The Euro Area 12: A Comparative Assessment of Its Member States in the Period 1998–2022

Round 1

Reviewer 1 Report

You should describe with more details and more specifically the objectives of the paper and also you should give more literature references in the related research issue analyzed in the paper

You should try to describe better the policy implications 

Author Response

Comments and Suggestions for Authors: Reply

1. You should describe with more details and more specifically the objectives of the paper

We did it.

2. You should give more literature references in the related research issue analyzed in the paper

The primary focus of the paper revolves around hysteresis. We have included a few additional references related to this topic.

3. You should try to describe better the policy implications

We did it, with a particular emphasis on the conclusions.

Author Response File: Author Response.pdf

Reviewer 2 Report

‘the new stylized fact points for the existence of hysteresis in aggregate demand (Ball, 2014; Blanchard et al., 2015; Yellen, 2016; Cerra & Saxena, 2017; Tervala, 2021)’, ‘which can only be changed by supply-side factors (Lucas, 1987, 2003; Campbell & Mankiw, 1987; Blanchard & Quah, 1989)’, ‘pointed to the presence of hysteresis in aggregate demand (see Ball, 2014; Blanchard et al., 2015; Ioannides & Pissarides, 2015; Romer, 2016; Yellen, 2016; Cerra & Saxena, 2005, 2017; Vines & Wills, 2018; Cerra et al.. 2020; Costa et al. 2020; Tervala, 2021)’, ‘this fact supports the existence of hysteresis in aggregate demand (Ball, 2014; Blanchard et al., 2015; Cerra & Saxena, 2005, 2017; Cerra et al., 2020; Tervala, 2021)’, ‘affecting the speed of economic recovery (Cerra & Saxena, 2005, 2017; Ball, 102 2014; Blanchard et al., 2015; Coibiou et al., 2017; Cerra et al. 2020; Costa et al., 2020; Tervala, 103 2021)’ – develop on the specific contribution of each mentioned reference. ‘Covid-19’ - COVID-19. Avoid excessive endnotes, try and integrate them in the text. ‘. The creation of the 114 Euro would lead investors to perceive that the high risks associated with cross border 115 investments within the EU would disappear (Krugman, 2013), and it did’ – unclear. “the functioning of global supply 177 chains was disrupted” – this quote can be easily rephrased. Use only the acronym after the first full phrase occurrence. E.g., ‘Seemingly Unrelated Regression Equations (SURE)’. The figures and the tables require more explanations. ‘6. CONCLUSION’ is way too short, with no specific future research directions and limitations. About half of the cited sources are not from peer reviewed journals.

Author Response

Comments and Suggestions for Authors: Reply

1. ‘the new stylized fact points for the existence of hysteresis in aggregate demand (Ball, 2014; Blanchard et al., 2015; Yellen, 2016; Cerra & Saxena, 2017; Tervala, 2021)’, ‘which can only be changed by supply-side factors (Lucas, 1987, 2003; Campbell & Mankiw, 1987; Blanchard & Quah, 1989)’, ‘pointed to the presence of hysteresis in aggregate demand (see Ball, 2014; Blanchard et al., 2015; Ioannides & Pissarides, 2015; Romer, 2016; Yellen, 2016; Cerra & Saxena, 2005, 2017; Vines & Wills, 2018; Cerra et al.. 2020; Costa et al. 2020; Tervala, 2021)’, ‘this fact supports the existence of hysteresis in aggregate demand (Ball, 2014; Blanchard et al., 2015; Cerra & Saxena, 2005, 2017; Cerra et al., 2020; Tervala, 2021)’, ‘affecting the speed of economic recovery (Cerra & Saxena, 2005, 2017; Ball, 102 2014; Blanchard et al., 2015; Coibiou et al., 2017; Cerra et al. 2020; Costa et al., 2020; Tervala, 103 2021)’

Develop on the specific contribution of each mentioned reference.

We did it.

2. ‘Covid-19’ - COVID-19. Avoid excessive endnotes, try and integrate them in the text.

We have incorporated the contents of all the endnotes into the main text body.

3. The creation of the Euro would lead investors to perceive that the high risks associated with cross border investments within the EU would disappear (Krugman, 2013), and it did’ - unclear. (lines 114, 115)

We have elaborated upon the statement.

4. “the functioning of global supply chains was disrupted”. This quote can be easily rephrased. (line 117).

We have reworded it - Global supply chains have experienced significant disruptions.

5. Use only the acronym after the first full phrase occurrence. E.g., ‘Seemingly Unrelated Regression Equations (SURE)’.

We did it.

6. The figures and the tables require more explanations.

We have expanded upon the explanations related to the figures and tables.

7. ‘6. CONCLUSION’ is way too short, with no specific future research directions and limitations.

We have expanded upon this section by delving deeper into the policy implications, exploring the limitations of our research, and providing an outline for future directions.

8. About half of the cited sources are not from peer reviewed journals.

The sources not from peer-reviewed journals include electronic books, IMF and NBER working papers from renowned authors. Additionally, some of the working papers have been published in peer-reviewed journals. We now cite the published articles instead of the corresponding working papers. Furthermore, we have added a few more peer-reviewed references.

Author Response File: Author Response.pdf

Reviewer 3 Report

The paper aims to evaluate aggregate demand to assess whether the hysteresis effect occurred in the Euro 12 MS, taking panel data from 1998 to 2022. The methodology (SURE, Kalman filter) is appropriately applied and justified. The research problem is well-defined, essential, and up-to-date. The division of the countries into net receivers and net contributors helps provide suitable policy recommendations.

Three minor remarks:

1. Several exogenous shocks are defined in the paper. As the COVID-19 pandemic and the Russia-Ukraine war are entirely exogenous, such an interpretation is invalid for the global financial crisis of 2008. It would be necessary to explain it in terms of the economic interpretation of crises. 

2. How are the exogenous shocks included in the model?

3. Formal:

Figure 1 - symbol IE is used twice; it should be replaced by Greece GR/EL

References need ordering, for example, Robert J. Barro José F. Ursúa. (2008). Macroeconomic Crises Since 1870 (No. 13940). https://doi.org/10.1017/CBO9781107415324.004  starts from the first name, not the family name, which is Barro

Author Response

Comments and Suggestions for Authors: Reply

The paper aims to evaluate aggregate demand to assess whether the hysteresis effect occurred in the Euro 12 MS, taking panel data from 1998 to 2022. The methodology (SURE, Kalman filter) is appropriately applied and justified. The research problem is well-defined, essential, and up-to-date. The division of the countries into net receivers and net contributors helps provide suitable policy recommendations.

Three minor remarks:

1. Several exogenous shocks are defined in the paper. As the COVID-19 pandemic and the Russia-Ukraine war are entirely exogenous, such an interpretation is invalid for the global financial crisis of 2008. It would be necessary to explain it in terms of the economic interpretation of crises.

We recognize that the interpretation of the 2008 Global Financial Crisis is subject to debate. Consequently, we have removed the term ‘exogenous’ from the title of Section 3 and introduced a new subsection, Section 3.1, which delves into hysteresis and the distinctive features of shocks. Specifically, we explore the differentiation between exogenous and endogenous shocks, as well as the impact of different demand and supply shocks on the output gap and potential output (through the lasting effect of hysteresis).

2. How are the exogenous shocks included in the model?

In Section 4, we have introduced a new subsection, Section 4.2, in which we explain the way the shocks are included in the model.

In our model, shocks typically result in either positive or negative output gaps. These shock effects are encapsulated within the output gap. Hysteresis, which represents lasting effects of the output gap on potential output, is captured through equation (2). Permanent shocks on supply manifest in the residuals of the frontier equation (1) and contribute to the unexplained random shocks component in growth decomposition.

Formal:

Figure 1 - symbol IE is used twice; it should be replaced by Greece GR/EL

References need ordering, for example, Robert J. Barro José F. Ursúa. (2008). Macroeconomic Crises Since 1870 (No. 13940). https://doi.org/10.1017/CBO9781107415324.004  starts from the first name, not the family name, which is Barro

We have addressed the specific formal issues that were pointed out.

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

A lot of sources are not developed or commented upon. E.g.,

'Dosi et al. (2018) and Cerra et al. (2023) have undertaken extensive research on hysteresis, its dynamics, and its implications for economic growth and business cycles.' - and what were the results?

 Covid-19 - COVID-19. There are many such instances.

' to the potential or frontier output, which can only be changed by supply-side factors (Lucas, 1987, 2003; Campbell & Mankiw, 1987; Blanchard & Quah, 1989)', 'The above assumptions are the premisses of New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models of the business cycle (e.g. Clarida et al.,1998; Blanchard & Galí, 2007; Avouyi-Dovi & Sahuc, 2016)' - who claims what?

'recent' - why mentioning, as you also indicates the year?

'providing insights into how persistent economic shocks can alter long-term growth trajectories.' - clarify how.

'Yellen (2017) offers valuable perspectives on the presence of hysteresis within the context of monetary policy and its implications for central bank decision-making.' - and what are those perspectives?

Author Response

We developed and provided comments on the sources. We replaced ‘Covid-19’ with ‘COVID-19’ and omitted the word ‘recent’. Additionally, we clarified how shocks can impact long-term growth trajectories.

Author Response File: Author Response.pdf

Round 3

Reviewer 2 Report

'Dosi et al. (2018) and Cerra et al. (2023) have undertaken extensive research on hysteresis, its dynamics, and its implications for economic growth and business cycles' - and what were the results?

Covid-19 - COVID-19, everywhere.

'Notable examples of these models include works by Clarida et al. (1998), Blanchard and Galí (2007), and Avouyi-Dovi and Sahuc (2016).' - this is zero info. Clarify why.

'Costa et al. (2021) utilize a VAR model to analyze the relationship between the output gap and potential output in Germany and Portugal, revealing insights into the persistent effects of hysteresis on potential output in different economic contexts.' - what are those insights?

'Cerra and Saxena (2008, 2017) and Cerra et al. (2023) new stylized fact regarding the business cycle asserts' - poorly constructed.

'Cerra & Saxena (2008) examined the role of fiscal and monetary policies in either reversing or perpetuating economic shocks, shedding light on the dynamics of hysteresis.' - clarify 'the dynamics of hysteresis'.

'But the 2020 Covid-19 pandemic had the potential to directly hit the economy's supply (Cerra & Saxena, 2023)' - explain.

'There is a consensus that countries with high general government deficits are usually the most vulnerable to crises (Baldwin & Giavazzi, 2015).' - a consensus with a single source?

'Cerra and Saxena (2008, 2017) and Cerra et al. (2023) new stylized fact regarding the business cycle asserts' - poorly constructed.

Author Response

Comments and Suggestions for Authors: Reply (Round 3)

'Dosi et al. (2018) and Cerra et al. (2023) have undertaken extensive research on hysteresis, its dynamics, and its implications for economic growth and business cycles' - and what were the results?

We expanded upon the explanations we gave in Round 2.

Covid-19 - COVID-19, everywhere.

We replaced Covid-19 with COVID-19 everywhere.

'Notable examples of these models include works by Clarida et al. (1998), Blanchard and Galí (2007), and Avouyi-Dovi and Sahuc (2016).' - this is zero info. Clarify why.

The sentence aims to highlight to the reader notable examples of New Keynesian DSGE models that assume temporary shocks, whether affecting demand or supply, do not modify the productive capacity of the economy.

'Costa et al. (2021) utilize a VAR model to analyze the relationship between the output gap and potential output in Germany and Portugal, revealing insights into the persistent effects of hysteresis on potential output in different economic contexts.' - what are those insights?

We provided the insights.

'Cerra and Saxena (2008, 2017) and Cerra et al. (2023) new stylized fact regarding the business cycle asserts' - poorly constructed.

We provided an alternative construction:

'Cerra & Saxena (2008) examined the role of fiscal and monetary policies in either reversing or perpetuating economic shocks, shedding light on the dynamics of hysteresis.' - clarify 'the dynamics of hysteresis'.

We clarified the dynamics of hysteresis pointed out by the authors:

'But the 2020 Covid-19 pandemic had the potential to directly hit the economy's supply (Cerra & Saxena, 2023)' - explain.

We provided an explanation.

'There is a consensus that countries with high general government deficits are usually the most vulnerable to crises (Baldwin & Giavazzi, 2015).' - a consensus with a single source?

We reworded the sentence.

Comments on the Quality of English Language

'Cerra and Saxena (2008, 2017) and Cerra et al. (2023) new stylized fact regarding the business cycle asserts' - poorly constructed.

We provided an alternative construction.

Author Response File: Author Response.pdf

Round 4

Reviewer 2 Report

The paper can now be published.