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on Public Economics |
| By: | Kai A. Konrad; Stergios Skaperdas |
| Abstract: | Leaders compensate supporters not just for performing their duties but also in order to preempt an overthrow by the same supporters. We show how succession rules affect the power of leaders relative to supporters as well as the resources expended on possible succession struggles. We compare two regimes of leadership succession: the conclave regime and the divide-et-impera regime which differ with respect to the role of supporters of the previous leader once the new leader takes power. The leadership rent is higher and supporters receive a lower compensation in the divide-et-impera regime, as supporters have to fight harder for succession to avoid the grim outcome of loss. A leader, then, would like to induce the divide-et-impera regime even when every supporter has veto power over his leadership. |
| Keywords: | political leadership, political support, political survival, successorship |
| JEL: | D72 D74 H50 N40 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1534&r=pbe |
| By: | Silvia Ardagna (Department of Economics, Harvard University, Littauer Center, Cambridge, MA 02138, USA.); Francesco Caselli (Department of Economics, Harvard University, Littauer Center, Cambridge, MA 02138, USA.); Timothy Lane (Policy Development and Review Department, IMF, 700 19th St.NW,Washington, DC 20431, USA.) |
| Abstract: | We use a panel of 16 OECD countries over several decades to investigate the effects of gov- ernment debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contempora- neous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. How- ever, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits. |
| Keywords: | Government deficit; public debt; long-term interest rates. |
| JEL: | E62 E44 H62 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040411&r=pbe |
| By: | Silvia Ardagna (Wellesley College, Department of Economics, 106 Central Street Wellesley, MA 02481, USA.) |
| Abstract: | Using a panel of OECD countries from 1960 to 2002, this paper shows that financial markets value fiscal discipline. Interest rates, particularly those of long-term government bonds, decrease when countries' fiscal position improves and increase around periods of budget deteriorations. Stock market prices surge around times of substantial fiscal tightening and plunge in periods of very loose fiscal policy. In addition, the paper shows that results depend on countries' initial fiscal conditions and on the type of fiscal consolidations. Fiscal adjustments that occur in country-years with high levels of government deficit, that are implemented by cutting government spending, and that generate a permanent and substantial decrease in government debt are associated with larger reductions in interest rates and increases in stock market prices. |
| Keywords: | Fiscal stabilizations; fiscal expansions; interest rates; stock market prices. |
| JEL: | E62 E44 H62 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040390&r=pbe |
| By: | Maarten Bosker; Steven Brakman; Harry Garretsen; Marc Schramm |
| Abstract: | Many modern trade and growth models are characterized by multiple equilibria. In theory the analysis of multiple equilibria is possible, but in practice it is difficult to test for the presence of multiple equilibria. Based on the methodology developed by Davis and Weinstein (2004) for the case of Japanese cities and WWII, we look for multiple equilibria in a model of German city growth. The strategic bombing of Germany during WWII enables us to assess the empirical relevance of multiple equilibria in a model of city-growth. In doing so, and in addition to the Davis and Weinstein framework, we look at the spatial inter-dependencies between cities. The main findings are twofold. First, multiple equilibria seem to be present in German city growth. Our evidence supports a model with 2 stable equilibria. Second, the explicit inclusion of geography matters. Evidence for multiple equilibria is weaker when spatial interdependencies are not taken into account. |
| JEL: | F12 R11 R12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1553&r=pbe |
| By: | António Afonso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Werner Ebert (Bundesministerium der Finanzen, Detlev-Rohwedder-Haus,Wilhelmstrße 97, D-10117 Berlin, Germany.); Ludger Schuknecht (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Michael Thöne (Finanzwissenschaftliches Forschungsinstitut (FiFo), Köln University, Zülpicher Str. 182, D-50937 Köln, Germany.) |
| Abstract: | In this paper we review the linkages between the quality of public finances, that is, the level and composition of public expenditure and its financing via revenue and deficits, and economic growth. We review the various channels through which public finances affect growth and its underlying determinants (institutional framework, employment, savings and investment, innovation). The paper addresses the approaches used to assess the performance and efficiency of public spending, and surveys the empirical findings on the impact of fiscal variables on sustained economic growth. |
| Keywords: | quality of public finances, efficiency, growth |
| JEL: | H50 O40 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050438&r=pbe |
| By: | Peter Birch Sørensen |
| Abstract: | The dual income tax combines a progressive tax schedule for labour income with a low flat tax rate on capital income and corporate income. This paper restates the case for the dual income tax and discusses alternative methods of taxing business income under such a tax system, paying special attention to the taxation of income from closely held corporations. It is argued that the imputed normal return to shares in unlisted companies should be taxed as capital income, while above-normal returns should be subject to labour income tax. The paper demonstrates that such a tax scheme can be designed to be neutral towards the firm’s investment and financing decisions and towards the decisions of shareholders to realize their shares. |
| Keywords: | dual income tax, tax neutrality, taxation of business income, shareholder income tax |
| JEL: | H24 H25 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1551&r=pbe |
| By: | Volker Grossmann; Panu Poutvaara |
| Abstract: | Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high. |
| Keywords: | bequest taxation, bequests, education, Pareto improvement |
| JEL: | D64 H21 H31 I21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1515&r=pbe |
| By: | Cahuc, Pierre; Zylberberg, Andre |
| Abstract: | This paper analyses optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the discounted value of the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed). Our quantitative analysis suggests that the introduction of layoff taxes, that are usually absent from actual tax schemes, could lead to significant increases in employment and GDP. |
| Keywords: | job destruction; layoff taxes; optimal taxation |
| JEL: | H21 H32 J38 J65 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5170&r=pbe |
| By: | James Alm; Jorge Martinez-Vazquez; Benno Torgler |
| Abstract: | This paper examines citizens’ attitudes toward paying taxes – what is sometimes termed their “tax morale”, or the intrinsic motivation to pay taxes – focusing on the experience of individuals in the Russian Federation. A unique aspect of our analysis is our ability to study tax morale before (1991), during (1995), and shortly after (1999) the transition of the Russian economy from a centrally planned economy to one based on market reliance. Our empirical analysis uses data from the World Values Survey and the European Values Survey. The results show decay in tax morale in the first four years of the transition from 1991 to 1995, and a small recovery in 1999. These results are consistent with the relevance of social norms in tax compliance, where the widespread perception of tax evasion and of a corrupt and inefficient state led initially to a decline of tax morale. However, the results also suggest that the restoration of a higher level of trust in the state, after some progress in the transition to a market economy, positively influenced tax morale. Using disaggregated data for Russian regions, we also find significant regional differences in tax morale, reflecting the degree of trust different regions have toward Moscow’s institutions and policies. |
| Keywords: | tax morale; tax compliance; social norms; transition countries |
| JEL: | H26 K42 P35 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2005-27&r=pbe |
| By: | Jordi Galí (CREI and Universitat Pompeu Fabra, Spain.); J. David López-Salido (Banco de España, Alcala 50, E-28014 Madrid, Spain.); Javier Vallés (Banco de España, Alcala 50, E-28014 Madrid, Spain.) |
| Abstract: | Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. |
| Keywords: | rule-of-thumb consumers; fiscal multiplier; government spending; Taylor rules. |
| JEL: | E32 E62 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040339&r=pbe |
| By: | Diego Martínez-López (Centro de Estudios Andaluces. C/ Bailén, 50. 41001 Seville, Spain) |
| Abstract: | This paper studies the provision of public inputs in a federal system. A vertical tax externality is also considered in a simple general equilibrium model used to analyze the efficiency of equilibria under different scenarios. The results show that the state provision of public inputs may affect ambiguously federal tax revenues, depending on the vertical tax externality, amongst others issues. Moreover, it is proved that achieving a second best allocation is not straightforward for a federal government that plays as Stackelberg leader. At this point, the state’s reaction function becomes crucial when the design of vertical grants is restricted. |
| Keywords: | Fiscal federalism; vertical externality; productive public spending. |
| JEL: | H2 H4 H7 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050484&r=pbe |
| By: | Will Martin (World Bank); James E. Anderson (Boston College) |
| Abstract: | The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify very much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. We confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation– and will provide the same result– as long as the income effects of both taxes and public good provision are incorporated in a consistent manner. |
| Keywords: | fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment. |
| JEL: | D61 F11 H21 H43 |
| Date: | 2005–09–08 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:617&r=pbe |
| By: | Richard Disney |
| Abstract: | I argue that the offsetting effect of social security contributions on household retirement saving depends on how closely the social security programme imitates a private retirement saving plan (i.e. the ‘actuarial’ component of the social security programme) – the closer the design of the programme to a private retirement saving plan, the higher the offset. I estimate the determinants of household saving rates in a cross-country panel, augmenting standard measures of social security programme generosity and cost by indicators that proxy the actuarial component of the programme. These indicators affect saving rates as predicted; moreover they also affect labour force participation rates of older women (but not men). The findings are consistent with the view that more actuarially-based public programmes are treated by participants as a mandatory saving programme rather than as a tax-and-transfer system, thereby raising labour force participation rates but also increasing the programme’s substitutability for private retirement saving. |
| Keywords: | social security reform, household saving |
| JEL: | E21 G23 H24 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1541&r=pbe |
| By: | Panu Poutvaara |
| Abstract: | Migration between countries with earnings-related and flat-rate pay-as-you-go social security systems may change human capital investments in both countries. The possibility of emigration boosts investments in human capital in the country with flat-rate benefits. Correspondingly, those expecting to migrate from the country with earnings-related benefits to a country with flat-rate benefits may reduce their investment in education. With suitably planned transfers between the two countries, allowing for migration may generate a Pareto-improvement for all current and future generations. Without transfers, either country may be unable to pay for promised benefits when labor becomes mobile. |
| Keywords: | social security, education, migration, earnings-related and flat-rate pensions |
| JEL: | F22 H55 I20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1544&r=pbe |
| By: | Jesús Fernández-Huertas Moraga (Columbia University, Department of Economics, 420 West 118th Street, New York, NY 10027, USA.); Jean-Pierre Vidal (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates fiscal sustainability in an overlapping generations economy with endogenous growth coming from human capital formation through educational spending. We assess how budgetary imbalances affect economic dynamics and the outlook for economic growth, thereby providing a rationale for fiscal rules ensuring sustainability. Our results show that the appropriate response of fiscal policy to temporary shocks is not trivial in the absence of fiscal rules. Fiscal rules allow for a timely reaction, thereby avoiding possibly disruptive fiscal adjustment in the future: the more adjustment is delayed, the larger is its necessary scale. We perform a rough calibration of the model to simulate the effects of a demographic shock (change in the population growth rate) under different fiscal policy scenarios. |
| Keywords: | Fiscal sustainability; public debt; overlapping generations. |
| JEL: | E62 H63 H55 O41 E17 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040395&r=pbe |
| By: | Grossman, Gene; Helpman, Elhanan |
| Abstract: | Polities differ in the extent to which political parties can pre-commit to carry out promised policy actions if they take power. Commitment problems may arise due to a divergence between the ex ante incentives facing national parties that seek to capture control of the legislature and the ex post incentives facing individual legislators, whose interests may be more parochial. We study how differences in "party discipline" shape fiscal policy choices. In particular, we examine the determinants of national spending on local public goods in a three-stage game of campaign rhetoric, voting, and legislative decision-making. We find that the rhetoric and reality of pork-barrel spending, and also the efficiency of the spending regime, bear a non-monotonic relationship to the degree of party discipline. |
| Keywords: | electoral competition; party politics; political economy; public goods |
| JEL: | D72 H41 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5233&r=pbe |
| By: | Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate. |
| Keywords: | Political economy; fiscal rules; Stability and Growth Pact; deficits; institutional reform. |
| JEL: | D7 H3 H6 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040421&r=pbe |
| By: | Mark Hallerberg (Emory University, ZEI.); Rolf Strauch (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany); Jürgen von Hagen (CEPR, University of Bonn, ZEI, Indiana University) |
| Abstract: | This paper examines the development of fiscal rules and budget procedures in EU countries, and their impact of public finances since the mid-1980s. It presents a new data set on institutional reforms and their impact in Europe. Empirical pattern confirm our prediction that more stringent fiscal rules exist under large coalition governments, while the centralisation of budgetary procedures is the main form of fiscal governance elsewhere. In addition, the centralisation of procedures does not restrain public debt in countries more prone to a rules-based approach, whereas more stringent fiscal rules seem to support fiscal discipline in almost all EU countries. |
| Keywords: | Public indebtedness; budgetary procedures; fiscal rules; European public finances. |
| JEL: | H11 H61 H62 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040419&r=pbe |
| By: | Roel M.W. J. Beetsma (Department of Economics, University of Amsterdam); Xavier Debrun (Fiscal Affairs Department, International Monetary Fund) |
| Abstract: | The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. |
| Keywords: | Fiscal rules, Stability and Growth Pact, procedural flexibility, deficits, structural reforms. |
| JEL: | E62 H6 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050433&r=pbe |
| By: | Randall Filer; Marjorie Honig |
| Abstract: | This paper suggests that pension characteristics are simultaneously determined along with workers’ retirement ages. Both the age of pension eligibility and actual retirement age are determined by the productivity and marginal disutility of work, factors that are influenced by worker and job characteristics. This approach differs from previous studies of retirement that treat pensions as exogenous, implying that prior empirical work may have overestimated the responsiveness of retirement age to changes in pension structure, a possibility with obvious policy implications for efforts to raise the age of retirement. We find that, in the conventional single-equation framework, delaying the age of pension eligibility would significantly delay retirement. When treated in a recursive simultaneous system, however, age of pension eligibility retains no explanatory power. |
| Keywords: | social security, early retirement, job characteristics, pension eligibility |
| JEL: | H31 H55 J26 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1547&r=pbe |
| By: | Javier J. Pérez (Centro de Estudios Andaluces (centrA), c/ Bailén 50, 41001 Seville, Spain) |
| Abstract: | In this paper I evaluate the usefulness of a set of fiscal indicators as early-warning-signal tools for annual General Government Net Lending developments for some EMU countries (Belgium, Germany, Spain, France, Italy, The Netherlands, Ireland, Austria, Finland) and an EMU aggregate. The indicators are mainly based on monthly and quarterly public accounts’ figures. I illustrate how the dynamics of the indicators show a remarkable performance when anticipating general government accounts’ movements, both in qualitative and in quantitative terms. |
| Keywords: | Leading indicators; Fiscal forecasting and monitoring; General Government Deficit; European Monetary Union. |
| JEL: | C53 E6 H6 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050497&r=pbe |
| By: | Dr. B.Mishra (North-Eastern Hill University); Dr. Purusottam Nayak (North-Eastern Hill University) |
| Abstract: | Demand for increased public expenditure due to enhanced political consciousness and implementation of investment programmes through mechanism(s) infected with diseconomies are the two important forces among several others to put increased pressure on the fiscal resources available within a state. Short-term measures undertaken by a Sate viz., dependence on federal transfers and resorting to overdraft evidently has their respective detrimental implications on fiscal health of the state. The remedial approach pervasively suggested by the contemporary fiscal strategists to tackle the ever-increasing fiscal gap moves towards attaining an appropriate degree of financial self reliance. Thus, the obvious solution of fiscal restructuring dwells on an in-depth understanding of the fiscal system of a state particularly on a temporal analysis of the indicators that throw light on the performance of a tax system in respect of two objectives: (i) siphoning off into the state exchequer the collection of revenue without endangering the incentive for private savings and investment and (ii) helping to release resources for private investment by reducing private consumption. While the indicators like the compound growth rate and marginal tax rates do not take in to account the taxable capacity, the tax ratio and the tax efforts measures generally fail to indicate the responsiveness of the tax structure to changes in state’s income over time. Thus the temporal analysis of tax responsiveness in terms of Elasticity and Buoyancy becomes imperative to have an evaluative insight into the effectiveness of a state’s tax system. The present study is an attempt in this regard by taking the States of North Eastern Region for the period 1963-64 to 2000-01. The study reveals that most of the States in the region have failed miserably in mobilizing resources to meet ever increasing public expenditures and thereby are suffering from dependency syndromes. |
| Keywords: | Elasticity Buoyancy Tax Productivity |
| JEL: | D6 D7 H |
| Date: | 2005–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwppe:0509011&r=pbe |
| By: | Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ali al-Nowaihi (Department of Economics, University of Leicester, University Road, Leicester LE1 7RH, United Kingdom.) |
| Abstract: | This model extends the keeping up with the Joneses (KUJ) model to incorporate the notion that positional concerns in consumption are best modelled with a reference dependence specification of preferences, as postulated by Tversky and Kahneman (1991) in the context of riskless choice. In line with this specification, which has received substantial empirical support in the literature, we assume that the marginal returns on the own consumption are increasing below the aggregate per capita levels of consumption (which is the reference point in our model). The main conclusion of the paper is that in our KUJ model aggregate consumption may be subject to sunspot fluctuations and the equilibrium level of consumption is not uniquely pinned down. The paper also discusses the role that fiscal policy can play in order to undo the effect of consumption externalities on both the determinacy and the desirability of the equilibrium. |
| Keywords: | Consumption externalities; keeping up with the Joneses; reference dependence; equilibrium indeterminacy; optimal taxation. |
| JEL: | D11 H21 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050444&r=pbe |
| By: | James E. Alt (Department of Government, Harvard University); David Dreyer Lassen (Department of Economics, University of Denmark) |
| Abstract: | The paper investigates the effects of checks and balances on corruption. Within a presidential system, effective separation of powers is achieved under divided government, with the executive and legislative branches being controlled by different political parties. When government is unified, no effective separation exists even within a presidential system, but, we argue, can be partially restored by having an accountable judiciary. Our empirical findings show that divided government and elected, rather than appointed, state supreme court judges are associated with lower corruption and, furthermore, that the effect of an accountable judiciary is stronger under unified government, where government cannot control itself. The effect of an accountable judiciary seems to be driven primarily by judges chosen through direct elections, rather than those exposed to a retention vote following appointment. |
| Keywords: | separation of powers; corruption; rent seeking; checks and balances; political institutions; judicial independence; rule of law |
| JEL: | D72 D73 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:05-12&r=pbe |
| By: | Marco Da Rin (Department of Economics and Finance, Turin University); Giovanna Nicodano (Department of Economics and Finance, Turin University); Alessandro Sembenelli (Department of Economics and Finance, Turin University) |
| Abstract: | We study how public policy can contribute to increase the share of early stage and high-tech venture capital investments, thus helping the development of active venture capital markets. A simple extension of the seminal model by Holmstrom and Tirole (1997) provides a theoretical base for our analysis. We then explore a unique panel of data for 14 European countries between 1988 and 2001. We have several novel findings. First, the opening of stock markets targeted at entrepreneurial companies positively affects the shares of early stage and high-tech venture capital investments; reductions in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in labor regulation creases the share of high-tech investments. Finally, we find no evidence of a shortage of supply of venture capital funds, and no evidence of an effect of increased public R&D spending on the share of high-tech or early stage venture capital investments. |
| Keywords: | Venture Capital; Capital Gains Tax; Public R&D Expenditure; Barriers to Entrepreneurship; Stock Markets; Public Policy |
| JEL: | G10 G24 H20 O30 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050430&r=pbe |
| By: | Cooper, Ian; Nyborg, Kjell G |
| Abstract: | In a recent paper, Fernandez (2004a) argues that the present value effect of the tax saving on debt cannot be calculated as simply the present value of the tax shields associated with interest. This contradicts standard results in the literature. It implies that, even though the capital market is complete, value-additivity is violated. As a consequence, adjusted present value formulae of a standard sort cannot be used. Also, it implies that the value of the tax saving differs from conventional estimates by a considerable amount. We reconcile Fernandez's results with standard valuation formulae for the tax saving from debt. We show that, as one would expect, the value of the debt tax saving IS the present value of the tax savings from interest. The apparent violation of value-additivity in the Fernandez paper comes from mixing the Miles-Ezzell and Miller-Modigliani leverage policies. |
| Keywords: | adjusted present value; leverage; tax shields |
| JEL: | G31 G32 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5182&r=pbe |
| By: | Deroose, Servaas; Turrini, Alessandro |
| Abstract: | The EU fiscal framework has often been criticized for neglecting a possible trade-off between short-term budgetary objectives and the implementation of reforms that could improve public finances in the long term This concern was reflected in the recent reform of the Stability and Growth Pact, which acknowledges that under certain conditions structural reforms can be taken into account both in the preventive and in the corrective arm of the Pact. The aim of the paper is that of making a step forward on the understanding of the empirical relevance of the trade-off between structural reforms in EU countries. The analysis will focus on product and labour market reforms and pension reforms. The main issue investigated will be as follow: which impact do reforms have on budgets in the short term? Results show that, in the aftermath of reforms, budgets do not worsen significantly compared with cases where no reforms occur. However, when the short-term budgetary impact of reforms is evaluated controlling for the response of fiscal authorities to the cycle and debt developments via the estimation of “fiscal reaction functions”, there is evidence that product and market reforms and pension reforms are associated with a deterioration in budgets. The impact appears rather weak (a primary CAB reduced by few decimal GDP points depending on the specific reform considered) and not always statistically significant. |
| Keywords: | deficits; Stability and Growth Pact; structural reforms |
| JEL: | E62 H50 H55 H62 J58 L50 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5217&r=pbe |
| By: | Cornelia Holthausen (Corresponding author: Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Jean-Charles Rochet (GREMAQ-IDEI, Université des Sciences Sociales, Toulouse, France) |
| Abstract: | We study optimal pricing rules for a public large-value payment system (LVPS) that produces a public good (like prevention of systemic risk) but faces competition by a private LVPS for the private provision of large value payments. We show that the marginal cost of the public LVPS has to be corrected by a “public good factor” that can be interpreted alternatively as the decrease in the cost of providing the public good when the private activity of the public system increases, or as the subsidy needed for private banks to internalize the cost of systemic risk. In either interpretation, the public good factor is easy to measure - it corresponds to the subsidy needed for private banks to allocate their payments in the way that is desired by banking authorities. |
| Keywords: | large-value payment systems; public goods; pricing rules. |
| JEL: | G28 H41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050507&r=pbe |
| By: | António Afonso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and ISEG/UTL - Technical University of Lisbon; CISEP – Research Centre on the Portuguese Economy, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal); Miguel St. Aubyn (ISEG/UTL - Technical University of Lisbon; UECE – Research Unit on Complexity in Economics, R.Miguel Lupi 20, 1249-078 Lisbon, Portugal) |
| Abstract: | We address the efficiency of expenditure in education provision by comparing the output (PISA results) from the educational system of 25, mostly OECD, countries with resources employed (teachers per student, time spent at school). We estimate a semi-parametric model of the education production process using a two-stage procedure. By regressing data envelopment analysis output scores on nondiscretionary variables, both using Tobit and a single and double bootstrap procedure, we show that inefficiency is strongly related to GDP per head and adult educational attainment. |
| Keywords: | Education; technical efficiency; DEA; bootstrap; semi-parametric. |
| JEL: | C14 C61 H52 I21 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050494&r=pbe |
| By: | Aaron N. Mehrotra (Department of Economics, European University Institute, Via della Piazzuola 43, I-50133, Florence, Italy); Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper examines the link between socio-economic development and fiscal policy. We introduce an indicator for socio-economic development (SEDI) and investigate its relationship with different fiscal variables, using data for the cohesion countries, namely Greece, Portugal, Spain and Ireland for 1980-1999. We find that an improvement in the net lending position of the government, as well as a fall in the level of public debt, would be beneficial for socio-economic development in the medium term. Furthermore, fiscal consolidation is found to be more relevant for promoting socio-economic development in the cohesion countries than in the other EU-15 Member States. Our results provide support for incentives to curb spending, such as the fiscal criteria of the Maastricht Treaty or the Stability and Growth Pact. |
| Keywords: | Socio-economic development; fiscal consolidation; EU enlargement; Stability and Growth Pact. |
| JEL: | H6 H5 I0 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050467&r=pbe |
| By: | R. Mohan (Centre for Development Studies); D. Shyjan (Centre for Development Studies) |
| Abstract: | The study analyses whether the growing State Domestic Product (SDP) of Kerala since the latter half of the 1980s, has acted as a larger resource base for the State and finds that it has not. While the inability to fully tap the existing resource potential could be cited as a reason, the paper argues that the main constraint is the limited taxing powers of the States. The Study concludes that the power to tax the services should be devolved from the Centre to the States, lest the fiscal dispossession should affect the sustainability of achievements, which made the development experience of Kerala unique. |
| Keywords: | Revenue Receipts, Tax Effort, SDP |
| JEL: | E62 E69 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:cdswpp:375&r=pbe |
| By: | Elisabetta Iossa |
| Abstract: | We use an incomplete-contract approach to compare contracting out by a public sector agency with the delegation of contracting out to a public-private partnership (PPP) that is a joint venture between private and sector agents. The PPP maximizes a linear combination of profit and social benefit. Such delegation may be desirable to curb innovations that reduce the cost of provision but also reduce social benefit. Delegation may be undesirable for innovations that increase social benefit but also raise costs. Our results are explained in terms of the shadow cost of public funds and the negotiating stance of the PPP. |
| Keywords: | delegation, Private Finance Initiative, Public Private Partnership, Public Service Provision |
| JEL: | H11 L33 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:05/125&r=pbe |
| By: | K Blackburn; G Forgues-Puccio |
| Abstract: | This paper presents a dynamic general equilibrium analysis of public sector corruption and economic growth. In an economy with government intervention and capital accumulation, state-appointed bureaucrats are charged with the responsibility for procuring public goods which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to appropriate public funds by misinforming the government about the cost and quality of public goods provision. The incentive for each bureaucrat to do this depends on economy-wide outcomes which, in turn, depend on the behaviour of all bureaucrats. We establish the existence of multiple development regimes, together with the possibility of multiple, frequency-dependent equilibria. The predictions of our analysis accord strongly with recent empirical evidence on the causes and consequences of corruption in public office.We study the effect of international financial integration on economic development when the quality of governance may be compromised by corruption. Our analysis is based on a dynamic general equilibrium model of a small economy in which growth is driven by capital accumulation and public policy is administered by government appointed bureaucrats. Corruption may arise due to the opportunity for bureaucrats to embezzle public funds, an opportunity that is made more attractive by financial liberalisation which, at the same time, raises efficiency in capital production. Our main results may be summarised as follows: (1) corruption is always bad for economic development, but its e¤ect is worse if the economy is open than if it is closed; (2) the incidence of corruption may, itself, be affected by both the development and openness of the economy; (3) financial liberalisation is good for development when governance is good, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:54&r=pbe |
| By: | Imbs, Jean; Rancière, Romain |
| Abstract: | We revisit the debt overhang question. We first use non-parametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60% of GDP or 200% of exports, and when its present value reaches 40% of GDP or 140% of exports. Second, we depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, we ask whether, as the overhang level of debt is reached: (i) investment falls precipitously as it should when it becomes optimal to default; (ii) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (iii) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to pre-empt default and exact punitive interest rates. We find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing, or the burden of debt. |
| Keywords: | debt contracts; debt overhang; debt relief; investment; kernel estimation |
| JEL: | E62 F34 F43 H63 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5210&r=pbe |
| By: | Valeria De Bonis (Dipartimento di Scienze Economiche, University of Pisa); Pompeo Della Posta (Dipartimento di Scienze economiche, University of Pisa) |
| Abstract: | In this paper we extend Nordhaus’ (1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that: a) co-operation among national fiscal authorities is welfare improving only if they also co-operate with the central bank; b) when this condition is not satisfied, fiscal rules, as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact, may work as co-ordination devices that improve welfare; c) the relationship between several treasuries and a single central bank makes the fiscal leadership solution collapse to the Nash one, so that, contrary to Nordhaus (1994) and Dixit and Luisa Lambertini (2001), when moving from the Nash to the Stackelberg solution, fiscal discipline no longer obtains. Also in this case we thus argue in favour of fiscal rules in a monetary union. |
| Keywords: | Fiscal and monetary policy co-ordination; monetary union;international fiscal issues |
| JEL: | E61 F42 H87 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ave:wpaper:262005&r=pbe |
| By: | Trevor Breusch (Australian National University) |
| Abstract: | The method of "excess sensitivity" of Bajada (1999, 2001, 2002) indicates a large underground economy in Australia, with estimates of unrecorded income around 15 per cent of official GDP. These estimates concern policymakers, especially those agencies responsible for national accounts, tax collection, economic stabilization and law enforcement. We show that the method exhibits a severe form of non-robustness, in which the results change markedly with a simple change in the units of measurement of the variables. There is a separate problem in which a key parameter is set to an unrealistic value that makes the estimates many times too high. |
| Keywords: | underground economy, currency demand, tax evasion, econometric models |
| JEL: | C51 E42 E62 H26 |
| Date: | 2005–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509025&r=pbe |
| By: | Kerstin Bernoth (Research Division, De Nederlandsche Bank); Jürgen von Hagen (Center for European Integration Studies); Ludger Schuknecht (DG Economics, European Central Bank) |
| Abstract: | This paper provides a study of bond yield differentials among EU eurobonds issued between 1991 and 2002. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premia which increase with the debt, deficit and debt-service ratio and depend positively on the issuer’s relative bond market size. Global investors’ attitude towards credit risk, measured as the yield spread between low grade US corporate bonds and government bonds, also affects bond yield spreads between EU countries and Germany/USA. The start of the European Monetary Union had significant effects on the bond pricing of the member states. |
| Keywords: | asset pricing, determination of interest rates, fiscal policy, government debt. |
| JEL: | G12 E43 E62 H63 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040369&r=pbe |
| By: | Pierpaolo Benigno (New York University, Department of Economics, 269 Mercer Street, New York, NY 10003, USA.); Michael Woodford (Columbia University, Department of Economics, 420 W. 118th Street, New York, NY 10027, USA.) |
| Abstract: | We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky and the only available sources of government revenue are distorting taxes. Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, we derive targeting rules through which the monetary and fiscal authorities may implement the optimal equilibrium. |
| Keywords: | Loss function, output gap, tax smoothing, targeting rules. |
| JEL: | E52 E61 E63 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040345&r=pbe |
| By: | Barbara Annicchiarico (School of Economics, Finance and Management, University of Bristol); Nicola Giammarioli (European Central Bank, DG Economics) |
| Abstract: | This paper presents a two period overlapping generations model with endogenous growth in the presence of a public sector with objectives of convergence for public debt and primary balance to GDP ratios. In order to ensure the existence of converging paths towards the target values of fiscal variables, we introduce a simple fiscal policy rule. According to this rule, the primary balance ratio is adjusted in function of the distance between the current and the target levels of the public debt and the primary surplus to GDP ratios. It is shown that the fiscal rule displaying time invariant parameters may produce non linear dynamic processes of adjustment of the fiscal ratios as well as endogenous fluctuations in the rate of growth of the economy. In addition the transitional process towards fiscal targets critically depends on the adjustment tool chosen by the fiscal authorities to implement the rule. |
| Keywords: | Fiscal Policy; Sustainability of Public Finances; Endogenous Growth. |
| JEL: | H62 H63 O41 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040381&r=pbe |
| By: | Barbara Annicchiarico (Ceis, Facoltà di Economia, Università di Roma “Tor Vergata”,Via Columbia 2, 00133 Rome, Italy.) |
| Abstract: | This paper investigates the inflationary effects of fiscal policy in an optimising general equilibrium monetary model with capital accumulation, flexible prices and wealth effects. The model is calibrated to Euro Area quarterly data. Simulation results show that government deficits, high debt level and slow fiscal adjustment adversely affect price stability in the presence of an independent monetary authority adopting a monetary targeting regime. The mechanism through which fiscal policy affects the dynamics of the price level presents monetarist properties, since the price level is determined in the monetary market. The effects produced by fiscal expansions on price dynamics are due to the behaviour of consumers, sharing the burden of fiscal adjustment with future generations. Fiscal variables are shown to influence the consumption plan of individuals and the demand for real money balances, thus affecting the equilibrium conditions in the money market where the price level is determined. |
| Keywords: | Price Stability; Fiscal Policy and Government Debt. |
| JEL: | E31 E62 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20030285&r=pbe |
| By: | Muren, Astri (Dept. of Economics, Stockholm University); Nyberg, Sten (Dept. of Economics, Stockholm University) |
| Abstract: | The paper examines the impact of income inequality and mobility on income redistribution in a modified median voter model where redistributive conflict takes place both between educational groups and age-groups. The effects of inequality and mobility are not unambiguous but depend on factors such as how mobility changes in different groups and causes of inequality. We also examine the effect of the length of electoral periods on redistribution and welfare for different groups and allow for majority voting on the length of electoral periods. Finally, we extend the model to encompass retirement and baby booms. |
| Keywords: | Inequality; mobility; income redistribution; median voter; age-earnings profiles |
| JEL: | D31 D72 H20 J31 P16 |
| Date: | 2005–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2005_0009&r=pbe |
| By: | Massimo Giuliodori (Department of Economics, University of Amsterdam, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands); Roel Beetsma (Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands) |
| Abstract: | We use a Vector Auto Regression (VAR) analysis to explore the (spill-over) effects of fiscal policy shocks in Europe. To enhance comparability with the existing literature, we first analyse the effects of these shocks at the national level. Here, we employ identification based on Choleski decomposition and a structural VAR, both of which lead to the same results. Then, we turn to study the cross-border spill-overs of fiscal shocks via the trade channel. Fiscal expansions in Germany, France and Italy lead to significant increases in imports from a number of European countries. In order to mimic the case of monetary union, we also shut off the effects via the short-term interest rate and the nominal exchange rate and find a slight strengthening on average of the cross-country spill-overs from a fiscal expansion. These results suggest that it may be worthwhile to further investigate the possibility of enhanced fiscal coordination. |
| Keywords: | Fiscal shocks; Fiscal policy; Monetary policy; Spill-overs; impulse responses. |
| JEL: | E62 E63 F42 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040325&r=pbe |
| By: | Geoffrey Brennan; Werner Güth; Luis G. Gonzalez; M. Vittoria Levati |
| Abstract: | Idiosyncratic risk attitudes are usually assumed to be commonly known and restricted to own payoffs. However, the alternatives faced by a decision maker often involve risks for others' payoffs as well. Motivated by the importance of other-regarding preferences in social interactions, this paper explores idiosyncratic attitudes toward own and others' risks. We elicit risk attitudes in an experiment involving choices with and without strategic interaction. |
| Keywords: | Other-regarding concerns, Random price mechanism, Public goods experiments |
| JEL: | C90 D63 D81 H41 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-22&r=pbe |
| By: | Jérôme Henry (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Pablo Hernández de Cos (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Sandro Momigliano (Banca d´Italia, Economic Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers? social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock. |
| Keywords: | Euro area; model simulations; fiscal policy; prices. |
| JEL: | E17 E31 E62 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040396&r=pbe |
| By: | Carsten Detken (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Vítor Gaspar (BANCO DE PORTUGAL, Avenida Almirante Reis, 71- 8º, 1150-012 LISBOA - PORTUGAL); Bernhard Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy. |
| Keywords: | Fiscal spillover effects; common pool; overlapping generations; bond market integration; fiscal discipline; fiscal rules; European Monetary Union. |
| JEL: | D62 E61 E63 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040420&r=pbe |
| By: | António Afonso (European Central Bank, Directorate General Economics); Rolf Strauch (European Central Bank, Directorate General Economics) |
| Abstract: | In this paper we assess the importance given in capital markets to the credibility of the European fiscal framework. We evaluate to which extent relevant fiscal policy events taking place in the course of 2002 produced a reaction in the long-term bond segment of the capital markets. Firstly, we identify the fiscal policy events and qualitatively assess the views of capital market participants. Secondly, we estimate the impact of these fiscal events on the interest rate swap spreads, which is our measure for the risk premium. According to our results the reaction of swap spreads, where it turned out to be significant, has been mostly around five basis points or less. |
| Keywords: | fiscal policy events; Stability and Growth Pact; interest rate swap spreads |
| JEL: | C22 G15 H30 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040303&r=pbe |
| By: | Günter Coenen (Directorate General Research, European Central Bank); Roland Straub (Monetary and Financial Systems Department, International Monetary Fund) |
| Abstract: | In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocks. |
| Keywords: | non-Ricardian households; fiscal policy; DSGE modelling; euro area. |
| JEL: | E32 E62 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050513&r=pbe |
| By: | Wilko Bolt (Corresponding author: Research Division, De Nederlandsche Bank, Amsterdam,The Netherlands); David Humphrey (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States) |
| Abstract: | This paper discusses various theoretic concepts which play a role in assessing the public benefits of Target, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the ‘most efficient scale’ or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing. Based on empirical results for the Federal Reserve’s payment system (Fedwire), it is further argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs. |
| Keywords: | public good; natural monopoly; most efficient scale; partial subsidy. |
| JEL: | G20 H41 L10 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050505&r=pbe |
| By: | Jes Winther Hansen (Department of Economics, University of Denmark) |
| Abstract: | Present-biased preferences cause distortions in consumption that can motivate the use of paternalistic in-kind transfers. Empirically, goods are consumed to different degrees when consumption outlay changes. Economists distinguish between necessary goods and luxury goods. A present-biased individual has an intertemporal distortion of consumption toward the present, which in turn distorts present consumption toward luxury goods. In-kind transfers of necessary goods, such as food stamps, can alleviate the intertemporal distortion and make present-biased transfer recipients better off. Further, transfers in kind are asymmetrical in the sense that they can target present-biased recipients without affecting fully rational recipients. |
| Keywords: | in-kind transfers; time preference |
| JEL: | D91 H21 H42 I38 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:05-11&r=pbe |
| By: | Mika Tujula (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | Fiscal balances have deteriorated quickly in recent years, bringing back to the foreground the question what factors help explain such sharp changes. This paper takes a broad perspective at the issue regarding countries included, the range of explanatory variables tried, and the time-span. The empirical analysis shows that changes in budget balances are affected by debt growth, macroeconomic developments and political factors. In particular, we find that the run-up to EMU induced additional consolidation in Europe and that budget balances deteriorate markedly in election years. Asset prices also may affect budgets, but the impact remains limited in normal times. |
| Keywords: | Fiscal policy; asset prices; economic growth; budget balance; Stability and Growth Pact. |
| JEL: | E61 E62 H61 H62 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040422&r=pbe |
| By: | Matthew Higgins (Georgia Institute of Technology); Daniel Levy (Bar-Ilan University); Andrew Young (University of Mississippi) |
| Abstract: | We use U.S. county data (3,058 observations) and 41 conditioning variables to study growth and convergence. Using OLS and 3SLS-IV we report on the full sample and metro, non-metro, and 5 regional samples: (1) OLS yields convergence rates around 2 percent; 3SLS yields 6–8 percent; (2) convergence rates vary (e.g., the Southern rate is 2.5 times the Northeastern rate); (3) federal, state and local government negatively correlates with growth; (4) the relationship between educational attainment and growth is nonlinear; and (5) finance, insurance & real estate industry and entertainment industry positively correlates with growth while education employment negatively correlates. |
| Keywords: | Economic Growth, Conditional Convergence, County-Level Data |
| JEL: | O40 O11 O18 O51 R11 H50 H70 |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509023&r=pbe |
| By: | Andrzej Rzonca (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.); Piotr Cizkowicz (National Bank of Poland, ul. Swietokrzyska 11/21, 00-919 Warszawa, Poland.) |
| Abstract: | Many economists are convinced that longer-term benefits from fiscal consolidation are in a trade-off with short-term deceleration in output growth. However, more recent research suggests that curbing fiscal imbalances contributes to faster growth already in the short term. This paper is about such non-Keynesian effects. Section two systematizes theoretical explanations. Section three reviews previous empirical research. Section four uses panel estimation techniques to examine the consequences of fiscal consolidation in New Member States. This analysis provides evidence that in those countries fiscal consolidation contributed substantially to the acceleration of output growth even in the short term. However, the exact channels through which non- Keynesian effects occurred could not be unambiguously identified in the paper. Section five takes the new step of a qualitative analysis of the outcomes of strong fiscal adjustments in the countries under consideration. That analysis shows that their experiences were quite similar to those of developed countries. |
| Keywords: | Fiscal consolidation; non-Keynesian effects; new member states. |
| JEL: | E62 E65 C33 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050519&r=pbe |
| By: | Gabriela Schuetz; Heinrich Ursprung; Ludger Woessmann |
| Abstract: | We provide a measure of equality of educational opportunity in 54 countries, estimated as the effect of family background on student performance in two international TIMSS tests. We then show how organizational features of the education system affect equality of educational opportunity. Our model predicts that late tracking and a long pre-school cycle are beneficial for equality, while pre-school enrollment is detrimental at low levels of enrollment and beneficial at higher levels. Using cross-country variations in education policies and their interaction with family background at the student level, we provide empirical evidence supportive of these predictions. |
| Keywords: | equality of opportunity, educational production, family background, student performance, tracking, pre-school, efficiency-equity tradeoff |
| JEL: | H52 I21 J62 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1518&r=pbe |
| By: | Henri Pagès (Banque de France – General DGEI 41-1430, 75049 Cedex 01 Paris, France); David Humphrey (Florida State University – Department of Finance,Tallahassee, FL 32306-1042, United States) |
| Abstract: | Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs but not risks would be equalized between networks. Full collateralization on DNS networks equalizes both user costs and risks. |
| Keywords: | payments; settlement; public good. |
| JEL: | E58 G15 H23 H41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050506&r=pbe |
| By: | Ludger Schuknecht (European Central Bank); Vito Tanzi (Carnegie Endowment for International Peace) |
| Abstract: | In this paper, we show that, contrary to common beliefs, over the past two decades several countries were able to reduce public spending by remarkable amounts. These countries did not seem to have suffered from these large reductions either in a macroeconomic sense, or in terms of lower values for socio-economic indicators. On the contrary, ambitious expenditure reform coincides with improvements in fiscal, economic, human development and institutional indicators. Positive developments associated with expenditure reform, in some instances, have taken a while to materialize and early and persistent reformers have, hence, already seen more of them. Unfavourable effects on income distribution within countries are small and they are mitigated in absolute terms by faster growth in the medium run and by the possibilities of better targeting of public spending. Moreover, there is significant divergence across countries that suggests that country circumstances and reform design matter. |
| Keywords: | public expenditure, expenditure reform, economic growth, socio economic indicators |
| JEL: | H5 H6 O57 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050435&r=pbe |
| By: | Rolf Strauch (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt/Main, Germany); Mark Hallerberg (Emory University, Department of Political Science, 201 Dowman Drive, Atlanta, GA 30322.); Jürgen von Hagen (ZEI Zentrum für Europäische Integrationsforschung /Center for European Integration Studies, Rheinische Friedrich-Wilhelms-Universität Bonn) |
| Abstract: | We analyse the performance of budgetary and growth forecasts of all stability and convergence programmes submitted by EU member states over the last decade. Differences emerge for the bias in budgetary projections across countries. As a second step we explore whether economic, political and institutional factors can explain this pattern. Our analysis indicates that the cyclical position and the form of fiscal governance are major determinants of forecast biases. Projected changes in the budgetary position are mainly affected by the cycle, the need of convergence before EMU and by electoral cycles. |
| Keywords: | Fiscal forecasting; Forecast evaluation; Budget processes; Stability and Growth Pact. |
| JEL: | C53 E17 H62 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20040307&r=pbe |
| By: | António Afonso (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and ISEG/UTL - Technical University of Lisbon; CISEP – Research Centre on the Portuguese Economy, R. Miguel Lupi 20, 1249-078 Lisbon, Portugal); Christiane Nickel (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany); Philipp Rother (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | We study fiscal consolidations in the Central and Eastern European countries and what determines the probability of their success. We define consolidation events as substantive improvements in fiscal balances adjusting for the impact of cyclical effects. We use Logit models for the period 1991–2003 to assess the determinants of the success of a fiscal adjustment. The results seem to suggest that for these countries expenditure based consolidations have tended to be more successful. By contrast, revenue based consolidations have a tendency to be less successful. |
| Keywords: | Fiscal policy; fiscal episodes; Central and Eastern Europe; Logit models. |
| JEL: | C25 E62 H62 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050473&r=pbe |