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on Public Economics |
| By: | Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The monetary integration of the acceding countries will proceed in several distinct steps, starting with membership in the European Union (EU), followed by participation in the so-called Exchange Rate Mechanism (ERM) II and ultimately entry into the euro area. This paper addresses the question of whether a reduction of public deficits, such as imposed by the Maastricht fiscal criteria, is a necessary or useful step on the road to the adoption of the euro. The question is addressed by examining the interaction of monetary, fiscal and wage policies and their effects on prices in a monetary union hit by economic shocks. The theoretical model shows that fiscal activism is related with both entry in monetary union and with structural differences in the national labour markets, and analyses in detail the effect of both factors. As for acceding countries, the conclusion is that the process of deficit reduction should be completed before entry, as suggested by the Maastricht criteria. The chapter also suggests that fiscal constraints on government deficits appear essential in a monetary union when the wage formation is taken into due consideration. JEL Classification: E61, E62, H30. |
| Keywords: | Fiscal policy, monetary policy, European Monetary Union, fiscal rules. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060664&r=pbe |
| By: | Christian Keuschnigg |
| Abstract: | Depending on the definition of the tax base, the statutory corporate tax rate implies rather different measures of effective average and marginal tax rates. This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm's capital stock. Extensive investment refers to the firm's production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the elasticities of the extensive and intensive investment responses. |
| Keywords: | Exports, foreign direct investment, corporate taxation, extensive and intensive investment, costs of public funds |
| JEL: | D21 F23 H25 L11 L22 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2006:2006-17&r=pbe |
| By: | Christian Keuschnigg |
| Abstract: | The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments. |
| Keywords: | Exports, foreign direct investment, corporate tax, dead weight loss |
| JEL: | D21 F23 H25 L11 L22 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2006:2006-16&r=pbe |
| By: | Francisco de Castro (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.); Pablo Hernández de Cos (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates the effects of exogenous fiscal policy shocks in Spain in a VAR framework. Government expenditure expansionary shocks are found to have positive effects on output in the short-term at the cost of higher inflation and public deficits and lower output in the medium and long term. Tax increases are found to drag economic activity in the medium term while entailing an only temporary improvement of the public budget balance. The application of these results to the analysis of fiscal policy in Spain since the mid-nineties points to the conclusion that the consolidation process does not seem to have involved costs in terms of output growth. Moreover, the stance of fiscal policy has become more counter-cyclical in that period. JEL Classification: E62; H30. |
| Keywords: | VAR; fiscal shocks; fiscal multipliers. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060647&r=pbe |
| By: | Santanu Gupta; Raghbendra Jha |
| Abstract: | This paper examines allocation of local public goods over jurisdictions (villages) with individuals with identical tastes and different incomes, in a model with democratic institutions and majority rule. The median voter (in income) in each jurisdiction determines the probability of re-election for the incumbent government. The jurisdiction with the median of these median voters is most favoured. With identical median voters in jurisdictions, and with re-election requiring less than 50mandate, jurisdictions with higher income inequality get favoured. Results from a survey data (from NCAER) on infrastructure provision in 1669 Indian villages confirm this hypothesis. Ethnic fragmentation does not affect public good provision but political fragmentation does. Finally, villages with the median population are the most favoured for public goods allocation. Sparsely populated and too densely populated villages are relatively neglected. |
| Keywords: | median voter, local public good, reservation utility |
| JEL: | H41 H72 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2006-07&r=pbe |
| By: | Campell Leith (University of Glasgow, Department of Economics, Adam Smith Building, Glasgow G12 8RT, Scotland, United Kingdom.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral. Naturally, this non-neutrality increases the importance of fiscal aspects for the design of policy rules consistent with determinate dynamics. JEL Classification: E52; E63. |
| Keywords: | Monetary policy; fiscal regimes. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060649&r=pbe |
| By: | Takero Doi; Toshihiro Ihori; Kiyoshi Mitsui |
| Abstract: | The purpose of this paper is to analyze sustainability issues of Japan’s fiscal policy and then to discuss the debt management policy using the theoretical models and numerical studies. We also investigate the desirable coordination of fiscal and monetary authorities toward fiscal reconstruction. We include a potential possibilities of the government bonds in our theoretical model. The public bonds, therefore, cannot be sold when the issuance leads the amount of debt outstanding to be more than a certain level. In this respect, the fiscal authority has to take into account the upper limit of stocks of public debt. This possibility of debt default provides the fiscal authority to issue public bonds strategically in an earlier period. A strategic behavior of fiscal authority induces the monetary authority, in a later period, to boost output and raise seigniorage revenues to eliminate the distortion of resource allocation due to the limitation on debt issuance. Therefore, the monetary policy in a later period suffers from an inflation bias from the ax ante point of view. There are two ways to eliminate this distortion toward successful fiscal restoration. One of them is to make the monetary authority more conservative than society in the sense that the price stability weight of monetary authority is higher than that of society. The other way of eliminating the distortion of the resource allocation is to design an institutional ceiling on the debt issuance. The direct ceiling can provide a binding constraint of the public bond issuance for the fiscal authority of Japan because it has accumulated the debt outstanding much more than other countries. |
| JEL: | H63 H21 E63 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12357&r=pbe |
| By: | Klaus Adam (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roberto M. Billi (Federal Reserve Bank of Kansas City, 925 Grand Blvd, Kansas City, MO 64198, United States.) |
| Abstract: | Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. Exclusive focus on inflation by the central bank recoups large part - in some cases all - of the steady state welfare losses associated with lack of monetary and fiscal commitment. An inflation conservative central bank tends to improve also the conduct of stabilization policy. JEL Classification: E52, E62, E63. |
| Keywords: | Banking, sequential non-cooperative policy games, discretionary policy, time consistent policy, conservative monetary policy. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060663&r=pbe |
| By: | Barbara Annicchiarico (Department of Economics, University of Rome ‘Tor Vergata’, Via Columbia 2, 00133 Rome, Italy.); Nicola Giammarioli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Piergallini (Department of Economics, University of Rome ‘Tor Vergata’, Via Columbia 2, 00133 Rome, Italy.) |
| Abstract: | This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is also shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization. JEL Classification: E52, E58, E63. |
| Keywords: | Fiscal Policy, Monetary Policy, Nominal Rigidities, Capital Accumulation, Finite Lifetime, Simulations. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060661&r=pbe |
| By: | Noriko Ishikawa (Graduate School of Science and Technology, Kobe Universit); Mototsugu Fukushige (Graduate School of Economics, Osaka University) |
| Abstract: | Japan consists of many small inhabited islands in addition to four main islands. We examine the impact of fiscal expenditure and the number of tourists on per capita taxable income in remote islands using panel data analysis. The results show that both fiscal expenditure and population size have significant positive impacts on per capita taxable income, whereas the number of tourists does not have statistically significant impact. They indicate that tourism development would not work as a substitute for financial support from the government. In other words, continuous financial support may be needed to maintain the islandsf economies. |
| Keywords: | Tourism Multiplier, Fiscal Multiplier, Remote Islands, Panel Data Analysis |
| JEL: | O23 R58 Q56 L83 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0621&r=pbe |
| By: | Ourania Dimakou (School of Economics, Mathematics & Statistics, Birkbeck) |
| Abstract: | This paper analyses the interaction between fiscal and monetary policy using the original Barro and Gordon (1983) model extended to include fiscal policy, dynamics and the level of institutional quality, measured as bureaucratic corruption. It is found that delegating monetary policy to an independent central bank (i.e. not fiscally dominated) the second best solution of the model is achievable only if there is no bureaucratic corruption. Otherwise, when institutional quality is not optimal, unless a less conservative than the government, regarding output considerations, independent central bank is delegated, the second best is not restored. The government has the incentive to increase debt strategically in an attempt to increase second period inflation. This result is augmented by the quality of institutions and poses difficulties on the achievement of both price stability and a balanced debt process. Quality of institutions, hence, can provide an explanation for the poorer inflation performance, due to debt boosts, of countries with lower institutional quality despite the introduction of central bank independence. |
| Keywords: | Monetary and Fiscal policy, time-inconsistency, independent central bank, corruption |
| JEL: | E58 E61 E63 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0607&r=pbe |
| By: | Paolo Paesani (University of Rome – Tor Vergata – Department of Economics and Institutions, Via Columbia n. 2, 00133 Rome, Italy.); Rolf Strauch (European Central Bank, Monetary Policy Strategy Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Manfred Kremer (European Central Bank, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The debate on the sustainability of public finances is closely related to the analysis of the financial and macroeconomic consequences of government debt accumulation. Focusing on the USA, Germany and Italy over the 1983?2003 period, the central issue addressed in this paper is how the accumulation of government debt affects long-term interest rates, both nationally and across borders. The analysis is based on a small, multivariate econometric model, which allows us to disentangle the more permanent and transitory components of interest rate developments. Empirical evidence shows that in all cases a more sustained debt accumulation leads at least temporarily to higher long-term interest rates. This transitory impact also spills-over into other countries, mainly from the US to the two European countries. JEL Classification: E6, H63. |
| Keywords: | Public debt, Long-Term Interest Rates, Cointegration, Common Trends. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060656&r=pbe |
| By: | Stefan Napel (Department of Economics, University of Hamburg); Mika Widgrén (Department of Economics, Turku School of Economics) |
| Abstract: | The paper analyzes the appointment of the European Commission as a strategic game between members of the European Parliament and the Council. The focal equilibrium results in Commissioners that duplicate policy preferences of national Council representatives. Different internal decision rules still prevent the Commission from being a Council clone in aggregate. Rather, it is predicted a priori that Commission policies are on average more in accord with the aggregate position of the Parliament. Empirical analysis suggests that the Council is, in fact, significantly more conservative than Parliament and Commission; the latter two are significantly closer to each other than Council and Commission. |
| Keywords: | European Commission, investiture procedure, voting rules, Council of Ministers, European Parliament |
| JEL: | C70 D71 H77 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp6&r=pbe |
| By: | David C. Grabowski; Jonathan Gruber; Joseph J. Angelelli |
| Abstract: | There has been much debate among economists about whether nursing home quality is a public good across Medicaid and private-pay patients within a common facility. However, there has been only limited empirical work addressing this issue. Using a unique individual level panel of residents of nursing homes from seven states, we exploit both within-facility and within-patient variation in payer source and quality to examine this issue. We also test the robustness of these results across states with different Medicaid and private-pay rate differentials. Across our various identification strategies, the results generally support the idea that quality is a public good within nursing homes. That is, within a common nursing home, there is very little evidence to suggest that Medicaid-funded residents receive consistently lower quality care relative to their private-paying counterparts. |
| JEL: | I11 I18 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12361&r=pbe |