nep-eec New Economics Papers
on European Economics
Issue of 2016‒06‒09
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro, crisis and unemployment: Youth patterns, youth policies? By Hector Sala Lorda; Atanu Ghoshray; Javier Ordóñez
  2. A European Disease? Non-tradable inflation and real interest rate divergence By Sophie Piton
  3. How does the Eurozone crisis affect securities portfolios? By Thomas Kick; Enrico Onali; Benedikt Ruprecht; Klaus Schaeck
  4. Flexibility versus Stability: A difficult trade-off in the eurozone By De Grauwe, Paul; Ji, Yuemei
  5. Shifts in euro area Beveridge curves and their determinants By Bonthuis, Boele; Jarvis, Valerie; Vanhala, Juuso
  6. Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation By Delle Monache,; Ivan Petrella; Fabrizio Venditti
  7. How do Experts Forecast Sovereign Spreads? By Jacopo Cimadomo; Peter Claeys; Marcos Poplawski-Ribeiro
  8. The use of short-term indicators and survey data for predicting turning points in economic activity: A performance analysis of the OECD system of CLIs during the Great Recession By Roberto Astolfi; Michela Gamba; Emmanuelle Guidetti; Pierre-Alain Pionnier
  9. Fiscal Policy Matters A New DSGE Model for Slovakia By Zuzana Mucka
  10. Contagion in Eurozone Sovereign Bond Markets? The Good, the Bad and the Ugly By Thomas Flavin; David Cronin; Lisa Sheenan
  11. Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU By Mariarosaria Comunale
  12. The drivers of differences between growth in GDP and household adjusted disposable income in OECD countries By Jennifer Ribarsky; Changku Kang; Esther Bolton
  13. PMI Thresholds for GDP Growth By Kilinc, Zubeyir; Yucel, Eray
  14. Fiscal Pressure of Interest Payments in Serbia - a Time Series Exploration By Andric, Vladimir; Arsic, Milojko; Nojkovic, Aleksandra
  15. Looking for a success: the euro crisis adjustment programs By Ricardo Reis
  16. Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises By Stijn Ferrari; Mara Pirovano
  17. What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries By Olivier Damette; Mathilde Maurel; Michael A. Stemmer

  1. By: Hector Sala Lorda (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Atanu Ghoshray (Newcastle University Business School); Javier Ordóñez (Instituto de Economía Internacional, Universitat Jaume I, UPAEP)
    Abstract: This paper examines the occurrence of structural breaks in European unemployment associated with major events experienced by the European economies at an institutional level: the creation of the European and Monetary Union (EMU) in 1999, and the Euro/financial crisis in 2008- 2009, which was followed by a general and intensive reform process in the years afterwards. Beyond the well documented asymmetries across countries, we uncover different responses of adult and youth unemployment rates. While adult unemployment is more prone to experience structural breaks, youth unemployment is more sensitive to business cycle oscillations. This has been especially so in the recent crisis and calls for fine tuning policy measures specifically targeted to youth unemployed in bad times. One important implication of our findings is that generic labour market reforms are not effective enough to solve the youth unemployment problem across Europe. We point to educational policies that raise average qualifications and help school-to-work transitions as suitable complementary cures.
    Keywords: Unemployment, structural breaks, crisis, Eurozone, youth, education
    JEL: J64 O52 J08 F66
    Date: 2016–05
  2. By: Sophie Piton (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. it then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA
    Keywords: Non-tradable prices; Balassa-Samuelson effect; Real interest rate
    JEL: F41 F45 E43
    Date: 2016–05
  3. By: Thomas Kick; Enrico Onali; Benedikt Ruprecht; Klaus Schaeck
    Abstract: We investigate if the Eurozone crisis affects the composition of security portfolios of households and non-financial firms. Using a unique dataset for all securities holdings by German investors, we exploit plausibly exogenous variation in the exposure to securities issued by stressed Eurozone economies in Greece, Ireland, Italy, Portugal, and Spain, to offer the first comparison of how these two types of investors respond to the European sovereign debt crisis. Difference-in-differences tests show that households, unlike non-financial firms, rebalance their portfoliosby moving from bonds to stocks and from securities issued by financial institutions to securities issued by non-financials.
    Keywords: asset allocation; sovereign debt crisis; household finance; Eurozone; quasi-natural experiment
    JEL: D12 D13 G11 G21
    Date: 2016–05–17
  4. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: Optimal currency area (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when shocks are temporary it does not follow that more flexibility is the answer. When shocks are the result of business-cycle movements, the way to deal with them is by stabilisation efforts. This paper provides empirical evidence that suggests that the biggest shocks in the eurozone were the result of business-cycle movements. These were relatively well synchronised, except for their amplitude. We argue that efforts to stabilise business cycles should be strengthened relative to the efforts that have been made to impose structural reforms, with consideration given to the implications for the governance of the eurozone.
    Date: 2016–04
  5. By: Bonthuis, Boele; Jarvis, Valerie; Vanhala, Juuso
    Abstract: This paper analyses euro area Beveridge curves at the euro area aggregate and country level over the past 25 years. Using an autoregressive distributed lag model we find a significant outward shift in the euro area Beveridge curve since the onset of the crisis, but considerable heterogeneity at country level. We test for factors underlying these developments using the local projections method of Jordà (2005). Skill mismatch, high shares of workers in the construction sector, as well as high pre-crisis financial slack and home ownership rates appear strong determinants of outward shifts in Beveridge curves in response to a negative shock. Higher female participation rates mitigate these effects. Keywords: Beveridge curve, crisis, mismatch, unemployment, labour shortages, vacancies
    JEL: J62 J63 E24 E32
    Date: 2015–02–03
  6. By: Delle Monache, (Bank of Italy); Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck; Bank of England); Fabrizio Venditti (Bank of Italy)
    Abstract: We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks.
    Keywords: inflation, time-varying parameters, score driven models, state space models, dynamics factor models.
    JEL: E31 C22 C51 C53
    Date: 2015–07
  7. By: Jacopo Cimadomo; Peter Claeys; Marcos Poplawski-Ribeiro
    Abstract: This paper assesses how forecasting experts form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the United Kingdom between January 1993 and October 2014, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—to be 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. This suggests that credible fiscal plans affect market experts’ expectations and reduce the pressure on sovereign bond markets. In addition, we show that expected fundamentals generally play a more important role in explaining forecasted spreads compared to realized spreads.
    Date: 2016–05–20
  8. By: Roberto Astolfi; Michela Gamba; Emmanuelle Guidetti; Pierre-Alain Pionnier
    Abstract: After reviewing the main features of the statistics available in the MEI to inform policy makers, this paper discusses the performance of the CLIs during the Great Recession. This performance is assessed using both ex-post and real-time analyses. The analyses evaluate the ability of the OECD CLIs to anticipate the peak and the subsequent trough of the Great Recession in G7 countries, and the extent to which the initial signal has been maintained over time. Après un examen des principales caractéristiques des statistiques disponibles dans les PIE, ce document évalue la performance des Indicateurs Composites Avancés de l’OCDE pendant la Grande Récession. Des analyses ex-post et en temps réel sont menées pour apprécier la capacité de ces indicateurs à anticiper le pic et le creux de la Grande Récession dans les pays du G7, ainsi que la stabilité dans le temps des points de retournement détectés.
    Date: 2016–05–25
  9. By: Zuzana Mucka (Council for Budget Responsibility)
    Abstract: The paper sets out a multiple-trend DSGE model designed, calibrated and estimated to match key stylized facts about the Slovak economy. The model includes a detailed fiscal policy block that allows a thorough analysis of fiscal policy measures and evaluate country’s fiscal policy credibility using interest rate spreads. The estimated model is firstly employed to identify the structural economic shocks that drive the economy and determine the sources of the forecast uncertainty. The empirical analysis emphasizes the importance of the foreign shocks on domestic GDP, trade and employment growth and high influence of productivity shocks on inflation and labour market dynamics. Next, using the model we study the response of the economy to a technology shock and to a foreign demand shock under alternative fiscal adjustment scenarios. We find that a well-designed programme involving increases in transfers as well as tax cuts can stabilize the economy in the short run and improve longer-term growth prospects following a shock with adverse fiscal implications. We analyse the consequences of fiscal policy shocks in and away from the steady state of the model. The exercise yields implied fiscal multipliers that are in line with standard literature. Raising capital and labour tax especially is particularly bad for the real economy, mainly in the long run. On the other hand, cutting subsidies and unproductive government consumption are the least harmful way of reducing spending, while reduction in the public wage bill and public investment has negative implications on household consumption and wealth.
    Keywords: dynamic stochastic general equilibrium model, simulations, fiscal rules, fiscal multipliers, fiscal consolidation
    JEL: E32 C61 C63 D58 E62 H63 H5
    Date: 2016–04
  10. By: Thomas Flavin (Department of Economics, Finance and Accounting, Maynooth University.); David Cronin (Central Bank of Ireland, Spencer Dock, Dublin 1, Ireland); Lisa Sheenan (Central Bank of Ireland, Spencer Dock, Dublin 1, Ireland)
    Abstract: We analyse the stability of linkages across Eurozone bond markets during the sovereign debt crisis. We distinguish between contagion and interdependencies as mechanisms for spreading the turmoil across bond markets. Using a three-regime Markov switching VAR, we identify two distinct phases of the crisis - the bad and the ugly - and find differences in shock transmission between them. Overall, evidence of contagion is scant and interdependence is the more common determinant of market comovements.
    Keywords: Eurozone Sovereign Debt Crisis; Contagion; Markov-switching VAR.
    JEL: G01 G15
    Date: 2016
  11. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.
    Keywords: real effective exchange rate, behavioural effective exchange rate, foreign capital inflows, FDIs, Dutch disease, GDP growth, European Union
    JEL: F31 F43 C23
    Date: 2016–05–23
  12. By: Jennifer Ribarsky; Changku Kang; Esther Bolton
    Abstract: Growth in household income has evolved differently from gross domestic product (GDP) in most OECD countries over the last eighteen years. Using the wealth of information available in the System of National Accounts, this paper provides an assessment of what may be driving this gap. A clear relationship, based on national accounts identities, between GDP and household income exists. This link allows for the calculation of each component’s contribution to the divergence in the growth rates. Based on this deconstruction, differences between the growth rates reflect several underlying effects that (often) offset each other. In many OECD countries, real GDP grew at a faster pace than real household income over the last eighteen years driven by different developments in prices faced by producers versus prices faced by consumers and a rising profit share of corporations. The positive evolution of the other components (such as government intervention) contributed to reducing the gap between the growth rates. Several indicators are investigated to help explain the underlying developments. La croissances des revenus des ménages ont évolué différemment de celle du Produit Intérieur Brut (PIB) dans la plupart des pays de l’OCDE ces 18 dernières années. En utilisant la richesse des informations disponibles dans le Système de Comptabilité Nationale, ce document de travail donne une évaluation de ce qui pourrait être à l’origine de cet écart. Une relation claire, établie sur la base des identités de comptabilité nationale, entre le PIB et le revenu des ménages existe. Cette relation permet le calcul de la contribution de chaque composante à la divergence entre les taux de croissance. À partir de cette déconstruction, les différences entre les taux de croissance reflètent plusieurs effets sous-jacents lesquels (souvent) s’annulent entre eux. Dans de nombreux pays de l’OCDE, le PIB en termes réels a crû à un rythme plus soutenu que le revenu réel des ménages ces 18 dernières années, poussé par des évolutions différentes des prix payés par les producteurs de ceux payés par les consommateurs, ainsi qu’une hausse des taux de marges des sociétés. L’évolution positive des autres composantes (telle que l’intervention gouvernementale) ont contribué à la baisse de l’écart entre les taux de croissance. Plusieurs indicateurs complémentaires sont examinés afin d’expliciter des facteurs sous-jacents.
    Date: 2016–05–20
  13. By: Kilinc, Zubeyir; Yucel, Eray
    Abstract: In this study, we try to uncover the information capacity of the Purchasing Managers Index (PMI) as a leading indicator of GDP growth of euro area. Our results show that PMI carries a significant amount of information that can be used to forecast the growth rate in the current as well as subsequent quarters. In particular, having verified that a PMI level around 50 works as the threshold distinguishing between positive and negative rates of GDP growth, we establish a sequence of other PMI thresholds to signify certain levels of GDP growth. Our estimation strategy reveals asymmetric responses of GDP growth to unit changes in PMI before and after the estimated threshold levels.
    Keywords: Purchasing Managers Index; Leading Indicators; Thresholds
    JEL: C24 C51 E27
    Date: 2016–04–22
  14. By: Andric, Vladimir; Arsic, Milojko; Nojkovic, Aleksandra
    Abstract: We focus on the response of primary fiscal balance to interest payments and borrowing costs on Serbian public debt before and in the aftermath of the global financial crisis. Our analysis reveals: i) policy makers financed up to 50% of each percentage point increase in interest payments to GDP ratio with new public debt issuance; ii) the government has responded to rising interest payments and borrowing costs by reducing primary fiscal balance from the onset of the global financial crisis; iii) the response of primary fiscal balance to interest payments mimics the response of primary fiscal balance to the costs of borrowing; iv) fiscal austerity measures adopted after the breach of fiscal rule for public debt have been insufficient to stabilize fiscal policy stance in Serbia.
    Keywords: Serbia,augmented fiscal reaction function,global financial crisis
    JEL: C54 H63 P20
    Date: 2016
  15. By: Ricardo Reis
    Abstract: It is difficult to call an adjustment process a success when the country in question has barely grown in 15 years and unemployment is 12.4%. Yet, the Portuguese economy has changed in many directions that seem promising. The misallocation of resources that plagued it seems to have reversed, as export sectors have grown, employment shifted to more educated workers, protection of local interests declined, and output per hour increased in the least productive sectors. At the same time, it is easy to claim success when looking at the profile of stable and small payments that the Portuguese state has to make in the near term. Another debt crisis is unlikely. Yet, behind the low interest rates and longer maturities, public debt is 130% of GDP, austerity was far from being decisive and to generate large primary surpluses, and public spending will keep on rising given the lack of a reform of the pension system. Without a quiet restructuring of the debt to the European authorities over the next few year that lowers its market value without affecting its face value, there are reasons to be worried, and the Greek crisis of 2015 may have made this goal harder to reach. In the long run, the definite tests of adjustment will be whether fast economic growth in the next few years is able to offset the stagnation of the last 15 years and whether public debt significantly falls.
    JEL: F3 G3
    Date: 2015
  16. By: Stijn Ferrari; Mara Pirovano (Prudential Policy and Financial Stability, National Bank of Belgium)
    Abstract: Given the indisputable cost of policy inaction in the run-up to banking crises as well as the negative side effects of unwarranted policy activation, policymakers would strongly benefit from earlywarning thresholds that more accurately predict crises and produce fewer false alarms. This paper presents a novel yet intuitive methodology to compute country-specific and state-dependent thresholds for early-warning indicators of banking crises. Our results for a selection of early-warning indicators for banking crises in 14 EU countries show that the benefits of applying the conditional moments approach can be substantial. The methodology provides more robust signals and improves the early-warning performance at the country-specific level, by accounting for country idiosyncrasies and state dependencies, which play an important role in national supervisory authorities’ macroprudential surveillance.
    Keywords: Banking crises, Early warning systems, Country-specific thresholds, State-dependent thresholds
    JEL: C40 E44 E47 E61 G21
    Date: 2016–05
  17. By: Olivier Damette (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, LEF - Laboratoire d'Economie Forestière - INRA - Institut National de la Recherche Agronomique - AgroParisTech - AgroParisTech); Mathilde Maurel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, FERDI - Fondation pour les Etudes et Recherches sur le Développement International - FERDI); Michael A. Stemmer (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Consequences from the subsiding 2008 financial crisis on long-run economic growth are widely debated. Existing literature on previous recessions, such as Cerra and Saxena (2008), emphasizes the long-term loss inflicted on per capita GDP levels. This paper concentrates on typical business cycles in advanced European and transition countries and assumes that lower than normal growth during recessions is followed by a recovery period with above normal growth until the economy reaches its pre-crisis level. The objective is to assess the capacity to rebound, the speed of convergence towards a normal growth path as well as potential nonlinearities. Through exploiting the cointegration relationships among variables in long-run growth regressions and by employing a variety of panel error-correction models, results show a strong evidence of error-correction and different linear speed in the convergence process with the transition economies outpacing Western European countries. Our analysis is further extended into a Panel Smooth Transition Error-Correction Model (PSTR-ECM) to account for different regimes in convergence patterns according to a selection of transition variables. Whereas the velocity of convergence for European core countries exhibits a nonlinear pattern and differs with respect to price and flexibility, transition countries remain linear in their return to the growth trend. Ultimately, our results suggest that internal adjustments remain the key factors for both European and transition countries to recover from negative economic growth shocks.
    Keywords: smooth-transition models,Economic growth,business cycles,transition economies,error-correction models,panel cointegration
    Date: 2016–04

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