Abstract

The confluence of multiple adverse shocks—the turbulence in financial markets, high commodity prices, and the appreciation of the exchange rate—have depressed growth in Europe. At the same time commodity prices increases have boosted headline inflation. While containing inflation remains a major concern, supporting the recovery is likely to gain policy prominence in the advanced economies. Looking forward, improvements in prudential regulation could mitigate the procyclicality of credit standards, which should help reduce macroeconomic volatility. Cross-border labor flows are generally seen to have beneficial macroeconomic effects.

References

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    • Export Citation
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Note: The main authors of this chapter are Rudolfs Bems and Philip Schellekens. Analytical underpinnings are provided in Bems and Schellekens (forthcoming).

42

The NMS comprise Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia.

43

World Bank (2006).

44

Worker registration systems, for example, may not be able to ensure that workers deregister when they leave the destination country. This would cause the measure of inflows to be overstated.

45

Brücker (2007). These figures are based on labor force and population statistics.

46

Kaczmarczyk and Okólski (2008).

47

Ireland attracted large migrant inflows from Lithuania, Poland, and Romania; the United Kingdom, from various countries but especially Poland.

48

Other countries where restrictions were applied regarding access of Bulgarian and Romanian workers during the first stage of the transitory arrangements include the Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Poland, Slovenia, the Slovak Republic, and Finland.

49

Iara (2008).

50

Low-cost airlines have facilitated the practice of “blue-collar” air commuting.

51

World Bank (2006).

52

Budnik (2007) and Kaczmarczyk and Okólski (2008).

54

However, average educational attainment levels might have been higher if highly educated migrants had not left.

55

These ratios are calculated as the simple unweighted average of the per capita income positions of Estonia, Latvia, and Lithuania to that of the EU-27.

56

The asymmetric treatment of productivity developments in the nontradable and tradable sectors does not result in a loss of generality. Its sole purpose here is to generate the Balassa-Samuelson effect of price convergence.

57

The theoretical underpinnings of the two stages of convergence are detailed in Bems and Schellekens (2007).

58

This is not to say that labor mobility is the only source of wage pressure. An inflationary macroeconomic policy mix may constitute an additional source of wage inflation.

59

The general equilibrium model in Bems and Schellekens (forthcoming) assumes a utility-maximizing representative household, a fraction of which can work abroad and earn the foreign wage.

60

Return migration is driven not only by the nature of the productivity shock, but also by imperfections in the degree of factor mobility, which amplify wage developments during transition. As labor flows out, capital cannot be immediately reduced to the optimal level. Thus, wages are temporarily “too high” in transition, which triggers return migration.

61

Other challenges, relating to the distributional impact of cross-border labor mobility, are beyond the scope of this chapter.

62

If labor flows out, optimality would require dismantling the capital stock, as the remaining labor force would have too much capital.

63

In a setting with a labor-leisure choice, employment could increase during the boom years, alleviating some of the wage pressure

64

Kaczmarczyk and Okólski (2008) report that most expenses by seasonal migrants who worked in Germany during 1998–2000 fall under the category of current consumption.

65

Overheating may also result from an inappropriate policy mix.

66

Statistics Estonia, Labor Force Surveys.

67

These non-EU countries may soon, however, face similar problems of labor shortage.

68

Romania, for example, launched initiatives to persuade Romanian construction workers to return home and fill domestic job vacancies.

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    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
  • Bems, Rudolfs, and Philip Schellekens, 2007, “Finance and Convergence: What’s Ahead for Emerging Europe?” IMF Working Paper 07/244 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Bems, Rudolfs, and Philip Schellekens, forthcoming, “Macroeconomics of Migration in New Member States,” IMF Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
  • Bernanke, Ben, and Mark Gertler, and Simon Gilchrist, 1999, “The Financial Accelerator in a Quantitative Business Cycle Framework,” in Handbook of Macroeconomics, Vol. 1C, ed. by John Taylor and Michael Woodford (Amsterdam: North-Holland), pp. 134193.

    • Search Google Scholar
    • Export Citation
  • Blanchard, J. Olivier, and Jordi Gali, 2007, “The Macroeconomic Effects of Oil Shocks: Why Are the 2000s So Different from the 1970s?” NBER Working Paper No. 13368 (Cambridge, Massachusetts: National Bureau of Economic Research).

    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
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    • Search Google Scholar
    • Export Citation
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  • Calza, Alessandro, Tommaso Monacelli, and Livio Stracca, 2007, “Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?” CEPR Discussion Paper No. 6231 (London: Centre for Economic Policy Research).

    • Search Google Scholar
    • Export Citation
  • Caruana, Jaime, and Aditya Narain, 2008, “Banking on More Capital,Finance & Development, Vol. 45 (June), pp. 2428.

  • Catte, Pietro, Nathalie Girouard, Robert Price, and Christophe André, 2004, “Housing Markets, Wealth and the Business Cycle,” OECD Economics Department Working Paper No. 394 (Paris: Organization for Economic Cooperation and Development).

    • Search Google Scholar
    • Export Citation
  • Čihák, Martin, and P. Koeva Brooks, forthcoming, “From Subprime Crisis to Subprime Growth,” IMF Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Čihák, Martin, and Li L. Ong, 2007, “Estimating Spillover Risk Among Large EU Banks,” IMF Working Paper 07/267 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Decressin, Jörg, Hamid Faruqee, and Wim Fonteyne, 2007, Integrating Europe’s Financial Markets (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Dees, Stephane, Filippo di Mauro, L., Vanessa Smith, and M. Hashem Pesaran, 2007, “Exploring the International Linkages of the Euro Area: A Global VAR Analysis,Journal of Applied Econometrics, Vol. 22 (January/February), pp. 138.

    • Search Google Scholar
    • Export Citation
  • De Nicolò, Gianni, and Iryna Ivaschenko, 2008, “Financial Integration and Risk-Adjusted Growth Opportunities,” IMF Working Paper 08/126 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Elekdag, Selim, René Lalonde, Douglas Laxton, Dirk Muir, and Paolo Pesenti, 2008, “Oil Price Movements and the Global Economy: A Model-Based Assessment,IMF Staff Papers, Vol. 55, No. 2, pp. 297311.

    • Search Google Scholar
    • Export Citation
  • European Central Bank, 2003, “Structural Factors in the EU Housing Markets” (Frankfurt, March).

  • European Central Bank, 2008a, Monthly Bulletin (Frankfurt, May).

  • European Central Bank, 2008b, Financial Stability Review (Frankfurt, June).

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    • Search Google Scholar
    • Export Citation
  • European Commission, 2008, “High Prices on Agricultural Commodity Markets: Situation and Prospects,” Working Document (Brussels: Directorate-General for Agriculture and Rural Development).

    • Search Google Scholar
    • Export Citation
  • European Mortgage Federation, 2006a, Study on the Cost of Housing in Europe (Brussels).

  • European Mortgage Federation, 2006b, “A Review of Europe’s Mortgage and Housing Markets,Hypostat (Brussels).

  • Fabrizio, Stefania, Deniz Igan, and Ashoka Mody, 2007, “The Dynamics of Product Quality and International Competitiveness,” IMF Working Paper 07/97 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Galesi, A., and S. Sgherri, forthcoming, “Regional Financial Spillovers Across Europe,” IMF Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Goodhart, Charles, and Avinash Persaud, 2008, “How to Avoid the Next Crash,Financial Times, January 30.

  • Gruss, B., and S. Sgherri, forthcoming, “The Volatility Costs of Procyclical Lending Standards: An Assessment Using a DSGE Model,” IMF Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Hilbers, Paul, Alexander Hoffmaister, Angana Banerji, and Haiyan Shi, 2008, “House Price Developments in Europe: A Comparison,” IMF Working Paper 08/211 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Hunt, Benjamin, 2006, “Oil Price Shocks and the U.S. Stagflation of the 1970s: Some Insights from GEM,Energy Journal, Vol. 27 (October), pp. 6180.

    • Search Google Scholar
    • Export Citation
  • Iara, A., 2008, “East-West European Migration: Labour Mobility in the EU-27,” paper presented at the Vienna Institute for International Economic Studies, Spring Seminar, Vienna, March 28.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2007, Euro Area Policies: 2007 Article IV Consultation—Staff Report, IMF Country Report No. 07/260 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2008a, World Economic Outlook (Washington, October).

  • International Monetary Fund (IMF), 2008b, Global Financial Stability Report (Washington, October).

  • _______, 2008c, Regional Economic Outlook: Europe (Washington, April).

  • International Monetary Fund (IMF), 2008d, Euro Area Policies: 2008 Article IV Consultation, IMF Country Report No. 08/262 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2008e, “Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses” (Washington: June). Available via the Internet: www.imf.org/external/np/pp/eng/2008/063008.pdf.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2008f, World Economic Outlook (Washington, April).

  • Jiménez, Gabriel, and Jesús Saurina, 2006, “Credit Cycles, Credit Risk, and Prudential Regulation,International Journal of Central Banking, Vol. 2 (June), pp. 6598.

    • Search Google Scholar
    • Export Citation
  • Jokipii, Terhi, and Alistair Milne, 2006, “The Cyclical Behaviour of European Bank Capital Buffers,” Bank of Finland Discussion Paper No. 17/2006 (Helsinki: Bank of Finland).

    • Search Google Scholar
    • Export Citation
  • Kaczmarczyk, Pawel, and Marek Okólski, 2008, “Economic Impacts of Migration on Poland and the Baltic States,” Fafo Paper No. 2008:01 (Oslo: Fafo Institute for Labour and Social Research). Available via the Internet: www.fafo.no/pub/rapp/10045/index.html.

    • Search Google Scholar
    • Export Citation
  • Kalemli-Ozcan, Sebnem, Bent E. Sorensen, and Oved Yosha, 2004, “Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe,” CEPR Discussion Paper No. 4463 (London: Centre for Economic Policy Research).

    • Search Google Scholar
    • Export Citation
  • Kiyotaki, Nobuhiro, and John Moore, 1997, “Credit Cycles,Journal of Political Economy, Vol. 105 (April), pp. 21148.

  • Lalonde, René, and Dirk Muir, 2007, “The Bank of Canada’s Version of the Global Economy Model,” Technical Report No. 98 (Ottawa, Bank of Canada, September).

    • Search Google Scholar
    • Export Citation
  • Laxton, Douglas, and Paolo Pesenti, 2003, “Monetary Rules for Small, Open, Emerging Economies,Journal of Monetary Economics, Vol. 50 (July), pp. 110946.

    • Search Google Scholar
    • Export Citation
  • Lee, Jaewoo, Gian Maria Milesi-Ferretti, Jonathan D. Ostry, Alessandro Prati, and Luca A. Ricci, 2008, Exchange Rate Assessments: CGER Methodologies, IMF Occasional Paper No. 261 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Lombardi, M. J., and S. Sgherri, forthcoming, “A Global Repricing of Risk or New Episodes of Financial Contagion?” IMF Working Paper (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Mendoza, Enrique G., 2006, “Lessons from the Debt-Deflation Theory of Sudden Stops,American Economic Review, Papers and Proceedings, Vol. 96 (May), pp. 41116.

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