nep-eec New Economics Papers
on European Economics
Issue of 2015‒07‒25
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Reassessing Price-Competitiveness Indicators of the Four Largest Euro-Area Countries and of their Main Trading Partners By Alberto Felettigh; Claire Giordano; Giacomo Oddo; Valentina Romano
  2. EMU 2.0 Drawing Lessons From the Crisis - a New Framework For Stability and Growth By Theodoros S. Papaspyrou
  3. German wage moderation and European imbalances: Feeding the global VAR with theory By Bettendorf, Timo; León-Ledesma, Miguel A.
  4. Decomposing euro area sovereign spreads: credit, liquidity and convenience By Marcello Pericoli; Marco Taboga
  5. Why is inflation so low in the euro area? By Antonio M. Conti; Stefano Neri; Andrea Nobili
  6. Time-varying integration in European post-transition sovereign bond market By Petra Posedel Simovic; Marina Tkalec; Maruska Vizek
  7. Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?* By Blanchard, Olivier; Erceg, Christopher J.; Lindé, Jesper
  8. The Greek referendum: an alternative approach By Mavrozacharakis, Emmanouil; Tzagarakis, Stelios
  9. The Vulnerability of Europe's Small and Medium-Sized Banks By Ashoka Mody; Guntram B. Wolff
  10. Testing information diffusion in the decentralized unsecured market for euro funds By Edoardo Rainone
  11. Democratic Responsiveness in the European Union: the Case of the Council By Christopher Wratil
  12. Europe's exports superstar - it's the organisation! By Dalia Marin; Jan Schymik; Jan Tscheke
  13. Searching for Patterns of Unemployment Persistence in OECD Countries with Aggregated and Disaggregated Data, 2000-2014 By André M. Marques; Gilberto Tadeu Lima

  1. By: Alberto Felettigh (Banca d'Italia); Claire Giordano (Banca d'Italia); Giacomo Oddo (Banca d'Italia); Valentina Romano (Banca d'Italia)
    Abstract: This paper provides new Bank of Italy indicators of price competitiveness for 62 countries. We refreshed the approach adopted by the Bank in the 1990s but later discontinued in 2005 due to the cumbersome statistical requirements in order to accommodate the significant extension of the original geographical coverage. Thanks to progress made in data availability, we were able to update the weighting system to 2009-11 and take into account competitive pressures from local producers in all the outlet markets while keeping the same vast geographical coverage. The new indicators show that the developments in price competitiveness since 1999 in the four largest euro-area countries have been slightly more favourable than those gauged by the current measures. However, the competitiveness gap in 2014 vis-à-vis Germany remained unchanged in Italy and Spain, while it increased marginally in France. The cumulative trend for 1999-2014 in France, Germany and Spain was more favourable vis-à-vis euro-area countries than with respect to the others; no significant difference was recorded in Italy.
    Keywords: price competitiveness, real effective exchange rates, trade weights, local producer competition
    JEL: F10 F30 F31
    Date: 2015–07
  2. By: Theodoros S. Papaspyrou (Bank of Greece)
    Abstract: This paper, drawing on the lessons from the sovereign debt crisis, tries to give answers to some key questions: Was the strategy and specific actions to cope with the crisis appropriate? Was the priority given to preserving financial stability justified? Are stability and growth objectives possible in EMU? What is the scope for national economic policy in the new policy framework? It emerges from the analysis that, after some initial weaknesses in policy action, decisive initiatives by EU authorities, supported by significant progress to strengthen further economic and financial governance and reduce macroeconomic imbalances succeeded in preserving the stability and integrity of the euro area. While the priority given by the EU policy action to financial stability was fully justified, it is also clear that robust economic growth is essential for durable financial stability and overall welfare. Policies enhancing both stability and growth are possible in EMU and some of them have started being implemented while others are at an advanced stage of development. There is ample scope for national economic policies which, if well-designed and properly implemented, will enhance the growth potential of member countries. However, legacy problems such as the excessive government debt burden in some countries must be resolved
    Keywords: Economic governance in EMU; the sovereign debt crisis; adjustment in a monetary union; European economic and financial integration; financial stability and growth; national economic policy in EMU
    JEL: E42 E44 E52 E61 F32 F33 F41
    Date: 2015–03
  3. By: Bettendorf, Timo; León-Ledesma, Miguel A.
    Abstract: German labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the Euro Area. We investigate this hypothesis quantitatively. We develop an open economy New Keynesian model with search and matching frictions from which we derive robust sign restrictions for a wage bargaining shock. We then impose these restrictions on a Global VAR consisting of Germany and 8 EMU countries to identify a wage bargaining shock in Germany. Our results show that, although the German current account was significantly affected by wage bargaining shocks, their contribution to European current account imbalances was negligible. We conclude that the reduction in bargaining power of German unions after labor market reforms cannot be the lone driver of European imbalances.
    Keywords: european imbalances,German wage moderation,DSGE,Global VAR,sign restrictions
    JEL: F10 F32 F41
    Date: 2015
  4. By: Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy)
    Abstract: We conduct an empirical analysis of sovereign bond spreads for a selected number of euro area countries. We analyze several methodologies to measure and to assess the relative importance of three components of sovereign spreads: credit premia, liquidity premia and convenience yields. We find that, except for Germany, credit premia explain the bulk of the level and variability in sovereign spreads, while liquidity premia and convenience yields seem to play a limited role, although they are in several cases statistically significant and they can become economically relevant during short episodes of illiquidity.
    Keywords: sovereign spreads, liquidity premia, convenience yields
    JEL: G12
    Date: 2015–07
  5. By: Antonio M. Conti (Bank of Italy); Stefano Neri (Bank of Italy); Andrea Nobili (Bank of Italy)
    Abstract: Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. This paper uses a VAR model to quantify the contribution of oil supply, aggregate demand and monetary policy shocks (identified by means of sign restrictions) on inflation in the euro area. The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline. Country-by-country analysis shows that both aggregate demand and oil supply shocks have driven inflation down everywhere, albeit with varying intensity. The findings stand confirmed after a series of robustness checks.
    Keywords: oil supply, monetary policy, inflation, VAR models, Bayesian methods
    JEL: C32 E31 E32 E52
    Date: 2015–07
  6. By: Petra Posedel Simovic (Zagreb School of Economics and Management); Marina Tkalec (The Institute of Economics, Zagreb); Maruska Vizek (The Institute of Economics, Zagreb)
    Abstract: The aim of this paper is to study time-varying integration between European post-transition government bond markets and eurozone bond market. We follow the empirical approach defined in Bekaert and Harvey’s (1995) seminal paper, which enables direct estimation of the time-varying degree of financial markets integration. We thus investigate bond markets of eight new member states of EU and one non-EU member (Ukraine). The result of our empirical examination is a time-varying parameter of integration that is driven by a set of macroeconomic instruments defined in order to represent the intensity of real economic integration of analyzed countries into the eurozone, and their fiscal stances. Our results suggest integration varies with respect to economic development, as economically more advanced countries demonstrate a higher level of integration in the observed period. Moreover, we observe that integration decreased with the financial crisis, but it levelled off relatively swiftly afterwards. Depending on the country, joining the EU either exerted a positive boost on sovereign bond integration, or was neutral with regards to integration. We also show that macroeconomic performance relative to the eurozone benchmark and fiscal stance matter greatly for bond market integration in all countries under examination.
    Keywords: European post-transition countries, sovereign securities markets, bond market integration
    JEL: E44 F36 G15
    Date: 2015–04
  7. By: Blanchard, Olivier (International Monetary Fund); Erceg, Christopher J. (Federal Reserve Board); Lindé, Jesper (Research Department, Central Bank of Sweden)
    Abstract: We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
    Keywords: Monetary Policy; Fiscal Policy; Liquidity Trap; Zero Bound Constraint; DSGE Model; Currency Union
    JEL: E52 E58
    Date: 2015–07–01
  8. By: Mavrozacharakis, Emmanouil; Tzagarakis, Stelios
    Abstract: Admittedly, the balance of power within the European institutions, especially those related to financial stability and economic policy, is controlled by Germany. The German Federal Republic as the "main creditor" controls the Eurogroup, the Euro Working Group and has privileged relations with the International Monetary Fund (IMF) and the European Central Bank (ECB). Due to this fact, Wolfgang Schäuble as the exponent of the hard German economic strategy has a leading role within the European decision-making institutions. France, Italy and other countries are unsuccessfully trying to counteract and mitigate the German influence, as shown by the Greek issue. This framework is tightly connected with the negotiating ability of any country that inconsistently attempts to reverse the status quo, modify the rules or change the terms of an agreement. The Greek government of Alexis Tsipras sufficiently experienced this suffocating experience and announced a referendum as an attempt to open the field of negotiations.
    Keywords: Greece, Populism, SYRIZA, Tsipras, Referendum , EU Crisis, Euro, Eurogroup
    JEL: A10 A11 A12 A13 E0 E02 G0 G01 H1 H12 H7 H77 P11 P16
    Date: 2015–07–12
  9. By: Ashoka Mody; Guntram B. Wolff
    Abstract: We study the vulnerability of 130 banks directly supervised by the European Central Bankâ??s Single Supervisory Mechanism. Illustrative stress tests using banksâ?? balance sheet data reveal that significant stress prevails in the euro areaâ??s smaller and medium-sized banks, many of them located in southern Europe. The banks we identify as stressed also have performed substantially worse on the stock market. The vulnerable banks are typically hobbled by non-performing loans to European businesses. Strengthening the banking system, therefore, is important to achieve sustainable recovery because it will revitalise credit to the healthier segments of the economy. But instead of emphasising bank recapitalisation, as in past years, we believe the task is to shrink the banking sector to a healthier core.
    Date: 2015–07
  10. By: Edoardo Rainone (Bank of Italy)
    Abstract: Average rates in the decentralized unsecured market for euro funds, like the EONIA for the overnight maturity, are fundamental indicators of the smooth transmission of the signal rate by the central bank. Public information plays an important role in this context, as key interest rates are set by the central bank and average market rates are published daily, constituting common knowledge. Nevertheless, according to the theoretical literature on over-the-counter markets, private information may have an important role in a decentralized market. The diffusion of private information can generate prices that depend on the decentralized market structure. This is the first paper to use an ad hoc (network) version of the spatial autoregressive model to assess the presence of this mechanism. I propose a simple methodology to test whether the joint distribution of rates depends on the interbank network structure and to estimate information diffusion strength. The method is applied to a unique dataset collecting unsecured interbank loans and characteristics of banks operating in European central bank money. A wide time span including sovereign debt crises in the euro area is considered. I find that information diffusion played a greater role during periods dominated by strong uncertainty.
    Keywords: interbank markets, money, trading networks, payment systems, information aggregation, spatial autoregressive models, bilateral trading
    JEL: E52 E40 C21 G21 D40
    Date: 2015–07
  11. By: Christopher Wratil
    Abstract: Governments’ responsiveness to citizens’ preferences is a key assessment criterion of democratic quality. This paper assesses responsiveness to public opinion in European Union politics with the example of governments’ position-taking in the Council of the EU. The analysis demonstrates that governments’ willingness to adopt negotiation positions that reflect public opinion systematically varies with their electoral incentives flowing from domestic arenas. Governments behave responsive in EU legislative negotiations if they face majoritarian electoral systems at home, when elections are imminent, and when parties or EU-related events trigger the public salience of integration. These findings have important implications for the debate on the EU’s democratic deficit and our understanding of democratic responsiveness outside the national political arena.
    Keywords: responsiveness, public opinion, European Union, multidimensional, democratic deficit
    Date: 2015–06
  12. By: Dalia Marin; Jan Schymik; Jan Tscheke
    Abstract: What explains Germanyâ??s superb export performance? Is Germanyâ??s export behaviour very distinct compared to other European countries? The authors explore the organisational responses to competition of 14,000 exporting firms in seven European countries. The paper examines the export business model of the median exporter and of the top one percent exporters in each country, accounting for 20 percent to 55 percent of total exports. What do these firms do to become superstars? The authors find, first, that the export market share of the median exporter in each of the countries to the world more than tripled (in some cases the export market share increases tenfold) for firms that combine decentralised management with offshoring of production to low-wage countries. Exporters which abstain from any organisational adjustment do very badly. Decentralised management provides incentives for workers for product improvements allowing exporters to compete on quality. Offshoring production to low-wage countries reduces costs allowing exporters to compete on price. Second, we find that Germany is the leading quality exporter in Europe followed by Austria and Spain. Among the top 10 percent of exporters there is no single firm with low quality in Germany and Austria, which suggest that decentralised management has provided incentives for quality in these countries. Third, Germanyâ??s exports are less vulnerable to price increases, while exports from France and Italy respond strongly to price changes, and thus costs reductions via offshoring benefits these countries most.
    Date: 2015–07
  13. By: André M. Marques; Gilberto Tadeu Lima
    Abstract: One major concern regarding the recent financial crisis that hit the US and several other OECD countries is that it may have worsened the pattern of unemployment persistence in those countries where the unemployment rate has remained above pre–crisis levels. In this context, we employ mean bias-corrected parameter estimator and bootstrap permutation test methods with a moving window to detect possible changes in the pattern of unemployment persistence in OECD countries. We investigate the patterns of unemployment persistence in two different periods (before and after the 2008 financial crisis) using both monthly aggregated and quarterly disaggregated unemployment data (by gender and age) for 29 OECD countries. As we estimate the most likely date of change in the trend function of unemployment, we use this information to compute an unbiased scalar measure of persistence which allows us to test (using a bootstrap permutation test) whether the 2008 financial crisis produced any significant change in the pattern of unemployment persistence relatively to previous periods. Our results show heterogeneity in OECD countries’ response to external shocks and offer borderline evidence of a significant increase in the persistence of unemployment in OECD countries which is correlated with the recent US financial crisis.
    Keywords: Unemployment persistence; bootstrap mean bias-corrected estimator; financial crisis.
    JEL: E24 E27
    Date: 2015–07–16

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