A new deliverable on government debt deleveraging by Alexandre Lucas Cole (LUISS Guido Carli), Chiara Guerello (LUISS Guido Carli), and Guido Traficante (European University of Rome) has been published today:
D4.4: Government Debt Deleveraging in the EMU
Abstract: We evaluate the stabilization properties and welfare implications of different government debt deleveraging schemes and instruments for deleveraging in a currency union. In a two-country new-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under a range of alternative shocks and under alternative scenarios for fiscal policy coordination. We find that greater stabilization is achieved by backloading the deleveraging process and when the two countries reduce the net exports gap. Moreover, taxes are a better instrument for deleveraging compared to government consumption or transfers. Our policy prescriptions for the Eurozone are to reduce government debt more gradually over time and less during recessions and to do so using distortionary taxes, while concentrating on reducing international demand imbalances.
Deliverable 6.4 by Iain Begg (LSE) has been published today:
Fiscal and other rules in EU economic governance: helpful, largely irrelevant or unenforceable?
Abstract: EU Member States have been pushed to adopt more extensive and intrusive fiscal rules, particularly in the euro area, but also in other EU Member States, yet evidence that they are succeeding is, at best, tentative. The EU level Stability and Growth Pact (SGP) has been – and remains – the most visible such rule, but has been complemented by a profusion of national rules and by new provisions on other sources of macroeconomic imbalance. Much of the analysis of rules has concentrated on their technical merits, but tends to neglect the political economy of compliance. This paper examines the latter looking at compliance with fiscal rules at EU and Member State levels, and at the rule-based mechanisms for curbing other macroeconomic imbalances. It concludes that politically-driven implementation and enforcement shortcomings are given too little attention, putting at risk the integrity and effectiveness of rules.
A new deliverable on Revisions of the cyclically adjusted budget balance published (D2.4, CEPS).
Abstract: The aim of this study is to analyse the revisions of the cyclically adjusted balances of the EU15 countries in order to learn whether the turn of the cycle is particularly prone to error and to evaluate whether the EU’s fiscal framework is well equipped for dealing with potential revisions. The analysis is conducted with real-time fiscal data published by the European Commission for the years 2003-2016. Our study finds that the cyclically adjusted balance forecasts as well as in-year estimates are heavily revised in the following years. Moreover first ex-post data are still significantly revised in the following years. We find no strong evidence to support the notion that these revisions are larger at the turn of the cycle and thus conclude that revisions are of a systematic nature. The revisions are large enough to cause significant differences in the ex-ante and ex-post assessments by the European Commission on whether member states achieved their structural targets. This study elaborates on the built-in flexibility in the Stability and Growth Pact (SGP), on which the Commission can capitalise to avoid unwarranted ex-post sanctioning. Moreover, the SGP entails several safeguards against revisions negatively affecting the policy advice given to member states, particularly with regard to sanctioning.
A new deliverable on measuring fiscal spillovers has been published:
D1.3: Measuring fiscal spillovers in EMU and beyond: A Global VAR approach (CEPS).
Abstract: This paper identifies and measures fiscal spillovers in the EU countries empirically, using a structurally stable global vector autoregression (GVAR) model. For our purposes, the individual EU countries, as well as the most important international trading partners, are modelled with a special focus on the effects of either single-country or coordinated fiscal shocks such as increases in fiscal spending. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. For this purpose, we differentiate between the spillovers of fiscal shocks in specific EMU member countries and the spillovers of “regional” shocks, i.e. area-wide shocks to fiscal policy. Fiscal policy is measured by government expenditure, government revenues or the government budget balance, all as percentages of GDP. Special attention is paid to the question of whether or not spillovers are stronger within the EMU group than within the “Rest of Europe” due to tighter financial or trade links.
New deliverable by NIESR published: Macroprudential tools, transmission and modelling (D4.7).
Abstract: The purpose of this paper is twofold. First, we review the theoretical and empirical literature on macroprudential policies and tools. Second, we test empirically the effectiveness of several macroprudential policies and tools using three datasets from the IMF and BIS that cover up to 19 OECD countries during 2000-2014, thus giving wide coverage of instruments. In addition, our focus on OECD countries gives us access to a wider range of control variables whose omission may lead to excessively favourable results on the impact of macroprudential policies. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.
A new deliverable by LUISS has been published: One EMU Fiscal Policy for the EURO (D3.2).
Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties of different fiscal policy scenarios. Our main findings are the following: a) a government spending rule that targets net exports rather than domestic output produces more stable dynamics, b) consolidating government budget constraints across countries and moving tax rates jointly provides greater stabilization than with separate budget constraints and independent tax rate movements, c) taxes on labour income are exponentially more distortionary than taxes on firm sales. These findings point out to possible policy prescriptions for the Eurozone: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of fiscal union or both, while avoiding the excessive use of labour taxes, in favour of sales taxes.
New deliverable by IHS published: Cross-Country Long-Run Spillover Effects and Coordination of Fiscal Policy: a Quantitative Exploration for Europe (D1.6).
Abstract: We develop a multi-country CGE-OLG model with detailed structures for the households and the governments. We then perform simulations to quantify spillovers from policy reforms and exogenous shocks typical of crisis and compare some forms of policy coordination, without being comprehensive. In the standard labor and consumption tax reforms that we consider, we find that spillovers are small and that simultaneous implementation of these fiscal reforms, one example of coordination, is not advantageous. Spillovers from exogenous shocks are significantly larger and area-wide shocks have a larger impact than a shock to a country alone. The type of fiscal policy response to a shock matters. An appropriate coordinated policy response can improve domestic economic circumstances and reduce negative spillovers to other countries. The gains are larger in case of an area-wide exogenous shock, but only to a small extent. The temporary violation of public debt rules can be beneficial for all countries.