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  • 1.
    book.ebook
    Sustainable real exchange rates in the New EU Member States [er] : is FDI a mixed blessing? European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2009.
    Summary
    This essay focuses on the various macroeconomic opportunities and challenges created by the foreign direct investment (FDI) inflows in the new member states (NMS). We question whether the macroeconomic performance of the NMS is furthered through the FDI’s overall positive impact on the trade balance or whether it can actually worsen the performance. Our findings suggest that in some NMS the integration gain, foreseen by the financial markets, may be reflected in a sustainable appreciation of the real exchange rate. Such real appreciation is in most cases moderate enough to allow for smooth nominal convergence required for to the euro adoption. In some cases, however, this appreciation is very fast, especially in the NMS with a low net external debt and massive FDI inflows, making it challenging to fulfill the Maastricht criteria. The Maastricht criteria may be difficult to meet also in those NMS where FDI has been channeled predominantly into services, housing construction, or nontradable sectors in general. In these countries we observe increasing net external debt without a corresponding improvement in the trade balance and these economies might be required to depreciate their currencies in real terms to sustain the external balance.
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  • 2.
    book.ebook
    The euro and prices [er] : changeover-related inflation and price convergence in the euro area. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2009.
    Summary
    This report examines the effects of the introduction of euro notes and coins ('euro cash changeover') on consumer prices in the euro area.
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  • 3.
    book.ebook
    The accuracy of the European Commission’s forecasts re-examined [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    Economic forecasts are widely used as a basis for economic policy analysis and decision-making. This calls for a regular assessment of forecasting performance. In recognition of the importance of providing high-quality predictions, the Commission's forecasting performance was first examined by Keereman in 1999, with an update carried out by Melander et al. in 2007. Both studies concluded that the Commission's forecasts 'dispose of a reasonable track record'. The macroeconomic environment has changed considerably since the 2007 update. The euro-area and EU economies entered the Great Recession of 2008-2009. Therefore, the first aim of this paper is to look at whether the ex-post accuracy of the Commission's fully-fledged forecasts has changed in recent years. This is done by comparing the forecast errors in the observation period 1969-2007 and those for the whole period until 2011, thus including the 2008-2009 crisis years. The second aim is to include a forecast accuracy analysis for the Member States which joined the European Union in 2004 and 2007. The third aim is to expand the analysis to short-term GDP growth forecasting. Finally, the fourth aim is to compare the Commission's and other international institutions' forecasting performance. It should be noted upfront that macroeconomic forecasts are conditioned by the assumptions adopted regarding the development of exogenous factors. In particular the assessment of world GDP and trade is crucial. The oil price baseline assumption also represents an important variable for all forecasts. Moreover, for budgetary policy, the European Commission uses a no-policy change assumption. Only those policy measures that are known in sufficient detail are taken into account. This may have a particular impact on the forecast errors. Conclusions on the forecast accuracy must therefore be drawn with due care. The remainder of the paper is structured as follows: section 2 discusses the variables, data and aggregates used in the analysis, while section 3 recalls the main definitions and summary statistics. The results for the extended observation period and the impact of the business cycle on forecasting performance are presented in sections 4 and 5. Section 6 presents the first analysis of Commission forecast errors for new Member States. Sections 7 and 8 present error persistence and bias tests. Section 9 analyses the accuracy of the Commission's quarterly GDP forecasts, whereas section 10 compares the track record of the Commission with that of other institutional forecasters. Finally, section 11 concludes.
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  • 4.
    book.ebook
    An early-detection index of fiscal stress for EU countries [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The financial and economic crisis has generated renewed interest, especially among policy-makers, in earlywarning systems that could help identifying fiscal and macro-financial vulnerabilities potentially triggering risks. Against this background, this paper presents an early-warning index of fiscal stress, incorporating fiscal, financial and competitiveness variables, some of which are common to the scoreboard used in the EU for the surveillance of macroeconomic imbalances. Thresholds of fiscal risk are determined, based on the nonparametric signals approach, for the overall index, the two sub-indexes grouping fiscal and financialcompetitiveness variables and each individual variable used in the analysis. Values of the overall index beyond its critical threshold pinpoint to potential risks of fiscal stress in the short run, while the analysis at individual variable level allows identifying possible sources of vulnerabilities, which is key to design appropriate risk-mitigating policies. The results obtained highlight the importance of incorporating financialcompetitiveness variables in an early-warning system for fiscal stress, as such variables appear to be better "leading indicators" of fiscal stress than fiscal variables are. The results also speak in favour of using an early-warning composite indicator of fiscal stress, rather than looking at the individual variables taken in isolation. Results obtained by applying the proposed methodology to EU countries are presented in the last part of the paper.
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  • 5.
    book.ebook
    The impact of structural policies on external accounts in infinite-horizon and finite-horizon models [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The paper uses the European Commission's QUEST III model to compare the impact of product market reform, labour market re-form and fiscal devaluation on economic activity and external accounts in infinite-horizon and finite-horizon versions of the model for a small open economy in monetary union with tradable and non-tradable sectors. The impact of structural policies on external positions tends to be stronger and more persistent, but also more diverse in the finite-horizon specification because of the impact of structural reforms on financial wealth and its transmission to consumption demand in the finitehorizon setting. The improvement in the net foreign asset position tends to be stronger if structural reforms are accompanied by fiscal consolidation and if countries start with high pre-reform levels of net foreign debt.
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  • 6.
    book.ebook
    National expenditure rules [er] : why, how and when. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
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  • 7.
    book.ebook
    Non-bank financial institutions [er] : assessement of their impact on the stability of the financial system. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The objectives of this study are to provide a contribution to the European Commission's knowledge and information gathering capacity in connection with the impact of NBFIs on financial stability. Specifically, on the basis of available literature and data, the study seeks to provide: An account of non-bank financials' market behaviour and performance over the past decade, by financial market segment; An account of how NBFIs have interacted with the banking sector; Details of how and via which channels NBFIs were affected by the crisis, and whether and how they contributed to the crisis. And, as a consequence of this analysis, the study seeks also to provide: A didactical element through which the roles and risks of different NBFIs are outlined; An understanding of the feasibility of a database of risk indicators and diagnostic tools to identify existing and the building up of risks in the various sub-sectors of NBFIs and in the financial market segments in which NBFIs play an important role.
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  • 8.
    book.ebook
    Energy inflation and house price corrections [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    We analyse empirically the role played by energy inflation as a determinant of downward corrections in house prices. Using a dataset for 18 OECD economies spanning the last four decades, we identify periods of downward house price adjustment and estimate conditional logit models to measure the effect of energy inflation on the probability of these house price corrections after controlling for other relevant macroeconomic variables. Our results give strong evidence that increases in energy price inflation raise the probability of such corrective periods taking place. This phenomenon could be explained by various channels: through the adverse effects of energy prices on economic activity and income reducing the demand for housing; through the particular impact on construction and operation costs and their effects on the supply and demand of housing; through the reaction of monetary policy on inflation withdrawing liquidity and further reducing demand; through improving attractiveness of commodity versus housing investment on asset markets; or through a lagging impact of common factors on both variables, such as economic growth. Our results contribute to the understanding of the pass-through of oil price shocks to financial markets and imply that energy price inflation should serve as an early warning indicator for the analysis of macrofinancial risks.
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  • 9.
    book.ebook
    The performance of simple fiscal policy rules in monetary union [er] European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The paper analyses the stabilising potential of simple fiscal policy rules for a small open economy in monetary union in a 2-region DSGE model with nominal and real rigidities. We consider simple fiscal instrument rules for government purchases, transfers, and consumption, labour and capital taxes in analogy to interest rate rules in monetary policy. The paper finds a dichotomy in the welfare effects of fiscal policy for liquidity-constrained and intertemporal optimising households, i.e. policies enhancing the welfare of one group tend to reduce the welfare of the other one. Moderate average welfare gains from optimal policy contrast with large losses from non-optimal policy. Fiscal rules that respond to employment fluctuations may be preferred to rules responding to indicators of price competitiveness, because optimal policy in the former corresponds more closely to the idea of countercyclical stabilisation. The paper also emphasises the strong impact of the budgetary closure rule on the welfare effects of business cycle stabilisation.
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  • 10.
    book.ebook
    Long-term care [er] : need, use and expenditure in the EU-27. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    Public provision of long-term care (LTC) will pose an increasing challenge to the sustainability of public finances in the EU, due to an ageing population. In this view, the paper aims to provide indications on the timing and potential fiscal impact associated to changes in the demographic structure. The ageing of the population is expected to put pressure on governments to provide long-term care services as (very) old people often develop multi-morbidity conditions, which require not only long-term medical care but assistance with a number of daily tasks. This paper presents the projections of public expenditure on LTC in the long run (2060) under alternative assumptions. All scenarios project a non-negligible increase in public expenditure. All other things being equal, the expected increase in the demand for formal LTC support will vary across EU-27 Member States according to their current patterns of LTC provision: the balance between formal and informal care, the emphasis they put on institutional care, home care or provision of cash benefits, the supply constraints both in the formal and informal care sectors, the current average cost and coverage rate for each type of care and their distribution across age groups. The paper also discusses policy implications of the projection results.
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  • 11.
    book.ebook
    Fiscal decentralisation and fiscal outcomes [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    In recent years, the concern that the behaviour of subnational governments may hinder the achievement of national budgetary targets has been increasingly raised across the EU. In this paper the relationship between fiscal decentralisation and budgetary outcomes of the general government is analysed. Results suggest that fiscal decentralisation is not harmful per se for budgetary discipline, although it is likely to have an adverse effect if predominantly financed by transfers from the central government rather than by subnational taxes and fees. Moreover, borrowing rules applying to subnational governments appear to partly counteract the adverse effect of transfers on fiscal balances. Therefore, policy concerns should not focus on decentralisation as such but rather on a 'bad' design of decentralisation, i.e. one which is not accompanied by subnational financial responsibility.
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  • 12.
    book.ebook
    Measuring quality and non-cost competitiveness at a country-product level [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    This paper contributes to the ongoing debate on macroeconomic imbalances and external competitiveness by developing a set of indicators of export capability at a country-product level which can be used to complement the existing toolkit of instruments based mostly on unit labour costs and relative price levels. A micro-based methodology is proposed here to extract information on the capacity of a country's exporters to compete abroad by combining trade and macroeconomic data. In particular, light is shed on two independent components of demand for a particular variety (country-product combination): markup-shifting "quality" and sales-boosting "non-cost competitiveness". Together with cost efficiency and information on foreign prices and consumption, these additional indicators may enhance our understanding of the determinants of a country's external position, thus providing better guidance for policymaking.
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  • 13.
    book.ebook
    Sovereign debt sustainability scenarios based on an estimated model for Spain [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    This paper proposes a framework for sovereign debt sustainability assessment based on an estimated DSGE model. One advantage of this is that it allows taking into account feedback effects of debt ratios, spreads and fiscal measures on growth and tax bases, and thus capture the impact of changes in the composition of GDP which is pronounced during fiscal consolidation. Unsustainable debt developments may give rise to increasing interest rate spreads which could further reduce growth and tax revenue and worsen debt dynamics, while fiscal austerity measures are likely to reduce growth and lower tax revenues in the short run. Capturing the impact of risk premium on growth and public debt dynamics is crucial to understand current developments and policy trade-offs in euro area periphery countries.
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  • 14.
    book.ebook
    The Dutch current account balance and net international investment position [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The aim of this paper is to shed light on the driving forces behind the Dutch current account surplus from various angles, in order to assess the likelihood of its persistence in the future, but also to detect fundamental strengths and/or vulnerabilities of the economy and to identify policy measures if any are called for. The paper also looks into the mirror image of the current account and the capital account, the financial account, in order to signal a potential accumulation of macro-financial vulnerabilities. Section 2 sets the stage by summarizing the main characteristics of the Dutch current account, focusing on foreign trade, and looking into the composition of Dutch exports and their competitiveness. Section 3 zooms in on the sectoral savings balances in order to examine to what extent savings and investment decisions of households, firms and the government have been driving the current account surplus. Section 4 looks into the financial account, describing the financial transactions mirroring the current account surpluses. Section 5 then examines the returns on the current account surpluses generated, relating the current account flows to changes in the Dutch net international investment position. Section 6 concludes and adds a few pointers to possible policy implications.
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  • 15.
    book.ebook
    Inflation forecasting and the crisis [er] : assessing the impact on the performance of different forecasting models and methods. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    This paper analyses how the accuracy of euro area inflation forecasting models has been affected by the financial and economic crisis. Its first objective is to compare the precision of three representative groups of inflation forecasting models (rules of thumb and benchmark models; autoregressive moving average models; autoregressive distributed lag models) under a direct and an indirect approach, respectively. Under the former, the forecasting models contain headline inflation as their dependent variable; under the latter, individual forecasts are generated in a first step for each of the main HICP components, and subsequently aggregated to obtain an indirect forecast of headline inflation. The second objective is to study how the absolute and relative forecasting performances of the models and approaches have been impacted by the economic and financial crisis. The paper finds that direct forecasting models selected on the basis of a penalty function generally dominate simple rules of thumb and econometric benchmark models. The analysis furthermore suggests that when an appropriate specification for the component-specific models is found, indirect forecasts outperform the corresponding direct forecasts. Nonetheless, in line with the findings from earlier studies, there are insufficient elements to assert a systematic superiority of one of the two approaches. Concerning the second objective, the across-the-board rise in the forecast errors of all models considered, confirms that inflation forecasting has become substantially more difficult after the onset of the crisis. However, the deterioration of the different models has been uneven. Relative to simple econometric models and rules of thumb, the performance of direct autoregressive distributed lag models and of the indirect approach has improved during the crisis.
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  • 16.
    book.ebook
    Securities transaction taxes [er] : macroeconomic implications in a general equilibrium model. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    This paper studies the impact of a securities transaction tax (STT) on financial trading, stock prices and real economic variables in closed-economy dynamic stochastic general-equilibrium model featuring financial frictions. The model incorporates channels by which 'noise trading' affects real economic volatility. Firms' investment expenditure is related to the value of their outstanding shares. The model is calibrated to stylised facts of financial trading and firm's financing. The simulations suggest distortive effects of the STT on real variables similar to those of corporate income taxation. At the same time, the STT reduces economic volatility, but this stabilisation gain is quantitatively modest.
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  • 17.
    book.ebook
    Corporate balance sheet adjustment [er] : stylized facts, causes and consequences. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    Using national account data, we define corporate balance sheet adjustment episodes as periods during which major increases in nonfinancial corporations' net lending/borrowing are experienced. An analysis of such episodes in Germany and Japan, and a more systematic exploration of a sample of 30 countries, show that corporate balance sheet adjustment tends to be long lasting and associated with significant effects on current accounts, wages and investment. Adjustment episodes lead to significant changes in corporate balance sheets ratios with a build-up of liquidity and a reduction of leverage. The adjustment is generally achieved by reducing investment and increasing savings on the back of a falling wage share. A panel econometric exercise shows that balance sheet adjustment periods are triggered by macroeconomic downturns as well as balance sheet stress due to high debt, low liquidity and negative equity price shocks.
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  • 18.
    book.ebook
    Tax avoidance and fiscal limits [er] : laffer curves in an economy with informal sector. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    The paper extends the QUEST III model by home production to discuss fiscal limits in an economy with tax avoidance. It finds that revenue-maximising labour and corporate tax rates in the benchmark model are relatively high (54% and 72%) compared to current EU-average implicit tax rates. No such limit is found for the consumption tax. Higher substitutability between market and home production flattens the Laffer curves for labour and corporate taxation and introduces one for the consumption tax. Although higher tax rates raise additional tax revenue, the economic costs of higher distortionary taxation in terms of output contraction are substantial.
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  • 19.
    book.ebook
    The impact of state guarantees on banks' debt issuing costs, lending and funding policy [er]. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2012.
    Summary
    On behalf of DG ECFIN, London Economics carried out an empirical study on the effectiveness of state guarantees given to banks in 2008-10. It analysed the market value of state guarantees as reflected in banks' issuing costs and whether there were significant differences visible in the balance sheets of banks that used state guarantees and those that refrained from using them. The report presents a comprehensive ex-post evaluation of one of the main tools to restore the functioning of wholesale financial markets after the Lehman bankruptcy. The results of the empirical research suggested that the guarantee schemes were successful in lowering the costs of bond issuance of participating banks while having relatively little distortionary impacts on nonparticipating banks. Moreover, cross-border spill-over appear to be non-existent.
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  • 20.
    book.ebook
    Structural reforms and external rebalancing in the euro area [er] : a model-based analysis. economic papers 442, April 2011. European Commission. Directorate-General for Economic and Financial Affairs.
    Publication
    Brussels : European Commission, 2011.
    Summary
    The paper uses a 3-region version (small open economy in EMU, other euro area, rest of the world) of QUEST to assess the impact of structural reforms on external positions along two dimensions, namely the impact of flexibility and prudence on the prevention of imbalances and the contribution of structural reforms to their correction. With regard to imbalance prevention, the impact of nominal price/wage flexibility above current levels on the reaction of external positions to bubble/demand shocks is modest and case-dependent ; prudent collateral valuation mitigates overborrowing risks. Product market reform, wage moderation and fiscal consolidation can support/accelerate the correction of imbalances as they increase price competitiveness and improve trade/current account balances in the short and medium term (here, up to 5-6 years). Lasting structural reforms bring permanent trade competitiveness gains. The initial improvement of external balances narrows in the long run, however, because growthenhancing reforms also raise import demand when income rises in the longer term. EMU-wide reforms affect balances with the rest of the world, but do not reduce disparities between EMU member states.
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