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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