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AbstractSizable prevailing real economic disparities among countries in a currency union potentially involve costs for those countries for which the aggregate policy stance is not appropriate. This paper contributes to the literature by testing for productivity convergence among euro area countries. While no convergence can be found on the aggregate level, selected service sectors and manufacturing sub-industries indicate evidence of convergence. In a search for factors influencing productivity, investments in research and development as well as a high skill level of employees are shown to be beneficial whereas regulations constitute a burden. Consequently, euro area countries should engage in structural reforms where necessary to provide a more competitive environment, eventually facilitating economic convergence.
Non-Technical SummaryAlthough similar levels of output are not imperative for a currency union to function, the costs for the individual member states tend to rise when economic disparities are firmly entrenched.This follows from a common policy stance, which will be too loose for some countries and too tight for others (Hallett and Weymark 2002). In order to shed light on convergence in real economic activity in the euro area, productivity developments among member states are analysed.From a theoretical standpoint we are agnostic about whether or not convergence should be expected. While the neoclassical growth models postulate convergence between higher and lower income countries, the endogenous growth theory allows for scenarios of persistent divergence among countries. Given the European economic and monetary integration since the 1950s, however, capital, labour and knowledge barriers have abated, which might have facilitated convergence. In adition, deregulation of some service sectors and advances in ICT technology could have been supportive.The convergence hypothesis is transformed into an empirically testable form by making use of recent advances in panel unit root tests. The paper contributes to the literature in that it provides empirical evidence on whether productivity convergence among euro area countries has taken place. Besides the look at the total economy, nine main euro area sectors (and eleven manufacturing sub-sectors) are put to test. In addition to the broad dataset used, this study captures the changes in labour market patterns by drawing on hours worked as input measure in contrast to total p...
This paper contributes to the literature measuring the response of stock markets to monetary policy actions. We analyse the reaction of European stock market returns to unexpected interest rate decisions by the European Central Bank (ECB). Endogeneity between interest rate changes and stock returns is taken into account using the identification through the heteroscedasticity approach. Relying on different methods to extract à The research for this paper was partly conducted while the first two authors were visiting the research centre of the Bank of Finland. We would like to thank the Bank for its hospitability and financial support. Moreover, the first two authors thank the Alexander von Humboldt Foundation for financial support. We are indebted to the participants of the monetary policy shocks, we find a negative and significant relation between unexpected ECB decisions and European stock market performance. Moreover, monetary policy decisions of the ECB are well anticipated by the market, implying that the central bank successfully communicates its monetary policy.
This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.
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