Pascal Jacquinot
- 1 February 2024
- OCCASIONAL PAPER SERIES - No. 337Details
- Abstract
- In the low inflation and low interest rate environment that prevailed over the period 2013-2020, many argued that besides expansionary monetary policy, expansionary fiscal policy could also support central banks’ efforts to bring inflation closer to target. During the pandemic, proper alignment of fiscal and monetary policy was again crucial in promoting a rapid macroeconomic recovery. Since the end of 2021 an environment of higher inflation, lower growth, higher uncertainty, and higher interest rates has changed the nature of the required policy mix and poses different challenges to the interaction between monetary and fiscal policy. Following up on the work done under the ECB’s 2020 strategy review (see Debrun et al., 2021), this report explores some of the renewed challenges to monetary and fiscal policy interactions in an environment of high inflation. The main general conclusion is that, with an independent monetary policy that aims to bring inflation back to target in a timely manner, it is still possible to design fiscal policy in a way that protects vulnerable parts of society against the costs of high inflation without pulling against the central bank’s effort to tame inflation. This is more likely to be the case if fiscal measures are temporary and targeted, and if priority is given to structural reforms and public investment in support of potential growth. The latter is particularly effective in reshaping the supply side of the economy in a manner that is likely to have a lasting positive structural impact.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
- 9 November 2023
- WORKING PAPER SERIES - No. 2871Details
- Abstract
- In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank independence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behavior to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy’s procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth.
- JEL Code
- E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
- 13 February 2023
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 2, 2023Details
- Abstract
- This article assesses the relation between fiscal policy and inflation, with a focus on the euro area and the period 2022-25 (corresponding to the horizon of the December 2022 Eurosystem staff macroeconomic projections for the euro area). Overall, the article concludes that, even without the discretionary policy response to the high energy prices and inflation (assessed at close to 2% of GDP over the 2022-23 period), the euro area budget balance could be negatively affected by the current high inflation beyond the short term. This is primarily explained by the nature of the inflation shock, which has a substantial external, energy-driven component, and its large size. Such factors lead to more limited gains on the revenue side of the budget, which in turn can easily be outweighed in the following years by extra spending pressures. In terms of the euro area debt-to-GDP ratio, the analysis shows that a negative impact on economic activity from an adverse supply shock, given the monetary policy reaction, may outweigh the positive initial impact of higher inflation through the denominator effect. The discretionary fiscal policy measures that have so far been adopted to shield the economy from the impact of high inflation in turn lower the inflationary pressures over the 2022-23 period, with a broad estimated reversal of the effect afterwards. The degree to which these fiscal measures will influence price dynamics is highly uncertain.
- JEL Code
- E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
- 25 January 2023
- WORKING PAPER SERIES - No. 2769Details
- Abstract
- Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment. Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 27 April 2022
- OCCASIONAL PAPER SERIES - No. 291Details
- Abstract
- This paper assesses the potential economic impact of Next Generation EU (NGEU), focusing on the euro area. Its findings suggest that the envisaged national investment and reform plans present a coherent package to support both recovery from the pandemic-induced crisis and longer-term modernisation of the euro area economy through their digital and green transitions. NGEU, however, can only unfold its full potential if all plans are implemented in a timely and effective way. We estimate the impact of the national plans on output, inflation and public debt using ECB staff economic models under the assumption of successful implementation. Specifically, NGEU is expected to take effect through three channels: structural reform, fiscal stimulus and risk premium. Overall, NGEU may increase gross domestic product (GDP) in the euro area by up to 1.5% by 2026, with the impact expected to be significantly larger in the main beneficiary countries. In Italy and Spain, two of the main beneficiaries, the public debt-to-GDP ratio may be more than 10 percentage points lower by 2031. At the same time, all euro area countries are expected to benefit from NGEU through positive spillovers, greater economic resilience and convergence across countries. Finally, the effect of NGEU on euro area inflation over the medium term is deemed to be contained to the extent that the inflationary effect of additional public expenditure is offset, at least to some degree, by the disinflationary effect of greater productive capacity resulting from the planned structural reform and investment measures.
- JEL Code
- C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
E02 : Macroeconomics and Monetary Economics→General→Institutions and the Macroeconomy
E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
H87 : Public Economics→Miscellaneous Issues→International Fiscal Issues, International Public Goods
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
- 11 October 2021
- WORKING PAPER SERIES - No. 2603Details
- Abstract
- This paper analyses the effects of the COVID-19 pandemic shock on small open economies in a monetary union with an application to the euro area. Accounting for a high degree of openness and a strong dependence on intra and extra union trade, we focus on the size and the direction of international spillovers - both from the shock itself and from the ensuing fiscal response. To do so, we use a unified modelling framework: The Euro Area and the Global Economy (EAGLE) model. Furthermore, within this general framework, we assess the extent to which specific modelling features shape the dynamic responses to the COVID-19 pandemic. The main messages are as follows. First, fiscal spillovers from the rest of the monetary union do matter. Second, the effective lower bound amplifies the size of the spillovers. Third, the design of wage negotiations leads to wage subsidies having negative international fiscal policy spillovers. Fourth, import content of government spending interacts with the effective lower bound, strongly affecting the size and sign of spillovers. Fifth, when households have finite lifetimes, the responses of output and inflation are amplified compared to the case with infinitely lived households. Finally, a next generation EU instrument is more effective when financed using a tax on consumption.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 275Details
- Abstract
- This report discusses the role of the European Union’s full employment objective in the conduct of the ECB’s monetary policy. It first reviews a range of indicators of full employment, highlights the heterogeneity of labour market outcomes within different groups in the population and across countries, and documents the flatness of the Phillips curve in the euro area. In this context, it is stressed that labour market structures and trend labour market outcomes are primarily determined by national economic policies. The report then recalls that, in many circumstances, inflation and employment move together and pursuing price stability is conducive to supporting employment. However, in response to economic shocks that give rise to a temporary trade-off between employment and inflation stabilisation, the ECB’s medium-term orientation in pursuing price stability is shown to provide flexibility to contribute to the achievement of the EU’s full employment objective. Regarding the conduct of monetary policy in a low interest rate environment, model-based simulations suggest that history-dependent policy approaches − which have been proposed to overcome lasting shortfalls of inflation due to the effective lower bound on nominal interest rates by a more persistent policy response to disinflationary shocks − can help to bring employment closer to full employment, even though their effectiveness depends on the strength of the postulated expectations channels. Finally, the importance of employment income and wealth inequality in the transmission of monetary policy strengthens the case for more persistent or forceful easing policies (in pursuit of price stability) when interest rates are constrained by their lower bound.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 273Details
- Abstract
- The last review of the ECB’s monetary policy strategy in 2003 followed a period of predominantly upside risks to price stability. Experience following the 2008 financial crisis has focused renewed attention on the question of how monetary and fiscal policy should best interact, in particular in an environment of structurally low interest rates and persistent downside risks to price stability. This debate has been further intensified by the economic impact of the coronavirus (COVID-19) pandemic. In the euro area, the unique architecture of a monetary union consisting of sovereign Member States, with cross-country heterogeneities and weaknesses in its overall construction, poses important challenges. Against this background, this report revisits monetary-fiscal policy interactions in the euro area from a monetary policy perspective and with a focus on the ramifications for price stability and maintaining central bank independence and credibility. The report consists of three parts. The first chapter presents a conceptual framework for thinking about monetary-fiscal policy interactions, thereby setting the stage for a discussion of specifically euro area aspects and challenges in subsequent parts of the report. In particular, it reviews the main ingredients of the pre-global financial crisis consensus on monetary-fiscal policy interactions and addresses significant new insights and refinements which have gained prominence since 2003. In doing so, the chapter distinguishes between general conceptual aspects – i.e. those aspects that pertain to an environment characterised by a single central bank and a single fiscal authority and those aspects that pertain to an environment characterised by a single central bank and many fiscal authorities (a multi-country monetary union). ...
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 28 January 2021
- OCCASIONAL PAPER SERIES - No. 255Details
- Abstract
- In response to the economic fallout from the coronavirus (COVID-19) pandemic, the European Council agreed on the Next Generation EU (NGEU) instrument. NGEU allows the European Commission to issue debt to finance grants and loans to EU Member States, with the disbursement of funds intended to be weighted towards the countries most affected by the crisis. This paper assesses the macroeconomic impact on the euro area of different uses of NGEU, using a large dynamic stochastic general equilibrium (DSGE) model of the euro area and global economy (EAGLE) that has been adapted to reflect the modalities of the NGEU instrument. Three uses of NGEU loans and grants are explored: (i) productive public investment, (ii) unproductive government spending, and (iii) replacing or repaying existing sovereign debt. The EAGLE results are cross-checked with a semi-structural model (ECB-BASE) and with the basic model elasticities (BMEs) of the forecasting models in use in the national central banks of the Eurosystem.
- JEL Code
- C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E65 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Studies of Particular Policy Episodes
F54 : International Economics→International Relations, National Security, and International Political Economy→Colonialism, Imperialism, Postcolonialism
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
- 24 July 2020
- WORKING PAPER SERIES - No. 2450Details
- Abstract
- The paper reviews the economic risks associated with regimes of high public debt through DSGE model simulations. The large public debt build-up following the 2009 global financial and economic crisis acted as a shock absorber for output, while in the recent and more severe COVID19-crisis, an increase in public debt is even more justified given the nature of the crisis. Yet, once the crisis is over and the recovery firmly sets in, keeping debt at high levels over the medium term is a source of vulnerability in itself. Moreover, in the euro area, where monetary policy focuses on the area-wide aggregate, countries with high levels of indebtedness are poorly equipped to withstand future asymmetric shocks. Using three large scale DSGE models, the simulation results suggest that high-debt economies (1) can lose more output in a crisis, (2) may spend more time at the zero-lower bound, (3) are more heavily affected by spillover effects, (4) face a crowding out of private debt in the short and long run, (5) have less scope for counter-cyclical fiscal policy and (6) are adversely affected in terms of potential (long-term) output, with a significant impairment in case of large sovereign risk premia reaction and use of most distortionary type of taxation to finance the additional debt burden in the future. Going forward, reforms at national level, together with currently planned reforms at the EU level, need to be timely implemented to ensure both risk reduction and risk sharing and to enable high debt economies address their vulnerabilities.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General
E43 : Macroeconomics and Monetary Economics→Money and Interest Rates→Interest Rates: Determination, Term Structure, and Effects
- 1 July 2020
- WORKING PAPER SERIES - No. 2434Macroeconomic effects of tariffs shocks: the role of the effective lower bound and the labour marketDetails
- Abstract
- We simulate a version of the EAGLE, a New Keynesian multi-country model of the world economy, to assess the macroeconomic effects of US tariffs imposed on one country member of the euro area (EA), and the rest of the world (RW). The model is augmented with an endogenous effective lower bound (ELB) on the monetary policy rate of the EA and country-specific labour markets with search-and-matching frictions. Our main results are as follows. First, tariffs produce recessionary effects in each country. Second, if the ELB holds, then the tariff has recessionary effects on the whole EA, even if it is imposed on one EA country and the RW. Third, if the ELB holds and the real wage is flexible in the EA country subject to the tariff, or if there are segmented labour markets with directed search within each country, then the recessionary effects on the whole EA are amplified in the short run. Fourth, if the elasticity of substitution among tradables is low, then the tariff has recessionary effects on the whole EA also when the ELB does not hold.
- JEL Code
- F16 : International Economics→Trade→Trade and Labor Market Interactions
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
- 21 April 2020
- OCCASIONAL PAPER SERIES - No. 240Details
- Abstract
- The paper describes the main transmission channels of the spillovers of national fiscal policies to other countries within the euro area and investigates their magnitude using different models. In the context of Economic and Monetary Union (EMU), fiscal spillovers are relevant for the accurate assessment of the cyclical outlook in euro area countries, as well as in the debates on a coordinated change in the euro area fiscal stance and on a euro area fiscal capacity. The paper focuses on spillovers from expenditure-based expansions by presenting two complementary exercises. The first is an empirical investigation of spillovers based on a new, long quarterly dataset for the largest euro area countries and on new estimates based on annual data for a panel of 11 euro area countries. The second uses a multi-country general equilibrium model with a rich fiscal specification and the capacity to analyse trade spillovers. Fiscal spillovers are found to be heterogeneous but generally positive among euro area countries. The reaction of interest rates to fiscal expansions is an important determinant of the magnitude of spillovers.
- 6 February 2019
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 1, 2019Details
- Abstract
- The article describes the main transmission channels of the spillovers of national fiscal policies to other countries within a monetary union and investigates their magnitude using different models.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
- 1 February 2018
- WORKING PAPER SERIES - No. 2127Details
- Abstract
- We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 17 June 2016
- WORKING PAPER SERIES - No. 1923Details
- Abstract
- We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross- country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features
- JEL Code
- E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
F45 : International Economics→Macroeconomic Aspects of International Trade and Finance
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
- 20 April 2016
- WORKING PAPER SERIES - No. 1891Details
- Abstract
- The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. We design a 6-region multi-country DSGE model which provides a structural interpretation of the salient features of these developments. The model spans the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Ger- many, France, Italy, Spain, and rest-of-euro area. We construct three stylised macro-financial scenarios as a synopsis of the euro area financial crisis and argue that the adverse interactions between sovereign, banking and corporate risk, can account to a large extent for the financial repression and poor economic performance observed in some parts of the euro area.
- JEL Code
- E4 : Macroeconomics and Monetary Economics→Money and Interest Rates
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
- 3 November 2014
- OCCASIONAL PAPER SERIES - No. 156Details
- Abstract
- This paper reviews potential output from a euro area perspective by summarising the developments according to international institutions and assessing the impact of the crisis. The paper also considers the methodological basis for potential output estimates, and the high degree of uncertainty that surrounds them. Although it is too early to see the full effects of structural reforms implemented since 2007/08, further structural reforms are needed to support euro area potential growth, especially in view of the negative impact that population ageing is expected to have on potential growth in the future.
- JEL Code
- E23 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Production
E25 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Aggregate Factor Income Distribution
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E37 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Forecasting and Simulation: Models and Applications
O49 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→Other
- 25 August 2014
- WORKING PAPER SERIES - No. 1727Details
- Abstract
- Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable.
- JEL Code
- E22 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Capital, Investment, Capacity
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H54 : Public Economics→National Government Expenditures and Related Policies→Infrastructures, Other Public Investment and Capital Stock
- 22 August 2014
- WORKING PAPER SERIES - No. 1725Details
- Abstract
- We assess the effects on trade balance of a temporary fiscal devaluation enacted by Spain or Portugal by simulating EAGLE, a large-scale multi-country dynamic general equilibrium model of the euro area. Social contributions paid by firms are reduced by 1 percent of GDP for four years and are financed by increasing consumption tax. Our main results are the following. First, the Spanish trade balance improves by 0.5 percent of GDP, the (before-consumption tax) real exchange rate depreciates by 0.7 percent and the terms of trade deteriorate by 1 percent. Second, similar results are obtained in the case of Portugal. Third, the trade balance improves when the fiscal devaluation is enacted also in the rest of the euro area, albeit to a lower extent than in the case of unilateral (country-specific) implementation. Fourth, quantitative results crucially depend on the degree of substitutability between domestic and imported tradables.
- JEL Code
- F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
H20 : Public Economics→Taxation, Subsidies, and Revenue→General
- 7 December 2012
- OCCASIONAL PAPER SERIES - No. 139Details
- Abstract
- The onset of the financial crisis in 2008 has highlighted the problems of diverging external imbalances within Economic and Monetary Union (EMU) and the role of persistent losses in competitiveness. This paper starts by investigating some of the competitiveness factors which contributed to external imbalances in euro area countries. The evidence suggests significant heterogeneity across countries in both price/cost and non-price competitiveness in the euro area and that there is no one factor, but rather a range of potential factors explaining diverging external imbalances. In particular, while non-price competitiveness effects contributed largely to the trade surplus in some countries, for some southern European countries the trade balance was also driven by price factors. The second part of the paper studies the implications of competitiveness adjustment by means of quantitative tools. Using four different multi-country macro models, improvements in both price/cost aspects (namely wage reduction, productivity improvements or fiscal devaluation) and non-price competitiveness factors (quality improvements) were shown - under certain conditions - to improve external imbalances. The analysis suggests differences in countries' composition of trade could lead to heterogeneity in the potential gains from improvements in competitiveness.
- JEL Code
- F10 : International Economics→Trade→General
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
F43 : International Economics→Macroeconomic Aspects of International Trade and Finance→Economic Growth of Open Economies
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
- 8 April 2011
- WORKING PAPER SERIES - No. 1323Details
- Abstract
- We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
- 17 December 2010
- WORKING PAPER SERIES - No. 1280Details
- Abstract
- Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare.
- JEL Code
- E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
- 14 October 2010
- WORKING PAPER SERIES - No. 1254Details
- Abstract
- The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results.
- JEL Code
- E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
- 20 May 2010
- WORKING PAPER SERIES - No. 1195Details
- Abstract
- Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad.
- JEL Code
- C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F47 : International Economics→Macroeconomic Aspects of International Trade and Finance→Forecasting and Simulation: Models and Applications
- 23 June 2008
- WORKING PAPER SERIES - No. 907Details
- Abstract
- In this paper, we utilise the multi-country version of the NAWM to analyse the impact of globalisation on euro area macroeconomic aggregates. We provide alternative model-based definitions of globalisation associated with an increase in potential output in emerging Asia and its impact on total factor productivity in the euro area, and a shift in international specialisation patterns leading to changes in relative demand and import substitutions. The results indicate that globalisation has a positive impact on output, consumption, investment and real labour income in the long-run. This impact is driven by the improvement in the terms of trade and associated positive wealth effects, as well as by spillovers of higher potential output in emerging Asia on euro area total factor productivity. Additionally, we provide evidence that structural reforms in goods and labour markets would amplify the benefits associated with globalisation.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy