Euro area private consumption: Is there a role for housing wealth effects

This paper adds to the literature on wealth effects on consumption by disentangling financial wealth effects from housing wealth effects for the euro area. We use two macro-datasets for our estimations, one on the aggregate euro area for the period 1980-2006, and one on the individual euro area countries from1995-2006, using panel data techniques. The impact of all wealth variables on euro area consumption is significant and positive in most specifications for both datasets. The marginal propensity to consume (MPC) out of financial wealth is roughly in line with the literature, with 2.4 to 3.6 cents per euro of financial wealth spent on consumption according to the estimations with euro area aggregate data. However, the panel estimation yields somewhat lower results (0.6 to 1.1 cents). The MPC out of nominal housing wealth lies between 0.7 to 0.9 cents per euro for both datasets. When specifying housing wealth in real terms, i.e. when taking out the effect of volatile house prices, we find similar effects in the times series estimation while the MPC is larger in the panel estimation (2.5 cents). JEL Classification: E21Consumption, euro area, financial wealth, housing wealth

Exchange rate volatility and euro area imports

This paper estimates an import demand function for the euro area vis--vis its main extra-area trading partners which takes into account the possible impact of both intra- and extra-euro area exchange rate uncertainty. We derive a theoretical model which captures various mechanisms by which exchange rate volatility may influence the demand for extra-euro area imports. If importers are risk averse, the model predicts not only a negative effect of exchange rate volatility, but also substitution possibilities between extra- and intra-area imports due to differences in the degree of extra- and intra-area exchange rate volatility. The magnitude of these impacts also depends on the share of trade invoiced in foreign currency (and not hedged) as well as the degree of substitutability between the imports of different suppliers. Using quarterly data for the past eleven years, panel estimates suggest that extra-area exchange rate volatility may have decreased extra-euro area imports by around 10 per cent. Although such quantitative estimates should be treated with caution, the magnitude of our estimate is similar to other studies which find a statistically significant impact of exchange rate volatility on trade flows. Finally, we also provide some limited evidence that differences in extra- and intra-area exchange rate volatility may have resulted in substitution between extra- and intra-area imports. JEL Classification: F15, F31

Pass-through of external shocks along the pricing chain: A panel estimation approach for the euro area

In this paper we analyse in a mark-up framework the pass-through of commodity price and exchange rate shocks to the main components of producer and consumer prices. Thereby we link movements in prices at the different production stages as firms set their prices as a mark-up over production costs. The empirical results reveal significant linkages between different price stages in the euro area. The overall results are roughly in line with the literature and provide insight into the effects at different stages of the production chain. Non-energy commodity prices turn out to be important determinants of euro area prices. JEL Classification: E31, E37commodity prices, consumer prices, exchange rate, Pass-Through, producer prices

Early estimates of euro area real GDP growth: a bottom up approach from the production side

This paper derives forecasts for euro area real GDP growth based on a bottom up approach from the production side. That is, GDP is forecast via the forecasts of value added across the different branches of activity, which is quite new in the literature. Linear regression models in the form of bridge equations are applied. In these models earlier available monthly indicators are used to bridge the gap of missing GDP data. The process of selecting the best performing equations is accomplished as a pseudo real time forecasting exercise, i.e. due account is taken of the pattern of available monthly variables over the forecast cycle. Moreover, by applying a very systematic procedure the best performing equations are selected from a pool of thousands of test bridge equations. Our modelling approach, finally, includes a further novelty which should be of particular interest to practitioners. In practice, forecasts for a particular quarter of GDP generally spread over a prolonged period of several months. We explore whether over this forecast cycle, where GDP is repeatedly forecast, the same set of equations or different ones should be used. Changing the set of bridge equations over the forecast cycle could be superior to keeping the same set of equations, as the relative merit of the included monthly indictors may shift over time owing to differences in their data characteristics. Overall, the models derived in this forecast exercise clearly outperform the benchmark models. The variables selected in the best equations for different situations over the forecast cycle vary substantially and the achieved results confirm the conjecture that allowing the variables in the bridge equations to differ over the forecast cycle can lead to substantial improvements in the forecast accuracy. JEL Classification: C22, C52, C53, E27bottom up approach, bridge equations, euro area, forecasting, GDP

Social Conflict and Growth in Euroland.

This paper aims at contributing to the literature on the differences in the transmission processes within Euroland. We start from the proposition that there are ‘deep’ differences in the nature of social conflicts and in the way countries deal with these conflicts. We empirically test this effect for the EU-growth and introduce several proxies for social conflicts and conflict management. We then analyse (in addition to common growth variables) an EU wide shock and find that differences in the social conflict and the conflict management institutions contribute to different effects on economic growth. We conclude by presenting a model giving a theoretical foundation of the empirical results.

Social conflict and growth in Euroland.

This paper aims at contributing to the literature on the differences in the transmission processes within Euroland. We start from the proposition that there are ‘deep’ differences in the nature of social conflicts and in the way countries deal with these conflicts. We empirically test this effect for the EU-growth and introduce several proxies for social conflicts and conflict management. We then analyse (in addition to common growth variables) an EU wide shock and find that differences in the social conflict and the conflict management institutions contribute to different effects on economic growth. We conclude by presenting a model giving a theoretical foundation of the empirical results.

Inflation and productivity differentials in EMU.

The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1970 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate a significant effect of the productivity differential, as proposed by the theory. According to our regression results, the impact of a productivity shock on the inflation differential can be quite substantial, going up to an 8% increase in the inflation differentiaEMU; Productivity;

Inflation and Productivity Differentials in EMU

The aim of this paper is to find out whether the Balassa-Samuelson effect is important in EMU. We use panel data going from 1970 to 1995 for the current EU members in order to estimate the long run effect of bilateral differences in productivity growth differential between the traded and non-traded goods sector on bilateral inflation differentials. The regression results indicate a significant effect of the productivity differential, as proposed by the theory. According to our regression results, the impact of a productivity shock on the inflation differential can be quite substantial, going up to an 8% increase in the inflation differential.

Trade effects of the euro: evidence from sectoral data

This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries. JEL Classification: F12, C33, E0Exchange rate volatility, gravity, monetary union, Rose effect, sectoral trade

Intra- and extra-euro area import demand for manufactures

The aim of this paper is to improve our understanding of the key determinants of intra- and extra-euro area imports. Using a simultaneous equation estimation framework, and pooling the data across nine euro area countries as an approximation of the euro area, we estimate intra- and extra-euro area import demand functions and impose various restrictions within and across equations. We find that there are significant substitution effects between intra- and extra-euro area imports due to changes in their relative prices, while exchange rate volatility decreases trade vis-à-vis regions characterised by volatility and leads to substitution of trade away from higher-volatility regions towards lower-volatility regions. JEL Classification: C32, C33, E00, E32, O3intra- and extra-euro area imports, substitution, three stage least squares, trade integration