nep-eec New Economics Papers
on European Economics
Issue of 2016‒04‒23
twelve papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic and Financial Effects of Oil Price Shocks: Evidence for the Euro Area By Claudio Morana
  2. An investigation into improving the real-time reliability of OECD output gap estimates By David Turner; Maria Chiara Cavalleri; Yvan Guillemette; Alexandre Kopoin; Patrice Ollivaud; Elena Rusticelli
  3. A New Settlement for the UK: A “Leap in the Dark” By Phedon Nicolaides; Roxana Nedelescu (née Sandu); Joanna Hornik; Gibran Watfe; Gil Stein
  4. Union Debt Management By Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
  5. Growth Patterns and Trade Imbalances in the EMU. A Global Value Chain Analysis By Stefan Ederer; Peter Reschenhofer
  6. Competitiveness and current account adjustments in the euro area By Böing, Tobias; Stadtmann, Georg
  7. In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area. By P. Fève; J.-G. Sahuc
  8. The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model By Gross, Marco; Kok, Christoffer; Żochowski, Dawid
  9. Changes in nominal rigidities in Poland – a regime switching DSGE perspective By Baranowski, Paweł; Kuchta, Zbigniew
  10. Why is Italy doing so badly? By Gianluigi Pelloni; Marco Savioli
  11. Reconsidering Wagner's Law: evidence from the functions of the government By António Afonso,; José Alves
  12. Are Unemployment Rates in OECD Countries Stationary? Evidence from Univariate and Panel Unit Root Tests By Khraief, Naceur; Shahbaz, Muhammad; Heshmati, Almas; Azam, Muhammad

  1. By: Claudio Morana (Department of Economics, Management and Statistics, University of Milano-Bicocca, Italy; Collegio Carlo Alberto, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: The paper asses the macroeconomic and financial effects of oil prices shocks in the euro area since its creation in 1999, with a special focus on the recent slump. The analysis is carried out episode by episode, within a time-varying parameter framework, consistent with the view that "not all the oil price shocks are alike", yet without imposing any a priori identification assumption. We find evidence of recessionary effects triggered not only by oil price hikes, but also by oil price slumps in some cases, likewise for the most recent episode, which is also rising deflation risk and financial distress. In addition through uncertainty effects, the current slump might then be depressing aggregate demand by increasing the real interest rate, as ECB monetary policy is already conducted at the zero lower bound. The increase in real money balances following the slump points to the accommodation of the shock by the ECB, concurrent with the implementation of the Quantitative Easing policy (QE). Yet, in so far as QE failed to generate inflationary expectations within the current and expected environment of soft oil prices, the case for a more expansionary use of fiscal policy than in the past would become compelling, in order to counteract the deflationary and recessionary threats to the euro area.
    Date: 2016–02
  2. By: David Turner; Maria Chiara Cavalleri; Yvan Guillemette; Alexandre Kopoin; Patrice Ollivaud; Elena Rusticelli
    Abstract: Estimates of the output gap ought to be a useful guide for macroeconomic policy, both for assessing inflationary pressures and fiscal sustainability, but their reliability has been called into question by the large revisions which they are often subject to, particularly around turning points. Revisions to OECD published estimates of the output gap around the period of the financial crisis have been exceptionally large, with by far the largest contribution to these revisions coming from the labour-efficiency gap. The current paper investigates a modification to the standard OECD production function method for deriving potential output, which involves an additional cyclical adjustment in the derivation of trend labour efficiency. The additional adjustment helps to reduce the occurrence of large end-point revisions and of sign switches between the initial and final estimates of the labour-efficiency gap. The variables which are most often found to be useful in providing this cyclical adjustment of labour efficiency are manufacturing capacity utilisation and the investment share. However, for a few countries additional variables – house prices and credit – have been used to provide the cyclical adjustment, although this raises an issue as to whether the cyclical adjustment should be limited to a core set of variables to ensure the method remains reasonably homogenous across countries. Recent improvements to the specification of the Phillips curve, which imply a tighter fit between the unemployment gap and inflation, should also reduce end-point revisions to the unemployment gap in future. Améliorer la fiabilité en temps réel des estimations d'écarts de production de l'OCDE : une investigation Les estimations de l’écart de production devraient être un guide utile à la politique macroéconomique, à la fois pour mesurer les pressions inflationnistes et la viabilité de la politique fiscale, mais leur validité et leur fiabilité ont été mises en question par les larges révisions dont elles ont souvent fait l’objet, particulièrement autour des points de retournements. Les révisions concernant les estimations de l’écart de production publiées par l’OCDE autour de la période de la crise financière ont été exceptionnellement larges, en majeure partie à cause de révisions aux écarts de productivité (efficience du travail). Cette étude examine une modification de la méthode usuelle utilisée par l’OCDE pour le calcul de la production potentielle, basée sur une fonction de production, qui rajoute un ajustement cyclique additionnel au niveau du calcul de l’efficience du travail. Cet ajustement additionnel permet de réduire l’occurrence de larges révisions dues à la sensibilité des filtres aux points terminaux et du changement de signe entre les estimations initiales et finales des écarts de productivité. Les variables s’avérant les plus utiles pour cet ajustement cyclique sont le taux d’utilisation des capacités du secteur manufacturier et la part de l’investissement dans le PIB. Cependant, pour quelques pays, des variables additionnelles comme les prix des logements et le crédit ont été utilisées pour effectuer cet ajustement cyclique, quoique cela soulève la question de savoir si l’ajustement cyclique devrait être limité à un noyau de variables de base pour assurer l’homogénéité de la méthode entre pays. Des améliorations récentes sur la spécification de la courbe de Phillips, dont découle une correspondance plus stricte entre écarts de chômage et inflation, devraient aussi permettre de réduire les révisions des écarts du chômage dans le futur.
    Keywords: production function, potential output, financial crisis, total factor productivity, labour efficiency, crise financière, efficience du travail, fonction de production, production potentielle, productivité multifactorielle
    JEL: E3 E32 E5 E6
    Date: 2016–04–19
  3. By: Phedon Nicolaides (Director of Studies and Jan Tinbergen Chair, Department of European Economic Studies, College of Europe); Roxana Nedelescu (née Sandu) (College of Europe, Department of European Economic Studies); Joanna Hornik (College of Europe, Department of European Economic Studies); Gibran Watfe (College of Europe, Department of European Economic Studies); Gil Stein (College of Europe, Department of European Economic Studies)
    Abstract: This paper examines the outcome of the negotiations for a new settlement concerning the United Kingdom’s relationship with the European Union. It reviews the nature and possible consequences of the “substantial changes” that were demanded in the areas of economic governance, competitiveness, sovereignty, and immigration. We argue that the proposed arrangements do not amount to much and can prove harmful to the future of the EU. The paper is a follow-up to our analysis of the initial proposals, available under Bruges European Economic Policy Briefings, 38/2016.
    JEL: O11 F02 E61 H50
    Date: 2016–03
  4. By: Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
    Abstract: We study the role of government debt maturity in a monetary union in the absence of fiscal transfers across countries. Our key finding is that fi scal hedging is only possible when spending represents an aggregate shock in the union. In the case of idiosyncratic disturbances in spending it is not possible to target a portfolio which provides fi scal insurance to the governments: the allocation is one of incomplete financial markets. These implications are in line with the empirical evidence. Using a sample of 5 Euro area countries and historical holding period returns on government debt, we find that fiscal insurance is not signifi cant against country speci fic shocks however, it is signifi cant against aggregate shocks. Our analysis extends the theoretical results of the literature on optimal fiscal policy without state contingent debt to a two country model. We show that in the two country setup and under an incomplete market the optimal tax schedule, consumption and leisure follow a random walk.
    Keywords: Debt Management; Fiscal policy; Government Debt; Maturity Structure; Tax Smoothing
    JEL: E43 E62 H63
    Date: 2016–03
  5. By: Stefan Ederer (WIFO); Peter Reschenhofer (WIFO)
    Abstract: This paper assesses whether or to what extent the macroeconomic imbalances, which emerged in the "North" and "South" of the European Monetary Union before the financial and economic crisis of 2008-09, are symmetric. First, we show that the imbalances stemmed from different growth patterns and quantify the contributions of foreign and domestic demand to GDP growth in the EMU countries. Second, we calculate bilateral exports and imports between all EU countries, applying the concept of "trade in value added", and discuss their role in the emergence of trade surpluses and deficits. Third, we quantify to what extent an increase in domestic demand in the North and a decrease in the South would support the elimination of these imbalances. Finally, we calculate a hypothetical scenario in which final demand expands to such extent that all intra-EMU trade is balanced. We thereby evaluate whether or to what extent the macroeconomic imbalances can be eliminated by demand adjustments in the EMU countries.
    Keywords: European Monetary Union, macroeconomic imbalances, global value chains, input-output analysis
    Date: 2016–01–21
  6. By: Böing, Tobias; Stadtmann, Georg
    Abstract: We empirically assess the impact of competitiveness measured by unit labor costs for current account balances in the Euro area. For this purpose, we estimate a panel with annual observations from 2000 to 2013. Our findings confirm the importance of competitiveness: Higher unit labor costs growth leads to lower current account balances. By splitting up unit labor costs growth in wage growth and productivity growth, we find wage growth and productivity growth to have a significantly negative and positive effect, respectively. However, the effect of unit labor costs is mainly driven by productivity growth, so that wage cuts are relatively ineffective and painful to fight current account deficits. But pushing productivity is also likely to be ineffective, since its positive effect for the current account may be offset by its effect on wages and GDP, which decreases current account balances.
    Keywords: Euro Area,Competitiveness,Unit Labor Costs,Wage Growth,Labor Productivity Growth,Current Account,Panel
    JEL: F32 E69 C33
    Date: 2016
  7. By: P. Fève; J.-G. Sahuc
    Abstract: This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.
    Keywords: Fiscal multipliers, hand-to-mouth, Edgeworth complementarity, DSGE-VAR, Euro area, Bayesian econometrics.
    JEL: C32 E32 E62
    Date: 2016
  8. By: Gross, Marco; Kok, Christoffer; Żochowski, Dawid
    Abstract: We develop a Mixed-Cross-Section Global Vector Autoregressive (MCS-GVAR) model for the 28 EU economies and a sample of individual banking groups to study the propagation of bank capital shocks to the economy. We conduct various simulations with the model to assess how capital ratio shocks influence bank credit supply and aggregate demand. We distinguish between contractionary and expansionary deleveraging scenarios and confirm the intuitive result that only when banks choose to achieve higher capital ratios by shrinking their balance sheets would economic activity be at risk to contract. The model can be used to establish ranges of impact estimates for capital-related macroprudential policy measures, including counter-cyclical capital buffers, systemic risk buffers, G-SIB buffers, etc., also with a view to assessing the cross-country spillover effects of such policy measures. We highlight the importance for macroprudential policy makers to give clear guidance to banks as to how certain macroprudential policy measures should be implemented – depending on what measure is considered, during which phase in the business cycle, and for what particular purpose. JEL Classification: C33, E51, E58
    Keywords: euro area money markets, financial crisis, network analysis, spatial regressions
    Date: 2016–03
  9. By: Baranowski, Paweł; Kuchta, Zbigniew
    Abstract: We estimate a dynamic stochastic general equilibrium model that allows for regimes Markov switching (MS-DSGE). Existing MS-DSGE papers for the United States focus on changes in monetary policy or shocks volatility, contributing the debate on the Great Moderation and/or Volcker disinflation. However, Poland which here serves as an example of a transition country, faced a wider range of structural changes, including long disinflation, EU accession or tax changes. The model identifies high and low rigidity regimes, with the timing consistent with menu cost explanation of nominal rigidities. Estimated timing of the regimes captures the European Union accession and indirect tax changes. The Bayesian model comparison results suggest that model with switching in both analyzed rigidities is strongly favored by the data in comparison with switching only in prices or in wages. Moreover, we find significant evidence in support of independent Markov chains.
    Keywords: nominal rigidities, Markov-switching DSGE models, Bayesian model comparison, regime switching
    JEL: C11 E31 E32 J30 P22
    Date: 2015–12
  10. By: Gianluigi Pelloni (The Rimini Centre for Economic Analysis, Italy; Wilfrid Laurier University, Canada; Johns Hopkins Bologna Centre, Italy; University of Bologna, Italy); Marco Savioli (University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We present the current Italian economic crisis as a phase of a major systemic decline. We argue that “Italy's system” has forced the country to abandon a “dynamic” view of comparative advantage, crucial for sustained economic growth, in favour of a “static” view of specialization. Creative destruction has been hampered and the indispensable sectoral restructuring has not taken place, leading to stagnation. The roots of this decline lay in collective action issues and an implicit contract between elites and civil society. We suggest that solving these issues is indispensable in order to support a “dynamic” view of comparative advantage and so the re-start of the Italian economy and society.
    Keywords: sustained growth, comparative advantage, collective action, Italy
    JEL: O52 O00 N14 D70
    Date: 2015–04
  11. By: António Afonso,; José Alves
    Abstract: We revisitWagner's law of increasing state expenditure by function of government expenditure. Using data of 14 European countries between 1996 and 2013, we apply panel data and SUR methods to assess public expenditure-income elasticities. We find that some functions of government spending for a few countries (e.g. Austria, France, the Netherlands, and Portugal) validate Wagner's law. For the Netherlands expenditures with environment protection increase more than proportionately to economic growth, and for France that is the case of spending in housing and community amenities. In addition, Greece is the only country where two public spending items react more than one to one to growth. Key Words : Fiscal Policies; Government spending; SUR estimation; Wagner's Law.
    JEL: C33 E62 H50 O47
    Date: 2016–04
  12. By: Khraief, Naceur (Faculty of Economic Science and Management of Sousse, University of Sousse, Tunisia, & GREDEG (Research Group on Law Economics and Management, University of Nice Sophia Antipolis, France); Shahbaz, Muhammad (Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan); Heshmati, Almas (Jönköping International Business School (JIBS), Centre of Excellence for Science and Innovation Studies (CESIS),& Department of Economics, Sogang University, Seoul, South Korea); Azam, Muhammad (School of Economics, Finance & Banking, College of Business, Universiti Utara Malaysia)
    Abstract: This paper revisits the dynamics of unemployment rate for 29 OECD countries over the period of 1980-2013. Numerous empirical studies of the dynamics of unemployment rate are carried out within a linear framework. However, unemployment rate can show nonlinear behaviour as a result of business cycles or some idiosyncratic factors specific to labour market (Cancelo, 2007). Thus, as a testing strategy we first perform Harvey et al. (2008) linearity unit root test and then apply the newly ESTAR nonlinear unit root test suggested by Kruse (2011). This test has higher power than conventional unit root tests when time series exhibits nonlinear behaviour. Our empirical findings provide significant evidence in favour of unemployment rate stationarity for 25 countries. For robustness purpose, we have also used panel unit root tests without and with structural breaks. The results show that unemployment hysteresis hypothesis is strongly rejected when taking into account the cross-sectional and structural break assumptions. Thus, unemployment rates are expected to return back to their natural levels without executing any costly macroeconomic labour market policies by the OECD’s governments.
    Keywords: Unemployment; Unit root; labour market policy; OECD
    JEL: C23 E24 J48 J64 N30
    Date: 2016–04–06

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