Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Karsten Staehr. The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries

1,078 views

Published on

Eesti Pank, open seminar. 29. January 2013

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Karsten Staehr. The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries

  1. 1. Eesti Pank, avatud seminar 29. jaanuar 2013 The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries KARSTEN STAEHR Tallinn University of Technology, Estonia Eesti Pank, Estonia Joint with Hubert Gabrisch, IWH All viewpoints personal!/12EPP-show9_EP.doc
  2. 2. Menu1. The issue2. The Euro Plus Pact3. Briefly on the literature4. Data5. Granger causality tests6. VAR models7. Final commentsQuestions welcome “along the way” ... and afterwards!State of paper Working Papers of Eesti Pank, no. 5/2012 IOS Working Paper, no. 324, Regensburg Presentation at ECB CompNet conference, Frankfurt, 10-11 Dec. 2012 Journal submission – varsti!/12EPP-show9_EP.doc 2
  3. 3. 1. The issueEconomic and financial crisis in Europe Countries affected differently Financial problems (private, government) Perceived need for new macroeconomic governance structuresRemodelling economic governance in the EU Euro 2020 European semester Six pack Fiscal Compact Euro Plus Pact competitiveness …/12EPP-show9_EP.doc 3
  4. 4. Main “idea” of the Euro Plus PactCrisis countries are crisis countries because of weak competitiveness! The (relative) unit labour costs of GIP(S) countries Greece, Ireland, Portugal and Spain have increased: this is the fundamental cause of their problems as export performance must have been bad, pushing them into current account deficits. Gros (2011, p. 1):Competitiveness ↓ (e.g. Unit Labour Cost = ULC ↑) ⇒“Deterioration” of Current Account balance, CA ↓Financial vulnerability ↑ ⇒Crisis if financial shock[Empirical proof a la Commission ]/12EPP-show9_EP.doc 4
  5. 5. Figure: Unit Labour Costs relative to euro area average, 1998 = 100Note: ULC is computed as the ratio between compensation per employee and real GDP per employed personSource: European Commission/12EPP-show9_EP.doc 5
  6. 6. This paper Is the implied / assumed direction of causality of the Euro Plus Pact correct? ▫ Time-based identification of direction of causality… ☺ Linkage(s) between capital flows and competitiveness important in itself ▫ Estonia before global financial crisis – and after …/12EPP-show9_EP.doc 6
  7. 7. 2. The Euro Plus PactOriginal name Pact of competitiveness German / Commission suggestion in late 2010 not enough to impose constraints on fiscal policy – competitiveness to ensure financial stabilityNext name Pact for the euro German-French compromiseFinal name Euro Plus PactGoals Competitiveness Employment Public finances Financial stability (Tax policy coordination)Implementation and “enforcement” “Open Method of Coordination”/12EPP-show9_EP.doc 7
  8. 8. Adopted 25 March 2011 = Euro Plus Pact participants members of the EA = Euro Plus Pact participants not members of the EA = EU members not participating in Euro Plus Pact/12EPP-show9_EP.doc 8
  9. 9. “Open Method of Coordination” case of Ireland/12EPP-show9_EP.doc 9
  10. 10. Main focusCompetitiveness measured using developments in Unit Labour Cost = ULCPolicies in Euro Plus Pact to improve competitiveness▫ Abolish wage indexation▫ Reform wage bargaining▫ Public wages ↓▫ Deregulate industries▫ Infrastructure ↑▫ Education ↑Here Does improved competitiveness reduce financial imbalances? ▫ Does relative ULC ↓ ⇒ current account ↑?/12EPP-show9_EP.doc 10
  11. 11. 3. Briefly on the literatureDiscussion of Euro Plus PactMostly from spring and summer 2011Gros & Alcidi, Gros (Eurointelligence), Schiliro, Wyplosz How to measure competitiveness? ▫ Why not start ULC index series in 1992? ▫ ULC ↑ if more attractive product Adjustment by deficit countries vs. adjustment by surplus countries Urgent crisis, but slow-working instruments/12EPP-show9_EP.doc 11
  12. 12. Linkages between capital flows and competitivenessCompetitiveness ↓ ⇒ current account balance ↓Theory trade sensitivitiesReal exchange rate appreciation / ULC ↑ / competitiveness ↓ ⇒ NX ↓ ⇒ currentaccount ↓ Marshall-Lerner j-curveEmpirics [ many studies of Marshall-Lerner condition]Belke, Ansgar & Christian Dreger (2011): “Current account imbalances in the euroarea: catching up or competitiveness”, DIW Discussion Papers, no. 1106, DeutschesInstitut for Wirtschaftsforschung.Jaumotte & Sodsriwiboon (2010): “Current account imbalances in the Southern EuroArea”, IMF Working Paper No. 10/139/12EPP-show9_EP.doc 12
  13. 13. CA ↓ (capital inflow) ⇒ Competitiveness ↓Theory the transfer effect Capital inflow ⇒ demand for non-traded products ↑ ⇒ wages etc. ↑ ⇒ unit labour costs ↑ / real exchange rate appreciation [ “demand story”] ▫ The transfer paradox post-WWI reparation recipients ▫ Dutch disease foreign exchange earnings ↑ ⇒ real exchange rate appreciationEmpirics [ many papers, in particular for emerging markets] Calvo, Guillermo A., Leonardo Leiderman & Carmen M. Reinhart (1993): “Capital inflows and real exchange rate appreciation in Latin America”, IMF Staff Papers, vol. 40, no. 1, pp. 108-151. Bakardzhieva et al. (2010): “The impact of capital and foreign exchange flows on the competitiveness of developing countries”, IMF WP/10/154/12EPP-show9_EP.doc 13
  14. 14. Conclusion from literatureTheory both directions possibleGaps in literature Few / no papers examines underlying logic of Euro Plus Pact Few / no papers examining current account balance and competitiveness in the EU Few (one?) papers examining causality in both directionsNB: No explicit theory is tested “descriptive statistics”/12EPP-show9_EP.doc 14
  15. 15. 4. DataPanel 27 EU countries Annual data 1995-2011Notation RULC = Relative Unit Labour Costs (in euro, relative to EA12 average) ▫ RULC ↑ ⇒ competitiveness ↓ GRULC = Growth in Relative change in Unit Labour Cost, % ▫ GRULC > 0 ⇒ competitiveness ↓ CA = Current Account balance, % of GDP ▫ CA < 0 negative current account balance capital inflow DCA = Difference in Current Account balance, %-points of GDP ▫ DCA < 0 “deterioration” of current account balance capital inflow ↑/12EPP-show9_EP.doc 15
  16. 16. “Preparations” GRULC, DCA panel stationary in sample 1997-2011 ☺ CA borderline case [ use DCA in baseline regressions] GRULC and other measures of price competitiveness closely correlated robustness checks easy ☺/12EPP-show9_EP.doc 16
  17. 17. Figure: Changes in competitiveness and changes in capital inflows (EU27) 10.0 7.5 5.0 2.5 DCA 0.0 -2.5 -5.0 -7.5 -10.0 -20 -15 -10 -5 0 5 10 15 20 GRULC/12EPP-show9_EP.doc 17
  18. 18. 5. Granger causality testsWhich direction of causality? Granger causalityQuestions Does DCA Granger-cause GRULC? does lagged DCA help explain GRULC? Does GRULC Granger-cause DCA? does lagged GRULC help explain DCA?Estimations (1 year lag) DCA = α0 + α1DCA(-1) + α2GRULC(-1) + εCA GRULC = β0 + β1GRULC(-1) + β2DCA(-1) + εGRULC GRULC ⇒ DCA if H0: α2 = 0 cannot be rejected / DCA ⇒ GRULC if H0: β2 = 0 cannot be rejected //12EPP-show9_EP.doc 18
  19. 19. Panel estimations Few observations along time dimension “Average effect” across EU countries ☺NB1: Few observations along time dimension 1 and 2 year lagsNB2: Most often country fixed effectsClustered standard errors in ( )-brackets, p-values in [ ]-brackets/12EPP-show9_EP.doc 19
  20. 20. “Wrong sign”/12EPP-show9_EP.doc 20
  21. 21. /12EPP-show9_EP.doc 21
  22. 22. Summary of results of Granger causality tests No effect from GRULC(-1) to DCA Effect from DCA(-1) to GRULC ▫ Sign “correct” DCA ↓ ⇒ GRULC ↑ ▫ Magnitude reasonable (-0.4 to -0.6) Robustness similar but slightly less “clear” results with CA/12EPP-show9_EP.doc 22
  23. 23. 6. VAR modelsAdvantages Model dynamic linkages between endogenous variables Allow contemporaneous effectsPanel Vector AutoRegressive models GRULC, DCA ~ I(0)Results Estimates from GRULC to DCA (violet) small and statistically insignificant Estimates from DCA to GRULC (orange) larger (in numerical terms) and statistically significantCountry fixed effects/12EPP-show9_EP.doc 23
  24. 24. NB: Estimates like (2.4)-(3.4), (2.5)-(3.5) and (2.6)-(3.6), but standard errors notclustered/12EPP-show9_EP.doc 24
  25. 25. Impulse responses…Problem identification!a) No contemporaneous effects (over-identification)b) Contemporaneous effect from DCA to GRULC, but not the other way (Cholesky orthogonalisation)c) Contemporaneous effect from GRULC to DCA, but not the other way (Cholesky orthogonalisation)Impulse responses with +/– 2 S.E. confidence interval/12EPP-show9_EP.doc 25
  26. 26. Figure 2: a) Over-identification no contemporaneous effects Response of DCA to DCA Response of DCA to GRULC 4 4 3 3 2 2 1 1 0 0 -1 -1 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Sign! Response of GRULC to DCA Response of GRULC to GRULC 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 (a) Non-factorised innovations/12EPP-show9_EP.doc 26
  27. 27. Figure 3: b) Contemporaneous effect from GRULC to DCA, but not the other way Response of DCA to GRULC Response of GRULC to DCA 3 5 4 2 3 2 1 1 0 0 -1 -1 -2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 (b) Cholesky decomposition, only contemporaneous effects from GRULC to DCA If negative effect (“correct sign”), then small and short-lived/12EPP-show9_EP.doc 27
  28. 28. Figure 3: c) Contemporaneous effect from DCA to GRULC, but not the other way Response of DCA to GRULC Response of GRULC to DCA 3 5 4 2 3 2 1 1 0 0 -1 -1 -2 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 (c) Cholesky decomposition, only contemporaneous effects from DCA to GRULC/12EPP-show9_EP.doc 28
  29. 29. Results Competitiveness ↑ ⇒ capital inflow / current account 0 ▫ At short-term “positive” effect, possible counter-intuitive effect in longer term Capital inflow ↑ ⇒ competitiveness 2-3 year ↓ ☺Robustness Without country fixed effects EA12, CEE Sample shortening (not so strong for EA12…) CA level (but results of CA ↑ on GRULC less clear…)/12EPP-show9_EP.doc 29
  30. 30. 7. Final commentsSummary No / few signs of effect from competitiveness to current account balance Effect from current account balance to competitiveness ▫ Increased capital inflow ⇒ real exchange rate appreciation in the short term ▫ Relative wages / competitiveness “very endogenous” variable dependent on credit availability…Lessons Euro Plus Pact the cart in front of the horse? Understand pattern in Estonia before crisis – and after crisis… Important to understand causes and effects of capital flows – current account balance matters also in a currency union!Policy discussion Possible to address “excessive” capital flows? ▫ Macro-prudential regulation ▫ Inflows and/or outflows. When excessive? Which policies?/12EPP-show9_EP.doc 30

×