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on European Economics |
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Issue of 2010‒10‒30
fifteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Filippo di Mauro (European Central Bank, Directorate Economics, Economic Developments, Kaiserstrasse 29, 60311 Frankfurt am Main); Katrin Forster (European Central Bank, Directorate Economics, Economic Developments, Kaiserstrasse 29, 60311 Frankfurt am Main); Ana Lima (European Central Bank, Directorate Economics, Economic Developments, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | World trade contracted sharply in late 2008 and early 2009 following the deepening of the financial crisis in September 2008. This paper discusses the main mechanisms behind the global downturn in trade and its impact on euro area exports and competitiveness. It finds that the euro area was hit particularly hard by the contraction in global demand. Moreover, the collapse in the demand for euro area products during the downturn was exacerbated to some degree by unfavourable developments in price competitiveness, resulting in further losses in competitiveness compared to our main trading partners, in line with pre-crisis trends. This view is also confirmed by evidence from broad-based competitiveness measures, which show that euro area countries recorded losses in productivity during this period. Going forward, the recovery in world trade will depend mainly on a resurgence in global demand and its expenditure composition. With regard to the euro area, as the global economy recovers at varying speeds and given the current growth momentum in emerging economies, the performance of the external sector may be hindered by the geographical orientation of its export markets, which are mainly focused on advanced economies and other EU member states. Furthermore, the strength and sustainability of the recovery in exports will also depend on the restructuring process undertaken by European firms in response to globalisation-related challenges. Governments within the European Union should therefore focus on policies to strengthen competition and increase market integration, in order to benefit fully from the globalisation process going forward. In contrast, a resurgence in global protectionist policies could dampen the prospects for world and euro area trade and should be strongly resisted. JEL Classification: F10, F15, F43 |
| Keywords: | Trade, euro area, competitiveness |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20100119&r=eec |
| By: | Helge Berger; Volker Nitsch |
| Abstract: | When does trade become a one-way relationship? We study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility. Reviewing the direction of imbalances, we find that bilateral trade surpluses are decreasing in the real exchange rate, decreasing in growth differentials, and increasing in the relative volatility of national business cycles. Finally, countries with relatively higher fiscal deficits and less flexible labor and product markets exhibit systematically lower trade surpluses than others. |
| Date: | 2010–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/226&r=eec |
| By: | Puriya Abbassi; Tobias Linzert |
| Abstract: | The recent financial crisis has deeply affected the marginal cost of funding bank loans and thus the proper functioning of the interest rate channel. We analyze the effectiveness of monetary policy in the euro area with respect to the predictability of money market rates on the basis of monetary policy expectations, and the impact of extraordinary central bank measures on money markets. We find that market’s expectations are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises. |
| Keywords: | Monetary transmission mechanism; Financial Crisis; Monetary policy implementation; European Central Bank; Money market |
| JEL: | E43 E52 E58 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2010-051&r=eec |
| By: | Ansgar Belke |
| Abstract: | The current instruments in the EU to deal with debt and liquidity crises include among others the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Both are temporary in nature (3 years). In terms of an efficient future crisis management framework one has to ask what follows after the EFSF and the EFSM expire in 3 years time. In this vein, this briefing paper addresses the question of the political and economic medium- to long-term consequences of the recent decisions. Moreover, we assess what needs to be done using this window of opportunity of the coming 3 years. Which institutions need to be formalized, into what format, in order to achieve a coherent whole structure? This briefing paper presents and evaluates alternatives as regards the on-going debate on establishing permanent instruments to support the stability of the euro. Among them are the enhancement of the effectiveness of the Stability and Growth Pact combined with the introduction of a “European semester” and a macroeconomic surveillance and crisis mechanism, fiscal limits hard-coded into each country’s legislation in the form of automatic, binding and unchangeable rules and, as the preferred solution, the European Monetary Fund. |
| Keywords: | EU governance; European Financial Stability Facility; European Financial Stabilisation Mechanism; European Monetary Fund; policy coordination; Stability and Growth Pact |
| JEL: | E61 E62 P48 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0207&r=eec |
| By: | Cristina Bodea (Michigan State University); Stefan Huemer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | Central bank independence is a common feature in advanced economies. Delegation of monetary policy to an independent central bank with a clear mandate for price stability has proven to be successful in keeping a check on inflation and providing a trusted currency. However, it is also a fact that central banks in most countries have regular contacts with the government and cooperate with them on a number of issues. This paper looks into the various forms of cooperation between central banks and governments in the G7. The focus is on those central banks that exercise a monetary policy decision-making function, i.e. the ECB and the central banks of the four G7 countries outside the euro area (the US, UK, Japan and Canada). The paper first reviews the objectives of and arrangements for central bank/government cooperation in the US, UK, Japan and Canada in areas such as monetary policy and its interlink with economic policy; foreign exchange operations and foreign reserve management; international cooperation; payment systems/securities clearing and settlement systems; supervision, regulation and financial stability; banknotes and coins; collection of statistics; and the role of fiscal agent for the government. In parallel the paper looks into the objectives of and arrangements for cooperation between the ECB and relevant European counterparts, reflecting the specific European institutional environment characterised by the absence of a ‘European government’. Following a comprehensive stocktaking of practices, the paper embarks on a comparison of existing arrangements, pointing to the similarities and differences among the five surveyed central banks. The Appendix provides a more in-depth description of central bank/government cooperation per country and topic; it presents the detailed factual background on which the paper builds, serving as a reference for the reader interested in more detail. JEL Classification: E58 |
| Keywords: | Central bank-government cooperation, central bank governance, central bank tasks, G7 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20100120&r=eec |
| By: | Martin Mandler (University of Giessen); |
| Abstract: | This paper studies whether the observed high correlation between monetary policy in the U.S. and the Euro area can be explained by economic fundamentals, i.e. by macroeconomic interdependence between the two regions. We show that an optimal monetary policy reaction function for the ECB that accounts explicitly for economic interrelationships between the two economies reproduces substantial parts of the observed patterns of interest rate correlation and represents a good approximation to the actually observed monetary policy of the ECB. It implies strong reactions to shocks to US variables, particularly to shocks to the Federal Funds Rate. |
| Keywords: | optimal monetary policy, monetary policy reaction function, vector autoregressions |
| JEL: | E47 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201025&r=eec |
| By: | Paolo Gelain; Marco Guerrazzi |
| Abstract: | In this paper we estimate a DSGE model built along the lines of the recent Farmer¡¯s micro-foundation of the General Theory. Estimating a simple demand-driven competitive-search model, we test the ability of this new theoretical proposal to match the behaviour of the US and Euro Area labour markets. We show that within a relatively simple model we are able to fairly replicate their salient features, confirming for instance the conventional wisdom according to which the US labour market is more flexible than its Euro Area counterpart. Moreover, we provide an estimation of the not-yet-measured (unobserved) Euro Area job vacancies time series. |
| Keywords: | Old Keynesian Economics, Competitive Search, DSGE Model, Bayesian Estimation. |
| JEL: | E24 E32 E52 J64 |
| Date: | 2010–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1014&r=eec |
| By: | Carmen Martinez-Carrascal (Banco de España, Servicio de Estudios, Alcalá 50, 28014 Madrid, Spain.); Julian von Landesberger (European Central Bank, Directorate General Economics, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses euro area non-financial corporations (NFC) money demand, both from a macro and a microeconomic point of view. At a macro level, money holdings are modelled as a function of real gross added value, the price level, the long-term interest rate on bank lending to non-financial corporations, the own rate of return on M3 and the real capital stock of the NFC sector. The results indicate that NFCs’ money holdings adjust quickly when deviations from their long-run level are registered, and that the large increase observed recently in NFCs’ money holdings has been driven by changes in their fundamentals and hence they stand in line with their long-run equilibrium level. The disaggregated analysis also shows that cash holdings are linked to balance-sheet ratios (such as non-liquid short term assets, tangible assets or indebtedness) and other variables such as the firm’ cash flow, its volatility or the size of the firm, which cannot be taken into account in the macro analysis. Likewise, results indicate that the main drivers of the increase in NFC cash holdings in the last years have been cyclical factors, captured by gross-added value and the cash-flow respectively. Variations in the opportunity cost of holding money, have also contributed to explain M3 developments but more modestly than at the end of the nineties, when its increase contributed negatively to cash accumulation. JEL Classification: E41, C23, C32, D21. |
| Keywords: | money demand, cointegrated VARs, panel estimation. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101257&r=eec |
| By: | Christiane Baumeister (Research Department, Bank of Canada, 234 Wellington Street, Ottawa, Ontario, Canada, K1A 0G9.); Luca Benati (Monetary Policy Research Division, Banque de France, 31, Rue Croix des Petits Champs, 75049 Paris CEDEX 01, France.) |
| Abstract: | We explore the macroeconomic impact of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a Bayesian time-varying parameter structural VAR. We identify a ‘pure’ spread shock which, leaving the short-term rate unchanged by construction, allows us to characterise the macroeconomic impact of a compression in the yield spread induced by central banks’ asset purchases within an environment in which the short rate cannot move because it is constrained by the zero lower bound. Two main findings stand out. First, in all the countries we analyse (U.S., Euro area, Japan, and U.K.) a compression in the long-term yield spread exerts a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the FED’s and the Bank of England’s asset purchase programmes on long-term government bond yield spreads, our counterfactual simulations indicate that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression. JEL Classification: E30, E32. |
| Keywords: | Great Recession, structural VARs, time-varying parameters, Bayesian VARs, stochastic volatility, Monte Carlo integration, policy counterfactuals. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101258&r=eec |
| By: | Barbone, Luca; Islam, Roumeen; Sanchez, Luis Alvaro |
| Abstract: | This paper examines fiscal outcomes in Eastern and Central European countries before and during the global crisis of 2008-2010. These outcomes are evaluated in the context of overall changes in fiscal institutions and global market conditions. Eastern and Central European countries’ situations improved dramatically in the pre-crisis period as tax revenues boomed, and fiscal institutions were reformed. Expenditures increased quite significantly in real terms for some of the countries in the pre-crisis era so that when tax revenues collapsed in the wake of the crisis, the countries were left with large deficits. Institutional reform helped countries manage their fiscal situations better, but the crisis also exposed shortcomings of the status quo. In the post-crisis period, fiscal institutions aimed at promoting fiscal discipline are being strengthened. Governments will also need to take a closer look at the sustainability of current expenditure patterns, particularly the strong emphasis on social expenditures. |
| Keywords: | Public Sector Expenditure Policy,Debt Markets,Fiscal Adjustment,Subnational Economic Development,Public Sector Economics |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5453&r=eec |
| By: | Boeri, Tito (Bocconi University); Galasso, Vincenzo (Bocconi University) |
| Abstract: | The introduction of NDC public pension scheme in few European countries, such as Latvia, Sweden, Italy, and Poland, in the nineties was motivated, among other things, by the need (i) to ensure the long term financial sustainability of the public pension system by linking pension returns to economic growth; (ii) to reduce the existing distortions in the labor market, due to the existing strong incentives to retire early, (iii) to increase the intergenerational equity of the system, jeopardized by the different returns across generations; and (iv) to reduce the systematic political interference with public pension systems under aging through the introduction of a sequence of automatic adjustments in the system that do not require government intervention. After more than ten years from their introduction, these systems have performed reasonably well on these accounts. However, some degree of political involvement with the working of the pension systems has continued (f.e., in Italy), and new concerns have emerged. In particular, the combination of a pension system, which strongly bases the benefit calculation on previous contributions (and on thus labor market status), and the existence in some countries of a dual labor market, with young workers being held on the margin of the regular labor market for many years, create a new, potentially strong challenge to these systems. Our simulations of the future pension benefits for the current generation of young workers with a discontinuous working history in Italy and Sweden suggest that the replacement rates will be low, unless the retirement age is significantly increased. This effect may end up jeopardizing the political sustainability of these NDC systems in the future, unless important labor market reforms are introduced. We discuss the effects on the future generation of retirees in Italy and Sweden of a current labor market reform: the introduction of a unique labor market contract, aimed at reducing the dualism between temporary and permanent workers. |
| Keywords: | notional defined contribution, pay as you go, labor market dualism and pensions |
| JEL: | J26 J68 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5235&r=eec |
| By: | Fatma Gul Unal; Mirjana Dokmanovic; Rafis Abazov |
| Abstract: | This paper looks at the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), where economies have been most dramatically hit by the global crisis and its impact is likely to be most long-lasting, especially among poor and vulnerable groups. Using poverty as the main axis, it looks at aspects of economic and social development in countries at similar poverty levels to identify the degree of fiscal space in each, as well as the different policy choices made. The paper argues that despite such economic fundamentals as increasing external debt, worsening current account imbalances, and demands for a balanced budget, governments have policy choices to make about how to protect different groups, especially the most vulnerable-including women. |
| Keywords: | Economic Crisis; Gender; Policy Response; Pro-poor Macro Policies; Gender; Policy Space; Central and Eastern Europe; Commonwealth of Independent States |
| JEL: | B5 E6 E61 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_598&r=eec |
| By: | Ketenci, Natalya |
| Abstract: | The purpose of this paper is to investigate the level of capital mobility in European Union members using the Feldstein-Horioka puzzle proposed by Feldstein and Horioka (1980) in order to investigate relations between saving and investment flows. In this paper, data for 27 European countries were used over the period of 1995-2009 on the quarterly basis. Data were extracted from the official statistical site of the European Union, Eurostat. Firstly, unit root tests were applied to the series in order to estimate the stationarity of the model variables. Two different tests were used, which are the Ng and Perron (2001) unit root test procedure and approach proposed by Zivot and Andrews (1992) for unit root test allowing for a structural shift. Then the Bai and Perron (1998) structural break test was applied to determine the presence of structural breaks in series. In most countries except Belgium and Finland UDmax and WD max tests rejected the hypothesis of no breaks. Moreover, structural break locations for every series were selected by sequentially procedure, BIC and LWZ. Finally, the cointegration relationships between investment and saving flows of European Union members were tested. Three different cointegration techniques were applied to the data. Firstly, the Johansen (1988) cointegration approach was used for the case of no cointegration shifts, then the Gregory and Hansen (1996) cointegration test was applied, which allows for one structural shift. Finally, again the Johansen’ cointegration approach was used; however, this time with the inclusion of dummy variables related to earlier selected structural break locations. The empirical results provided stronger evidence of cointegration between investment and saving variables in the case of structural break accommodation compared to the case where the presence of structural breaks was ignored. In most cases of estimations saving-investment correlation has a tendency to increase with regime changes. However, the estimated saving retention coefficient in the presence of structural breaks using the Bai and Perron (1998) approach appeared relatively low in many cases, illustrating by this the openness of estimated countries. In general, world and European countries with time have a tendency to a higher level of their capital market openness. According to Feldstein and Horioka (1980), a higher saving-investment correlation is related to lower capital mobility. Therefore, the contradicting results between saving retention coefficient estimates and cointegration tests illustrate that cointegration indicates a rather current account solvency condition than capital mobility. Estimations of a saving retention coefficient in the presence of structural changes do not support the existence of the Feldstein-Horioka Puzzle in the considered EU countries. |
| Keywords: | Feldstein-Horioka puzzle; saving-investment association; capital mobility; cointegration; structural breaks; EU. |
| JEL: | F32 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26010&r=eec |
| By: | Rafael Repullo (CEMFI); Jesús Saurina (Banco de España); Carlos Trucharte (Banco de España) |
| Abstract: | Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclical effects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987 2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the input of the Basel II formula by using through the cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks’ risk pricing and risk management systems. For the portfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically-varying LGDs. |
| Keywords: | Bank capital regulation, Basel II, Pro-cyclicality, Business cycles, Credit crunch |
| JEL: | E32 G28 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1028&r=eec |
| By: | Filip Abraham (K.U.Leuven, Centre for Economic Studies); Jan Van Hove (H.U.Brussel; K.U.Leuven) |
| Abstract: | Exporting firms are affected in many ways by competition on foreign markets. This paper focuses on the impact of Asian competition on the bilateral export performance of Belgian firms, controlling for firm level as well as destination-market characteristics. Export performance is measured in several ways, including the export intensity, the variety and quality of trade as well as the export intensity growth. Export performance appears to differ substantially across firms, across sectors and across destination markets. Our overall results indicate that both the export intensity and variety of Belgian firms’ exports are reduced by Asian competition. Especially the competitive pressure caused by mainland China and Hong Kong is strong. The competitive pressure is intense in labour-intensive sectors but also felt in a wide range of activities with a higher value added. Belgian exporters cope with foreign competition by following a variety-expansion or a quality-upgrading strategy. |
| Keywords: | multi-product firms, international trade, variety, quality, export intensity, competition, Asia |
| JEL: | F14 F15 L6 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201010-204&r=eec |