Occasional papers published in 2004

Communication device to a broad audience

Our Occasional Paper Series (OPS) disseminates work carried out by, as a rule, ECB staff on subjects that relate to the main tasks and functions of the ECB and the ESCB. Occasional Papers (OPs) are addressed to a wide audience, including other policy-makers, financial analysts, academics, the media and the interested general public. Understanding the papers will normally require some prior knowledge of the topic.

No. 21
26 November 2004
Governance of securities clearing and settlement systems

Abstract

JEL Classification

G29 : Financial Economics→Financial Institutions and Services→Other

G34 : Financial Economics→Corporate Finance and Governance→Mergers, Acquisitions, Restructuring, Corporate Governance

L49 : Industrial Organization→Antitrust Issues and Policies→Other

K2 : Law and Economics→Regulation and Business Law

Abstract

In the context of securities clearing and settlement systems, the nature of governance arrangements acquires a dimension that goes beyond their traditional function in corporate law. They constitute a tool for regulators and central banks to achieve their respective policy goals relating to market operation, market integrity, and systemic stability. In the light of the analysis of this paper, and pending a further evolution in the regulation of securities clearing and settlement in the Community, the following conclusions can be drawn. Whatever the model of corporate governance used in a jurisdiction, securities clearing and settlement systems should adopt and ensure effective implementation of the highest corporate governance standards or best practices adopted or recommended for companies in the jurisdiction in which it operates as such standards or practices evolve over time. Generally, this would imply that securities clearing and settlement systems at minimum should adopt and implement the best practices recommended for listed companies.

No. 20
6 August 2004
The supervision of mixed financial services groups in Europe

Abstract

JEL Classification

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

Abstract

Over time, the banking, insurance and securities sectors have become increasingly interlinked and one way through which this occurs is via financial conglomerates. Such groups, in particular those that combine banking and insurance, have over time become more important in Europe. They require an appropriate regulatory and supervisory set-up to deal with the specific risks they raise. In the EU, this regulatory set-up was introduced with the Financial Conglomerates Directive (2002) and which Member States are now implementing into national law. The Directive introduces a regime of supplementary supervision, in addition to the one that already exists for the regulated entities of the conglomerate. The Directive covers areas such a capital requirements, intra-group transactions, large exposures, organisational requirements and information exchange between authorities. The paper further compares the regime in the US and the EU. It concludes with issues that might require attention from authorities in the future.

No. 19
31 July 2004
Sectoral specialisation in the EU: a macroeconomic perspective

Abstract

JEL Classification

E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles

E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity

E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production

E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital

Abstract

This paper analyses trends in sectoral specialisation in the EU and concludes the following: 1) The European production structure appears more homogenous than that of the US. 2) While sectoral specialisation has shown a slight increase in some smaller euro area countries towards the end-1990s, it is too early to detect any potential impact of EMU. 3) Despite some changes in sectoral composition, the business cycles of euro area countries became more synchronised over the 1990s, which may be seen as reassuring from the point of view of the single monetary policy. 4) Sectoral re-allocation accounts for as much as 50% of the increase in labour productivity growth in business sector services in the euro area. 5) The slowdown of European labour productivity growth relative to the US since the mid-1990s is explained by a stronger performance in the US wholesale and retail trade, financial intermediation and high-tech manufacturing sectors.

No. 18
30 July 2004
The international role of the euro: evidence from bonds issued by non-euro area residents

Abstract

Abstract

This paper analyses the main features of the market for euro-denominated bonds issued by non-euro area residents on the basis of a new database. It shows that large private corporations from mature economies have contributed significantly to the internationalisation of the euro since 1999, more than sovereigns in transition and emerging economies, whose part was initially expected to be stronger. It confirms that the euro

No. 17
26 July 2004
Corporate "excesses" and financial market dynamics

Abstract

Abstract

The recent corporate failures in the US and in Europe have considerably damaged investors

No. 16
22 June 2004
Market dynamics associated with credit ratings: a literature review

Abstract

JEL Classification

G10 : Financial Economics→General Financial Markets→General

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

G29 : Financial Economics→Financial Institutions and Services→Other

Abstract

This paper investigates the potential impact of the growing influence of the opinions of credit rating agencies (CRAs) on market dynamics. This impact can be seen as a consequence of the information content of the ratings themselves or indirectly as a consequence of the "hardwiring" of ratings into regulatory rules, management mandates, bond covenants, etc. Rating agencies who strive to provide credit assessments that remain broadly stable through the course of the business cycle have been themselves affected as the growing reliance on rating mean that they are increasingly expected to satisfy a widening range of constituencies with different and sometimes conflicting interests. They have responded to this challenge largely by adding more products to their traditional product palette but also through modifications in the rating process. It is however too early to say whether these changes mean a fundamental shift in their approach to credit risk measurement.

No. 15
25 May 2004
Quality adjustment of European price statistics and the role for hedonics

Abstract

JEL Classification

C10 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→General

C18 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Methodological Issues: General

C43 : Mathematical and Quantitative Methods→Econometric and Statistical Methods: Special Topics→Index Numbers and Aggregation

E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation

Abstract

In this paper we review the well-known problem of how to measure price developments when the quality of the underlying goods and services is changing over time. The importance of appropriate methods to take account of quality change is highlighted from the perspective of monetary policy. In particular, we highlight the need for credible and transparent price indicators. In this context, we review the hedonic approach to calculating quality-adjusted price indices and assess the available information on their effects as well as their potential for improving credibility and comparability. Current practices as regards quality adjustment in the European Union (EU) are also discussed, with particular emphasis on the Harmonised Index of Consumer Prices (HICP). Overall, we give a qualified endorsement of hedonics for specific product categories and make some suggestions about how the work on quality adjustment in the EU can be further developed, focusing in particular on the role of hedonics.

No. 14
5 May 2004
Measuring financial integration in the euro area

Abstract

JEL Classification

G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G15 : Financial Economics→General Financial Markets→International Financial Markets

G18 : Financial Economics→General Financial Markets→Government Policy and Regulation

Abstract

In this paper, we present a set of specific measures to quantify the state and evolution of financial integration in the euro area. Five key markets are considered, namely the money, corporate bond, government bond, credit and equity markets. Building upon the law of one price, we developed two types of indicators that can be broadly categorised as price-based and news-based measures. We complemented these measures by a number of quantity-based indicators, mainly related to the evolution of the home bias. Results indicate that the unsecured money market is fully integrated, while integration is reasonably high in the government and corporate bond market, as well as in the equity markets. The credit market is among the least integrated, especially in the short-term segment.

No. 13
29 April 2004
Fair value accounting and financial stability

Abstract

JEL Classification

G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading

G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages

G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation

M41 : Business Administration and Business Economics, Marketing, Accounting→Accounting and Auditing→Accounting

Abstract

Accounting standard setters are considering the wider use of fair value accounting. This paper focuses on the financial stability implications of a move in the banking sector from the current accounting framework to full fair value accounting. A simulation exercise is performed on how various external shocks affect the balance sheet of an average European bank under the two frameworks. The paper further investigates the impact of the alternative framework on the main balance sheet items, and the interaction with banks

No. 12
26 April 2004
Understanding the impact of the external dimension on the euro area: trade, capital flows and other international macroeconomic linkages

Abstract

JEL Classification

E : Macroeconomics and Monetary Economics

F : International Economics

Abstract

Overall, the paper underlines the difficulties in spelling out the transmission and the final effects of external shocks on the euro area, and highlights the complexity of the various direct and indirect mechanisms. We describe the main channels by which potential spillovers from external economic shocks may affect the euro area. Although the evidence is unclear on the extent to which the synchronisation of international cycles may have changed, the conclusion of the paper is that the

No. 11
29 February 2004
Official dollarisation/euroisation: motives, features and policy implications of current cases

Abstract

Abstract

Official and unilateral dollarisation/euroisation has become a common policy advice for emerging market economies. Against this background, the paper provides a comprehensive review of all the main cases of dollarisation/euroisation, analysing motives, features and policy implications of this exchange rate regime. The main results are that policies fostering integration with the anchor country, in particular fiscal transfers, tourism and offshore finance, have been crucial in supporting the exchange rate regime. To this end, most dollarised/euroised countries have exploited advantages that are largely prior to the choice of exchange rate regime, namely their small size, geographic proximity to the anchor country, and politically dependent status. Thus, recommending dollarisation/euroisation irrespective of countries’ ex ante degree of integration with the potential anchor country seems to bear considerable risks, as dollarisation/euroisation does not seem to be a straightforward substitute for integration.

No. 10
29 February 2004
The acceding countries’ strategies towards ERM II and the adoption of the euro: an analytical review

Abstract

Abstract

This paper reviews the strategies announced by the ten countries joining the European Union in May 2004 with regard to their intentions for participation in ERM II and the adoption of the euro. The paper examines the economic rationale of the monetary integration strategies declared by most acceding countries with a view to identifying also their potential risks. It does so by making use of several different approaches, including a short review of nominal convergence and a more extensive discussion from an optimum currency area perspective. An important part of the analysis is devoted to the implications of real convergence – i.e. catching-up growth in income and adjustment of the real economic structures towards those prevailing in the euro area – on the patterns of economic dynamics in acceding countries. Other aspects covered are the risks for external competitiveness in the convergence process and the appropriate pace of fiscal consolidation.

No. 9
13 February 2004
Fiscal adjustment between 1991 and 2002: stylised facts and policy implications

Abstract

JEL Classification

E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy

E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy

H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus

H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt

Abstract

This paper aims to assess whether the implementation of the European Union (EU) framework of fiscal rules has been successful in promoting budgetary consolidation in EU Member States. The paper focuses on the period 1991-2002. It reviews the patterns of budgetary adjustment adopted in the 1990s in the Member States by analysing the size and composition of budget measures, while also taking into account the initial state of public finances. Moreover, the paper looks at the behaviour of fiscal policy over the business cycle, examining the link between budgetary consolidation and the cyclicality of public finances. As a closely related issue, the paper points out conditions under which the negative effects of fiscal contractions on economic activity might possibly be minimised. It then looks at the experience of fiscal consolidation in the various countries and assesses whether countries have implemented adequate budgetary adjustments. Stylised facts show that Member States implemented major budgetary adjustments in the 1990s marking clear structural breaks in the policy regimes compared with the previous decade. However, most progress was made via revenue-based adjustment, including temporary measures, with insufficient emphasis put on primary expenditure restraint. In recent years,

Disclaimer: Please keep in mind that OPs are published in the name of the author(s). Their views do not necessarily reflect those of the ECB.