Download GDP volatility before and after de euro

Working Paper 12-21
Economic Series
July, 2012
Departamento de Economía
Universidad Carlos III de Madrid
Calle Madrid, 126
28903 Getafe (Spain)
Fax (34) 916249875
GDP Volatility Before and After the Euro:
The Evidence∗
Jaime Luque†
University of Wisconsin – Madison
Abderrahim Taamouti‡
Universidad Carlos III de Madrid
Abstract
The message in this note is that the adoption of the Euro has changed the effect of
Eurozone countries’ economic fundamentals on per capital Gross Domestic Product
(GDPpc) growth rate volatility (economic uncertainty). Increments in government debt
significantly decreased GDPpc growth rate volatility before the Euro, but increased it
after. The other fundamentals exhibit less structural change on economic uncertainty.
These stylized facts are robust to different measures of GDPpc growth rate volatility
and to the exclusion of the recent financial crisis period, and are specific to the
Eurozone countries in Europe.
Keywords: GDPpc growth rate volatility; Euro; Eurozone countries; economic
uncertainty; government debt; economic fundamentals.
JEL classification: E02, E52, F00, F02, F15, F33, F34, F36, F42.
1
∗
We thank Antonio Cabrales, Jean-Marie Dufour, Erwan Quintin, Salvador Ortigueira, Carlos Ponce, and José Tavares for
their very useful comments and suggestions. Alejandro Latre provided excellent research assistance. Luque gratefully
acknowledges the Spanish Ministry of Education and Science for financial support under grant SEJ2008-03516. Taamouti also
gratefully acknowledges the Spanish Ministry of Education and Science for grant ECO2010-19357.
†
CORRESPONDING AUTHOR: Department of Real Estate and Urban Land Economics, Wisconsin School of Business,
University of Wisconsin - Madison, Grainger Hall, 975 University Ave., Madison, Wisconsin 53706, U.S.A. Email:
[email protected].
‡
Economics Department, Universidad Carlos III de Madrid. Address: Departamento de Economía Universidad Carlos III de
Madrid Calle Madrid, 126 28903 Getafe (Madrid) España. Email: [email protected].
1
Introduction
In the current debt crisis, there is a strong priority to understand the structural changes
that the Euro has brought to the Eurozone countries.1 This note attempts to understand
this issue by addressing the following question: Did the adoption of the Euro change
the structural e¤ect of economic fundamentals on economic uncertainty? The goal is
to document stylized facts that may help policy makers to implement the appropriate
economic policies.
There has been an important line of research on optimum currency unions since
Mundell’s (1961) seminal work. It is now well established that asymmetric economic
shocks and the absence of ‡exible adjustment mechanisms can o¤set the economic bene…ts associated with a common currency. See Baldwin and Wyplosz (2006) and De Grauwe
(1992) for an empirical investigation, and Eichengreen (1991) for a survey.2 The very recent European debt crisis has opened a debate on the bene…ts and costs associated with
the European Monetary Union.3 However, up to our knowledge, previous literature has
been silent about whether the Euro has changed the structural e¤ect of fundamentals on
growth volatility. This issue is interesting because in the aggregate level volatility is negatively correlated with countries’economic growth; see Acemoglu et al. (2003) and Ramey
and Ramey (1995). Thus, understanding whether there has been a structural change
on the determinants of growth rate volatility is of great importance when analyzing the
impact of the Euro adoption on Eurozone members’economic growth.
We base our analysis on the …rst twelve European countries that joined the Euro and
consider the period 1980-2011. We …nd that the adoption of the Euro has changed the
e¤ect that di¤erent economic fundamentals have on economic uncertainty (measured in
terms of per capita gross domestic product (GDPpc) growth rate volatility). In particular,
increases in government debt decreased GDPpc growth volatility before the Euro, but
increased it after the adoption of the common currency. The other economic fundamentals
1
By Eurozone countries we mean the set of European countries that adopted the Euro.
See also the following recent papers: Alesina and Barro (2002) for an analysis of the trade-o¤ between
volume of trade and price stability in the formation of a currency union, Barro and Tenreyro (2007) for
an investigation of the impact of currency unions on bilateral trade and the extent of comovements of
prices and outputs, Frankel and Rose (2002) for evidence about substantial advantages for a currency
union in reducing the transaction costs of trade, and Tenreyro and and Silva (2010) for evidence about
a small increase in trade after the Euro adoption.
3
Without further economic institutions, the adoption of the Euro by some European countries is seen
as a big obstacle for their economic recovery from the recent debt crisis. See De Grauwe (2011) who
argues that government debt crisis in the Eurozone is due to a failure of economic governance.
2
1
exhibit less structural change on economic uncertainty before and after the Euro. These
…ndings are robust to di¤erent measures of GDPpc growth rate volatility (square and
absolute value-based volatility measures), and to the exclusion of the …nancial crisis period
(2008-2011). Moreover, the comparison between non-Euro and Euro European countries
shows that the above stylized facts are speci…c to the Euro countries.
The remaining sections are organized as follows. Section 2 presents the data and
the regression strategy. Section 3 reports our main results. Section 4 provides several
robustness checks. Section 5 concludes.
2
Data and Regression Strategy
This section aims to describe the data and discuss the methodology followed to examine
the impact of fundamentals on economic uncertainty before and after the Euro. Given the
recent debt crisis in Europe, we are mainly interested in studying the government debt
e¤ect. The other potential variables that we use to explain the real GDPpc growth rate
volatility are: government structural de…cit, gross national savings (GNS), 10-year government bond yield, imports, exports, current account, unemployment rate, oil-exports,
oil-imports, government revenue, government expenditure, and in‡ation.4 These additional economic variables are considered as a gauge of the economy’s growth rate, and
many of them are important indicators used by many central banks to determine the
health of the economy when setting monetary policy.
The data on real GDPpc comes from Economic Research Service (ERS), International
Macroeconomic Data Set. The data on remaining variables are from International Monetary Fund (IMF) database. The variables are at the annual frequency and the sample runs
from 1980 to 2011. In our analysis we cover the …rst twelve Eurozone members: Austria,
Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Portugal, and Spain.5 The total number of both cross-sectional and time-series observations
in our sample is 384. We have performed an Augmented Dickey-Fuller test (not reported,
but available from the authors upon request) for nonstationarity of the previous variables
and the results show that all variables in growth rates are stationary. Thus, in our study
the economic variables were transformed into growth rates, and consequently the causal
4
Here we use government structural balance in negative sign as a proxy of government structural
de…cit.
5
Few other Eurozone countries are not included in our analysis because of missing data. Most of these
countries had Communist regimes and did not make data publicly available. Other small countries such
as Andorra, Malta, Monaco, and San Marino are also disregarded in our analysis.
2
e¤ects have to be interpreted in terms of the growth rate of variables.
Our investigation is based on the following two steps.6 We …rst use a panel regression
to extract the real GDPpc growth rate volatility. In particular, we …rst recuperate the
residuals from a panel regression of GDPpc growth rate on country and time …xed-e¤ects.
We then take the square of the residuals as a proxy of GDPpc growth rate volatility. A
panel regression with country and time …xed-e¤ects allows us to …lter out the GDPpc
growth rate. In this way, the …ltered volatility will not re‡ect the uncertainty from the
underlying economic structure of a country, or from a speci…c year. Formally, we run the
following panel regression:
git =
Yit Yit
Yit 1
where git
1
i
+
t
+
(1)
it ;
represents the GDPpc growth rate of a country i at time t, with Yit
being the country i’real GDPpc at time t,
i
represents country i’s …xed e¤ect, and
t
represents the time t …xed e¤ect. The permanent e¤ect of the adoption of the Euro by
Eurozone countries should not be re‡ected by any speci…c year …xed e¤ect. The residual
captures an e¤ect that cannot be attributed neither to the economic structure of
it
country i nor to the economic events associated with a particular year t. Thereafter, we
take as a proxy of real GDPpc growth rate volatility the square of the residual
2
\
V ol
it (git ) ' ^ it = git
^i
it ,
2
^t
(2)
;
where ^ it is the …tted residual and ^i and ^t are the estimates of the country and time
…xed-e¤ects, respectively.In Section 4 we also consider another measure of GDPpc growth
rate volatility given by the absolute value of the residuals,
\
V ol
it (git ) ' j^ it j = git
^t :
^i
In the second step and to examine the e¤ect of government debt and other fundamentals
on GDPpc growth rate volatility before and after the adoption of the Euro, we run the
following panel regression
2
it
=
it
+(
1
+
1
Ii;t 1 ) Debti;t
1
+
J
X
j
+
j
Ii;t
1
Xj;i;t
1
+ "i;t ;
(3)
j=2
where Ii;t
1
is a dummy variable that takes value 1 if country i has adopted the Euro in
year t 1; and the value 0 otherwise, Debti;t
1
6
is country i’s government debt at time t 1;
Morgan, Rime, and Strathan (2004) followed a similar two-step regression procedure, although their
economic question is di¤erent. They investigated how integration of bank ownership across states has
a¤ected economic volatility within states.
3
and Xj;i;t 1 ; for j = 2; :::; J, are the other potential economic fundamentals of country i
at time t
1.
It is worth observing that in the panel regression (3) the coe¢ cients of the impact of
government debt and the other economic variables Xj;i;t
1
are di¤erent before and after
the introduction of the Euro. Before the Euro the coe¢ cients are given by
by
j
+
j;
j
and after
for j = 1; :::; J. If economic fundamental j has the same e¤ect on GDPpc
growth rate volatility before and after the Euro, then the following equality must hold:
j
and thus the coe¢ cient
j
=
j
+
j;
must be equal to zero. For example, testing whether the
adoption of the Euro has changed the e¤ect of debt on the GDPpc growth rate volatility
is equivalent to testing the following null hypothesis
H0 :
1
= 0;
H1 :
1
6= 0:
against the alternative
The rejection of H0 against H1 will indicate that government debt had a di¤erent e¤ect
on GDPpc growth rate volatility before and after the Euro. Furthermore, the comparison
of the sign and the magnitude of the coe¢ cients
j
and
j
+
j
will help to identify the
direction of the changes and to check whether the e¤ect becomes stronger or weaker after
the introduction of the Euro.
In the next section we use the data to report the results from the above regressions
and tests, and discuss the e¤ects that the government debt and the remaining covariates
had on the economic uncertainty before and after the adoption of the Euro.
3
Results and discussion
After …ltering GDPpc growth rate volatility using equations (1) and (2), we ran regression
(3) using all mentioned economic fundamentals.7 We found that some of the variables
(in‡ation, exports, and oil-imports) are statistically insigni…cant. Our …nal regression
omits these insigni…cant variables. The estimation results are summarized in Table 1.
From column 2 of Table 1, we see that, before the Euro, increases in government
debt have a negative e¤ect on GDPpc growth rate volatility, with a coe¢ cient estimate
7
Using equation (1) we found that both country and time …xed e¤ects are statistically signi…cant.
4
Table 1: Estimation results of the impact of economic fundamentals on GDPpc growth
volatility, 1980-2011
GDPpc growth rate volatility
Coe¢ cient
t-Statistic
Prob.
Govnt. Debt
-5.839
-5.98
0.000
Govnt. Debt*Dummy
12.752
2.64
0.025
Govnt. Structural De…cit
-6.615
-29.72
0.000
Govnt. Structural De…cit*Dummy
6.643
31.81
0.000
Gross National Savings
-23.459
-5.13
0.000
Gross National Savings*Dummy
14.192
1.21
0.254
10yr. Govnt. Bond Yield
11.143
2.36
0.040
10yr. Govnt. Bond Yield*Dummy
1.637
0.35
0.730
Imports
-0.090
-1.19
0.260
Imports*Dummy
0.087
1.13
0.283
Unemployment
4.731
1.41
0.190
Unemployment*Dummy
-5.277
-1.53
0.156
Current Account
0.037
4.07
0.002
Current Account*Dummy
-0.038
-3.84
0.003
Oil Exports
-4.794
-3.55
0.005
Oil Exports*Dummy
2.953
2.66
0.024
Government Revenue
-72.143
-2.66
0.024
Government Revenue*Dummy
69.394
2.94
0.015
Government Expenditure
26.244
3.42
0.007
Government Expenditure*Dummy
-16.244
-1.03
0.329
Const.
2.905
6.38
0.000
R-sq within (%)
62.80
R-sq between (%)
72.75
R-sq overall (%)
59.69
Note: This table reports the estimation results of the impact of economic fundamentals on
GDPpc growth rate volatility. The dependent variable (proxy of GDPpc growth volatility) is
given by the square of the residual
it
in (1). The results correspond to regression equation (3).
Recall that the e¤ ect of economic fundamental j before the Euro is measured by the coe¢ cient
j;
and after the Euro by
j
the adoption of the Euro is
+
j:
For example, in this table the e¤ ect of government debt before
5:839, whereas its e¤ ect after the Euro is
5:839 + 12:752 = 6:
913: The total number of both cross-sectional and time-series observations in our sample is 384.
5
equal to
5:839. However, after the adoption of the Euro this e¤ect becomes positive,
with a large coe¢ cient estimate equal to 6: 913; meaning that an increase in government
debt increases GDPpc growth rate volatility. Columns 3 and 4 show that these e¤ects
(before and after Euro) are statistically very signi…cant. Our interpretation of this striking
structural change in the e¤ect of government debt on GDPpc growth volatility is given
at the end of this section.
The rest of the covariates appear less important in accounting for a structural change
on economic uncertainty after the creation of the Euro. First, the coe¢ cient estimate of
the e¤ect of government structural de…cit on the economic uncertainty before the Euro
is
6:643, which has the same sign as the e¤ect of government debt. However, after
the Euro government structural de…cit does not increase economic uncertainty as much
as government debt: the coe¢ cient estimate for de…cit is only 0:028. Second, gross
national savings has a negative and statistically signi…cant e¤ect on GDPpc growth rate
volatility before the Euro. However, the coe¢ cient
GN S
is not statistically signi…cant,
meaning that we cannot reject the null hypothesis for GNS. This implies that there is
no structural change on GDPpc growth rate volatility due to GNS. Third, the yield of
10-year government bond yield increases volatility before and after the Euro, meaning
that economic uncertainty increases the higher is the interest rate that the country must
pay to …nance itself. Since the coe¢ cient
bond yields
is not statistically signi…cant, we can
assert that the e¤ect of government bond yield on GDPpc growth rate volatility is the
same before and after the Euro.
Fourth, current account has a statistically signi…cant e¤ect on GDPpc growth rate
volatility before and after the Euro. Before the Euro the coe¢ cient estimate is positive
but small (0.037). After the Euro, the e¤ect, although statistically signi…cant, seems not
economically very signi…cant (-0.001). Fifth, oil exports and government revenue always
have negative and statistically signi…cant e¤ects before and after the Euro. However,
the e¤ects after the Euro are smaller than the e¤ects before the Euro, meaning that
when oil exports and government revenue are denominated in Euro the capacity to decrease economic uncertainty is smaller. Sixth, government expenditure increases economic
uncertainty before and after the Euro. However, the coe¢ cient
gnt.expend.
is not statis-
tically signi…cant after the Euro, which means that we cannot reject the null hypothesis
of a structural break on economic uncertainty due to government expenditure. Finally,
we …nd that both imports and unemployment rate have no signi…cant e¤ect on GDPpc
growth rate volatility both before and after the adoption of the Euro.
One plausible interpretation of the e¤ect exerted by government debt on economic un-
6
certainty can be obtained by considering a simple economy where government debt is only
used for public investment (transfers to households are not considered here). Government
borrowing (or increases in government debt) is associated with two components: (i) the
marginal productivity (mp) of the public investment using government debt, and (ii) the
interest rate (r) that represents the cost of borrowing. On the one hand, if mp > r,
then the returns from investing the government debt exceed its cost. In this case, the
public investment …nanced by government debt is pro…table and, therefore, there is no
uncertainty associated with the borrowing. On the other hand, if mp < r; then the public
investment is not pro…table. In this case, if there is no mechanism available to reduce the
burden of the debt, then the fear of default increases uncertainty.8 However, a country
with its own national currency has the ‡exibility of using monetary policy to reduce the
interest rate r by depreciating its currency. Thus, this country has the ability to revert
the inequality mp < r. This possibility reduces the uncertainty about the pro…tability of
its public investment.
4
Robustness checks
To support the main …ndings in Table 1, in the Appendix we have conducted a battery of
robustness checks (i) using a di¤erent proxy of GDPpc growth rate volatility given by the
absolute value of residual
it ;
(ii) excluding the …nancial crisis by only focusing on the
period 1980-2007; (iii) considering an additional control variable given by the exchange
rates between the U.S. Dollar and each Eurozone country’s currency; and (iv) rerunning
the main regression (3) using data on the non-Euro European countries: Check Republic,
Denmark, Hungary, United Kingdom, Denmark, Norway, Sweden, and Switzerland. The
last exercise will help us to see whether the stylized facts in Table 1 characterize only the
countries of the Euro area or if they can also be observed in the non-Euro area European
countries. We have also examined (the results are not reported) the immediate e¤ect,
rather than time-lag e¤ect, of government debt and other economic fundamentals on
GDPpc growth rate volatility.
All the above robustness checks con…rmed the stylized facts documented previously in
Table 1. In particular, our main result showing that government debt decreases GDPpc
growth rate volatility before the Euro and increases it after is very consistent in all
considered robustness checks. These e¤ects are still statistically and economically very
8
Another standard channel to reduce the burden of government debt is by creating in‡ation. Christopher Sims (2012) recently pointed out that “Joining the Euro meant that countries gave up the cushion
of country-speci…c in‡ation impacts on debt burden”.
7
signi…cant, and this validates our main message.
Comparing the results with and without the exclusion of …nancial crisis period 20082011, we …nd the following di¤erences. Without …nancial crisis, the signs of the e¤ects of
GNS and government revenue are now positive after the adoption of the Euro, but remain
negative before. Moreover, the sign of the e¤ect of government expenditure now becomes
negative after the Euro, but it remains positive before. This is consistent with the fact
that during an economic crisis, increases in government revenues and savings should help
to reduce economic uncertainty, whereas increases in government spending (expenditure)
could contribute to increasing economic uncertainty.
Finally, the comparison of results using Euro and non-Euro European countries data
sets shows that, contrary to the Eurozone countries, in the non-Euro European countries
the e¤ects of government debt and economic fundamentals, except GNS and unemployment rate, on GDPpc growth rate volatility do not exhibit statistically signi…cant structural changes. The e¤ects of GNS and unemployment rate have the same sign as those
in Table 1. Thus, no economic di¤erence is found for these two covariates. Hence, this
comparison leads to the conclusion that the main …ndings (stylized facts) in Table 1 are
speci…c to the Eurozone countries.
5
Conclusion
In this note we investigated whether the adoption of the Euro - and hence the abandoning
of countries’own monetary policy - has introduced structural changes on the e¤ects that
government debt and other economic fundamentals have on economic uncertainty in the
Eurozone. Our main …nding is that increases in government debt decreased GDPpc
growth rate volatility before the adoption of the Euro, but increased it after. This might
be attributed to the fact that after 1999 Eurozone countries lost the monetary policy
instrument to manage their interest rates associated with their government debts.
The established stylized facts should be taken into account for future research on debt
crisis, possibly using general equilibrium models of self ful…lling debt crisis. Moreover,
political economy models should take into consideration the necessity of creating new
permanent institutions that can o¤set the negative structural changes induced by the
adoption of a common currency.
8
References
[1] Alesina, A., and R. Barro (2002), “Currency Unions,” Quarterly Journal of Economics 117, pp. 409-436.
[2] Acemoglu, D., S. Johnson, J. Robinson, and Y. Thaicharoen (2003), “Institutional
Causes, Macroeconomic Symptoms: Volatility, Crises and Growth,”Journal of Monetary Economics 50, pp. 49-123.
[3] Baldwin, R. and C. Wyplosz (2006), “The Economics of European Integration,”2nd
edn. McGraw-Hill, London.
[4] Barro, R. and S. Tenreyro (2007), “Economic E¤ects of Currency Unions,”Economic
Inquiry 45, pp. 1-197.
[5] De Grauwe, P. (1992), “The Economics of Monetary Integration,” 1st edn, Oxford
University Press, Oxford.
[6] Eichengreen, B. (1991), “Is Europe an Optimum Currency Area,” NBER Working
Paper 3579.
[7] Frankel, J., and A. Rose. (2002), “An Estimate of the E¤ect of Common Currencies
Unions on Trade and Income,”Quarterly Journal of Economics CXVII, pp. 437-466.
[8] Luque, J. and A. Taamouti (2012), “GDP Volatility Before and After the Euro: The
Evidence,”Universidad Carlos III de Madrid, Working Paper 1221.
[9] Morgan, D.P., B. Rime, and P. Strathan (2004), “Bank Integration and State Business Cycles,”Quarterly Journal of Economics 119, pp. 1555-1584.
[10] Mundell, R.A. (1961), “A Theory of Optimum Currency Areas,”American Economic
Review 51, pp. 657-665.
[11] Ramey, G. and V. A. Ramey (1995), “Cross-Country Evidence on the Link between
Volatility and Growth”, American Economic Review 85, pp. 1138-51.
[12] Sims, C. (2012), “Gaps in the Institutional Structure of the Euro Area”, Financial
Stability Review 16, Banque de France, pp. 217-224.
[13] Tenreyro, S. and S. Silva (2010), “Currency Unions in Prospect and Retrospect,”
Annual Review of Economics 2, pp. 51-74.
9
A
Absolute value-based volatility measure
We have considered another panel regression in which the dependent variable is now the
absolute value of the residual j
j
it j =
it + (
1+
1
it j
instead of the square of
Ii;t 1 ) Debti;t
1+
J
X
j
+
it :
j
Iit
1
Xj;i;t
1
+ "i;t :
j=2
The estimation results are reported in Table 2 below. The new results are largely similar
to those in Table 1 of Luque and Taamouti (2012). Only two di¤erences can be reported,
although these do not go against the main …ndings in Luque and Taamouti (2012). First,
the impact of current account is now statistically signi…cant both before and after the
adoption of the Euro, but with small coe¢ cient estimates 0:037 and
0:001, respectively.
Second, the e¤ect of government debt now becomes statistically signi…cant before the
Euro and remains negative.
B
Exclusion of the …nancial crisis period
Here, we show that the results in Table 1 of Luque and Taamouti (2012) remain robust to
the recent …nancial crisis. To do so, we run the above panel regression after excluding the
…nancial crisis, thus considering only the period 1980-2007. We then compare the results
with those obtained using the whole period 1980-2011 [Table 1 of Luque and Taamouti
(2012)].
The estimation results are presented in Table 3 below. Again, we see that the new
results are comparable to the ones in Table 1 of Luque and Taamouti (2012), but with
the following di¤erences. Without …nancial crisis, the signs of the e¤ects of GNS and
government revenue are now positive after the adoption of the Euro, but remain negative
before. Moreover, the sign of the e¤ect of government expenditure now becomes negative
after the Euro, but it remains positive before. This is consistent with the fact that
during an economic crisis, increases in government revenues and savings should help to
reduce economic uncertainty, whereas increases in government spending (expenditure)
could contribute to increase economic uncertainty.
10
C
Additional control variable: exchange rates
In March 1979 the European Community introduced what was known as the European
Exchange Rate Mechanism (ERM) to reduce exchange rate variability and achieve monetary stability in Europe. This was to prepare European countries for the creation of the
Economic and Monetary Union with one single currency.
Given the above institutional change, in the main regression (3) we included an additional control variable given by the exchange rates between the U.S. Dollar and each
Eurozone country’s currency.9
The estimation results using the whole period 1980-2011 are reported in Table 4.10 As
can be seen in Table 4, we …nd that controlling for exchange rate does not alter the results
in Table 1 of Luque and Taamouti (2012).
D
Non-Euro countries
One may also ask if the stylized facts reported in Table 1 of Luque and Taamouti (2012)
can also be observed in the non-Euro area EU countries. To investigate this question,
we run regression (3) using data on the following non-Euro European countries: Check
Republic, Denmark, Hungary, United Kingdom, Denmark, Norway, Sweden, and Switzerland.
In the empirical analysis the total number of both cross-sectional and time-series observations is 256. The estimation results for the period 1980-2011 are presented in Table
5. The latter shows that the e¤ects of government debt and other economic fundamentals,
except GNS and unemployment rate, are statistically insigni…cant before and after 1999.
The e¤ects of GNS and unemployment rate have the same sign as the ones in Table 1 of
Luque and Taamouti (2012), thus no economic di¤erence is found for these two variables.
Hence, the comparison between Euro and non-Euro European countries leads to the
conclusion that the …ndings (stylized facts) in the main paper Luque and Taamouti (2012)
are speci…c to the Eurozone countries.
9
The data on exchange rates is obtained from EconStats.
Similar results hold when we exclude the …nancial crisis period 2008-2011. These results are available
from the authors upon request.
10
11
Table 2: Estimation results of the impact of economic fundamentals on GDPpc growth
volatility, with absolute value volatility, 1980-2011
GDPpc growth rate volatility
Coe¢ cient
t-Statistic
Prob.
Govnt. Debt
-0.474
-0.81
0.419
Govnt. Debt*Dummy
1.786
2.05
0.042
Govnt. Structural De…cit
-0.686
-7.82
0.000
Govnt. Structural De…cit*Dummy
0.681
7.49
0.000
Gross National Savings
-4.949
-2.93
0.004
Gross National Savings*Dummy
3.274
1.61
0.109
10yr. Govnt. Bond Yield
2.139
2.67
0.008
10yr. Govnt. Bond Yield*Dummy
-0.252
-0.25
0.799
Imports
0.007
0.33
0.742
Imports*Dummy
-0.007
-0.30
0.767
Unemployment
0.493
0.63
0.531
Unemployment*Dummy
-0.808
-0.77
0.445
Current Account
0.000
-0.06
0.955
Current Account*Dummy
0.000
0.04
0.968
Oil Exports
-1.143
-2.32
0.021
Oil Exports*Dummy
0.835
1.51
0.134
Government Revenue
-12.352
-2.82
0.005
Government Revenue*Dummy
13.461
2.36
0.019
Government Expenditure
0.811
0.29
0.770
Government Expenditure*Dummy
2.797
0.77
0.445
Const.
1.142
13.70
0.000
R-sq within (%)
0.432
R-sq between (%)
0.641
R-sq overall (%)
0.418
Note: This table reports the estimation results of the impact of economic fundamentals on the absolute
value of the residual
it
(another proxy of GDPpc growth volatility). The results correspond to regression
(3). Recall that the e¤ect of economic fundamental j before the Euro is given by the coe¢ cient
+
j:
after by the coe¢ cient
j
adoption of the Euro is
0:474, whereas the e¤ect after the Euro is
j;
and
For example, in this table the e¤ect of government debt before the
0:474 + 1:786 = 1: 312: The total
number of both cross-sectional and time-series observations of our sample is 384.
12
Table 3: Estimation results of the impact of economic fundamentals on GDPpc growth
volatility, 1980-2007 (without …nancial crisis period)
GDPpc growth rate volatility
Coe¢ cient
t-Statistic
Prob.
Govnt. Debt
-5.264
-5.67
0.000
Govnt. Debt*Dummy
8.245
3.24
0.009
Govnt. Structural De…cit
-6.586
-29.05
0.000
Govnt. Structural De…cit*Dummy
6.607
29.97
0.000
Gross National Savings
-20.572
-5.75
0.000
Gross National Savings*Dummy
21.390
3.99
0.003
10yr. Govnt. Bond Yield
9.905
2.29
0.045
10yr. Govnt. Bond Yield*Dummy
-9.329
-1.94
0.081
Imports
-0.095
-.137
0.202
Imports*Dummy
0.102
1.44
0.181
Unemployment
6.050
1.74
0.112
Unemployment*Dummy
-6.420
-1.53
0.157
Current Account
0.036
5.76
0.000
Current Account*Dummy
-0.036
-5.71
0.000
Oil Exports
-4.407
3.54
0.005
Oil Exports*Dummy
2.866
2.67
0.024
Government Revenue
-65.705
-2.91
0.016
Government Revenue*Dummy
75.237
3.18
0.010
Government Expenditure
25.617
3.64
0.005
Government Expenditure*Dummy
-31.089
-2.94
0.015
Const.
2.152
6.16
0.000
R-sq within (%)
81.28
R-sq between (%)
38.68
R-sq overall (%)
78.10
Note: This table reports the estimation results of the impact of economic fundamentals on GDPpc
growth volatility for the period 1980-2007 (…nancial crisis not included). The dependent variable (proxy
of GDPpc growth volatility) is given by the square of the residual
it
in (1). The results correspond
to regression (3). Recall that the e¤ect of economic fundamental j before the Euro is given by the
coe¢ cient
j;
and after by the coe¢ cient
j
+
j:
The total number of both cross-sectional and time-
series observations of our sample is 336.
13
Table 4: Estimation results of the impact of economic fundamentals on GDPpc growth
volatility, controling for foreign exchange rates, 1980-2011
GDPpc growth rate volatility
Coe¢ cient
t-Statistic
Prob.
Govnt. Debt
-5.797
-6.08
0.000
Govnt. Debt*Dummy
12.681
2.59
0.027
Govnt. Structural De…cit
-6.622
-29.10
0.000
Govnt. Structural De…cit*Dummy
6.658
30.78
0.000
Gross National Savings
-23.202
-5.01
0.001
Gross National Savings*Dummy
13.417
1.06
0.313
10yr. Govnt. Bond Yield
11.021
2.09
0.063
10yr. Govnt. Bond Yield*Dummy
2.278
0.39
0.706
Imports
-0.087
-1.28
0.230
Imports*Dummy
0.084
1.22
0.249
Unemployment
4.663
1.59
0.142
Unemployment*Dummy
-5.423
-1.35
0.206
Current Account
0.037
3.83
0.003
Current Account*Dummy
-0.038
-3.60
0.005
Oil Exports
-4.756
-3.44
0.006
Oil Exports*Dummy
3.461
2.38
0.038
Government Revenue
-71.520
-2.51
0.031
Government Revenue*Dummy
66.288
2.29
0.045
Government Expenditure
26.371
3.30
0.008
Government Expenditure*Dummy
-15.894
-1.02
0.331
Exchange Rate
0.400
0.11
0.917
Exchange Rate*Dummy
0.896
0.20
0.846
Const.
2.837
5.38
0.000
R-sq within (%)
62.90
R-sq between (%)
74.94
R-sq overall (%)
60.04
Note: This table reports the estimation results of the impact of economic fundamentals on GDPpc
growth volatility. The dependent variable (proxy of GDPpc growth volatility) is given by the square
of the residual
it
in (1). In regression (3) we also control for exchange rates. Recall that the e¤ect
of economic fundamental j before the Euro is given by the coe¢ cient
j
+
j:
j;
and after by the coe¢ cient
The total number of both cross-sectional and time-series observations of our sample is 384.
14
Table 5: Estimation results of the impact of economic fundamentals on GDPpc growth
volatility, non-Euro countries, 1980-2011
GDPpc growth rate volatility
Coe¢ cient
t-Statistic
Prob.
Govnt. Debt
0.132
1.40
0.257
Govnt. Debt*Dummy
-0.274
-2.35
0.100
Govnt. Structural De…cit
-0.453
-2.36
0.099
Govnt. Structural De…cit*Dummy
0.432
2.07
0.130
Gross National Savings
-8.906
-3.90
0.030
Gross National Savings*Dummy
11.073
2.47
0.090
10yr. Govnt. Bond Yield
0.092
0.05
0.965
10yr. Govnt. Bond Yield*Dummy
1.662
1.24
0.303
Imports
0.003
0.62
0.582
Imports*Dummy
-0.009
-1.00
0.391
Unemployment
0.847
3.25
0.047
Unemployment*Dummy
-1.201
-4.46
0.021
Current Account
0.019
1.61
0.207
Current Account*Dummy
-0.004
-0.32
0.770
Oil Exports
1.110
1.64
0.199
Oil Exports*Dummy
-1.573
-197
0.144
Government Revenue
9.923
1.71
0.186
Government Revenue*Dummy
-10.374
-2.75
0.071
Government Expenditure
-24.889
-2.39
0.097
Government Expenditure*Dummy
29.525
1.99
0.141
Const.
0.446
25.47
0.000
R-sq within (%)
27.54
R-sq between (%)
11.72
R-sq overall (%)
27.03
Note: This table reports the estimation results of the impact of economic fundamentals on GDPpc
growth volatility, using a di¤erent sample of countries (Check Republic, Denmark, Hungary, United
Kingdom, Denmark, Norway, Sweden, and Switzerland). The dependent variable (proxy of GDPpc
growth volatility) is given by the square of the residual
it
in (1). The results correspond to regression
(3). Recall that the e¤ect of economic fundamental j before the Euro is given by the coe¢ cient
after by coe¢ cient
j
+
j:
j;
and
The total number of both cross-sectional and time-series observations of our
sample is 256.
15