Did the euro change the effect of fundamentals on growth and uncertainty?
-
Jaime Luque
and
Abderrahim Taamouti
Abstract
We present empirical evidence on whether the introduction of the euro has changed the effect of economic fundamentals on the growth rates of euro countries’ GDPpc and GDPpc volatility. We find that there is a statistically significant structural break in the impact of increments in government debt on both economic growth and uncertainty. In particular, after adoption of the euro increments in government debt decreased growth and increased uncertainty. These results are robust to a battery of checks, including exclusion of the recent financial crisis period, comparison with non-euro European countries, and controlling for different debt/GDP ratios.
Acknowledgments
We thank A. Cabrales, J.-M. Dufour, J.-S. Fountain, E. Quintin, S. Ortigueira, C. Velasco, two anonymous referees and editor Arpad Abraham for useful comments and suggestions. A. Latre provided excellent research assistance. Jaime Luque gratefully acknowledges the Spanish MEC for financial support under grant ECO2011-30323-C03-01.
Appendix
Robustness checks and tables
To support the main findings in Tables 1 and 2, we conduct several robustness checks:
We exclude the financial crisis by focusing on the period 1980–2007.
We consider as an additional control variable the real exchange rate defined as the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs.
We re-run the main regressions (8) and (12) using instead robust standard errors (meaning that the estimators of the standard errors are robust to the heteroskedasticity and also to the cross-sectional dependence that characterizes panel data).
We re-run the regression (12) using instead the square of the residuals as a proxy for GDPpc growth rate’s volatility.
We re-run the main regressions (8) and (12) conditional on a given ratio of government debt to GDP.
Hausman test to test for endogeneity of government debt: We use the Hausman test to check whether government debt growth is endogenously determined with GDPpc growth. If endogeneity is present, then OLS estimates will be biased and inconsistent. To test this hypothesis, we use the growth rate of real exchange rate as the instrumental variable. As it is well known in the literature, it is difficult to find a good instrument for this type of regression [see Panizza and Presbitero (2012)]. The real exchange rate is usually argued to be a satisfactory instrumental variable due to its correlation with government debt through its foreign debt component (in the auxiliary regression government debt appears to be positively correlated to the real exchange rate at a 1% statistically significance level). To run the Hausman test we compare two sets of estimates, one that is consistent under both the null and the alternative and another that is consistent only under the null hypothesis. A large difference between the two sets of estimates is taken as evidence in favor of the alternative hypothesis. Our analysis confirms that government debt growth is not an endogenous variable. Results are reported in Table 5. We refer to the note of Table 5 for the details of this test.
Cusum test for the constancy of the coefficients: To test the validity of our structural break results, we use the “cusum” test introduced by Brown, Durbin, and Evans (1975). Using recursive residuals, this test allows a point by point analysis, enabling us to see both the abrupt and gradual changes and also the approximate sample periods in which the changes occur. We take here a standard approach and apply the cusum test to each individual country. We find that there is a break in the year of adoption of the euro for the majority of countries.
The output of the cusum test is a graph. The interpretation is the following. There is no break when the cusum line is close to the horizontal axis (at zero level of the vertical axis). A departure from the horizontal axis indicates that there is a break at the point of departure.
Cusum test
We were not able to apply the cusum test to Luxemburg and the Netherlands due to missing data problems. In particular, for these two countries there are no data between 1980 and 1996 for variables such as government debt, government revenue, and interests. For the rest of the Eurozone countries, the problem of missing data is less important and the cusum test can be performed.
The cusum tests for the residuals (proxy of GDPpc growth rate) of each Eurozone country (except Luxemburg and the Netherlands) are presented in Figures 1–10. This test is done in the context of regression (8). The cusum tests for the absolute value of the residuals (proxy of volatility of GDPpc growth rate) of each eurozone country (except Luxemburg and the Netherlands) are presented in Figures 11–20. This test is done in the context of regression (12).
These figures show that there is a departure of the cusum line from the horizontal axis for the majority of these countries in a small neighborhood of year 1999, except for Greece whose departure is around 2001 (the year when Greece joined the euro).
Our main results of existence of structural breaks in the effect of government debt on both economic growth and uncertainty after introduction of the euro are consistent in all robustness checks.
Robustness checks for the impact of economic fundamentals on GDPpc growth level.
| Robustness checks GDPpc growth rate level | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
|---|---|---|---|---|---|---|---|---|---|---|
| Gov. Debt | 35.41 | 48.08 | 18.96 | 62.07 | 65.31 | 58.02 | 46.41 | 37.18 | 45.31 | 5.00 |
| (0.010)*** | (0.017)** | (0.253) | (0.014)** | (0.011)** | (0.016)** | (0.039)** | (0.076)* | (0.471) | (0.977) | |
| Gov. Debt*Dummy | –62.38 | –62.67 | –42.50 | –67.07 | –94.26 | –93.68 | –77.88 | –62.86 | –141.03 | –120.43 |
| (0.000)*** | (0.066)* | (0.032)** | (0.093)* | (0.005)*** | (0.003)*** | (0.003)*** | (0.009)*** | (0.054)* | (0.612) | |
| Gov. Revenue | 87.06 | 123.35 | 59.77 | 144.06 | 130.63 | 118.95 | 105.06 | 78.75 | 148.35 | –798.62 |
| (0.001)*** | (0.010)*** | (0.148) | (0.025)** | (0.023)** | (0.027)** | (0.042)** | (0.090)* | (0.213) | (0.248) | |
| Gov. Revenue*Dummy | –193.87 | –297.83 | –142.51 | –128.92 | –176.33 | –188.71 | –207.48 | –181.79 | 100.79 | 697.04 |
| (0.000)*** | (0.000)*** | (0.022)** | (0.300) | (0.047)** | (0.023)** | (0.005)*** | (0.008)*** | (0.563) | (0.369) | |
| Interest | –26.27 | –37.76 | –42.53 | –11.85 | –122.63 | –66.22 | –59.25 | –33.94 | –298.77 | –389.49 |
| (0.741) | (0.623) | (0.525) | (0.939) | (0.294) | (0.455) | (0.477) | (0.667) | (0.076)* | (0.802) | |
| Interests*Dummy | 49.76 | 50.26 | 70.7 | –29.73 | 66.84 | 70.18 | 89.96 | 49.89 | 287.22 | –634.95 |
| (0.535) | (0.867) | (0.331) | (0.917) | (0.642) | (0.544) | (0.325) | (0.558) | (0.113) | (0.832) | |
| Imports | –11.85 | –15.30 | –9.47 | –46.88 | –29.61 | –30.03 | –9.50 | –6.18 | –13.25 | –305.72 |
| (0.000)*** | (0.006)*** | (0.045)** | (0.000)*** | (0.002)*** | (0.001)*** | (0.164) | (0.322) | (0.273) | (0.348) | |
| Imports*Dummy | 9.50 | 18.71 | 7.95 | –17.12 | 0.47 | 5.42 | 2.08 | 2.17 | 41.16 | 673.24 |
| (0.000)*** | (0.015)** | (0.186) | (0.224) | (0.967) | (0.620)** | (0.801) | (0.774) | (0.007)*** | (0.068)* | |
| Employment | 28.43 | 48.13 | 12.08 | –108.29 | 17.56 | 1.87 | 14.00 | 29.15 | 100.90 | 426.22 |
| (0.351) | (0.545) | (0.858) | (0.433) | (0.861) | (0.985) | (0.881) | (0.714) | (0.505) | (0.750) | |
| Employment*Dummy | 58.80 | 96.25 | 102.38 | 314.78 | 255.84 | 239.85 | 161.19 | 75.42 | –131.86 | –3909.70 |
| (0.551) | (0.551) | (0.369) | (0.125) | (0.127) | (0.139) | (0.290) | (0.559) | (0.712) | (0.025)** | |
| Exchange Rate | n.a. | n.a. | 0.17 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. | |
| (0.207) | ||||||||||
| Exchange Rate*Dummy | n.a. | n.a. | 0.38 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| (0.000)*** | ||||||||||
| Const. | –6.73 | –2.00 | –6.79 | –13.94 | –12.00 | –11.69 | –9.45 | –7.79 | –3.48 | 31.64 |
| (0.257) | (0.499)*** | (0.642) | (0.004)*** | (0.001)*** | (0.001)*** | (0.007)*** | (0.022)** | (0.008)*** | (0.043)** | |
| R2 overall (%) | 42.49 | 41.07 | 71.39 | 25.34 | 26.67 | 29.46 | 36.60 | 33.39 | 66.94 | 16.10 |
| Observations | 384 | 336 | 384 | 384 | 384 | 384 | 384 | 384 | 384 | 256 |
All results in Table 3 correspond to regression equation (8). As in Table 1 the effect of economic fundamental j before adoption of the euro is measured by the coefficient φj, and after adoption by φj+ψj. The last row of the table corresponds to the total number of both cross-sectional and time-series observations in each sample. Below each coefficient we write the p-value in brackets. Statistical significance levels are as follows: ***significant at 1%, **significant at 5%, and *significant at 1%. Table 3 reports the following robustness checks for the impact of economic fundamentals on GDPpc growth rate volatility.
Robustness check 1 reports estimation results of the impact of economic fundamentals on GDPpc growth rate level for the period 1980–2011 when standard errors are robust to the heteroskedasticity and also to the cross-sectional dependence that characterizes panel data.
Robustness check 2 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level when we omit the financial and sovereign crisis (period 1980–2007).
Robustness check 3 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 and controlling for contemporaneous real exchange rates.
Robustness check 4 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government debt to real GDP is below 51%.
Robustness check 5 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government debt to real GDP is below 71%.
Robustness check 6 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government debt to real GDP is below 91%.
Robustness check 7 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government debt to real GDP is below 111%.
Robustness check 8 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government debt to real GDP is below 131%.
Robustness check 9 reports estimation results of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011 when ratio of government revenue to real GDP is below 41%.
Robustness check 10 reports estimation results for the set of non-Euro countries of the impact of economic fundamentals on real per capita GDP growth level for the period 1980–2011.
Robustness checks for the impact of economic fundamentals on GDPpc growth volatility.
| Robustness checks GDPpc growth rate volatility | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 |
|---|---|---|---|---|---|---|---|---|---|---|
| Gov. Debt | –1177.82 | –22.24 | –28.33 | –3.30 | –76.20 | –63.83 | –64.32 | –52.97 | –43.05 | –203.93 |
| (0.247) | (0.058)* | (0.065)* | (0.819) | (0.001)*** | (0.004)*** | (0.003)*** | (0.005)*** | (0.013)** | (0.170) | |
| Gov. Debt*Dummy | 3659.92 | 57.75 | 63.65 | 29.88 | 144.73 | 116.81 | 129.75 | 103.08 | 81.64 | 71.12 |
| (0.002)*** | (0.000)*** | (0.019)** | (0.082)* | (0.000)*** | (0.000)*** | (0.000)*** | (0.000)*** | (0.000)*** | (0.723) | |
| Gov. Revenue | –2861.12 | –49.98 | –57.99 | 21.75 | –158.40 | –101.34 | –115.79 | –99.78 | –75.04 | –702.69 |
| (0.257) | (0.127) | (0.125) | (0.548) | (0.014)** | (0.034)** | (0.012)*** | (0.022)** | (0.056)* | (0.229) | |
| Gov. Revenue*Dummy | 8460.81 | 122.77 | 209.41 | 23.50 | 168.33 | 171.57 | 171.60 | 192.49 | 143.49 | 281.57 |
| (0.025)** | (0.061)* | (0.001)*** | (0.661) | (0.0123) | (0.018)** | (0.012)*** | (0.002)*** | (0.012)** | (0.668) | |
| Interest | –620.59 | –10.11 | –0.18 | –45.59 | –26.82 | 76.68 | 54.24 | 19.26 | 7.39 | 465.55 |
| (0.879) | (0.841) | (0.998) | (0.415) | (0.787) | (0.383) | (0.465) | (0.783) | (0.910) | (0.723) | |
| Interests*Dummy | –804.16 | –2.97 | 108.802 | 27.62 | 206.09 | –48.77 | –39.30 | –37.40 | –14.31 | –563.75 |
| (0.858) | (0.954) | (0.541) | (0.652) | (0.262) | (0.657) | (0.389) | (0.629) | (0.840) | (0.823) | |
| Imports | –185.34 | –0.59 | 0.15 | –7.36 | –5.96 | –4.60 | –2.90 | 7.28 | 4.86 | 427.86 |
| (0.530) | (0.783) | (0.975) | (0.081)* | (0.558) | (0.594) | (0.733) | (0.217) | (0.372) | (0.120) | |
| Imports*Dummy | –148.61 | –0.49 | –5.00 | 9.53 | 45.90 | 19.69 | 15.60 | –4.13 | –4.60 | –46.91 |
| (0.690) | (0.811) | (0.413) | (0.075)* | (0.000)*** | (0.049)** | (0.108) | (0.554) | (0.475) | (0.880) | |
| Employment | –2129.64 | –37.19 | –43.65 | –7.57 | 110.26 | –66.52 | –68.11 | –64.96 | –85.34 | –984.71 |
| (0.616) | (0.339) | (0.486) | (0.896) | (0.325) | (0.429) | (0.415) | (0.406) | (0.203) | (0.383) | |
| Employment*Dummy | 1676.18 | 11.02 | –89.75 | –50.74 | –83.73 | –74.92 | –67.53 | –50.83 | 37.64 | –1956.89 |
| (0.816) | (0.909) | (0.478) | (0.607) | (0.644)*** | (0.595) | (0.626) | (0.696) | (0.733) | (0.184) | |
| Exchange Rate | n.a. | n.a. | n.a. | 0.24 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| (0.039)** | ||||||||||
| Exchange Rate*Dummy | n.a. | n.a. | n.a. | 0.19 | n.a. | n.a. | n.a. | n.a. | n.a. | n.a. |
| (0.000)*** | ||||||||||
| Const. | 1046.80 | 29.78 | 27.94 | –4.39 | 35.65 | 32.92 | 33.66 | 32.60 | 31.49 | 86.17 |
| (0.000)*** | (0.000)*** | (0.000)*** | (0.716) | (0.000)*** | (0.000)*** | (0.000)*** | (0.000)*** | (0.000)*** | (0.000)*** | |
| R2 overall (%) | 26.59 | 25.03 | 15.53 | 40.67 | 41.74 | 20.85 | 24.12 | 24.83 | 25.72 | 19.31 |
| Observations | 384 | 384 | 336 | 384 | 384 | 384 | 384 | 384 | 384 | 256 |
In columns 2–10 of Table 4 the dependent variable (proxy of GDPpc growth rate volatility) is given by the absolute value of the residual. In column 1 the dependent variable (proxy of GDPpc growth rate volatility) is given by the square of the residual. The results correspond to regression equation (12). As in Table 2, the effect of economic fundamental j before adoption of the euro is measured by the coefficient βj; and after adoption by βj+γj: The last row of the table corresponds to the total number of both cross-sectional and time-series observations in each sample. Below each coefficient we write the p-value in brackets. Statistical significance levels are as follows: ***significant at 1%, **significant at 5%, and *significant at 10%. Table 4 reports the following robustness checks for the impact of economic fundamentals on GDPpc growth rate volatility:
Robustness check 11 reports estimation results of the impact of economic fundamentals on GDPpc growth rate volatility for the period 1980–2011 using squared residuals as a proxy for volatility.
Robustness check 12 reports estimation results of the impact of economic fundamentals on GDPpc growth rate volatility for the period 1980–2011 when standard errors are robust to the heteroskedasticity and also to the cross-sectional dependence that characterizes panel data.
Robustness check 13 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility when we omit the financial and sovereign crisis (period 1980–2007).
Robustness check 14 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 and controlling for contemporaneous real exchange rates.
Robustness check 15 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 when ratio of government debt to real GDP is below 51%.
Robustness check 16 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 when ratio of government debt to real GDP is below 71%.
Robustness check 17 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 when ratio of government debt to real GDP is below 91%.
Robustness check 18 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 when ratio of government debt to real GDP is below 111%.
Robustness check 19 reports estimation results of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011 when ratio of government debt to real GDP is below 131%.
Robustness check 20 reports estimation results for the set of non-Euro countries of the impact of economic fundamentals on real per capita GDP growth volatility for the period 1980–2011.
Hausman endogeneity test.
| GDPpc growth | Coefficient | t-Statistic | Prob. |
|---|---|---|---|
| Gov. Debt Growth | 51.20 | 0.54 | 0.592 |
| Gov. Revenue | 267.21 | 2.98 | 0.003 |
| Interest on Borrowing | –230.87 | –1.78 | 0.077 |
| Imports | 6.50 | 0.84 | 0.403 |
| Employment | –14.48 | –0.08 | 0.939 |
| Residual_debt | –57.47 | –0.59 | 0.557 |
| Const. | –19.20 | –2.32 | 0.021 |
| R2 overall (%) | 7.49 |
Note: We use the Davidson and MacKinnon’s (1989) version of the Hausman test by running an auxiliary regression. For this, we have to run two OLS regressions. In a first regression (the auxiliary regression), we regress the suspect variable (government debt growth) on all exogenous variables and instruments and retrieve the residuals (this regression shows that government debt and the real exchange rate are positively correlated at 1% statistically significance level). We then use these retrieved residuals as additional regressors in a second regression that re-estimates the GDPpc growth rate function. Results are reported in Table 5. If the OLS estimates are consistent, then the coefficient on the first stage residuals should not be significantly different from zero. In Table 5 we can see that the test does not reject the hypothesis of consistent OLS estimates at conventional levels (t-statistic =–0.59). Thus, we conclude that government debt growth is not an endogenous variable. There are 264 total panel observations. Variable “Residual_debt” stands for the retrieved residuals from the auxiliary regression.
Cusum test for economic growth
Austria.
Belgium.
Finland.
France.
Germany.
Greece.
Ireland.
Italy.
Portugal.
Spain.
Cusum test for economic uncertainty
Austria.
Belgium.
Finland.
France.
Germany.
Greece.
Ireland.
Italy.
Portugal.
Spain.
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©2014 by De Gruyter
Articles in the same Issue
- Frontmatter
- Advances
- Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model
- Inventories and the stockout constraint in general equilibrium
- Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective
- Inflation effects on capital accumulation in a model with residential and non-residential assets
- Optimal capital-income taxation in a model with credit frictions
- Contributions
- Interest rate fluctuations and equilibrium in the housing market
- News shocks and learning-by-doing
- Capacity utilization and the effects of energy price increases in Japan
- Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
- Optimal policy and Taylor rule cross-checking under parameter uncertainty
- The impact of American and British involvement in Afghanistan and Iraq on health spending, military spending and economic growth
- Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience
- The skill bias of technological change and the evolution of the skill premium in the US since 1970
- Aggregate impacts of recent US natural gas trends
- Organizational learning and optimal fiscal and monetary policy
- Industrial specialization, financial integration and international consumption risk sharing
- Leverage, investment, and optimal monetary policy
- Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate
- Temporal aggregation and estimated monetary policy rules
- International transmission of productivity shocks with nonzero net foreign debt
- Did the euro change the effect of fundamentals on growth and uncertainty?
- Topics
- Real factor prices and factor-augmenting technical change
- Monetary policy and TIPS yields before the crisis
Articles in the same Issue
- Frontmatter
- Advances
- Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model
- Inventories and the stockout constraint in general equilibrium
- Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective
- Inflation effects on capital accumulation in a model with residential and non-residential assets
- Optimal capital-income taxation in a model with credit frictions
- Contributions
- Interest rate fluctuations and equilibrium in the housing market
- News shocks and learning-by-doing
- Capacity utilization and the effects of energy price increases in Japan
- Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
- Optimal policy and Taylor rule cross-checking under parameter uncertainty
- The impact of American and British involvement in Afghanistan and Iraq on health spending, military spending and economic growth
- Why does natural resource abundance not always lead to better outcomes? Limited financial development versus political impatience
- The skill bias of technological change and the evolution of the skill premium in the US since 1970
- Aggregate impacts of recent US natural gas trends
- Organizational learning and optimal fiscal and monetary policy
- Industrial specialization, financial integration and international consumption risk sharing
- Leverage, investment, and optimal monetary policy
- Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate
- Temporal aggregation and estimated monetary policy rules
- International transmission of productivity shocks with nonzero net foreign debt
- Did the euro change the effect of fundamentals on growth and uncertainty?
- Topics
- Real factor prices and factor-augmenting technical change
- Monetary policy and TIPS yields before the crisis
