Leonor Modesto

HERMIN: A macroeconometric modelling framework for the EU periphery

Abstract The need to analyse the effects of EU regional policy required the construction of new models with an orientation towards the problems being experienced in the periphery. We explain the justification for, and nature of, the new modelling framework, giving a brief overview of the economies of the four objective 1 countries, focusing on issues that are particularly relevant to the targets of regional policy. We explore the implications of the stylized facts for model design in the periphery. Finally, we summarize the main common features of the HERMIN modelling approach, and illustrate where key choices need to be made in the light of national specificities.

The macroeconomic effects of the CSF 1994–1999 in the EU periphery: An analysis based on the HERMIN model☆

Abstract This paper tries to assess the macroeconomic effects of the Community Support Framework (CSF) for the period 1994–1999 in the peripheral countries of the European Union (Ireland, Portugal and Spain) using the HERMIN model. To that end, after providing an overview of the CSF in each country and analysing their main programmes, we offer a detailed description of the macroeconomic methodology used to explore the quantification of the effects of those CSF programmes. Three main programmes are considered: physical infrastructure, human resources and aids to production and investment. The contribution to growth by these programmes, both separately and jointly, is analysed and compared with a stylized projection of the peripheral economies used as a baseline. In order to treat supply shocks, the HERMIN model of the peripheral economies of the EU is correspondingly adapted in a first attempt to use a macroeconometric model for the analysis of those effects.

Portuguese banking sector: a mixed oligopoly?

Abstract In this paper we investigate whether we can find evidence of a regulatory intervention in the Portuguese banking sector. We develop and estimate using panel data a simple oligopoly model where one public bank competes in prices with several private banks. We assume that private banks maximize profits and that the public bank is instructed to maximize an objective function that depends on the profits of the public bank and on the public banks revenues from deposits and loans, evaluated at their respective opportunity costs. Empirically we find evidence supporting the existence of a regulatory intervention in the loans market, which aimed at reducing the equilibrium interest rates paid on loans. However in the deposits markets our empirical results do not support the hypothesis of the existence of internal regulatory devices.

Similarity and diversity in the EU periphery : A HERMIN-based investigation

Abstract We review the experience gained in the econometric estimation and simulation of the three HERMIN national models. The simple econometric approach we used shows interesting features that may indicate broad patterns of national behaviour rather than specific results in terms of sophisticated hypothesis testing. The responses of the models to a range of policy and other shocks are compared and contrasted, and have implications for the state and process of peripheral development.

An Analysis of Labour Adjustment Costs in Unionized Economies

In this paper we conduct a theoretical analysis of the implications of a union which can exploit the existence of firm labour adjustment costs. We consider a model involving a large number of identical firms facing a single, economy-wide union. We solve (i) for the Markov perfect equilibria with no commitment, under the assumption that the union chooses wages each period and firms react by choosing employment, and (ii) for the commitment equilibria where the union can precommit to the entire (infinite) sequence of wages. We conclude that the speed of adjustment of employment, that is higher in the no-commitment case, decreases with adjustment costs in both models. Moreover adjustment costs affect the long run values of employment and wages only in the no-commitment case, i.e., the higher the relevance of adjustment costs the higher the wage and therefore the smaller the level of employment in the long run. Commitment on the part of the union leads to lower wages, and moreover is beneficial to firms as well as to the union. Given that the union would like to commit to a lower path of wages we consider whether reputation building is desirable.

Unions, Firing Costs, and Unemployment

In this paper we conduct an analysis of the effects of firing costs in models that consider simultaneously worker heterogeneity, imperfect information on their productivity and union power. We consider an OLG model where heterogeneous workers participate in the labour market both when young and old. Each generation of workers is represented by its own union. Unions set wages unilaterally taking into account firm behavior. Firms are atomistic and choose employment treating wages parametrically. There is imperfect information about worker productivity. We find that at given wages firing costs increase youth unemployment and decrease old age unemployment. However, once we take the wage response into account, we find that firing costs increase both youth and old age unemployment. This happens because unions react strategically, and respond to higher firing costs. Indeed, when firing costs increase, firms refrain from hiring youths since, if a young worker turns out to be inadequate, it will be more costly to fire him. The union, knowing this, reduces the wage of young workers in order to attempt to increase their employment prospects. However, despite this cut youth unemployment still increases with firing costs. In the second period, on the contrary, higher firing costs give the union more power. In fact, knowing that firms will be less likely to cut their labour force when firing costs are high, the union increases the wage of old workers, and, therefore, old age unemployment increases.

Energy taxation in Southern Europe: The case of Portugal

We investigate whether or not the imposition of a common EC energy-tax will penalize more the poorer Southern European economies and if this will harm convergence at the EC level. We start by surveying briefly the existing studies and empirical evidence. Then we exploit the results obtained when using the macroeconometric HERMES models to simulate the introduction of an energy-tax. Unfortunately, as we only have HERMES results for one Southern European economy, Portugal, our conclusions are limited. Finally, we investigate convergence in Europe and the effects of energy taxation on convergence. We conclude that energy taxation will harm growth all over the EC, penalizing more one of the less developed countries, Portugal, and having most probably adverse effects on convergence.

Some Aspects of the Portuguese Labour Market, 1977-1988: Neutrality, Hysteresis and the Wage Gap

The purpose of this paper is to analyze, in a simple way, the economic functioning of the portuguese labour market. Being the result of several decades of “corporatist” interference and of the changes resulting from the revolution of 74 and the entry into the EEC, the portuguese labour market deserves a rigorous and profound study. This work pretends to be just a first approximation to such an investigation.

Can Consumption Taxes Stabilize the Economy in the Presence of Consumption Externalities

We discuss the stabilization role of consumption taxes under a balanced-budget rule in the presence of consumption externalities of the “keeping up with the Joneses” type. We consider a finance constrained economy and depart from a situation where sufficiently strong externalities make the steady state indeterminate, if government intervention is absent. Sufficiently procyclical consumption tax rates are able to ensure local saddle path stability. However, this procyclicality leads to the appearance of another steady state with lower levels of output which is a source or indeterminate. Therefore, government intervention with stabilization purposes may not be successful.

Endogenous Credit and Investment Cycles with Asset Price Volatility

It is commonly accepted that credit market frictions are an important source of macroeconomic fluctuations. But what is the link between the two? And what is the driving factor of asset prices volatility? To answer these questions, we have introduced a specific credit friction, limited commitment, in a general equilibrium model with production and investment in productive capital, where agents can trade bonds. The model always displays a stationary equilibrium where bonds are traded. More importantly, limited commitment may generate stochastic endogenous fluctuations driven by self-fulfilling volatile expectations (sunspots), yielding credit and investment cycles and bond price volatility consistent with data.