; Deisting, Florent
    Abstract: In this paper, we examine the financial integration process amongst 17 EMU countries from January 2002 to June 2013 over a normal period as well as for the Global Financial Crisis (GFC) and Eurozone Debt Crisis (EDC) periods. We classify the economies in three groups (A, B and C) based on their GDP to examine whether the economic size influences financial integration. Seven indicators are used for the purpose, namely, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Dynamic Cointegration, Market Synchronisation Measure and Common Components Approach. The results suggest that large sized EMU economies (termed as Group A) exhibit strong financial integration. Moderate financial integration is observed for middle-sized EMU economies with old membership (termed as Group B). Small sized economies (termed as Group C) economies seemed to be least integrated within the EMU stock market system. The findings further suggest presence of contagion effects as one moves from normal to crisis periods, which are specifically stronger for more integrated economies of Group A. We recommend institutional, regulatory and other policy reforms for Group B and especially Group C to achieve higher level of integration.
    Keywords: EMU, Global Financial crisis, Eurozone Debt Crisis, Stock Market integration, Time-varying financial integration, Beta Convergence, Sigma Convergence, Variance Ratio, Asymmetric DCC, Rolling Cointegration, Carhart four factor model, Markov Regime Switching Model
    JEL: C22 E44 F36 G14 G15
    Date: 2014–10–26
  4. By: Campiglio, Luigi Pierfranco
    Abstract: We specify a VEC model based on six main macroeconomic imbalances to explain the Great European Recession, in Germany, France, Spain and Italy, from 1999 to 2013, estimating their long-term relationships. We focus on employment and unemployment as the main imbalances and identify consumption and investment slumps, prompted by fiscal consolidation, as the causes and current account rebalance and low inflation as the main consequences. Our main results are the following: a) public investment is the main policy instrument which can foster employment, prompting private investment and growth, exports can only partly balance a falling domestic demand; b) the unemployment-current account trade-off is a structural constraint to a lower unemployment level; c) mild deflation set in as a consequence of the consumption slump and oil price decline; d) breaks dates for consumption and inflation thresholds are estimated; and e) Germany successfully passed through the European recession by sharply increasing its exports and reshaping its economic role.
    Keywords: E21, E22, E24, E31, F32, F45, O52
    JEL: E0 E22
    Date: 2015–05
  5. By: Guillemin, François; Alexandre, Hervé; Refait-Alexandre, Catherine
    Abstract: This paper investigates the relationship between disclosure and bank CDS spread during the sovereign debt crisis over the period 2011-2013. We cumulated the evolution of the spread of CDS on 4 different timeframes. We modeled two transparency index: one global and one specifically dedicated to sovereign exposure. We obtained significant results on the impact of targetted sovereign disclosure on the evolution of the CDS spreads, while the global index have not significant impact on the evolution of the CDS spread.
    Keywords: Bank; Sovereign crisis; Disclosure; CDS;
    JEL: G14 G21
    Date: 2015–06
  6. By: Christophe Blot (OFCE); Bruno Ducoudre (OFCE); Xavier Timbeau (OFCE)
    Abstract: The outbreak of the Greek crisis has revived the literature on the sovereign debt spreads. Recent evidence has shed new lights on the main determinants of interest rates spreads. The sharp increase of government bond yields cannot be entirely attributed to changes in macroeconomic fundamentals. Contagion effects can occur and self-fulfilling speculation may arise. Yet, this literature has been mainly empirical and needs sound theoretical foundations. The aim of this paper is to fill in this gap. We develop a simple model in the spirit of second generation currency crises models developed by (Obstfled, 1996). The model describes a strategic game between governments and financial markets. Eurozone countries face a trade-off as governments may either commit and implement restrictive fiscal policies or default on debt. The cost of the commitment strategy increases when interest rates increase or when the fiscal multipliers are high. This leaves the opportunity for speculators to drive the economy towards a bad equilibrium, forcing the government to renege its commitment. We introduce a source of uncertainty about the cost of default in the model. By this way, we may introduce the possibility that governments do not default although risk premiums on bond yield is high.
    Keywords: Sovereign default; risk premium; multiple equilibria; asymmetric information
    JEL: H63 E44 E61
    Date: 2015–04
  7. By: Pietro Cova (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: This paper analyzes the operation of the Eurosystem’s public and private assets purchases programmes for monetary policy purposes, quantifying the potential effect on the Italian economy. First we give an exhaustive account of the main transmission channels by which the purchases can be expected to affect economic activity and inflation. Then we assess the effects on the main channels of transmission to the economy and measure the impact on the main macroeconomic variables, applying the Bank of Italy’s quarterly model. For 2015-16 the purchase programme can be expected to make a significant contribution to the growth of output and of prices, of more than 1 percentage point in both cases. Among the channels examined, the largest contribution is judged to come through the depreciation of the euro and the reduction in the interest rates on government securities and bank loans. These effects are comparable in magnitude to those found by studies on the securities purchase programmes conducted in the United States and the United Kingdom.
    Keywords: unconventional monetary policy, quantitative easing, transmission mechanism
    JEL: E51 E52 E58
    Date: 2015–04
  8. By: Ludek Kouba; Michal Mádr; Danuše Nerudová; Petr Rozmahel
    Abstract: The European integration process is ongoing. Europe is still heterogeneous. Within this context, the paper addresses the question of whether policies in the EU should head towards autonomy, coordination or harmonization. Taking the path dependence effect into account, in the papers’ opinion, Europe has gone too far in its integration process to be able to continue with policies fully under the competencies of individual member countries. Furthermore, the establishment of the common currency in the EU as a result of deep harmonization in the monetary policy area is an unambiguous precedent with many consequences. First of all, the habitual question still arises in the literature: does fiscal policy need to be harmonized to a comparable level, as these two policies necessarily complement each other? The paper argues that it does not. First, the authors build on the theory of fiscal federalism, which often recommends the strengthening of the stabilization function of public finance; typically in the form of rules and surveillance institutions (e.g., Fiscal Compact, the Six-Pac, European Semester). And on the contrary, they usually refute the intensification of the redistribution function, due to the fact that intergovernmental transfers in contemporary Europe are highly unpopular. Second, Europe is still too heterogeneous and it will continue to be so in the future, simply because of the different cultures, mentalities, traditions, social relations and ways of thinking it harbours. In our context, this means that there are significantly different regimes of welfare states and extents of social policies among European countries, which strongly determine the character of public finance. And third, the tax systems across Europe are also highly divergent, with many different features of continued tax competition. Therefore, a top-down harmonization path towards a full fiscal union is neither politically enforceable, nor economically rational. On the other hand, in order to keep the European integration process viable, it is necessary to reduce behaviour with features of moral hazard and free ride and strengthen joint responsibility for the fiscal development of public finances in the EU. In addition to the discussed matter of joint responsibility and fiscal discipline, the paper points out the open coordination method as an approach towards a sustainable alternative path between a fragmented Europe and a European super state.
    Keywords: EU integration, European economic policy, European governance, European Monetary Union, Full employment growth path, Good governance, Policy options
    JEL: E63 F15 F42
    Date: 2015–04
  9. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Bruno Ducoudre (OFCE); Xavier Timbeau (OFCE)
    Abstract: The European consolidation process has raised a few questions. The most frequent one has been how large are the costs of consolidation and has the Eurozone fiscal stance improved or achieved debt sustainability? Second, do these costs and sustainability depend on the composition (tax vs. spending) of the consolidation process? Third, do risk premia matter? Fourth, which of the two following strategies, backloading vs. frontloading, is superior to the other? The aim of the paper is to shed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states are facing a dual trade-off, first between labor market outcomes of consolidation and public debt dynamics and, second, between reducing public expenditures and increasing taxes. The main conclusion is that a tax-based backloaded consolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclusion.
    Keywords: fiscal consolidation; fiscal multiplier; composition effect; public debt; frontloading; backloading
    JEL: E61 E62 E47
    Date: 2015–03
  10. By: Paredes-Lodeiro, Joan; Pérez, Javier J; Pérez-Quirós, Gabriel
    Abstract: Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy, and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental to unveil the current course of policy in real-time. Our approach complements a well-established branch of the literature that finds politically-motivated biases in policy targets.
    Keywords: fiscal policy; forecasting; policy credibility
    JEL: C54 E61 E62 H30 H68
    Date: 2015–04
  11. By: Sergio Destefanis; Giuseppe Mastromatteo (-)
    Abstract: This paper tests the existence of a Beveridge Curve across the economies of nine OECD countries from 1980 to 2011, investigating the impact of various kinds of structural factors (technological progress, globalisation, oil prices) and of the current recession on the Curve. Technological progress (R&D intensity) shifts the Curve outwards, producing evidence in support of the creative destruction effect. Globalisation and unfavourable oil price shocks also shift the Curve outwards, worsening the unemployment-vacancies trade-off. Structural relationships seem to be stable enough in the 2008-2011 period, suggesting that the current crisis mainly implied moves along the Curve.
    Keywords: Unemployment, vacancies, capitalisation effect, creative destruction, labour-market institutions.
    JEL: E24 J20 O40
    Date: 2015–03–04
  12. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies - the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries’ financial variables to the center economies, controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor. While certain macroeconomic and institutional variables are important, the arrangement of open macro policies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. We also find, among other results, that an economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies. Nonetheless, exchange rate regimes have mostly indirect effects on the strength of financial linkages. We conclude the trilemma remains relevant.
    JEL: F33 F41
    Date: 2015–04
  13. By: Ioannidis, Yiorgos
    Abstract: The relation of the Greek employment policy to the European one, as it was formulated within EES and the Lisbon strategy, was a particular one. The Greek employment policy fully adopted the form, the structure and the discourse of the EES but it was only marginally influenced by the “way of doing things.” The compliance of the Greek employment policy with the European guidelines for employment was primarily aimed at ensuring the precious flow of the European resources, and only secondarily at improving the effectiveness of the implemented policies. In that sense, the case of Greece, can be described as a case of “ritual compliance”; that is an adherence to the form rather than to the substance of the matter, a practice whose main objective is the unobstructed flow of European funding
    Keywords: Greece, employment policy, vocational policy, unemployment
    JEL: H00 J00 J08 J30 J38 J60 J65 J68
    Date: 2014

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