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Exit Expectations and Debt Crises in Currency Unions

Alexander Kriwoluzky, G. J. Müller, M. Wolf
IWH Discussion Papers, No. 18, 2015
Abstract
Membership in a currency union is not irreversible. Exit expectations may emerge during sovereign debt crises, because exit allows countries to reduce their liabilities through a currency redenomination. As market participants anticipate this possibility, sovereign debt crises intensify. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside currency unions and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009 to 2012.
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EFN Report Autumn 2015: Economic Outlook for the Euro Area in 2015 and 2016

European Forecasting Network Reports, No. 4, 2015
Abstract
For the end of this year and for 2016, chances are good that production in advanced economies will continue to expand a bit faster than at trend rates, while growth dynamics in emerging markets economies will not strengthen or even continue to decrease. Since autumn 2014, production in the euro area expands at an annualized rate of about 1.5%. The recovery appears to be broad based, with contributions from private consumption, exports, and investment into fixed capital, although it fell back in the second quarter after a strong increase at the beginning of the year. From a regional perspective, the recovery is as well quite broad based: production is expanding in almost every country, surprisingly and according to official data, including Greece. Structural impediments still limit the ability of the euro area economy to grow strongly: firms and, in particular, private households are only slowly reducing their heavy debt burdens. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 1.9% in 2016. The high increase in the number of refugees in 2015 will, in principle, positively affect private as well as public consumption, but the effect should be below 0.1 percentage points relative to GDP. Our inflation forecast for 2015 is 0.1%. For 2016, we expect that inflation will increase to 1.3%, which is still below the ECB’s target of 2%.
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EFN Report Summer 2015: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 3, 2015
Abstract
External conditions for the euro area economy are still favourable, albeit somewhat less so than at the beginning of the year. Oil prices are by more than a third lower than they were on average in 2014, but about 10 USD higher than in January. Long term interest rates are still very low, but by half a percentage point higher than in January. Worldwide growth in production and trade has disappointed in the first quarter of 2015, and recent leading indicators point to no more than a slightly faster expansion of world production for the rest of the year. The risks of contagion from the Greek crisis to the partner countries appear limited, because financial exposure to the Greek banking sector has been very much reduced. The EU nowadays has instruments with considerable power to fight losses of confidence, and the other countries that received financial assistance in the euro crisis appear politically much more stable, and their economies (including that of Cyprus in the first quarter of this year) have started growing at quite satisfactory rates. According to our forecasts, the euro area GDP will grow by 1.6% in 2015 and by 2.1% in 2016, as negative factors slowly become less important. Both private consumption and investment will expand at a good pace, and the unemployment rate will diminish, but still remain above 10% by the end of 2016. The main risk is that the Greek crisis has a more negative effect on confidence than initially expected. Our inflation forecast for 2015 is 0.2%, with the possibility of a mild deflation not excluded. During the first quarter of 2015 rising oil prices were the main contributors to the ascending inflation expectations, while during the second quarter upward surprises over expected inflation have come from manufactured goods and services. For 2016, we expect that inflation will increase up to 1.2%, still below the 2% ECB’s target.
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EFN Report Winter 2014/15: Economic Outlook for the Euro Area in 2015 and 2016

EFN Reports, No. 1, 2015
Abstract
At the beginning of the year 2015 crude oil is, with little more than 50 dollars per barrel (Brent), about 50% cheaper than in the summer 2014. The oil price hike is a stimulus for the whole world economy, even though the gains of energy users are matched by losses of the suppliers: oil producing countries frequently run high current account surpluses vis-à-vis the rest of the world. It is therefore plausible to assume that, reacting to the redistribution of incomes, the oil user countries will increase their spending by more than what will be lost in spending by producers. Investment activity in the euro area has recently been particularly weak. Remarkably, investment in Greece, Portugal, and Spain, i.e. in countries that had to accept international support during the euro crisis, has strengthened. The setback took place in the so-called core countries, including Germany. Consumption growth was also subdued. Lower oil prices, by increasing real incomes of consumers and lowering production costs for firms, should increase private consumption and, in particular, investment. Moreover, the depreciation of the euro will favour exports. Overall, according to our forecasts, the euro area GDP will grow by 1.3% in 2015 and by 1.6% in 2016. GDP growth is about 0.3 percentage points higher due to the impact of lower oil prices in 2015. However, these forecasts are subject to substantial uncertainty, and we do not see any significant reduction of the unemployment rate during the forecasting horizon. Our inflation forecast for 2015 is 0.3%, with the possibility of a mild deflation not excluded. In 2016 inflation will increase up to 1.1%, still clearly below the 2% ECB’s target. This calls for further monetary expansion, though its effects could be limited in the absence of a complementary fiscal stimulus. The expansionary cyclical policies should be combined with more structural reforms to enhance the competitiveness of the euro area and its growth potential, which in our forecasts remains quite limited. In fact, we expect potential output to grow by only 0.4% both in 2015 and 2016.
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Do Better Pre-migration Skills Accelerate Immigrants' Wage Assimilation?

Boris Hirsch, Elke J. Jahn, Ott Toomet, Daniela Hochfellner
Labour Economics, 2014
Abstract
This paper analyzes wage assimilation of ethnic German immigrants to Germany using unique administrative data that include an administrative estimate of immigrants' expected wage in Germany at the time of migration. We find that a 10% higher wage potential translates into a 1.6% higher wage in Germany when also controlling for educational attainment, thus pointing at partial transferability of pre-migration skills to the host country's labor market. We also document that wage assimilation is significantly accelerated for immigrants with higher wage potentials. Our results are both in line with complementarities between pre-migration skills and host country-specific human capital and a U-shaped pattern of immigrants' job mobility with initial downgrading and subsequent upgrading.
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College Choice Allocation Mechanisms: Structural Estimates and Counterfactuals

J.-R. Carvalho, T. Magnac, Qizhou Xiong
IZA Discussion Paper, Heft 8550, No. 8550, 2014
published in: Quantitative Economics
Abstract
We evaluate a simple allocation mechanism of students to majors at college entry that was commonly used in universities in Brazil in the 1990s and 2000s. Students first chose a single major and then took exams that select them in or out of the chosen major. The literature analyzing student placement, points out that this decentralized mechanism is not stable and is not strategy-proof. This means that some pairs of major & students can be made better off and that students tend to disguise their preferences using such a mechanism. We build up a model of performance and school choices in which expectations are carefully specified and we estimate it using cross-section data reporting choices between two medical schools and grade performances at the entry exams. Given those estimates, we evaluate changes in selection and students’ expected utilities when other mechanisms are implemented. Results highlight the importance of strategic motives and redistributive effects of changes of the allocation mechanisms.
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EFN Report Summer 2014: Economic Outlook for the Euro Area in 2014 and 2015

, 2014
Abstract
World growth disappointed at the beginning of the year, when in the US extremely cold weather caused production to contract, the recovery in the euro area stumbled and the slowdown of the Chinese economy continued. At present, however, confidence indicators and order books point to a moderate pickup of growth in most regions. Prices on markets for energy, real and financial assets have reacted little to recent bad news about rising geopolitical risks in the Middle East and Eastern Europe up to now. A sudden increase of risk aversion or a change of believes among investors could trigger a swift deterioration of financial conditions for the world economy. In the euro area, strong stimuli from abroad are not to be expected and private households continue to keep their real spending about constant. Investment has been expanding since summer 2013, but at a very moderate rate. In this context, our forecast for GDP growth is 1.1% in 2014 and 1.6% in 2015. For 2014 and 2015, we do not see any significant reduction of the unemployment rate, because employment dynamics will stay weak due to subdued growth and the still rising participation rate in the euro area. Our inflation forecast for 2014 is 0.6%. In 2015 inflation will also remain subdued, at about 1.0%. In this context of very low price dynamics, monetary policy keeps the recovery alive: official interest rates around zero and the search for yields on financial markets have depressed yields for government bonds; the fall in financing costs allows euro area governments to conduct fiscal policies that are much less restrictive than in the years before, with tax cuts in Italy, France, and Spain starting this year. Nonfinancial firms benefit from a shrinking burden of interest payments, and the availability of bank loans for small and medium enterprises has improved since 2012 in most countries.
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(De-)Centralization and Voter Turnout: Theory and Evidence from German Municipalities

Claus Michelsen, Peter Bönisch
Public Choice, No. 3, 2014
Abstract
A vast academic literature illustrates that voter turnout is affected by the institutional design of elections (e.g., compulsory voting, electoral system, postal or Sunday voting). In this article, we exploit a simple Downsian theoretical framework to argue that the institutional framework of public good provision – and, in particular, the distribution of political and administrative competences across government levels – likewise affects voters’ turnout decisions by influencing the expected net benefit of voting. Empirically, we exploit the institutional variation across German municipalities to test this proposition, and find supportive evidence.
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Socially Gainful Gender Quotas

Walter Hyll, Oded Stark
Journal of Economic Behavior and Organization, No. 105, 2014
Abstract
We study the impact of gender quotas on the acquisition of human capital. We assume that individuals’ formation of human capital is influenced by the prospect of landing high-pay top positions, and that these positions are regulated by gender-specific quotas. In the absence of quotas, women consider their chances of getting top positions to be lower than men’s. The lure of top positions induces even men of relatively low ability to engage in human capital formation, whereas women of relatively high ability do not expect to get top positions and do not therefore engage in human capital formation. Gender quotas discourage men who are less efficient in forming human capital, and encourage women who are more efficient in forming human capital. We provide a condition under which the net result of the institution of gender quotas is an increase in human capital in the economy as a whole.
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Determinants of Foreign Technological Activity in German Regions – A Count Model Analysis of Transnational Patents

Eva Dettmann, Iciar Dominguez Lacasa, Jutta Günther, Björn Jindra
Foresight-Russia, No. 1, 2014
Abstract
Most research on R&D internationalisation focuses on comparative analysis of location factors at the national level of analysis. Very little work, however, has taken place in this field for the sub-national regional location behavior of multi-national enterprises (MNE). The paper contributes to the existing research by providing evidence on the determinants of foreign technological activities at the sub-national level for Germany, which hosts the largest share of foreign R&D within the EU27 and features the highest cross-regional dispersion of patented research. Using a pooled count data model, we estimate the effect of various sources for externalities on the extent of foreign technological activity across regions. Particular attention is paid to the role of local knowledge spillovers, technological specialization and diversification. We differentiate foreign and domestic sources of specialisation and account for region and sector-specific influences. This is the first time that the ‘cross-border-ownership’ principle to measure R&D internationalisation is combined with regionalised patent information. To verify our findings we develop hypotheses. In particular, we expect and find that foreign technological activity is attracted by technologically specialised sectors of regions. In contrast to current empirical work, this effect applies both to foreign as well as domestic sources of specialization, although effects on foreign specialization seem more significant. We expect and find the same for science-industry spillovers. We postulate a negative impact of domestic specialization on foreign technological activities and a strong positive effect from diversificationspillovers, by comparison with specialisation spillovers, but these hypotheses are rejected. We find that the direction of the specialisation effect depends on dominance in the position of domestic firms as well as on the balance of knowledge flows between them and foreign actors.
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