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on European Economics |
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Issue of 2009‒11‒27
nineteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Kuzin, Vladimir; Marcellino, Massimiliano; Schumacher, Christian |
| Abstract: | This paper compares the mixed-data sampling (MIDAS) and mixed-frequency VAR (MF-VAR) approaches to model specification in the presence of mixed-frequency data, e.g., monthly and quarterly series. MIDAS leads to parsimonious models based on exponential lag polynomials for the coefficients, whereas MF-VAR does not restrict the dynamics and therefore can suffer from the curse of dimensionality. But if the restrictions imposed by MIDAS are too stringent, the MF-VAR can perform better. Hence, it is difficult to rank MIDAS and MF-VAR a priori, and their relative ranking is better evaluated empirically. In this paper, we compare their performance in a relevant case for policy making, i.e., nowcasting and forecasting quarterly GDP growth in the euro area, on a monthly basis and using a set of 20 monthly indicators. It turns out that the two approaches are more complementary than substitutes, since MF-VAR tends to perform better for longer horizons, whereas MIDAS for shorter horizons. |
| Keywords: | euro area growth; MIDAS; mixed-frequency data; mixed-frequency VAR; nowcasting |
| JEL: | C53 E37 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7445&r=eec |
| By: | Darné, Olivier; Ferrara, Laurent |
| Abstract: | In addition to quantitative assessment of economic growth using econometric models, business cycle analyses have been proved to be helpful to practitioners in order to assess current economic conditions or to anticipate upcoming fluctuations. In this paper, we focus on the acceleration cycle in the euro area, namely the peaks and troughs of the growth rate which delimitate the slowdown and acceleration phases of the economy. Our aim is twofold: First, we put forward a reference turning point chronology of this cycle on a monthly basis, based on gross domestic product and industrial production index. We consider both euro area aggregate level and country specific cycles for the six main countries of the zone. Second, we come up with a new turning point indicator, based on business surveys carefully watched by central banks and short-term analysts, in order to follow in real-time the fluctuations of the acceleration cycle. |
| Keywords: | Acceleration cycle; Business surveys; Dating chronology; Euro area; Turning point indicator |
| JEL: | C22 C52 E32 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7376&r=eec |
| By: | Stephanie A. Kelton; L. Randall Wray |
| Abstract: | Social unrest across Europe is growing as Euroland's economy collapses faster than the United States', the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland's fiscal policy space. The nations that have adopted the euro face "market-imposed" fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levppb:ppb_106&r=eec |
| By: | Raphael A. Espinoza; Fabio Fornari; Marco Lombardi |
| Abstract: | The U.S. business cycle typically leads the European cycle by a few quarters and this can be used to forecast euro area GDP. We investigate whether financial variables carry additional information. We use vector autoregressions (VARs) which include the U.S. and the euro area GDPs as a minimal set of variables as well as growth in the Rest of the World (an aggregation of seven small countries) and selected combinations of financial variables. Impulse responses (in-sample) show that shocks to financial variables influence real activity. However, according to out-of-sample forecast exercises using the Root Mean Square Error (RMSE) metric, this macro-financial linkage would be weak: financial indicators do not improve short and medium term forecasts of real activity in the euro area, even when their timely availability, relative to GDP, is exploited. This result is partly due to the 'average' nature of the RMSE metric: when forecasting ability is assessed as if in real time (conditionally on the information available at the time of the forecast), we find that models using financial variables would have been preferred, ex ante, in several episodes, in particular between 1999 and 2002. This result suggests that one should not discard, on the basis of RMSE statistics, the use of predictive models that include financial variables if there is a theoretical prior that a financial shock is affecting growth. |
| Keywords: | Asset prices , Business cycles , Cross country analysis , Economic forecasting , Economic growth , Economic models , Euro Area , Financial crisis , Financial sector , Global Financial Crisis 2008-2009 , Stock markets , |
| Date: | 2009–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/241&r=eec |
| By: | Sven Schreiber (Macroeconomic Policy Institute (IMK) at Hans Boeckler Foundation, Duesseldorf) |
| Abstract: | We use frequency-wise Granger-causality tests and error-correction models to investigate the driving forces behind longer-run inflation developments in the euro area. Employing an eclectic approach we consider various relevant theories. With a general-to-specific testing strategy we distill the unemployment rate and long-term interest rates as causal for low-frequency variations of inflation. Money growth is found to be causal for inflation only if other variables are omitted, which we therefore interpret as a spurious result. |
| Keywords: | money growth, Granger causality, quantity theory |
| JEL: | E31 E40 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:6-2009&r=eec |
| By: | Schuknecht, Ludger; von Hagen, Jürgen; Wolswijk, Guido |
| Abstract: | This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact. |
| Keywords: | Bond Markets; Financial Crisis; Sovereign Risk Premiums |
| JEL: | G12 G15 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7499&r=eec |
| By: | Cwik, Tobias; Wieland, Volker |
| Abstract: | The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending --- the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation. |
| Keywords: | crowding-out; fiscal policy; fiscal stimulus; government spending multipliers; New-Keynesian models |
| JEL: | E62 E63 H31 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7389&r=eec |
| By: | Beetsma, Roel; Giuliodori, Massimo |
| Abstract: | This article provides an overview of recent research into the macroeconomic costs and benefits of monetary unification. We are primarily interested in Europe’s monetary union. Given that unification entails the loss of a policy instrument its potential benefits have to be found elsewhere. Unification may serve as a vehicle for beneficial institutional changes. In particular, it may be a route towards an independent monetary policy, which alleviates the scope for political pressure to relax monetary policy. Unification also eliminates harmful monetary policy spill-overs and competitive devaluations. We explore how disagreement between the monetary and fiscal authorities about their policy objectives can lead to extreme macroeconomic outcomes. Further, we pay considerable attention to the desirability (or not) of fiscal constraints and fiscal coordination in a monetary union. Monetary commitment and fiscal free-riding play a key role in this regard. Similar free-riding issues also feature prominently in the analysis of how unification influences structural reforms. We end with a brief discussion of monetary unification outside Europe. The cost-benefit trade-off of unification may differ substantially between industrialized and less-developed countries, where differences in fiscal needs and, hence, the reliance on seigniorage revenues may dominate the scope for unification. |
| Keywords: | credibility; EMU; euro; exchange rates; fiscal constraints; fiscal policy; structural reforms |
| JEL: | E5 E6 F4 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7500&r=eec |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R. |
| Abstract: | We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU. |
| Keywords: | Bootstrap; DSGE; indirect inference; New Classical; New Keynesian; Open economy model; VAR; Wald statistic |
| JEL: | C12 C32 C52 E1 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7385&r=eec |
| By: | Gilles Mourre (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and European Commission, DG Economic and Financial Affairs (ECFIN).) |
| Abstract: | The paper decomposes GDP both in terms of level per capita and growth rate, so as to identify the extent of labour utilisation in Europe and its effect on income differences and economic growth in all EU27 countries. While some caveats are associated with this approach, GDP is broken down into 5 items (per capita GDP level) and 12 (GDP growth), decomposing labour inputs thoroughly and including a partial but comparable indicator of labour quality, based on the employment composition by educational attainment. The level of labour utilisation in the EU, defined as hours worked per capita, is clearly lower than that seen in the US and the 5 richest EU countries. The labour underutilisation accounts for two thirds of the per capita GDP gap in the EU15 vis-à-vis the US (17 p.p. out of 26%). The underutilisation of labour is much lower in the New Member States, being only 9% below the US level and is even above that in the five richest EU Member States. While the combination of lower labour utilisation and lower per-hour productivity is the cause of relatively low per capita GDP in euro area and EU15 countries, weak hourly productivity is the main concern in the New Member States. Over the last ten years (1995-2006), the growth in labour input (i.e. total hours worked) was the driving force behind one third of GDP growth in the EU15, while labour input growth only explained a very modest part of the buoyant GDP growth in the New Member States. |
| Keywords: | GDP accounting; European Union; Aggregate employment; Average hours worked; Quality of Labour. |
| JEL: | J21 J24 O47 O52 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:09-050&r=eec |
| By: | Imbs, Jean; Mumtaz, Haroon; Ravn, Morten O.; Rey, Hélène |
| Abstract: | We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) Absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders. |
| Keywords: | border effects; brand perception; international and regional price differences |
| JEL: | F15 F23 F41 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7504&r=eec |
| By: | Thierry Debrand (IRDES institut for research and information in health economics); Nicolas Sirven |
| Abstract: | The aim of this research is to identify the determinants of pathways to retirement in Europe and, by measuring the influence or combined influence of individual, contextual and institutional domains on labor force participation, to better understand inter-country variations in the employment rates of older citizens. The dataset consists of both the first two longitudinal waves of SHARE (2004-2006) and some macroeconomic series from the OECD describing three complementary social protection systems (pensions, disability, employment). The analysis is simultaneously carried out in terms of "stocks" (labor force participation in 2004) and "flows" (pathways from employment in 2004 to retirement in 2006). Indicators are developed to measure the contribution of each domain (individual, contextual, institutional), and their various combinations to the employment rate of older citizens, and their role in explaining inter-country differences. As expected, results demonstrate that labor force participation and the decision to retire are determined by the various individual and contextual domains with social protection systems, each playing a significant role. Institutional determinants explain most of the inter-country differences. There appears to be a complementary effect between the different categories of social protection, and the global effect of the three systems combined is greater than the sum of the idiosyncratic effect of each system. Future public policies aiming at increasing the workforce participation of older citizens should therefore take into account that retirement decisions are determined by complex, interactive and individual determinants, and that within the European Union, the main convergence factors are to be found in the differences in social protection systems. |
| Keywords: | Social Protection, Social Security, Retirement, Ageing, Health, Europe |
| JEL: | I10 I18 J21 J28 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:irh:wpaper:dt28&r=eec |
| By: | Alfonso Arpaia (European Commission, DG Economic and Financial Affairs (ECFIN) and IZA.); Gilles Mourre (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and European Commission, DG Economic and Financial Affairs (ECFIN).) |
| Abstract: | This paper presents a selective survey of the recent literature on labour market institutions and offers new empirical EU-based evidence on the impact of labour market reforms on employment and labour market adjustment. While the literature traditionally treats labour market institutions as exogenous, attention shifted recently towards understanding the underlying causes of specific institutional arrangements. As a consequence, the literature highlights the great importance of an efficient policy design exploiting these interactions wisely and identifies general principles for achieving an efficient policy design at both macro and micro levels. While empirical evidence does no show a major change in terms of intensity of labour market reform after the setting of the Economic and Monetary Union and the creation of the euro, the reforms aiming at strengthening the labour market attachment of vulnerable groups tend to have been successful both in raising their employment and increasing labour market adjustment. |
| Keywords: | labour market functioning; political economy; endogeneity; institutions; policy design |
| JEL: | J20 J50 J64 K31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:09-049&r=eec |
| By: | Salvatori, Andrea (ISER, University of Essex) |
| Abstract: | In the EU, one in seven employees work on temporary contracts associated with lower pay and less training. Using workplace-level data from 21 countries, I show that, in contrast with previous evidence for the US, unionized workplaces are more likely to use temporary employment across Europe. To address the endogeneity of unions, I then use a British dataset and exploit variation over time and across occupations to control for workplace unobserved heterogeneity. This confirms that unions contribute to creating contract duality in the labour market and thus do not limit the ability of firms to adjust employment through flexible contracts. |
| Keywords: | temporary employment, unions, panel data |
| JEL: | J41 J51 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4554&r=eec |
| By: | Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan |
| Abstract: | Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts. We begin by documenting two new empirical facts that link these inequality differences to tax policies. First, we show that countries with more progressive labor income tax schedules have significantly lower before-tax wage inequality at different points in time. Second, progressivity is also negatively correlated with the rise in wage inequality during this period. We then construct a life cycle model in which individuals decide each period whether to go to school, work, or be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. We find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 76% of the difference in inequality at the upper end (log 90-50 differential). When this economy experiences skill-biased technological change, progressivity also dampens the rise in wage dispersion over time. The model explains 41% of the difference in the total rise in inequality and 58% of the difference at the upper end. |
| JEL: | E62 H2 J24 J31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15526&r=eec |
| By: | Havnes, Tarjei (University of Oslo); Mogstad, Magne (Statistics Norway) |
| Abstract: | There is a heated debate in the US, Canada and many European countries about introducing universally accessible child care. However, studies on universal child care and child development are scarce and only consider short-run outcomes. We analyze the introduction of universal child care in Norway, addressing the impact on children's long-run outcomes. Our precise and robust difference-in-difference estimates show that child care had strong positive effects on children's educational attainment and labor market participation, and also reduced welfare dependency. Subsample analysis indicates that children with low educated mothers and girls benefit the most from child care. |
| Keywords: | universal child care, child development, long-run outcomes |
| JEL: | J13 H40 I28 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4561&r=eec |
| By: | Willem Adema; Maxime Ladaique |
| Abstract: | This paper first presents information on trends and composition of social expenditure across the OECD. Gross public social expenditure on average across OECD increased from 16% of GDP in 1980 to 21% in 2005, of which public pensions (7% of GDP) and public health expenditure (6% of GDP) are the largest items. This paper then accounts for the effects of the tax system and private social expenditure which leads to a greater similarity in social expenditure-to-GDP ratios across countries and to a reassessment of the magnitude of welfare states. After accounting for the impact of taxation and private benefits, social expenditure (1) amounts to over 30% of GDP at factor cost in Belgium, Germany, and France and (2) ranges within a few percentage points of each other in Austria, Canada, Denmark, Finland, Italy, the Netherlands, Portugal and the United States.<BR>Ce document présente les tendances et la composition des dépenses sociales des pays de l’OCDE. Les dépenses sociales publiques brutes on augmenté de 16 % du PIB en 1980 à 21 % du PIB en 2005, dont les retraites publiques (7 % du PIB) et les dépenses de santé publique (6 % du PIB) représentent les plus grandes catégories de dépenses en moyenne en 2005. Ce document examine ensuite les effets de l'intervention du gouvernement sur les dépenses sociales par le système fiscal et la prise en compte des prestations sociales privées, qui ont pour effet d’égaliser les ratios entre les niveaux des dépenses sociales et le PIB. Après la prise en compte des prestations sociales privées et de l’impact de la fiscalité, les dépenses sociales atteignent plus de 30 % du PIB aux coûts des facteurs en Belgique, Allemagne et France ; enfin les écarts entre les dépenses sociales en Autriche, Canada, Danemark, Finlande, Italie, Pays-Bas, Portugal et aux États-Unis ne sont que de quelques points de pourcentage. |
| Keywords: | private social spending, public welfare system, social policy, tax breaks with a social purpose, taxation of benefit income |
| JEL: | H2 H53 |
| Date: | 2009–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaab:92-en&r=eec |
| By: | Cadot, Olivier; Jaud, Mélise; Suwa Eisenmann, Akiko |
| Abstract: | This paper documents a decreasing trend in the geographical concentration of EU agro-food imports. Decomposing the concentration indices into intensive and extensive margins components, we find that the decrease in overall concentration indices results from two diverging trends: the pattern of trade diversifies at the extensive margin (EU countries have been sourcing their agri-food products from a wider range of suppliers), while geographical concentration increases at the intensive-margin (EU countries have concentrated their imports on a few major suppliers). This leads to an increasing inequality in market shares between a small group of large suppliers and a majority of small suppliers. We then move on to exploit a database of food alerts at the EU border that had never been exploited before. After coding it into HS8 categories, we regress the incidence of food alerts by product on determinants including exporter dummies as well as HS8 product dummies. Coefficients on product dummies provide unbiased estimates of the intrinsic vulnerability of exported products to food alerts, as measured at the EU border. We incorporate the product risk coefficient as an explanatory variable in a regression of geographical concentration and show that concentration is higher for risky products. |
| Keywords: | agricultural trade; European Union; food; import concentration; sanitary risk |
| JEL: | F1 O3 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7431&r=eec |
| By: | Görg, Holger; Spaliara, Marina-Eliza |
| Abstract: | We examine the differential effects of financial status and exporting activity on the likelihood of survival for firms in the UK and France - two countries with different financial systems. We aim to answer two main questions: What is the direct impact of financial characteristics and different facets of exporting activity on the likelihood of survival? Do the sensitivities of survival incidence to financial variables vary with the exporting status of firms? We find strong evidence that continuous exporters face a higher probability of survival compared to starters, continuous non-exporters and firms exiting the exporting market. Further, important sensitivities of survival prospects to financial indicators are observed for the UK firms which might be explained by the "market based" economy. Finally, a within and across countries comparison reveals that the survival of exporting groups varies substantially depending on firms' financial status, the financial system and the prolonged participation in the export market. |
| Keywords: | exports; financial health; firm survival |
| JEL: | F1 G3 L2 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7532&r=eec |