Measuring the effectiveness of cost and price competitiveness in external rebalancing of euro area countries: What do alternative HCIs tell us?

This study examines the marginal effects of traditional determinants of exports and imports with a focus on the role of price competitiveness in restoring external balances in the euro area. It is a first attempt to compare marginal effects of various harmonised competitiveness indicators (HCIs) on both exports and imports of both goods and services across individual euro area countries. We find evidence that HCIs based on broader cost and price measures have a larger marginal effect (with some exceptions) on exports of goods. Exports of services are sensitive to HCIs in big euro area countries and Slovakia, where exports of services are also found more sensitive to competitiveness indicators based on broader price measures. Imports of goods and imports of services are quite insensitive to changes in relative prices. Finally, in some cases measures of fit indicate that a large unexplained residual part is present, implying that other non-price related factors might play an important role in driving foreign trade and policies aimed at enhancing the quality of goods traded are warranted.     

Non‐residents’ Holdings,Market Volatility and Public Debt Sustainability. An Analysis with Data for Italy

Non‐residents’ holdings (NRH) of debt securities have been large in euro area countries, but during the euro area debt crisis some of those countries experienced a steep contraction of such holdings. The analysis aims to provide a data‐founded explanation of what is behind the decrease observed in 2011 by testing two alternative hypotheses. At the same time, we discuss how that decrease might have endangered the sustainability of public debt and study the empirical relevance of the most important of those processes. The topics presented refer to any advanced economy, but we check the hypotheses discussed by taking Italy as a case study because of data constraints. Italy is an interesting country to consider since it is a very large debt issuer. Our results point towards the importance of market volatility to explain variations of NRH, but those holdings do not seem to influence debt sustainability.     

Transitional price rises with the adoption of the euro: aggregate and disaggregate sector evidence

This paper presents a time‐series regression analysis of price inflation at the time of the euro currency changeover in January 2002. Cross‐equation tests on 12 euro countries and three non‐euro EU countries are used to identify significant price changes around that time. For a small number of product and service categories, positive price changes immediately after the euro changeover suggest the possible existence of menu costs, sellers' rounding up of prices or buyers' temporary rational inattention. However, the lack of evidence for reduced inflation immediately prior to the euro changeover suggests menu costs are not important.     

Market power in distribution and pass‐through for consumers and producers

We examine the differential pass‐through of import prices into consumer and producer prices. We develop a framework with distribution costs and distribution market power. We then examine pass‐through from import prices to consumer and producer prices in the euro area using the U.S. import price as instrument. We find that pass‐through rates to producer prices are more sensitive to changes in distribution margins than pass‐through to consumer prices. Furthermore, only a portion of import price changes translate into domestic price changes limiting potential consumer benefits from tariff liberalization, with market power in distribution services being one important factor reducing pass‐through.     

Is There a Trade‐Off Between Inflation Variability and Output‐Gap Variability in the EMU Countries?

This paper examines the performance of monetary policy in eleven EMU countries for the whole period of the EMS. This is based on the trade‐off between inflation variability and output‐gap variability. To this end, we examine whether the introduction of an implicit inflation targeting by the EMU member countries after the Maastricht Treaty, changed the trade‐off between inflation variability and output‐gap variability. We employ a stochastic volatility model for two sub‐periods of the EMS (i.e. before and after the Maastricht Treaty). We find that the trade‐off varies amongst EMU countries. The implication of these findings is that there are asymmetries in the euro area, due to different economic structures among the member countries of the EMU.     

Mortgage lending,monetary policy,and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro‐area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using quarterly bank‐level data on domestic lending in both countries for 2003–2018, we find that restrictive euro‐area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is some weak evidence for an international bank lending channel that can be mitigated by stricter lender‐based domestic prudential regulation.     

Productivity Trends and the Sterling Real Exchange Rates*

This paper provides favorable econometric evidence for a productivity‐based model of the pound/euro real exchange rate. We find that a 1% increase in UK productivity is consistent with a 3.5% real depreciation of sterling. Likewise, a 1% increase in euro area productivity is compatible with a 5.16% real appreciation of sterling. The asymmetric response of UK and foreign productivity shocks corresponds well with our model if UK labor supply is more elastic than euro area labor supply. Estimates of equilibrium exchange rates suggest that sterling was not overvalued at its 2004Q3 level vis‐à‐vis the euro.     

Perceived inflation and the euro: Evidence from an Austrian survey

This paper employs an Austrian micro-dataset to analyze why inflation perceptions became disconnected from official inflation measures in the course of the euro cash changeover. We find evidence that persons who are more often confronted with prices, who expected price increases and who mentally convert euro prices into old currency prices when making price comparisons have a significantly higher perception of inflation. Furthermore, our results indicate that the latter two factors have a persistent impact. This contributes in explaining why price perceptions have not normalized for several years in some countries. The results suggest that policy measures in countries which are going to introduce the euro should address these issues in order to prevent a similar development as experienced in many euro area countries.     

Price effects of the euro cash changeover: the role of product market competition

The euro cash changeover that took place in 2002 in 12 countries of the European Economic and Monetary Union was associated with abnormal price increases in most member countries. This paper investigates the influence of product market competition on the size of the changeover-related prices hikes, showing that the price hikes were less prevalent in countries with a higher level of competition. For the countries that are to join the euro area in coming years, this means that fostering competition can help contain changeover-related price increases. This aspect is of particular importance for the most recent and next wave of euro adopters, because of their rather heavy product market regulation as measured by the OECD, which are likely to restrain competition. The results indicate that comprehensive reform efforts can be more beneficial in containing changeover-related price hikes than a selective easing of product market regulation in a subset of areas.     

EMU and the transmission of monetary policy: evidence from business lending rates

This paper analyses the pass-through of money market rates to short-term and long-term business lending rates in the four largest euro area countries. The main findings of the paper are (1) that since the start of EMU loan rates appear to have become more responsive to money market rate changes in France, Italy and Spain, but not in Germany, and (2) that German loan rates are significantly more sluggish than loan rates in the other three large euro area countries. I also test for non-linear pass-through based on an asymmetric error-correction model but do not find much evidence of non-linearity in euro area interest rate pass-through.The views expressed in this paper do not necessarily represent the views of the Deutsche Bundesbank.     

Low‐inflation Targeting and Long‐run Unemployment*

The model of Akerlof, Dickens and Perry (2000) (ADP) predicts that low inflation may cause unemployment to persist at high levels. When applied to U.S. data, their results strongly rejected the conventional NAIRU model. We apply the ADP model to Swedish data. The fact that our Swedish data also reject the NAIRU model has a number of interesting implications for the Swedish economy and, potentially, for other European countries as well. The results indicate that raising the Swedish inflation target from 2 to 4 percent would bring long‐run unemployment down by several percentage points. The possibility of ADP‐type long‐run Phillips curves also across the euro countries may raise some concern about the EMU project. While detailed studies on other countries are needed, there is nothing to suggest that these non‐vertical Phillips curves would not differ considerably across the euro countries. Any single inflation level targeted by the ECB would then generate excess unemployment in individual member states.     

影响欧元区经济增长的因素分析

除2001年以外,欧元区的经济增长水平一直低于世界发达经济体。根本原因是其技术进步相对落后,劳动力市场僵化,失业率居高不下。以价格稳定为首要目标的单一货币政策,有利于其宏观经济稳定,但在一定程度上制约了经济的快速增长;共同财政纪律,有利于其经济顺利推进,但是削弱了各成员国运用财政政策抵御国内经济周期性振荡以及外部经济失衡的能力,尤其在经济衰退时期限制了各国利用扩张性财政政策刺激经济的手段。     

Elementary Index Bias: Evidence for the Euro Area from a Large Scanner Dataset

We provide evidence on the effect of elementary index choice on inflation measurement in the euro area. Using scanner data for 15,844 individual items from 42 product categories and 10 euro area countries, we compute product category level elementary price indexes using eight different elementary index formulas. Measured inflation outcomes of the different index formulas are compared with the Fisher ideal index to quantify elementary index bias. We have three main findings. First, elementary index bias is quite variable across product categories, countries and index formulas. Second, a comparison of elementary index formulas with and without expenditure weights shows that a shift from price only indexes to expenditure weighted indexes would entail at the product level multiple percentage points differences in measured price changes. And finally, we show that elementary index bias is quantitatively more important than upper level substitution bias.     

Persistence of Current‐account Disequilibria and Real Exchange‐rate Misalignments

This paper aims at studying whether the persistence of the gap between the observed current‐account position and its equilibrium value nonlinearly depends on real exchange‐rate misalignments. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we find evidence for this hypothesis, showing that persistence of current‐account imbalances strongly depends on the deviation of the real exchange rate from its long‐term equilibrium. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non‐eurozone members.     

Interdependency and adjustments in the European Union

Since the euro was launched, divergences in European economies'evolutions have been more significant than generally expected. The article, based on a multinational macroeconomic model describing the interdependence between 14 European countries, examines the role played by relative‐price adjustment mechanisms and difficulties inherent in asymmetric evolutions.

The efficiency of relative‐price adjustment mechanisms seems limited and, even in the most flexible countries, the return to equilibrium is slow and still incomplete after 10 years. Differences in relative‐price adjustment mechanisms remain a source of asymmetries between member countries. Extra‐European exchanges have a stabilizing role which is uneven on account of trade openness and price elasticities. A decrease of the world demand and a depreciation of the euro, still have an important impact with significant disparities between countries.

Several lessons can be drawn in terms of economic policy. A more restrictive European fiscal policy proves more costly in the long run in Germany and the Netherlands on account of the weakness of price compensation effects. On the contrary, thanks to their greater flexibility, the United Kingdom and Sweden can offset an initial negative shock more rapidly. The wage dimension in the definition of a good European policy mix has also to be examined.     

Exchange Rate Pass‐Through And The Welfare Effects Of The Euro*

This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange‐rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange‐rate volatility. We find that this affects both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune.     

Sudden stops in a currency union – some lessons from the euro area

During the Great Financial Crisis several euro area Member States with current account deficits were subject to sharp reversals of private capital flows. We examine how the specific policy rules of the euro area's payments system TARGET2 affects the macroeconomic adjustments to sudden stops. We find that – in the short run – public capital flows in form of TARGET2 help euro area‐deficit countries to stabilize output, consumption, and investment after a sudden stop of private capital inflows. In the long run, however, euro area countries suffer under a prolonged economic recovery and accumulated large public debt as well as higher welfare losses relative to euro peggers.     

The last fifteen years of stagnation in Italy: a business cycle accounting perspective

In this paper, we investigate possible sources of declining economic growth in Italy beginning near the middle of the 1990s. A long-term data analysis suggests that the poor performance of the Italian economy cannot be blamed on an unfortunate business cycle contingency. Other countries of the euro area have shown better performance, and the macroeconomic data indicate that the Italian economy has not grown at the same rate as these other European economies. We investigate the sources of economic fluctuations in Italy by applying the business cycle accounting procedure introduced by Chari et al. (Econometrica 75(3):781–836, 2007). We analyze the relative importance of efficiency, labor, investment and government wedges for business cycles in Italy during the 1982–2008 period. We find that individual wedges have played different roles during this period; however, the efficiency wedge is shown to be the factor most responsible for the stagnation phase that began in approximately 1995. Our findings also show that the decline in labor market distortions that occurred in Italy during the 1990s alleviated the stagnation effect somewhat and prevented an even more abrupt slowdown in per capita output growth.     

THE RELATIONSHIP BETWEEN CAPITAL STOCK, UNEMPLOYMENT AND WAGES IN NINE EMU COUNTRIES

The focus of this paper is to investigate the importance of the capital stock in the determination of wages and unemployment in a range of EMU countries and to compare the results across countries. A time‐series analysis is conducted in the case of nine euro area countries, which were selected solely on the basis of data availability and consistency: Austria, Belgium, Finland, France, Germany, Italy, Ireland, the Netherlands and Spain. The paper begins with a short review of the literature on capital stock and unemployment, before it deals with the theoretical model. This is followed by estimation and testing of the theoretical model put forward, using both time‐series and panel data. The results are supportive of the main hypothesis of the paper: capital stock is an important determinant of unemployment and wages in the countries considered for the purposes of the paper.     

THE MONEY DEMAND FUNCTION FOR THE EURO AREA: SOME EMPIRICAL EVIDENCE

This paper sets out to re‐examine the money demand function for the euro area. Traditional specifications often yield unsatisfactory results: instability of short and long‐term coefficients; relatively large differences between estimated and actual value of variables; and significant changes in the number of long‐term relationships, etc. Using a standard Vector Error Correction Model, we find that the usual specification is indeed unstable. However, introducing a European equity price gives rise to a more stable system. Furthermore, recursive estimates confirm the relative stability of long‐term coefficients. Estimates of the real money gap, based on the money demand equation including equity prices, point to moderate, albeit persistent, excess liquidity in the euro area in recent years. The real money gap contains information about future inflation but this content may have diminished since 2001.