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on European Economics |
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Issue of 2015‒11‒07
thirteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Leila E. Davis; Charalampos Konstantinidis; Yorghos Tripodis |
| Abstract: | The ongoing crisis in the Eurozone, together with growing evidence of structural imbalances, points to a role for new institutions to support a more stable EMU structure. As is well established in the context of monetary union when business cycles are not synchronized, a system of fiscal transfers can support monetary union. Unemployment insurance (UI) is, in particular, a key component of fiscal crisis management. UI supports household incomes during downturns, and also acts as an automatic stabilizer, thereby helping individual countries respond to asymmetric shocks. This paper proposes a `federalized’ EMU-level UI mechanism as one program that can contribute to a system of fiscal transfers in the EMU, and estimates the cost of the proposed system under different financing and eligibility scenarios. We find that, under a variety of reasonable institutional parameters, such a system is fiscally feasible with limited reason to expect adverse employment effects in member countries. We conclude that fiscal transfers extended via automatic stabilizers are a productive avenue towards a more stable Eurozone architecture. |
| Keywords: | Eurozone, unemployment insurance, fiscal transfers |
| JEL: | E51 E62 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:mab:wpaper:2015_02&r=eec |
| By: | Ben Cheikh, Nidhaleddine (ESSCA School of Management); Rault, Christophe (University of Orléans) |
| Abstract: | This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits. |
| Keywords: | exchange rate pass-through, import prices, sovereign spreads, smooth transition models |
| JEL: | C22 E31 F31 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9467&r=eec |
| By: | Angel Ubide (Peterson Institute for International Economics) |
| Abstract: | The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions. |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb15-19&r=eec |
| By: | Christopher L. House; Linda L. Tesar |
| Abstract: | As of August 2015, Greece’s loan repayments due to external creditors through 2057 summed to €319.5 billion, requiring an average debt payment on a flow basis of 4.1 percent of 2014 Greek GDP. This paper examines the economic impact of increases in distortionary taxes on consumption, capital and labor income as well as reductions in government expenditures sufficient to increase Greece’s primary balance by one percent of 2014 GDP – roughly a quarter of Greece’s total debt obligations. In the baseline case calibrated to the Greek economy, all of the tax and expenditure policies we consider produce declines in output in both the short- and long-run. Projections of the primary surplus based on static revenue scoring grossly overestimate the amount of actual revenue that Greece would raise due to the endogenous adjustment of capital and labor. Meeting the debt repayment schedule is substantially more costly because Greece is a small economy that is integrated with the larger European economy. Failure to incorporate the impact of capital and labor mobility results in a significant overestimate of future revenue. Delaying the implementation of tax increases or government expenditure cuts can help mitigate the short-run fall in output, but such delays require greater economic hardship in the long run. |
| JEL: | E62 F42 F43 H63 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21688&r=eec |
| By: | Gökçer Özgür (Hacettepe University, Department of Economics); Emel Memiş (Ankara University, Department of Economics) |
| Abstract: | The economic crisis of the Eurozone emerged after the subprime mortgage crisis of the U.S. and since then fiscal profligacy of some member countries primarily Greece at the outset, were seen as the root of the crisis. However, alternative approaches pointed to the current account imbalances within the Eurozone; the flaws in the architecture of the Eurozone system. In this study, we aim to analyze these structural problems behind the macroeconomic imbalances and trace their consequences in terms of credit expansion and asset price speculation. More specifically we examine the impacts of credit expansion (the change in new loans relative to GDP) on asset prices using dynamic panel estimations for 11 countries in the Eurozone over the period 1990-2011. We provide the estimates for the pooled sample and for the subsample countries separately regrouped based on Hein (2013) as: i) the debt-led consumption (Greece, Ireland and Spain); ii) export-led mercantilist (Austria, Belgium, Finland, Germany and Netherlands) and iii) domestic demand-led countries (France, Italy and Portugal). We find that the credit expansion and asset prices are closely associated in the first and third group of countries whereas no significant correlation is observed in the second group. In addition we also provide evidence on the relationship between the growth of GDP and credit expansion supporting previous findings in the literature. |
| Keywords: | Credit expansion; Asset prices; Eurozone crisis; Macroeconomic imbalances |
| JEL: | E42 E65 F36 F34 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2015:296&r=eec |
| By: | Comunale , Mariarosaria (BOFIT) |
| Abstract: | Using the IMF CGER methodology, we make an assessment of the current account and price competitiveness of the Central Eastern European Countries (CEEC) that joined the EU between 2004 and 2014. We present results for the “Macroeconomic Balance (MB)” approach, which provides a measure of current account equilibrium based on its determinants together with mis-alignments in real effective exchange rates. We believe that a more refined analysis of the mis-alignments may useful for the Macroeconomic Imbalance Procedure (MIP). This is especially the case for these countries, which have gone through a transition phase and boom/bust periods since their independence. Because such a history may have influenced a country’s performance, any evaluation must take account of each country’s particular characteristics. We use a panel setup of 11 EU new member states (incl. Croatia) for the period 1994-2012 in static and dy-namic frameworks, also controlling for the presence of cross-sectional dependence and check-ing specifically for the role of exchange rate regimes, capital flows and global factors. <p> We find that the estimated coefficients of the determinants meet with expectations. Moreover, the foreign capital flows, the oil balance, and relative output growth seem to play a crucial role in explaining the current account balance. Some global factors such as shocks in oil prices or supply might have played a role in worsening the current account balances of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in accord with the current account gaps, which clearly display cyclical behaviour. The CAs and REERs come close to equilibria in 2012 in most of the countries andthe rebalancing is completed for some countries that were less misaligned in the past, such as Poland and Czech Republic, but also for Lithuania. When Foreign Direct Investment (FDI) is introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments) whereas the negative misalignments are smaller in magnitude. |
| Keywords: | real effective exchange rate; Central Eastern European Countries; EU new member states; fundamental effective exchange rate; current account |
| JEL: | C23 F31 F32 |
| Date: | 2015–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2015_028&r=eec |
| By: | Jörg Döpke (Hochschule Merseburg (University of Applied Sciences Merseburg)); Ulrich Fritsche (Universität Hamburg (University of Hamburg)); Christian Pierdzioch (Helmut-Schmidt-Universität (Helmut-Schmidt-University)) |
| Abstract: | We use a machine-learning approach known as Boosted Regression Trees (BRT) to reexamine the usefulness of selected leading indicators for predicting recessions. We estimate the BRT approach on German data and study the relative importance of the indicators and their marginal effects on the probability of a recession. We then use receiver operating characteristic (ROC) curves to study the accuracy of forecasts. Results show that the short-term interest rate and the term spread are important leading indicators, but also that the stock market has some predictive value. The recession probability is a nonlinear function of these leading indicators. The BRT approach also helps to recover how the recession probability depends on the interactions of the leading indicators. While the predictive power of the short-term interest rates has declined over time, the term spread and the stock market have gained in importance. We also study how the shape of a forecaster’s utility function affects the optimal choice of a cutoff value above which the estimated recession prob- ability should be interpreted as a signal of a recession. The BRT approach shows a competitive out-of-sample performance compared to popular Pro- bit approaches. |
| Keywords: | Recession forecasting, Boosting, Regression trees, ROC curves |
| JEL: | C52 C53 E32 E37 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201505&r=eec |
| By: | Stijn Rocher (BNP Paribas Fortis); Michael Stierle (European Commission) |
| Abstract: | This paper investigates what can contribute to explaining why household saving rate levels are persistently so dispersed across EU countries, ranging from –10% of household income in Romania to +16% in Germany in 2013. Factors explaining changes over time or forecasting of household savings fall out of the scope of this paper. First, we argue that caution is needed when comparing household saving rates across countries. Institutional differences and data reliability are likely to hinder the international comparability of saving rates. Second, we discuss various determinants of household saving behaviour. We find that traditional explanatory variables like income levels, age dependency and uncertainty can explain more than half of the cross section variance in saving rates. However, large unobserved country fixed effects (e.g. because of institutional differences and measurement error) appear to be present. |
| Keywords: | household saving, international comparability, determinants of saving, panel data. |
| JEL: | E21 C23 H55 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2015.01&r=eec |
| By: | Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Sandra M. Leitner (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | Abstract The analysis of the international migration flows, their determinants and the impact on host countries' labour markets is of great interest in the context of current European developments. This paper analyses the role of EU labour market mobility, specifically cross-border mobility by migrants, in labour market adjustments and, vice versa, how labour market developments across the EU in terms of relative wage differences, differences in activity rates, in labour productivity differentials and in human capital structures affect labour mobility. The analysis is carried out in the context of estimating a panel Vector Auto Regressive (pVAR) model involving bilateral net migration flows and cross-country differences in the above variables. It is estimated for the period 2000 to 2012, thus capturing also the two waves of accession of Central and Eastern European new Member States (NMS). The estimations are performed for cross-border mobility patterns for the EU as a whole, as well as for the migration patterns between NMS and OMS, thus analysing the changes which the integration of new Member States may have caused to labour market and mobility dynamics in the European Union. |
| Keywords: | labour mobility, determinants of migration flows, European Union, new Member States, econometric analysis of labour mobility, panel VAR model, push and pull factors of migration |
| JEL: | F22 J61 J62 J63 R23 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:120&r=eec |
| By: | Kurmaş Akdoğan (Central Bank of Turkey) |
| Abstract: | We examine the unemployment hysteresis hypothesis for 31 European countries, US and Japan, using linear and nonlinear unit root tests. Two types of smooth transition models - Exponential Smooth Transition Autoregressive (ESTAR) and Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) - are employed to account for the mean-reverting behaviour in unemployment due to heterogeneity in hiring and firing costs across firms. Four main results emerge: First, the hysteresis hypothesis is rejected for 60 percent of the countries in our sample. Second, nonlinear models capture the asymmetries in unemployment dynamics over the business cycle for some countries. Third, many of the series display multiple structural breaks which might point out shifts in mean level of unemployment. Fourth, forecasting powers of our nonlinear models are moderately better than the random walk model in the longer term. The results have policy implications for the debate on the benefits of demand or supply side policies for tackling the current unemployment problem in Europe. |
| Keywords: | Unemployment, Hysteresis, Nonlinear Adjustment, Structural Breaks, Forecasting |
| JEL: | E24 C22 E27 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:eyd:cp2015:266&r=eec |
| By: | José María Casado (Banco de España); Cristina Fernández (Banco de España); Juan F. Jimeno (Banco de España) |
| Abstract: | We firstly measure the contribution of worker flows across employment, unemployment, and non-participation to the change in unemployment in eleven EU countries during the period 2006-2012, paying special attention to which socio-demographic groups in each of the countries were most affected by job creation and job destruction during the crisis. We find that age, to a greater extent than educational attainment, is the main determinant of flows from employment into unemployment, particularly in those countries where unemployment increased most. Secondly, we highlight some institutional features of the labour market (employment protection legislation, unemployment insurance and the incidence of active labour market policies) that help explain the cross-country differences in flows between employment and unemployment and in their socio-demographic composition. Finally, we examine whether the crisis has led to some employment reallocation across sectors, finding that, so far, there is no clear evidence in favour of cleansing effects. |
| Keywords: | labour flows, unemployment, labour market institutions, Great Recession |
| JEL: | J6 E24 C25 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1529&r=eec |
| By: | Simone Salotti (European Commission – JRC - IPTS); Letizia Montinari (European Commission – JRC - IPTS); Antonio F. Amores (European Commission – JRC - IPTS); José Manuel Rueda-Cantuche (European Commission – JRC - IPTS) |
| Abstract: | This document presents the results of an empirical analysis carried out in order to estimate total expenditure elasticities for the household consumption module of the FIDELIO model. The estimates are based on survey data for the following six European countries: Austria, France, Italy, Slovakia, Spain, and the UK. The analysis deals with twelve categories of non-durable consumption: four energy- and eight non-energy-related goods and services. Results appear to be in line with the comparable elasticity estimates of the existing literature. Socio-demographic controls related to both household characteristics and housing conditions offer interesting additional results that may be useful at a later stage of the analysis with the FIDELIO model. |
| Keywords: | Income elasticity, household consumption, non-durable goods, survey data |
| JEL: | D12 C21 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc94405&r=eec |
| By: | Dimitrios Paparas (Harper Adams University, UK); Christian Richter (German University in Cairo, Egypt) |
| Abstract: | The role of Fiscal policy in the long run growth process has been crucial in macroeconomics since the appearance of endogenous growth models. Additionally, a significant debate among economists involves whether several types of spending or taxation enhance economic growth. The main objective of this paper is to highlight the relationship between fiscal policy and economic growth in the EU-15, and to make an attempt to determine which of the fiscal policy instruments enhance economic growth. We deployed panel data techniques and included both sides of budget, spending and taxation, in our regressions and used the most recent dataset data for fiscal variables from Eurostat. We made a new classification of public expenditures into homogeneous groups in order to reduce the explanatory variables and increase the efficiency of our model and results since we have data for only 14 years. In our empirical analysis we included OLS, fixed effects models, random effects models and GMM estimators, the Arellano and Bond (1991) and the Arellano and Bover (1995) - Blundell and Bond (1998) estimators. On the first round of our regressions we find a negative impact of spending on human capital accumulation on economic growth. Our empirical results also indicate that an increase in government spending on infrastructure has a significant positive impact on the economic growth of a country. Additionally, in our regressions the variable government spending on property rights protections include spending on defence and spending on public order safety. Our empirical results from the first round of regressions imply a strongly negative relationship between t hese two variables. However, on the second round of our regressions we aggregate defence spending from spending on property right protection and we did not find any relationship between economic growth and defence spending. Moreover, we found a non-significant relationship between government spending on social protection and economic growth. On the second round of regressions, when we allow for non-linear growth effects we find a positive relationship with deficits and economic growth, which is in contrast with Ricardian Equivalence. We also included the employment growth and business investment in our model because labour and capital are very important factors of production in growth models. In our empirical results we do not find a significant impact of employment on economic growth, but when we allow for non-linear growth effects we find a strongly positive impact. However, we found that gross fixed capital formation of the private sector as a percentage of GDP in both rounds of our regressions, has no significant impact on economic growth. Finally, our empirical results do not support any evidence of a relationship between openness and economic growth. |
| Keywords: | Panel Data. Fiscal Policy. Taxation. Government Expenditures. |
| JEL: | C23 C33 E62 H2 H5 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2015.06&r=eec |