Ansgar Belke

Energy Consumption and Economic Growth - New Insights into the Cointegration Relationship

This paper examines the long-run relationship between energy consumption and real GDP, including energy prices, for 25 OECD countries from 1981 to 2007. The distinction between common factors and idiosyncratic components using principal component analysis allows to distinguish between developments on an international and a national level as drivers of the long-run relationship. Indeed, cointegration between the common components of the underlying variables indicates that international developments dominate the long-run relationship between energy consumption and real GDP. Furthermore, the results suggest that energy consumption is price-inelastic. Causality tests indicate the presence of a bi-directional causal relationship between energy consumption and economic growth.

How the ECB and the US Fed Set Interest Rates

Monetary policies of the European Central Bank (ECB) and US Fed can be characterized by ‘Taylor rules’, that is both central banks seem to be setting rates by taking into account the ‘output gap’ and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro–dollar exchange rate, thereby improving the ‘fit’ between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECBs short-term interest rates have been at a much lower level in the last 2 years compared with what a Taylor rule would suggest.

Current account imbalances and structural adjustment in the Euro area : how to rebalance competitiveness

Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe.

Current Account Imbalances in the Euro Area: Does Catching Up Explain the Development?

In the debate on global imbalances, the euro area countries received increasing attention since the outbreak of the financial crisis. While the current account is on balance for the entire area, divergences between individual member states have increased since the introduction of the common currency and are part of the excessive imbalances procedure. This paper explores the determinants of the imbalances by using panel-econometric techniques. The analysis shows that a lack in competitiveness is the main explanation for the external deficits of the countries that are at the heart of the euro area debt crisis. As a deterioration of competitiveness is not feasible for the surplus countries, an asymmetric response is required to reduce the imbalances.

Enlarging the EMU to the East: What Effects on Trade?

The purpose of this paper is to assess the implications of the Economic and Monetary Union (EMU) accession of eight Central and Eastern European Countries (CEECs) on their share in EMU-12 imports. Overcoming biases related to endogeneity, omitted variables and sample selection, our results indicate that the common currency has boosted intra-EMU imports by 7%. Under the assumption that the same relationship between the explanatory variables and imports will hold for EMU-CEEC trade, we are able to predict the future impact of the euro. Our findings suggest that except for the least integrated countries, Poland, Latvia and Lithuania, all CEECs can expect increases in the EMU-12 import share.

Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?

Abstract In a baseline micro model a band of inaction due to hiring and firing costs is widened by option value effects of exchange rate uncertainty. Based on this micro foundation, an aggregation approach is presented. Under uncertainty, intervals of weak response to exchange rate reversals (called ‘play’ areas) are introduced on the macro level. ‘Spurts’ in new employment or firing may occur after an initially weak response. Since these mechanisms may apply to other ‘investment’ cases where the aggregation of microeconomic real options effects under uncertainty are relevant, they may even be of a more general interest.

Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?

Intra-European exchange rate variability has significant economic costs. VAR causality tests show that higher short-run variability of exchange rates against other EU currencies was associated with higher unemployment, less employment, and lower investment for most EU member countries. Robustness tests show that this result holds up in the presence of both policy instruments that might have had an impact on exchange rate variability and cyclical variables that might have influenced labor demand. A model that incorporates the “option value of waiting” suggests that even short-term spikes in volatility exert a strong impact on investment and labor markets.

Current account imbalances in the euro area: Catching up or competitiveness?

In the debate on global imbalances, the euro area countries did not receive much attention so far. While the current account is on balance for the entire area, divergences between individual member states have increased since the introduction of the common currency. In this paper, the imbalances are traced to catching up and competitiveness factors using paneleconometric techniques. In line with the intertemporal approach to the current account, low income countries tend to run deficits, while rich countries realize surpluses. However, the effect diminishes, if early years are dropped from the sample. The competitiveness channel is more robust and shows the expected sign, i.e. a real appreciation leads to external deficits. To restore competitiveness, a reduction of unit labour costs is on the agenda. Since a deterioration of competitiveness is not a feasible strategy for the surplus countries, an asymmetric response across countries is required in order to reduce the imbalances.

Global Liquidity and Commodity Prices: A Cointegrated VAR Approach for OECD Countries

This paper examines the interactions between money, consumer prices and commodity prices at a global level from 1970 to 2008. Using aggregated data for major OECD countries and a cointegrating VAR framework, we are able to establish long run and short run relationships among these variables while the process is mainly driven by global liquidity. According to our empirical findings, different price elasticities in commodity and consumer goods markets can explain the recently observed overshooting of commodity over consumer prices. Although the sample period is rather long, recursive tests corroborate that our CVAR fits the data very well.

Monetary integration in the Southern Cone

Abstract The effect of exchange-rate volatility on the domestic economy depends in part on the importance of trade in total economic activity. Unlike the European Union (EU), trade among the Mercosur countries is less highly integrated, so that movements in intra-area exchange rates are less important than exchange rates vis-a-vis the dollar and the euro. This paper analyzes the impact of exchange-rate and interest-rate volatility on investment and labor markets in the Southern Cone and finds that both volatility against the dollar and the euro and variability of interest rates have significant dampening effects on employment and investment.