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on Financial Development and Growth |
| By: | Karlis Vilerts (Bank of Latvia); Olegs Tkacevs (Bank of Latvia) |
| Abstract: | This paper studies the impact of sovereign bond yields on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra-expansionary monetary policies of recent years. By employing the panel data econometric approach for a sample of OECD, EU and euro area countries over the period 1980–2014, the study suggests a positive and statistically significant impact of long-term sovereign bond yields on primary balances (PBs), indicating that a decrease in borrowing costs leads to a statistically significant deterioration of fiscal balances. The findings herein also suggest that falling bond yields pass on to fiscal balances through increases in government expenditure rather than revenue reduction. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra-low interest rates may cause negative side effects for fiscal discipline. |
| Keywords: | fiscal policy, fiscal reaction function, sovereign bond yields, panel data |
| JEL: | E62 H62 |
| Date: | 2016–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201605&r=fdg |
| By: | Francesco Saraceno (OFCE Sciences PO) |
| Abstract: | The Economic and Monetary Union (EMU) institutions are consistent with a New Consensus that emerged in the 1980s, limiting the role for macroeconomic (particularly fiscal) policy to short term stabilizations by means of rules. I will argue that the policy inertia induced by the Consensus may have played a role in the disappointing performance of EMU economies even before the crisis. The crisis of the Consensus, and the debate on secular stagnation, proved that Keynesian (and possibly) persistent excesses of savings over investment may hamper growth. This has put fiscal policy back to the center of the scene, and given the General Theory, at eighty, a second youth. I will argue therefore that the EMU fiscal rule should be amended to allow semi-permanent negative government savings. I will finally argue that a modified Golden Rule may serve this objective, and allow EU-wide policy coordination. This seems the only reasonable reform with some chances of being adopted by the EU divided policy makers. |
| Keywords: | Fiscal rules, fiscal policy, EMU, golden rule, secular stagnation, Keynes, policy mix, public investment |
| JEL: | B22 E02 E62 E65 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1632&r=fdg |
| By: | Badinger, Harald; Fichet de Clairfontaine, Aurélien; Reuter, Wolf Heinrich |
| Abstract: | This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materializing through interest rate effects and inter-generational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985-2012. As previous studies we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules. (authors' abstract) |
| Keywords: | Twin Deficits; Fiscal Policy; Fiscal Rules; Current Account |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:4579&r=fdg |
| By: | Skritek, Bernhard; Crespo Cuaresma, Jesus; Kryazhimskii, Arkadii V.; Prettner, Klaus; Prskawetz, Alexia; Rovenskaya, Elena |
| Abstract: | We revisit the influential economic growth model by Lucas (1988) ["On the mechanics of economic development." Journal of Monetary Economics, 22(1):3-42], assuming that households optimally allocate consumption and education over the life-cycle given an exogenous interest rate and exogenous wages. We show that in such a partial equilibrium setting, the original two-state (physical capital and human capital) optimization problem can be decomposed into two single-state optimal control models. This transformation allows us to rigorously prove the existence of a singular control describing the allocation of education time along a balanced growth path. We derive a constructive condition for a singular control to exist and show that under this condition infinitely many singular controls are optimal in the individual household problem. In contrast to the original general equilibrium framework in which an agent always chooses part-time education and part-time work, in our framework such an agent might find it optimal to allocate her whole available time to education at the beginning of her life and to focus on labor supply only when she is older. (authors' abstract) |
| Keywords: | Optimal lifetime education; optimal control; singular control; economic growth; human capital |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:4653&r=fdg |
| By: | Yongzheng Liu (School of Finance, China Financial Policy Research Center, Renmin University of China); James Alm (Department of Economics, Tulane University) |
| Abstract: | The central government of the People's Republic of China enacted a fiscal reform known as the "Province-Managing-County" (PMC) fiscal reform in the early 2000s. This reform eliminated the prefecture city government as the intermediate layer between the province and the county, and was intended largely to improve administrative efficiency and to lessen the fiscal stress of county governments. We apply a difference-in-difference method using a panel data set of 263 cities nationwide over the period of 1999-2011 to examine how the introduction of the PMC fiscal reform affects the economic growth of the cities. Our results show that on average implementing the PMC fiscal reform moderately increases city GDP growth by around 1 percentage point. We argue that this unexpected positive growth effect of the reform is induced by the expansion of land supply of the reformed cities, which in the post-reform period have faced the need to look for revenues outside the budget system, mainly extra-budgetary funds in the form of leasing land. Our analysis provides evidence on this argument, and reveals that the reformed cities tend to expand land leasing at a speed that is 14 percent higher than the non-reformed cities. Furthermore, we show that the impacts of the reform tend to be strengthened over time following the introduction of the reform. Our results are quite robust to alternative estimation methods. |
| Keywords: | Province-Managing-County Fiscal Reform, Land Lease, City GDP Growth, China. |
| JEL: | H11 H77 R11 R52 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1625&r=fdg |
| By: | Lukmanova, Elizaveta; Tondl, Gabriele |
| Abstract: | This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature: It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002-2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle 2002 which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in the current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone. (authors' abstract) |
| Keywords: | Business cycle synchronization; Macroeconomic imbalances; Monetary union; Euro Area; Simultaneous equations model; Panel data |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:5087&r=fdg |
| By: | Feldkircher, Martin; Huber, Florian |
| Abstract: | In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs. (authors' abstrct) |
| Keywords: | Unconventional monetary policy; transmission channel; Bayesian TVP-SV-VAR |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus005:4934&r=fdg |