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About this book

Against the background of the introduction of the euro in 1999, France, Germany and Italy have recently experienced higher divergence in terms of GDP growth. Indeed, there is no consensus among economists regarding the effects of monetary union, which can lead either to more specialisation as in the United States, or to increasing intra-industry trade, hence higher co-movements. Based on a set of original papers produced by a team of economists from the three main National Central Banks of the euro area, presented to an International Conference held in Paris as well as the contributions of panel of leading economists, the book analyses the latest developments in three largest European economies in a broad perspective, using modern econometric techniques. One of the conclusions is that, while business cycles are more strongly correlated across the three countries, as evidenced by the common reaction to the 2001 slowdown, the three countries still exhibit differences in terms of long term growth.

Table of Contents

Frontmatter

General Conclusions

Frontmatter

Measuring Cyclical Comovements and Asymmetries in Growth and Business Cycles

Without Abstract
Olivier de Bandt

Supply-side Developments

Without Abstract
Heinz Herrmann, Jörg Döpke

Cyclical Patterns in Main Components of Aggregate Demand

Without Abstract
Francesco Zollino

Convergence and Divergence in External Trade

Without Abstract
Olivier de Bandt, Jean-Pierre Villetelle

Panel Discussion

Without Abstract
Anton Brender, Jean Pisani-Ferry, Domenico Giannone, Riccardo Faini

Measuring Cycles

Frontmatter

Tracking the Economy in the Largest Euro Area Countries: a Large Datasets Approach

Summary
The paper proposes a set of monthly business (growth-) cycle indicators for Germany, France, Italy and the euro area useful for ex post characterization of the cycle, and, most importantly, to assess the current economic outlook. These indicators are projections of quarterly aggregates on the space spanned by a set of regressors extracted from a large panel of monthly series. Being based on static linear combinations of monthly series, they do not suffer from the end-of-sample problem associated with traditional bilateral filters (HP filter). The indicators are used to: (1) study the degree of co-movement and synchronization across economies; (2) derive a dating of the cycle; (3) obtain the ‘stylized’ cyclical facts; (4) assess the predictive content of the panel for GDP growth. The monthly indicators are good forecasters of GDP performing often better than other simple methods. As expected, since the growth cycle indicator is a ‘smoothed’ estimate of the GDP growth, the best forecasts are obtained in terms of year-on-year (rather than quarter-on-quarter) GDP growth.
Riccardo Cristadoro, Giovanni Veronese

Assessing Aggregate Comovements in France, Germany and Italy Using a Non Stationary Factor Model of the Euro Area

Summary
The objective of the paper is to investigate to what extent business cycles co-move in Germany, France and Italy. We use a large-scale database of nonstationary series for the euro area in order to assess the effect of common versus idiosyncratic shocks, as well as transitory versus permanent shocks, across countries over the 1980:Q1 to 2003:Q4 period. We apply the methodology proposed by Bai (2004) and Bai and Ng (2004) to construct a coincident indicator of the euro area business cycle to which national developments appear to be increasingly correlated at business cycle frequencies, while more significant differences appear at lower frequencies which measures potential growth. The indicator is also shown to be related to extra euro area economic developments.
Olivier de Bandt, Catherine Bruneau, Alexis Flageollet

Supply Side

Frontmatter

Capital, Labour and Productivity: What Role Do They Play in the Potential GDP Weakness of France, Germany and Italy?

Summary
The paper analyses the recent supply side developments in France, Germany, and Italy by employing a non-parametric approach to estimate potential GDP. The analysis reveals marked heterogeneity among the three countries with regard to the contribution of labour input. Similarities can be found, however, in the slowdown of capital accumulation and in the pronounced worsening of Total Factor Productivity growth. The paper is complemented by estimates of some measures of wage pressures and profitability in order to assess the role played by the movements of relative input prices in the intensity of use of primary factors in the production process.
Antonio Bassanetti, Jörg Döpke, Roberto Torrini, Roberta Zizza

Estimating Potential Output with a Production Function for France, Germany and Italy

Summary
This paper discusses the supply conditions for economic growth in terms of potential GDP estimated by the production function approach for France, Germany and Italy. The aim of this study is twofold: first, we keep a consistent framework as regards national accounts institutional sectors. Second, after defining Total Factor Productivity (TFP) in the so-called productive sector from the Solow residual, we specify it in a general framework for the three countries as a function of a time trend corrected for the effects of the age of equipments and the capacity utilisation rate (CUR). This framework allows to distinguish temporal considerations: in the medium to long term, the variables that could generate short to medium term fluctuations in potential output growth are assumed to be stable at a structural level. This implies modifications of the functional specifications related to the time horizon.
Mustapha Baghli, Christophe Cahn, Jean-Pierre Villetelle

Demand Side

Frontmatter

Synchronisation of Cycles: a Demand Side Perspective

Summary
The paper addresses the issue of synchronisation of economic cycles. While the literature has focused on the supply side, we present evidence from a demand side perspective. Using different measures of correlation both in the time and the frequency domain, we find evidence of a high degree of co-movement between GDP national business cycles. Studying the cyclical properties of demand aggregates, we find similar high values of synchronisation only for import and more recently for export variables. Investment series show intermediate values of correlation while consumption cycles are considerably less synchronised. Estimation of unobserved factor models supports these findings. Furthermore, GDP cycles seem to have become more synchronised over time, reflecting a general increase of correlation coefficients among demand components; the uncertainty surrounding point estimates indicates however that results should be taken only as preliminary.
Guido Bulligan

Short-Run and Long-Run Comovement of GDP and Some Expenditure Aggregates in Germany, France and Italy

Summary
The paper presents empirical work on short-run and long-run comovement between the German, French and Italian GDP as well as the aggregates of private consumption, business investment, exports, imports, and changes in inventories. In country-specific data sets, cointegration analyses are carried out both to identify long-run economic relationships and to remove the trend components from the nonstationary series. Analytically, this is done by reparametrizing the vector error correction model in its common trends representation. The resulting (Beveridge-Nelson) trend and cycle components as well as the series of changes in inventories are analyzed with a focus on synchronicity. To measure cross-country comovement at different frequencies, “cohesion”, a summary statistic developed by Croux et al. (2001), is applied. Sampling variability and parameter uncertainty are captured by bootstrapped confidence intervals.
Thomas A. Knetsch

Synchronization of Responses to Cyclical Demand Shocks in France, Germany and Italy: Evidence from Central Banks Macro-models

Summary
This paper uses the macro-econometric models of the European System of Central Banks to simulate a measure of the extent to which the sources of business cycle of France, Germany and Italy can be traced down to common and/or idiosyncratic factors and to investigate the propagation mechanism of these factors through the various components of aggregate demand. The paper computes responses of GDP and components to hypothetical cyclical shocks that may perturb some of the exogenous factors driving the three economies. Moreover, it shows with couterfactual simulations that over the 1998Q4–2003Q4 period: a) the cycle of world demand could account for up to 35% of the French GDP cycle, 23% of the German and 17% of the Italian; b) the cycle in the Euro exchange rate could account for a large fraction of the German GDP cycle, but only a small fraction of the French and the Italian; and c) taking French government consumption as a benchmark -because the most countercyclical- the deviation of government consumption growth with respect to the benchmark could only account for up to 8% of the Italian GDP cycle and only up to 7% of the German.
Andrea Tiseno

External Side

Frontmatter

Market Shares and Trade Specialisation of France, Germany and Italy

Summary
The trade performances of France, Germany and Italy in the 1990s and 2000s have followed heterogeneous national patterns. Contrary to the Italian situation, French and German divergences cannot be explained by relative cost and price developments; geographical specialisation has a limited role in the differences between the three countries. Sectoral specialisation sheds some light to these divergences, emphasising the exposure of Italy to emerging country competition and the limited specialisation of France, while all three countries share a lack of specialisation in ICT products. Non-price competitiveness indicators, such as R&D or education levels, could also contribute to explain the German strength and Italian weakness.
Alberto Felettigh, Rémy Lecat, Bertrand Pluyaud, Roberto Tedeschi

Modelling Imports and Exports of Goods in France, Distinguishing Between Intra and Extra Euro Area Trade

Summary
This paper presents equations for intra and extra euro area trade for France. Volumes and prices of imports and exports of goods are modelled. Dynamic simulations, residual tests and rolling forecasts indicate that the equations have satisfactory forecasting properties. However, trends and dummy variables are often added and competitiveness effects are not always well captured, probably due to inadequate data. Among other results, we find a stronger long run elasticity to price competitiveness for intra than for extra euro area exports, and positive contributions of price competitiveness to non energy import growth since 1999, probably due to evolutions in costs rather than in exchange rates.
Bertrand Pluyaud

Has the Impact of Key Determinants of German Exports Changed?

Summary
The question as to whether changes in the external environment may have caused the importance of key determinants of German exports to shift since the 1990s is addressed by estimating Germany’s exports to EMU partner countries (intra exports) and to countries outside the euro area (extra exports). Analytically, this is done first by estimating error correction models across different samples. Second, it is tested whether the long-run export behaviour of intra and extra exports has changed since the 1990s. As an initial and tentative result, the impact of price competitiveness on both intra and extra exports appears to have decreased. Finally, simulations are conducted to reconstruct the adjustment process of both intra and extra exports following demand and price shocks.
Kerstin Stahn
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