Occasional papers published in 2005

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. 42
22 December 2005
The New Basel Capital Framework and its implementation in the European Union

Abstract

JEL Classification

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

Abstract

Following the adoption by the Basel Committee of new capital rules for banks, aprocess is now taking place in the EU to transpose the rules into Community law and, ultimately, into national legislation. This paper gives an overview of the main issues that relate to the EU implementation, mainly from theperspectives of financial stability and financial integration. Although the EU rules are to a large extent based on the texts of the Basel Committee, modifications have been introduced to account for the specific legal and institutional setting, as well as for some features of the European financial system. The paper gives an overview of these modifications and deals in greater detail with a number of selected topics: the monitoring of procyclicality, the role of the consolidating supervisor and the treatment of real estate lending and covered bonds. The paper concludes with an outlook for the future.

No. 41
19 December 2005
Trends and patterns in working time across euro area countries 1970-2004: causes and consequences

Abstract

JEL Classification

J3 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs

J22 : Labor and Demographic Economics→Demand and Supply of Labor→Time Allocation and Labor Supply

J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity

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

D02 : Microeconomics→General→Institutions: Design, Formation, and Operations

Abstract

This paper analyses trends in working time in the euro area, in comparison with the US, over the period 1970 to 2004 and examines the causes and consequences of the observed changes. Between 1970 and 2004, a downward trend in average annual hours worked per worker can be observed for the euro area as a whole, all individual euro area countries and the United States. In contrast to the US, the euro area and a number of euro area countries also experienced a significant decline in annual hours worked per capita ("labour utilisation") over the last three decades. Data reveal important disparities across countries - both in trends and levels. While some countries managed to reverse their downward trends in labour utilisation in the 1980s and 1990s, the level of average hours worked per capita in 2004 remained significantly below their 1970 levels for all euro area countries for which data are available. From a policy perspective, falling annual average hours worked per worker or per capita are not a problem per se, if they reflect preferences. For example, increasing shares of voluntary part-time employment across many euro area countries, whilst increasing European employment rates, have contributed to the downward trend in average annual hours per worker. However, to the extent that low working hours are due to institutional features which create disincentives to work, such as high tax wedges and high unemployment benefits, or enforced reductions in working hours, these factors should be addressed.

No. 40
2 December 2005
What does European institutional integration tell us about trade integration?

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

F15 : International Economics→Trade→Economic Integration

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics

Abstract

The start of the European Economic and Monetary Union (EMU) has spurred a new interest in the debate on the effects of monetary unions on regional economic integration. This literature either investigates past episodes of monetary unions or attempts to gauge any effect with a few years of EMU data. This paper takes instead a more general perspective: it investigates the link between economic integration and the overall institutional process of regional integration in Europe - of which monetary integration was only one step - over the last 50 years. We look mainly at two dimensions: European institutional integration - whose main steps were the customs union in 1968, the single market in 1993 and the single currency in 1999 - and intra-European trade. We pay special attention to the successive EU enlargements which took place in 1973, 1981, 1986, and 1995. Different facets of openness and trade linkages are presented. After looking at some descriptive links between institutional and trade integration, the paper uses some causality tests to assess the direction of causality and magnitude of impact. The evidence provided is consistent with the idea that the interaction between regional institutional and trade integration before monetary union matters. Such interaction runs in both directions, although the link from institutional to trade integration dominates. Many open questions remain, however.

No. 39
28 October 2005
Labour productivity in the Nordic EU countries: a comparative overview and explanatory factors 1980-2004

Abstract

Abstract

This paper analyses the differences in hourly labour productivity growth rates and levels between the Nordic EU countries (Denmark, Finland and Sweden) and four larger euro area countries (Germany, France, Italy and Spain). Additional information for the euro area as a

whole, the UK and the US is also provided. Given that the economic and social models developed in the Nordic EU countries are in many ways closer to those of the larger euro area countries than that of the US, the

experience of these countries is particularly interesting. Since the mid-1990s, the Nordic EU countries, particularly Sweden and Finland, have experienced stronger labour productivity growth than the larger euro countries. Like in the US, innovation and technological changes have played a major role

in explaining the higher labour productivity growth in the Nordic EU countries compared with the larger euro area economies. Information and Communication Technology

(ICT) diffusion is a key element to explain these differences. A number of institutional indicators, relating to market regulation, human capital, R&D nvestments and venture capital, show that the Nordic EU economies are better positioned than some of the larger euro area countries to exploit the opportunities provided by ICT in terms of productivity growth. However, remaining labour market rigidities may not allow the Nordic EU countries to fully enjoy the benefits of ICT diffusion in terms of increased employment.

No. 38
20 October 2005
Economic reactions to public finance consolidation: a survey of the literature

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

The paper reviews the theoretical and empirical literature that has investigated the conditions under which a contradictionary fiscal policy is effective in reducing debt and deficit, but does not have a negative effect on growth. The issue is central to macroeconomics and policy making, given that many countries are currently facing increasing fiscal imbalances, with additional pressure coming in the medium term from population ageing. The paper concludes that the theoretical impact of fiscal policy on aggregate demand and economic activity depends largely on the conceptual framework considered and its assumptions about the world. Empirical studies based on macro-econometric model simulations find evidence that fiscal consolidations lead initially to production losses, while they can result in a higher output in the medium term. Empirical studies focusing on episodes of changes in fiscal policies provide in turn evidence that under certain circumstances austerity measures may have an expansionary impact on the economy.

No. 37
4 October 2005
Financing conditions in the euro area

Abstract

JEL Classification

G20 : Financial Economics→Financial Institutions and Services→General

G30 : Financial Economics→Corporate Finance and Governance→General

E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General

Abstract

For central banks, the monitoring of financing conditions plays a pivotal role in assessing the actual transmission of monetary policy impulses to borrowers. This paper presents in detail some of the indicators and data used by the ECB to assess financing conditions in the euro area. It also shows how these indicators have been used to provide a broad assessment of developments in financing conditions in the euro area in recent years. The ECB's analysis of financing conditions is dynamic and seeks to reflect underlying changes in the euro area's financial structure.

No. 35
20 September 2005
The institutional framework for financial market policy in the USA seen from an EU perspective

Abstract

JEL Classification

F3 : International Economics→International Finance

H4 : Public Economics→Publicly Provided Goods

Abstract

The paper takes a closer look at the institutional set-up of financial markets in the United States of America and investigates whether the US can serve as a model for the EU. The overall conclusion is that the US institutional set-up as a whole does not seem to be a suitable benchmark for the EU as it is the outcome of specific historical, political and economic circumstances, which differ substantially from those in the EU. Nevertheless, there are features which could provide inspiration for further debate on the EU institutional framework, such as the prominent role of federal regulatory agencies (including the central bank and its role as "umbrella supervisor" over financial holding companies), the capacity of the Office of the Comptroller of the Currency (OCC) as a federal institution to remove barriers to cross-border activities, and the elements of choice for the supervised entities in the regulatory system, which allow for some regulatory competition.

No. 36
15 September 2005
Economic and monetary integration of New Member States - helping to chart the route

Abstract

JEL Classification

E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems

F13 : International Economics→Trade→Trade Policy, International Trade Organizations

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission

Abstract

This paper examines diverse aspects of the monetary integration of the ten new Member States (NMS) which joined the EU on 1 May 2004 into the euro area. Most NMS have undergone a rapid and deep transformation in

all areas with considerable progress in their processes of reform and convergence, and more is underway. While trade integration with the other 15 EU Member States (EU15) has progressed quickly, convergence in output specialisation to EU standards has been slow, especially if measured in real terms. This may influence negatively the pace of real convergence. Most NMS lag significantly behind in building up and deepening their financial systems. There is also evidence that exchange rate flexibility may still be serving as a useful shock absorber for some NMS, and so far the evidence indicates that real exchange rates have moved, broadly speaking, in line with long term fundamental equilibria. On the positive side, many NMS are quite advanced relative to the euro area in the process of labour market and institutional reform (their labour market structures are more flexible than those of the euro area countries). There is also some evidence that a few NMS have a significant degree of business-cycle synchronisation with the euro area: hence, they may become less likely to be affected by different economic shocks. This, however, is not true for all NMS. The monetary policy institutions of the NMS have also converged to some degree: goals and

institutional settings of central banks are now much more similar than before. A case-by-case approach to adopting the euro, based on country-specific conditions, seems natural due to the differences between the countries.

No. 34
26 August 2005
Hedge funds and their implications for financial stability

Abstract

JEL Classification

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

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

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

G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors

G24 : Financial Economics→Financial Institutions and Services→Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies

Abstract

The paper provides an overview of the hedge fund industry, mainly from a financial stability and European angle. It is primarily based on an extensive analysis of information from the TASS database. On the positive side of the financial stability assessment, hedge funds have a role as providers of diversification and liquidity, and they contribute to the integration and completeness of financial markets. Possible negative effects occur through their impact on financial markets (e.g. via crowded trades) and financial institutions (e.g. via prime brokerage). Several initiatives have been launched to address these concerns and most of them follow indirect regulation via banks. If any direct regulation were to be considered, it would probably have to be implemented in a coordinated manner at the international level. At the EU level there is currently no common regulatory regime, although some Member States have adopted national legislation.

No. 33
7 July 2005
Integration of securities market infrastructure in the euro area

Abstract

JEL Classification

L1 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance

Abstract

This paper investigates the state and process of integration of the European securities market infrastructure. The integration of financial infrastructures is one of the basic policy goals and key responsibilities of the Eurosystem. The paper finds that, despite the single currency, the euro area securities infrastructure remains highly fragmented and insufficiently integrated. There are still a high number of providers for trading, clearing and settlement, and they are not efficiently connected to one another. The paper also finds that the degree of consolidation varies among different integrated groups of market infrastructure. Economies of scale and scope and positive network externalities inherent in the securities services industry mean that substantial cost savings and increased efficiency can be expected from further integration. The most relevant factors underlying the less advanced areas of integration are likely to be not only persistent cross-border differences in tax regimes, procedures and laws, but also vested interests among users, owners and managers. Current work at the Eurosystem level can be expected to be helpful in promoting further integration.

No. 32
1 July 2005
Managing financial crises in emerging market economies - experience with the involvement of private sector creditors

Abstract

JEL Classification

F33 : International Economics→International Finance→International Monetary Arrangements and Institutions

F34 : International Economics→International Finance→International Lending and Debt Problems

Abstract

Financial crises in emerging market economies are often accompanied by difficulties of the sovereign to honour its contractual obligations. The official sector may reduce the likelihood of a disorderly outcome by extending financial assistance but there are limits to official sector involvement, not least because the potential volume of IMF lending is small compared to private capital flows and because a large "bail out" by the official sector would lead to moral hazard. For both these reasons - limited official funds and moral hazard - private sector creditors need to share some of the financial burden and thereby actively get involved in the management of financial crises in emerging market economies. The purpose of this report is to review the instruments that may promote such private creditor involvement as well as to provide a stock-taking of past experience and identify areas of possible improvement to the framework for crisis resolution.

No. 31
30 June 2005
Regional monetary integration in the member states of the Gulf Cooperation Council

Abstract

JEL Classification

E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit

E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy

Abstract

The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses.

No. 29
22 June 2005
Wealth and asset price effects on economic activity

Abstract

JEL Classification

D1 : Microeconomics→Household Behavior and Family Economics

D3 : Microeconomics→Distribution

D9 : Microeconomics→Intertemporal Choice

G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions

Abstract

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth effects in Europe and some other major economies. The main focus of this report is on consumption effects via the wealth channel, reflecting the bulk of literature on the effects of asset prices. However, asset price effects on investment via the Tobin

No. 30
9 June 2005
Competitiveness and the export performance of the euro area

Abstract

JEL Classification

E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles

Abstract

Chapter 1 provides an overview and assessment of the price competitiveness and export performance of the euro area and the larger euro area countries, as well as an evaluation of how standard equations have been able to explain actual export developments. Chapter 2 carries out a constant market share analysis for the euro area and thereby sheds light on the reasons for movements in aggregate export market shares by looking at the sectoral and geographical composition of euro area exports. Chapter 3 looks at the evolution of the technological competitiveness of the euro area and major competitors

No. 26
28 April 2005
Analysing banking sector conditions - How to use macro-prudential indicators

Abstract

JEL Classification

C82 : Mathematical and Quantitative Methods→Data Collection and Data Estimation Methodology, Computer Programs→Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, Data Access

E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy

E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies

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

Abstract

This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-

No. 28
11 April 2005
Regulatory reforms in selected EU network industries

Abstract

JEL Classification

E30 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→General

L33 : Industrial Organization→Nonprofit Organizations and Public Enterprise→Comparison of Public and Private Enterprises and Nonprofit Institutions, Privatization, Contracting Out

L51 : Industrial Organization→Regulation and Industrial Policy→Economics of Regulation

L93 : Industrial Organization→Industry Studies: Transportation and Utilities→Air Transportation

L94 : Industrial Organization→Industry Studies: Transportation and Utilities→Electric Utilities

L95 : Industrial Organization→Industry Studies: Transportation and Utilities→Gas Utilities, Pipelines, Water Utilities

L96 : Industrial Organization→Industry Studies: Transportation and Utilities→Telecommunications

Abstract

In the course of the 1990s, the EU has embarked on an ambitious regulatory reform programme for a number of European network industries, such as telecommunications, energy and transport. This paper analyses the potential benefits of successful reforms in these sectors with a focus on the price effects of regulatory reforms. Following a review of the existing empirical literature in this field, the paper discusses the evolution of the current regulatory framework for network industries in the EU. An empirical analysis of the main determinants of recent price developments in these industries provides evidence that regulatory reform measures had a substantial downward impact on prices in the four sectors under review.

No. 27
1 April 2005
The EU budget - how much scope for institutional reform?

Abstract

JEL Classification

D78 : Microeconomics→Analysis of Collective Decision-Making→Positive Analysis of Policy Formulation and Implementation

H77 : Public Economics→State and Local Government, Intergovernmental Relations→Intergovernmental Relations, Federalism, Secession

H87 : Public Economics→Miscellaneous Issues→International Fiscal Issues, International Public Goods

Abstract

This paper reviews current discussions on reforming the European Union (EU) budgetary procedure and assesses the main reform proposals that have been suggested thus far. It argues that prospects for reforms are presently hampered by the complex interplay between supranational and intergovernmental decision modes and the requirement of any budgetary procedure to strike a balance between efficiency and legitimacy. The paper reviews the main criticisms of the present budgetary procedure and the related reform proposals, which are assessed on the basis of relevant theoretical literature as well as brief comparisons with the federal budget of the United States. The paper argues that the current EU budgetary procedure maximises efficiency and legitimacy, given the present state of political integration in the EU. Significant modifications to the budgetary procedure would depart from that equilibrium.

No. 25
1 March 2005
Government debt management in the euro area - recent theoretical developments and changes in practices

Abstract

JEL Classification

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

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

Abstract

This paper reviews recent developments in the management of government debt in the euro area, covering both theoretical and practical aspects. It focuses on key aspects of debt management; the objectives of debt management, its organisation, the maturity of debt, inflation-indexation, currency-denomination, the ownership of debt, and debt issuing and trading practices. Main adjustments include an increase in autonomy of debt management agencies, and a convergence in debt maturities and in debt issuing strategies. Issuance of inflation-indexed bonds and the use of interest rate swaps have increased strongly. While the share of government debt denominated in non-domestic currencies is falling, foreign ownership of euro area government debt is increasing markedly. The observed changes in recent years in part reflect the introduction of the euro and the related integration of European capital markets.

No. 24
25 February 2005
Wage diversity in the euro area - an overview of labour cost differentials across industries

Abstract

JEL Classification

J31 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→Wage Level and Structure, Wage Differentials

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

J41 : Labor and Demographic Economics→Particular Labor Markets→Labor Contracts

Abstract

This paper provides an overview of the magnitude of sectoral wage differentials in the euro area as a whole. Even when adjusting for structural sectoral features such as the skill structure or the proportion of part-timers, average wage levels in services are substantially lower than in manufacturing. The paper also studies how the euro area wage structure compares with that of the United States and the United Kingdom. It discusses some possible determinants of intersectoral wage differentials in the euro area and their likely implications from a policy perspective. A number of worker characteristics (e.g. age, skills, the proportion of temporary or self-employed) are highly correlated with the structure of wage differentials. At the same time, wage differentials are also highly correlated with sector-specific features such as average firm size or capital intensity. Finally, the paper presents some stylised facts on how the euro area wage structure has evolved since the early 1980s.

No. 23
11 February 2005
The bank lending survey for the euro area

Abstract

JEL Classification

E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects

E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers

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

Abstract

This occasional paper explains why the bank lending survey was developed by the ECB and describes its main features. It discusses the importance of credit developments for both the economy and the functioning of monetary policy, and further clarifies why the survey was introduced. Furthermore, the paper demonstrates that the value added of implementing a bank lending survey for the euro area lies in particular in the way it provides greater insight into developments in credit standards, non-interest rate credit conditions and terms, the risk perception of banks and the willingness of banks to lend. Credit standards are the internal guidelines or criteria of a bank which reflect the bank

No. 22
28 January 2005
Assessing potential output growth in the euro area - a growth accounting perspective, January 2005

Abstract

JEL Classification

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

O47 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Abstract

For monetary policy purposes it is useful to apply a concept of potential output growth that looks through the fluctuations inherent in most model based estimates. Growth accounting can be a useful tool in this respect, given its focus on average developments in real GDP growth and supply side factors over medium to longer-term horizons. This paper describes the assumptions and measurement issues underlying the growth accounting framework and applies it to euro area data for the period 1980 to 2003. It shows that growth in measured total factor productivity has been the single most important contributor to real GDP growth over this period. However, the contribution to growth from this factor declined between the 1980s and the 1990s, while that from labour increased. Looking forward, the projected demographic developments imply a reduction in average real GDP growth in the coming decades unless compensation is achieved from other supply-side factors.

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.