The External Dimension of the Euro Area: Assessing the Linkages

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
Illustrations......Page 9
Contributors......Page 13
Preface......Page 15
1 Introduction......Page 17
2 The external dimension of the euro area:
stylised facts and initial findings......Page 24
2.1 The external trade of the euro area......Page 25
International comparisons......Page 26
Relative openness within the euro area......Page 27
Imports, exports and the net contribution of trade to GDP......Page 29
Some stylised facts......Page 32
Extra-euro area trade elasticities......Page 37
2.1.3 Euro area export performance and its product and
geographical composition......Page 40
2.2.1 The overall size of financial flows......Page 44
2.2.2 Determinants and recent developments in the euro area’s FDI......Page 46
‘Horizontal’ FDI channel......Page 49
‘Vertical’ FDI channel......Page 51
2.3.1 Confidence channels......Page 53
2.3.3 Determinants of business cycle synchronisation......Page 57
2.3.4 Empirical evidence of synchronisation......Page 61
2.4 Conclusions......Page 64
References......Page 66
3.1 Introduction......Page 68
3.2 Trade linkages in macro models......Page 70
3.3 Application to Europe......Page 72
References......Page 77
4.1 Introduction......Page 79
4.2 Conceptual underpinnings......Page 80
4.3.1 Introduction......Page 85
4.3.2 Empirical estimation of exchange rate pass-through into import prices......Page 88
4.3.3.1 Convergence in inflation rates......Page 98
4.3.3.2 Changes in the share of extra-EMU imports......Page 99
4.3.3.3 The currency of price denomination in international trade......Page 102
4.3.3.4 Evidence on the existence of a structural break......Page 104
4.4 Conclusions......Page 107
References......Page 109
5.1 Introduction......Page 111
5.2 Theoretical framework......Page 113
5.3.1 The dataset......Page 114
5.3.3 Portfolio equity holdings by euro area countries......Page 115
5.3.4 Portfolio equity investment, country size, and
stock market capitalisation......Page 117
5.3.5 Geographical allocation of euro area portfolio equity investment......Page 119
5.4.1 Determinants of the international equity holdings of the aggregate euro area......Page 121
5.4.2 International holdings by individual euro area countries......Page 124
5.4.3 Do euro-area members invest disproportionately in each other?......Page 128
5.5 Concluding remarks......Page 130
Appendix 5.1......Page 131
References......Page 132
6.1 Relevance......Page 134
6.2 Who is investing where?......Page 136
6.3 Why do companies invest abroad?......Page 140
Supply-side effects......Page 141
Demand-side effects......Page 142
International business cycle co-movement......Page 143
6.5 Role of FDI from a labour market perspective......Page 149
Rent sharing......Page 150
Empirical analysis......Page 151
Empirical results......Page 153
6.6 Summary and policy implications......Page 157
References......Page 158
7.2 The macroeconomic importance of equity markets......Page 162
7.3 Estimation of cointegrating relationships......Page 166
7.4 Modelling the impact of equity prices......Page 168
Trade in goods and services......Page 170
Wealth and asset accumulation......Page 171
Consumption and personal income......Page 172
Production......Page 173
Fiscal policy rules......Page 174
7.4.3 Model residuals for equity prices, consumption and income......Page 175
7.5 The 2000–2002 bear market......Page 176
7.6 Analysing the impact of equity prices......Page 179
7.6.1 Equity shocks......Page 180
7.6.2 Policy responses to the shock......Page 182
Changing the monetary feedback in the US......Page 183
Monetary responses outside the US......Page 184
Fiscal feedbacks in the US......Page 185
7.7 Conclusions......Page 186
References......Page 187
Introduction......Page 189
How to account for international linkages?......Page 190
GVAR approach: an overview......Page 193
Correlations between euro-area variables and their foreign counterparts......Page 196
Significance and magnitude of the contemporaneous impact of foreign variables on euro-area variables......Page 198
The sensitivity of the euro-area economy to its international environment......Page 200
Impact of external ‘aggregate demand shocks’ on the euro area......Page 201
Impact of external ‘equity shocks’ on the euro area......Page 205
Impact of ‘aggregate demand shock’ to the euro area and transmission to its partners......Page 207
Impact of an ‘equity shock’ on the euro area and transmission to its partners......Page 210
Main lessons from the simulations and concluding remarks......Page 212
Appendix 1: Countries included in the GVAR model and composition of regional groups......Page 213
Appendix 2: Definition of global shocks......Page 215
References......Page 216
Index......Page 218