Asymmetry and Aggregation in the EU

252 Pages·2011·1.211 MB·English

by  David G. Mayes, Matti Virén (auth.)

Asymmetry and Aggregation in the EU
Also by David G. Mayes
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PROSPECTS FOR FINANCIAL MARKETS
THE STRUCTURE OF FINANCIAL REGULATION (Co-authored)
ADJUSTING TO EMU (Co-authored)
NEW ZEALAND AND EUROPE: Connections and Comparisons (Co-authored)
WHO PAYS FOR BANK INSOLVENCY? (Co-authored)
SOCIAL EXCLUSION IN EUROPEAN WELFARE STATES (Co-authored)
SOCIAL EXCLUSION AND EUROPEAN POLICY (Co-authored)
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THE EVOLUTION OF THE SINGLE EUROPEAN MARKET (Co-authored)
SOURCES OF PRODUCTIVITY GROWTH (Co-authored)
THE SINGLE MARKET PROGRAMME AS A STIMULUS TO CHANGE: Comparisons
between Britain and Germany (Co-authored)
INEFFICIENCY IN INDUSTRY (Co-authored)
THE EVOLUTION OF RULES FOR A SINGLE EUROPEAN MARKET:
VOL 1 Industry and Finance
VOL 2 Rules Democracy and the Environment
VOL 3 Social and International Issues
FOREIGN DIRECT INVESTMENT AND TRANSITION: The Case of the Visegrad
Countries (Co-authored)
THE EXTERNAL IMPLICATIONS OF EUROPEAN INTEGRATION (Co-authored)
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(Co-authored)
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A NEW STRATEGY FOR SOCIAL AND ECONOMIC COHESION AFTER 1992 (Co-authored)
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INTEGRATION AND EUROPEAN INDUSTRY (Co-authored)
THE EXCHANGE RATE ENVIRONMENT (Co-authored)
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APPLICATIONS OF ECONOMETRICS
THE PROPERTY BOOM
INTRODUCTORY ECONOMIC STATISTICS (Co-authored)
Asymmetry and
Aggregation in the EU
David G. Mayes
and
Matti Virén
© David G. Mayes and Matti Virén 2011
Softcover reprint of the hardcover 1st edition 2011 978-0-230-53808-5
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ISBN 978-1-349-35969-1 ISBN 978-0-230-30464-2 (eBook)
DOI 10.1057/9780230304642
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10 9 8 7 6 5 4 3 2 1
20 19 18 17 16 15 14 13 12 11
Contents
List of Figures vi
List of Tables viii
List of Abbreviations x
Acknowledgements xi
Preface xii
1 The Nature of Asymmetry 1
2 Estimation and Aggregation Concerns 10
3 Aggregate Supply and Demand in an Open Economy 42
4 The Phillips Curve 77
5 Regional and Sectoral Concerns 115
6 Output, Unemployment and the Labour Market: 134
The Okun Curve
7 Asymmetry and the Role of the Public Sector 158
8 Monetary Policy 174
9 Fiscal Responses 204
References 219
Index 232
v
List of Figures
2.1 Illustration of a simple threshold model with cyclical data 19
2.2 A comparison of a rigid and smooth threshold 21
2.3 An effect of smoothing on a two threshold model 22
2.4 Illustration of the minimum conditions 25
2.5 Friedman’s plucking model 27
2.6 Kernel densities of output growth with the EU27 data 28
for 1990–2008
2.7 Implications of the convexity of the Phillips curve 30
2.8 An effect of heterogeneity of estimation results 32
2.9 Kalman filter estimates of threshold model coefficients 34
2.10 Distribution of coefficients 37
2.11 Comparison of cross-section variance of GDP growth 41
rates and the squared growth rate of EU27 GDP
3.1 Estimated country-specific interest rate effects from 52
an IS curve
3.2 Sectoral coefficients of the real interest rate 53
3.3 Coefficients of the real exchange rate 53
3.4 Median of key macro variables before and after the EMU 54
3.5 Similarities in (a) growth and (b) inflation performance 56
in the euro area and the US
3.6 Scatter plot between change rates of house and 58
stock prices
3.7 The growth rate of (real) house and stock prices (medians) 59
3.8 Median values of output growth and output gap 62
3.9 Comparison of GDP growth rates and inflation over 69
15 EU countries
4.1 Indicators of output (medians) 86
4.2 Comparison of inflation rates (medians) 87
4.3 Expected inflation 90
4.4 Coefficient of unemployment in a New Keynesian 91
Phillips curve
4.5 Estimates of simple nonlinear Phillips curve for the EU 92
for the pre-euro period
4.6 Linearity and nonlinearity in the Phillips curve and 96
the setting of policy
4.7 Real time OECD output gap estimates 1994–2002 102
vi
List of Figures vii
4.8 Real time HP filtered output gaps 107
4.9 Real time and revised HP filtered output gaps 108
5.1 Comparison of unemployment dispersion measures 121
5.2 Sectoral output growth dispersion indicators 125
5.3 The extent of change 125
5.4 Evolution of sectoral shares (median values) 126
5.5 Comparison of income (per capita) and unemployment 128
dispersion
5.6 Impulse responses of the VAR model 130
5.7 Finnish data on regional unemployment rates 131
6.1 Convergence of unemployment in the EU 146
6.2 Comparison of income (per capita) and unemployment 147
dispersion
6.3 Indicators of output 148
6.4 Country-specific coefficients of a threshold model for 149
the Okun curve
6.5 Variance of the unemployment rate across countries 149
6.6 Variance of GDP growth across countries 150
7.1 Long-run effect of a 1 per cent increase in public 170
consumption on government surplus/GDP with and
without policy coordination
7.2 Comparison of expansive fiscal policy effects in the 171
euro area
8.1 Interest rate forecast for the euro period 193
8.2 An FCI for the euro area 194
8.3 An FCI for Germany 195
8.4 An FCI for the UK 195
8.5 An FCI for the euro area with an increased weight on 196
the real exchange rate
8.6 The real interest rate, real exchange rate and asset 197
prices in the euro area
8.7 The impact of house prices on a country by country 198
basis
8.8 Confidence and house prices 202
9.1 An EU average of the impulse responses of d/y* to 210
growth shocks
9.2 Median of fiscal variables before and after the EMU 212
9.3 Change in the responsiveness to the debt ratio 215
List of Tables
2.1 LR test results for a threshold model 35
2.2 Mean values of ˆc andcˆ from the simulated data 38
1 2
2.3 Summary of Granger and Lee findings 39
3.1 Estimates of the ratio of the real interest rate to the 47
real exchange rate effect from Mayes and Virén (2000)
3.2 OLS estimation results for the 1987:1–1997:4 period 48
3.3 IS curves (basic specification) 49
3.4 Estimation of an extended IS curve 50
3.5 Basic IS curve specification with different lags 60
3.6 Comparison of different IS curve specifications 61
3.7 Estimation of the IS curve with the output gap variable 63
3.8 Asymmetry in the IS curve 66
3.9 The effect of house and stock prices: An update 67
3.10 Euler equations for output using the Consensus 71
Forecast data
3.11 Estimation of a ‘consumption function’ 74
4.1 Phillips curves 84
4.2 GMM estimates of a New Keynesian Phillips curve 88
4.3 When did the EMU show up? 89
4.4 Estimates of a Phillips curve with the OECD forecast data 90
4.5 Correlations and test for unbiasedness 104
4.6 Estimates of restricted Hybrid model with HP filtered 110
output gap, 1977–2006
4.7 Estimates of restricted Hybrid model, 1994–2006 111
4.8 Estimates of the hybrid model, GMM, 1977–2006 112
5.1 Phillips curves from regional data 120
5.2 Backward-looking Phillips curve with regional data 122
5.3 Estimates using unemployment rather than the 123
output gap
5.4 Estimates of a nonlinear Phillips curve with output 124
dispersion variables
5.5 Sectoral shares of output over countries and time 127
(1991–2008)
5.6 Estimates of a VAR model with the unemployment 129
dispersion variable
5.7 Finnish regional data results 132
viii
List of Tables ix
6.1 The Okun curve 139
6.2 Individual country estimates of a nonlinear Okun curve 142
7.1 Threshold model estimation results G/Yas the threshold 162
variable
7.2 Estimation results with panel data 164
7.3 A summary of the public consumption simulation 169
8.1 Estimates of the Taylor rule 179
8.2 Autocorrelation of inflation 181
8.3 Threshold model estimates for the Taylor rule 181
8.4 Simultaneous system estimation from panel data 183
8.5 Reaction function estimates 184
8.6 Corridor reaction functions 185
8.7 Impact of house and stock prices on interest rates 190
8.8 Estimates of alternative interest rate equations 192
8.9 The effect of house and stock prices: An update 200
9.1 Selected country-specific estimates of equation (9.1) 207
9.2 Evidence of changing fiscal behaviour 214