The hard shadow of the Greek economy: new estimates of the size of the underground economy and its fiscal impact

This article presents new estimates of the Greek underground economy and explores the link between the underground economy and aggregate debt. We show that the Greek underground economy has been underestimated heavily and has been on a rising trend again since Greece adopted the Euro. We also present evidence that the size of the underground economy is positively related to the debt-to-GDP ratio, implying that fighting the underground economy is also conducive to financial and macroeconomic stability. Our results suggest that for our sample of 11 EMU member countries, the loss of the inflation tax as an economic policy instrument had drastic consequences. While the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the Euro, it has pushed up the debt-to-GDP ratio in our sample since.     

Euro conversion and return dynamics of European financial markets: a frequency domain approach

Using a frequency domain approach, we compare the spectra of equity market index returns for the 12 Euro-zone countries, the UK, the US, and Japan, over several time frames before and after the introduction of the Euro. In the immediate aftermath of the Euro-introduction, we find a reduced volatility over all frequencies, in which no strong cyclical components are present. However, in the long run, equity markets exhibit a volatility increase: the larger European equity markets develop dynamics that exhibit strikingly similar patterns, while the smaller European equity markets appear to follow dynamics closely resembling white noise. The similarity in dynamics is a likely candidate to explain the increase in correlation among the European markets. Furthermore, the European equity markets initially exhibited dynamics that resembled those of the US, while after the introduction of the Euro, the dynamics of the European Markets exhibits patterns similar to those found the UK. This suggests a change in the dynamic interdependency between the UK and the European markets and an increased convergence of UK market behavior with that behavior dominant in the Euro-zone. The findings may provide important implications for investors seeking to take advantage of international diversification.     

Low interest rate policy and the use of reserve requirements in emerging markets

This paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012, we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate, most likely to preserve financial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up, emerging markets lower reserve requirements.     

Do trade and investment agreements lead to more FDI? Accounting for key provisions inside the black box

The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI. Most empirical studies ignore the actual content of BITs and RTAs, treating them as “black boxes”, despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.     

Strommarktdesign: Zur Ausgestaltung der Auktionsregeln an der EEX

This paper studies the design of power exchanges in liberalized electricty markets. We analyze several pricing rules for day ahead trading and show that a uniform price mechanism has quite desirable properties as compared to its alternatives. We then discuss how the particular cost structure of electricity generation can be accounted for by appropriate bid formats. We moreover analyze the effects of bid caps and price floors in electricity auctions on market performance, as well as several other aspects of electricity market design. In particular, we discuss linkage of independently operating markets for electricity, reserve energy and transmission capacities, coupling of national power exchanges, and the effects of transparency on the outcome of electricity markets.     

Ein Vergleich ausgewählter europäischer Strombörsen

We study the rules of selected european energy exchanges and compare their institutional design. In most countries (except for the UK) a uniform price mechanism is used. The rules differ, however, in the possibilities to express complementary cost components in the bids. Also the degree of international coupling of markets is very different across countries. Our comparison of the markets allows to identify attractive trading rules and yields insights on an effective electricity market design.     

Aging, Asset Markets, and Asset Returns: A View From Europe to Asia

The extent of the demographic changes is dramatic especially in some Asian and European countries. This paper investigates the effect of aging on global asset markets and asset returns, focusing on markets for productive capital, and especially on interactions between European and Asian economic development. Aging has complex effects on the markets for real capital. If elderly people save less than younger people, interest rates will increase. At the same time, however, the younger generation becomes smaller, which reduces the demand for new investment. The equilibrium effect is thus uncertain. Our multicountry computational equilibrium model delivers a subtle picture: there will be some decline in the return from productive capital, but it is relatively small. We find noticeable interaction effects between labor market and pension reforms in Europe on the one hand, and the demographic and economic developments in Asia, especially India and China, on the other hand.     

Would you like to shrink the welfare state? A survey of European citizens

The fundamental problems facing European welfare states – high unemployment and unsustainable public pensions plans in particular – have been in the political debate for years, so why have we seen so little reform? To find out, we surveyed the opinions of citizens in France, Germany, Italy and Spain on their welfare states and on various reform options. This is what we found. First, most workers underestimate the costs of public pensions, though they are aware of their unsustainability. Second, the status quo is a majoritarian outcome: a majority of citizens opposes cuts to social security and welfare spending, but also opposes further increases. Since population ageing without reform implies an automatic expansion, our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states. Third, many would welcome changes in the allocation of benefits. A large number of workers in Italy and Germany would be willing to opt out of public pensions and replace them with private pensions, though the details of how this scheme is formulated matter for its popularity. And many Italians and Spaniards would welcome an extension of the coverage of unemployment insurance. Fourth, conflicts over the welfare state are mainly shaped by the economic situation of the respondent, while political ideology plays a limited role. Disagreements are found along three dimensions: young versus old, rich versus poor, and 'outsider' versus 'insider' in terms of labour market status. From a practical point of view, this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters.
— Tito Boeri, Axel Börsch-Supan and Guido Tabellini