Does one monetary policy fit all? the determinants of inflation in EMU countries

This chapter aims at assessing the long-run determinants and the short-run dynamics of inflation in each country belonging to the European Monetary Union (EMU). Our work complements the recent literature on this topic for the Euro Area as a whole. Detecting such determinants can be crucial in designing structural reforms acting as aside instruments of monetary policy in maintaining price stability. The empirical methodology consists of a reinterpretation of the structural cointegrating VAR approach, which allows for a structural long-run analysis of inflation determinants along with an accurate assessment of its short-run dynamics. The main conclusion emerging from the estimates is that not only the determinants of inflation differ in the countries belonging to the Euro Area, but also that cost-push factors have a considerable role in explaining inflation in most of the countries examined. As a policy implication, a tight monetary policy pursued in those countries whose inflation is mainly driven by costs would result in a contraction of economic activity without exerting relevant effects on price dynamics.Inflation, markup, EMU countries, long-run structural VARs, subset VEC models

The third dredge-up and the carbon star luminosity functions in the Magellanic Clouds

We investigate the formation of carbon stars as a function of the stellar mass and parent metallicity. Theoretical modelling is based on an improved scheme for treating the third dredge-up in synthetic calculations of thermally pulsing asymptotic giant branch (TP-AGB) stars. In this approach, the usual criterion (based on a constant minimum core mass for the occurrence of dredge-up, M_c^min) is replaced by one on the minimum temperature at the base of the convective envelope, T_b^dred, at the stage of the post-flash luminosity maximum. Envelope integrations then allow determination of M_c^min as a function of stellar mass, metallicity, and pulse strength (see Wood 1981), thus inferring if and when dredge-up first occurs. Moreover, the final possible shut down of the process is predicted. Extensive grids of TP-AGB models were computed using this scheme. We present and discuss the calibration of the two dredge-up parameters (lambda and T_b^dred) aimed at reproducing the carbon star luminosity function (CSLF) in the LMC. It turns out that the faint tail is almost insensitive to the history of star formation rate (SFR) in the parent galaxy (it is essentially determined by T_b^dred), in contrast to the bright wing which may be more affected by the details of the recent SFR. Once the faint end is reproduced, the peak location is a stringent calibrator of lambda. The best fit to the observed CSLF in the LMC is obtained with Z=0.008, lambda=0.50, log(T_b^dred)=6.4, and a constant SFR up to 5x10^8 yr ago. A good fit to the CSLF in the SMC is then easily derived from the Z=0.004 models, with a single choice of parameters, and a constant SFR over the entire significant age interval. The results are consistent with the theoretical expectation that the third dredge-up is more efficient at lower Zs.Comment: 22 pages with 15 figures, to appear in A&

Price Formation on the EuroMTS Platform

This paper examines the process of price discovery in the MTS system, which builds on the parallel quoting of euro-denominated government securities on a number of (relatively large) domestic markets and on a (relatively small) European marketplace (EuroMTS). Using twenty-seven months of daily data for 107 pairs of bonds, we present unambiguous evidence that trades on EuroMTS have a sizeable informational content.MTS system, price discovery

Fiscal Spillovers in the Euro Area

This paper analyses the dynamic effects of fiscal imbalances in a given EMU member state on the borrowing costs of other countries in the euro area. The estimation of a multivariate, multi-country time series model (specifically a Global VAR, or GVAR) using quarterly data for the EMU period suggests that euro-denominated government yields are strongly linked with each other. However, financial markets seem to be able to discriminate among different issuers. Consequently, fiscal imbalances in Italy and in other peripheral countries should be closely monitored by their EMU partners and the European institutions.Global VAR methodology, fiscal spillovers, euro area, public debt

Fiscal Spillovers in the Euro Area

This paper analyses the dynamic effects of fiscal imbalances in a given EMU member state on the borrowing costs of other countries in the euro area. The estimation of a multivariate, multi-country time series model (specifically a Global VAR, or GVAR) using quarterly data for the EMU period suggests that euro-denominated government yields are strongly linked with each other. However, financial markets seem to be able to discriminate among different issuers. Consequently, fiscal imbalances in Italy and in other peripheral countries should be closely monitored by their EMU partners and the European institutions.global VAR methodology, fiscal spillovers, euro area, public debt

Price Discovery and Trade Fragmentation in a Multi-Market Environment: Evidence from the MTS System

This paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro-denominated government securities. Analysing price data on daily transactions for 107 bonds over a period of twenty-seven months, we find a greater degree of price leadership of the dominant market when our measures (as opposed to the traditional price discovery metrics) are used. We also present unambiguous evidence that a market's contribution to price discovery is crucially affected by the level of trading activity. The implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the Treasury bond market in Europe.Price discovery, liquidity, MTS system

Time-varying spot and futures oil price dynamics

We investigate the role of crude oil spot and futures prices in the process of price discovery by using a cost-of-carry model with an endogenous convenience yield and daily data over the period from January 1990 to December 2008. We provide evidence that futures markets play a more important role than spot markets in the case of contracts with shorter maturities, but the relative contribution of the two types of market turns out to be highly unstable, especially for the most deferred contracts. The implications of these results for hedging and forecasting crude oil spot prices are also discussed.Cointegration, Oil market, Futures prices, Price Discovery.

Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market

Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.liquidity, trading activity, treasury bond market, Europe, commonality

The Euro Changeover and Price Adjustments in Italy

By estimating a staggered price model over the period 1980q1-2010q2, this paper documents that, after the euro changeover, Italian retailers have increased the number of price adjustments, which has translated into a higher inflation rate, with a detrimental effect on the competitiveness of the Italian economy.Euro changeover, staggered price adjustments, inflation

Are the Baltic Countries Ready to Adopt the Euro? A Generalised Purchasing Power Parity Approach

This paper focuses on macroeconomic interdependencies between the Euro area and three transition economies (Estonia, Lithuania and Latvia), with the aim of establishing whether the latter are ready to adopt the Euro. The theoretical framework is based on the Generalised Purchasing Power Parity (GPPP) hypothesis, which is empirically tested within a Vector Error Correction (VEC) model. Using both monthly and quarterly data over the period 1993-2005, it is found that GPPP holds for the real exchange rate vis-à-vis the Euro of each Baltic country, reflecting a degree of real convergence consistent with Optimum Currency Area criteria. Further, the adopted joint modelling approach for the real exchange rates of the Baltic region outperforms a number of alternative models in terms of out-of-sample forecasts.transition economies, Euro area, (Generalised) Purchasing Power Parity, Vector Error Corrector models