stefaan ide nbb, research department the views expressed in this paper are those of the authors and...
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Stefaan IDENBB, research department
The views expressed in this paper are those of the authors and do not necessarily reflect the views
of the National Bank of Belgium.
Rethymno, August 2003
EMU workshop: Prospects & Challenges
PP 3
Scope of asymmetries in the euro area
Part 1: descriptive analysis
→ core & periphery
Part 2: quantitative analysis (SVAR approach)
→ countries spread along a line
(today: emphasis on part 2)
PP 4
Part 1: The potential or likelihood for asymmetries w.r.t. the euro area by looking at a range of indicators
1. Growth 1.1 Labour supply
1.2 TFP
2. Policy 2.1 Monetary policy (real short-term interest rate)
2.2 Fiscal policy (structural primary balance)
3. Trade 3.1 Intra-area degree of openness versus
extra-area degree of openness
3.2 Intra-industry trade (Intra-EMU)
3.3 Product Composition of Exports
PP 5
Part 1: The potential or likelihood for asymmetries w.r.t. the euro area by looking at a range of indicators
Method: 1) differences with respect to the euro-area
2) 3 subperiods 1970-1980, 1981-1990, 1993-2000
1993-2000
"core" "periphery"
BE, DE, FR, IT, PT, FI
ES, AT EL, IR
→ problems of inconclusiveness, ranking, inconsistency,... (Tavlas (1994),
Mongelli (2002))
PP 6
Part 2: Quantitative approach
correlation measures of business cycles
(cycle-trend approach; # filters, cluster analysis, ...)
type and incidence of shocks
approach that concentrates on shocks and their
transmission, and the cyclical patterns that result
inspired by the Bayoumi & Eichengreen approach
PP 7
Our SVAR-approach
i) euro-area variables are included together with country
variables
clear definition of symmetric / common
(monetary policy for the euro-area as a whole)
ii) one VAR per country
iii) both growth and inflation asymmetries are analyzed
specificcountrydemand
specificcountrysupply
commondemand
commonsupply
44434241
34333231
24232221
14131211
i
.i
.
areaeuro
.
areaeuro
.
ε
ε
ε
ε
(L)a(L)a(L)a(L)a
(L)a(L)a(L)a(L)a
(L)a(L)a(L)a(L)a
(L)a(L)a(L)a(L)a
p
y
p
y
PP 8
Two forms of asymmetries
i) first form: importance of symmetric versus asymmetric shocks
ii) second form: difference in reaction to symmetric shocks
PP 9
Identification: two sets of long-run restrictions
1) symmetric (common) versus asymmetric (country-specific)
shocks
euro-area output and price levels are only affected by
symmetric shocks
2) demand versus supply shocks
Blanchard & Quah (1989)
0 1a(1)a1a1a 24231413
0 1a 1a1a 343212
PP 10
The data
NiGEM
1970-2000, quarterly basis
dummy for German reunification in German VAR
GDP ~ I(1)
some cointegration but same model accross countries
inflation ~ I(2) in most cases
PP 11
Adjusting (non-stationary) inflation
Gerlach & Svensson (2001): "The gradual decline of inflation
could be interpreted as a fall in the average (implicit) inflation
objective of the central banks"
→ use of flexible trend (logistic function)
PP 12
Adjusting inflation for a logistic trend: the euro area
-1
0
1
2
3
41
97
0
19
75
19
80
19
85
19
90
19
95
20
00
observed inflation trend-adjusted inflation trend (implicit inflation target)
→ limited sensitivity to the choice of end points
PP 13
Empirical results
Symmetric asymmetric versus demand supply
trade-off: clearness versus loss of information
Synthetic tool: "Cumulative historical effects"
= (shock x impulse response function)
to be able to distinct 3 subperiods: 1970-1980, 1981-1990,
1993-2000
PP 14
Historical impact of symmetric and asymmetric shocks on annual growth
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
Symmetric Asymmetric
-6
-4
-2
0
2
4
6
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
France
Finland
PP 15
Two forms of asymmetries
i) first form: importance of symmetric versus asymmetric shocks
ii) second form: difference in reaction to symmetric shocks
PP 16
Growth: first form of asymmetry
Table 2a - Criterion 1: impact of symmetric versus asymmetric shocks on annual growth (= first form of asymmetry)
(absolute impact of the symmetric or asymmetric shocks, percentages, average per sub-period)
Symmetric shocks Asymmetric shocks 1971-1980 1981-1990 1993-2000 1971-1980 1981-1990 1993-2000
BE 1.9 1.3 1.1 1.1 0.9 1.0 DE 1.9 1.0 0.9 0.9 1.0 0.5 FR 1.4 0.9 0.9 0.5 0.7 0.4 IT 1.4 1.1 1.2 1.8 0.9 0.7 ES 1.9 1.2 1.0 1.5 0.8 0.8 NL 1.7 1.0 0.8 1.0 1.2 1.0 PT 2.5 2.1 1.5 1.8 1.4 1.3 AT 1.7 0.9 0.9 1.3 1.1 0.8 IE 0.7 0.5 0.4 1.8 1.9 3.5 FI 0.7 0.6 0.5 2.5 1.4 2.0 GR 1.2 1.7 1.3 2.1 1.5 0.9 Euro area 1.6 1.0 0.9 0.0 0.0 0.0 Average: all countries 1.6 1.1 0.9 1.5 1.2 1.2 all countries
except FI and IE
1.3 1.0 0.8
PP 17
Growth: second form of asymmetry
Table 2b - Asymmetric impact of symmetric shocks on annual growth (= second form of asymmetry)
(absolute difference between the impact of the symmetric shocks on a country and the impact of the symmetric shocks on the euro area, percentages, average per sub-period)
1971-1980 1981-1990 1993-2000 BE 0.4 0.5 0.2 DE 0.4 0.3 0.3 FR 0.3 0.2 0.1 IT 0.4 0.3 0.3 ES 0.8 0.4 0.2 NL 0.4 0.5 0.4 PT 1.1 1.1 0.6 AT 0.4 0.2 0.2 IE 1.0 0.6 0.6 FI 1.0 0.6 0.6 GR 1.1 0.9 0.6 Average 0.7 0.5 0.4
PP 18
Inflation: first form of asymmetry
Table 3a - Criterion 1: impact of symmetric versus asymmetric shocks on annual inflation (= first form of asymmetry)
(absolute impact of the symmetric or asymmetric shocks, percentages, average per sub-period)
Symmetric shocks Asymmetric shocks 1971-1980 1981-1990 1993-2000 1971-1980 1981-1990 1993-2000
BE 1.3 1.3 0.6 1.4 1.0 0.4 DE 0.7 0.6 0.3 0.5 0.4 0.7 FR 1.2 1.2 0.6 0.5 0.5 0.3 IT 2.6 2.7 1.5 1.5 0.9 1.1 ES 1.2 0.9 0.5 2.8 1.3 1.0 NL 0.7 0.8 0.3 0.8 0.7 0.5 PT 2.4 2.2 1.1 3.0 3.0 1.4 AT 0.5 0.6 0.2 1.2 0.6 0.5 IE 1.0 1.0 0.5 2.6 2.0 2.3 FI 1.4 1.0 0.6 2.3 1.2 1.0 GR 1.8 2.8 1.1 2.0 1.9 1.7 Euro area 1.2 1.3 0.7 0.0 0.0 0.0 Average: all countries 1.3 1.4 0.7 1.7 1.2 1.0 all countries
except FI and IE
1.5 1.2 0.8
PP 19
Inflation: second form of asymmetry
Table 3b - Asymmetric impact of symmetric shocks on annual inflation (= second form of asymmetry)
(absolute difference between the impact of the symmetric shocks on a country and the impact of the symmetric shocks on the euro area, percentages, average per sub-period)
1971-1980 1981-1990 1993-2000 BE 0.5 0.5 0.3 DE 0.6 0.7 0.4 FR 0.3 0.2 0.1 IT 1.5 1.4 0.9 ES 0.8 0.5 0.3 NL 0.6 0.5 0.4 PT 1.5 1.0 0.7 AT 0.7 0.7 0.5 IE 1.0 0.5 0.5 FI 0.8 0.5 0.5 GR 1.3 1.5 0.7 Average 0.9 0.7 0.5
PP 20
Impact of asymmetric shocks on growth and inflation(1993-2000)
0
1
2
3
4
0 1 2 3 4
AT
FR
NL
DE
IT
GR
FI
IE
PT
ES
BE
Inflation
Growth
PP 21
Conclusion
Growth:
symmetric shocks were the main cause of fluctuations in a majority of countries
few differences with the euro area in the reaction to these symmetric shocks
asymmetric shocks were invariably the most important factor underlying the
asymmetries in growth patterns
Inflation:
asymmetric shocks were the main source of inflation fluctuations in most countries
1993-2000:
asymmetric shocks, although decreasing, are still not negligible: average impact of
1 percentage point on growth and inflation