nep-eec New Economics Papers
on European Economics
Issue of 2016‒06‒14
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The golden rule of public investment – a necessary and sufficient reform of the EU fiscal framework? By Achim Truger
  2. A European Disease?Non-tradable inflation and real interest rate divergence By Sophie Piton
  3. Long-Run Drivers of Current Account Imbalances in the EU: the Role of Trade Openness By Giuseppe Caivano; Nicola D. Coniglio
  4. The interest rate effects of government bond purchases away from the lower bound By De Rezende, Rafael B.
  5. Export Subsidies and Interdependence in Euro Union: Beggar Thy Neighbor? By Damodaran, Nikhil
  6. 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
  7. The impact of the financial crisis on the long-range memory of European corporate bond and stock markets By Lisana B. Martinez; M. Belen Guercio; Aurelio F. Bariviera; Antonio Terce\~no
  8. How informative are aggregated inflation expectations? Evidence from the ECB Survey of Professional Forecasters By Oinonen, Sami; Paloviita, Maritta
  9. Political Economics of Fiscal Consolidations and External Sovereign Accidents By Carolina Achury; Christos Koulovatianos; John Tsoukalas
  10. Fiscal Consolidation Under Imperfect Credibility By M. Lemoine; J. Lindé

  1. By: Achim Truger
    Abstract: It is by now a widely shared insight that fiscal policy needs to be re-strengthened as a macroeconomic policy instrument within European macroeconomic policies: Recent experiences with austerity policies, new research regarding the size of the fiscal multiplier and the fact that monetary policy is obviously overstrained have led to this conclusion. As a consequence, increases in public investment are particularly necessary. Against this background this contribution discusses and proposes the introduction of the traditional public finance golden rule into the EU/Eurozone fiscal framework (Stability and growth pact (SGP), Fiscal Compact (FC)). Such a rule would exempt public (net) investment suitably defined from the relevant deficit targets of both the preventive and the corrective arm of the SGP as well as the FC. That way, fiscal policy would be upgraded and receive larger room for manoeuvre and public investment as a particularly growth enhancing public expenditure category would be strengthened. Different definitions are discussed and a pragmatic definition based on the national accounts with some modifications is proposed. The standard reservations against a golden rule are critically assessed, but mostly discarded. However, the potential limits of the golden rule are examined by way of pragmatic multiplier-based macroeconomic assessments: Would a golden rule have prevented the austerity crisis since 2010? Would other expenditure categories - particularly spending on social policy - have necessarily suffered? Would a golden rule leave sufficient fiscal leeway for expansionary fiscal policy in the current situation? The results are encouraging, yet they show, that the golden rule alone would not be sufficient to stabilise the Euro area economies.
    Keywords: Golden rule, public investment, fiscal policy austerity, Euro area
    JEL: E22 E61 E62 E65 H54 H62
    Date: 2016
  2. By: Sophie Piton (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)
    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.
    Abstract: Cet article étudie dans quelle mesure la divergence des taux d'intérêt réels a contribué à la dynamique du prix des biens non échangeables en zone euro. Partant d'un modèle proposé par De Gregorio et al. (1994), il montre que la baisse du taux d'intérêt réel dans les pays périphériques de la zone euro (ZE) après l'adoption de la monnaie unique a induit une augmentation du prix relatif des biens non échangeables. L'utilisation d'une nouvelle base de données permet de documenter la dynamique des secteurs abrités et ouverts sur la période 1995-2013 et de montrer l'expansion du secteur abrité dans les pays périphériques avant la crise de l'euro. Une estimation économétrique est menée pour 11 pays de la ZE sur la période 1995-2013 pour quantifier la contribution de l'effet Balassa-Samuelson et l'impact du taux d'intérêt sur les prix relatifs des biens non échangeables. Il semble que la divergence dans l'évolution des taux d'intérêt a fortement impacté l'évolution des prix des biens non échangeables dans la zone euro sur la période. En Grèce, la baisse du taux d'intérêt réel sur la période 1995-2008 pourrait expliquer près de la moitié de l'augmentation des prix des biens non échangeables par rapport à la moyenne de la ZE, alors qu'en Allemagne, l'augmentation du taux d'intérêt réel pourrait expliquer 7 % de la diminution du prix des biens non échangeables par rapport à la moyenne de la ZE.
    Keywords: Non-tradable prices,Balassa-Samuelson effect,Real interest rate,Secteur abrité,effet Balassa-Samuelson,taux d'intérêt réel
    Date: 2016–05
  3. By: Giuseppe Caivano (Università degli Studi di Bari "Aldo Moro"); Nicola D. Coniglio (Università degli Studi di Bari "Aldo Moro")
    Abstract: This paper investigates, using panel cointegration methods, the long-run drivers of current account imbalances in 15 EU member States during the period 1974-2011. We argue that the degree of trade openness greatly affects the relative strength of the different long-term drivers of current account imbalances. Our empirical results indicate that competitiveness factors strongly affect imbalances in countries with a low trade openness, while the effects weakens as trade openness increases. Similarly, we find evidence of a positive effects of government debt on current account deficits for high openness countries and a negative impact for medium and low openness countries. Our results suggest that the structural heterogeneity in the degree of openness across EU countries might be an important contributor to the diverging patterns in current account balances experienced in the last decades.
    Keywords: Current account imbalances; panel cointegration; trade openness
    JEL: D63 E24 O15 O40
    Date: 2016–05
  4. By: De Rezende, Rafael B. (Monetary Policy Department, Central Bank of Sweden)
    Abstract: I analyze the recent experience of unconventional monetary policy in Sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are not constrained by a lower bound. Using dynamic term structure models and event study regressions I find that government bond purchases have important portfolio balance and signaling effects. The signaling channel operates mainly by lowering short-rate expectations in the intermediate segment of the yield curve, while the portfolio balance channel is effective in lowering longer maturity term premia. In addition, I find that target interest rate policy and government bond purchases operate in different segments of the yield curve. This suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum, making monetary policy more expansionary.
    Keywords: quantitative easing; signaling channel; portfolio balance channel; yield curve; dynamic affine term structure models; short rate expectations; term premium
    JEL: E43 E44 E52
    Date: 2016–05–01
  5. By: Damodaran, Nikhil
    Abstract: We examine the inter-linkages between economies in the European Monetary Union. We work through a baseline New Keynesian Model and include export subsidies into the analysis. Theoretically, it is plausible to have a beggar thy neighbor expansion of the core at the cost of periphery.
    Keywords: International Relations/Trade, E32, E42, F13, F41, F44, F45,
    Date: 2016–05–24
  6. By: Olivier Damette (BETA - Université de Lorraine); Mathilde Maurel (Centre d'Economie de la Sorbonne et FERDI); Michael A. Stemmer (Centre d'Economie de la Sorbonne et FERDI)
    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: Economic growth; business cycles; transition economies; error-correction models; panel cointegration; smooth-transition models
    JEL: C23 C50 E32 F43 O40
    Date: 2016–04
  7. By: Lisana B. Martinez; M. Belen Guercio; Aurelio F. Bariviera; Antonio Terce\~no
    Abstract: This paper investigates the presence of long memory in corporate bond and stock indices of six European Union countries from July 1998 to February 2015. We compute the Hurst exponent by means of the DFA method and using a sliding window in order to measure long range dependence. We detect that Hurst exponents behave differently in the stock and bond markets, being smoother in the stock indices than in the bond indices. We verify that the level of informational efficiency is time-varying. Moreover we find an asymmetric impact of the 2008 financial crisis in the fixed income and the stock markets, affecting the former but not the latter. Similar results are obtained using the R/S method.
    Date: 2016–05
  8. By: Oinonen, Sami; Paloviita, Maritta
    Abstract: This study examines aggregated short- and long-term inflation expectations in the unbalanced panel of the ECB Survey of Professional Forecasters. The focus of the study is on heterogeneity of expectations and changing panel composition. First, we compare two sub-groups of survey respondents divided on the basis of forecast accuracy. Then, we examine possible differences between regular and irregular forecasters. Finally, we assess the relevance of aggregated forecast revisions in the unbalanced panel by constructing alternative forecast revisions based on the set of sub-panels of fixed composition. The results show that, because of heterogeneity across individual views, aggregated inflation expectations in the ECB SPF must be analysed also on a micro level.
    Keywords: survey data, aggregated inflation expectations, euro area, ECB SPF
    JEL: C53 E37 E31
    Date: 2016–05–24
  9. By: Carolina Achury; Christos Koulovatianos; John Tsoukalas
    Abstract: As the recent chain of EU sovereign crises has demonstrated, after an unexpected massive rise to the debt GDP ratio, several EU countries manage to proceed with scal consolida- tion quickly and e¤ectively, while other countries, notably Greece, proceed slowly, fuelling Graccidentand Grexitscenarios, even after generous rescue packages, involving debt haircuts and monitoring from o¢ cial bodies. Here we recursively formulate a game among rent-seeking groups and propose that high debt-GDP ratios lead to predictable miscoordina- tion among rent-seeking groups, unsustainable debt dynamics, and open the path to political accidents that foretell Graccidentscenarios. Our analysis and application helps in under- standing the politico-economic sustainability of sovereign rescues, emphasizing the need for scal targets and possible debt haircuts. We provide a calibrated example that quanti es the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.
    Keywords: sovereign debt, rent seeking, international lending, tragedy of the commons, EU crisis, Grexit, Graccident
    JEL: H63 F34 F36 G01 E44 E43 D72
    Date: 2016–05
  10. By: M. Lemoine; J. Lindé
    Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.
    Keywords: monetary and fiscal policy, front-loaded vs. gradual consolidation, DSGE model, sticky prices and wages, currency union.
    JEL: E32 F41
    Date: 2016

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