Pablo Hernández de Cos
- 10 June 2015
- OCCASIONAL PAPER SERIES - No. 162Details
- Abstract
- This paper seeks to link the debate surrounding short-term fiscal multipliers with the medium and longer-term impact of fiscal consolidation on public debt sustainability. A literature review and empirical findings for state-dependent multipliers confirm that there is considerable uncertainty surrounding the size of the short-term multiplier. Notably, multipliers may be larger in deep recessions or financial crises, but the negative impact of fiscal consolidation is mitigated when public finances are weak. Using a stylised framework and a range of plausible values for the fiscal multiplier, simulations suggest that an increase in the debt ratio following episodes of fiscal consolidation is likely to be short-lived. Even in a macroeconomic context in which multipliers are high, a front-loaded fiscal consolidation reduces the total consolidation effort and implies a faster stabilisation of the debt ratio. In general, back-loading is subject to higher implementation risks, most notably in the light of political economy considerations. Overall, when determining the fiscal adjustment path, both the short-term costs and the longer-term benefits need to be taken into account. Particular attention should be paid to the composition of consolidation packages, with well-designed adjustments likely to imply a faster stabilisation of the debt ratio.
- JEL Code
- H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General
H6 : Public Economics→National Budget, Deficit, and Debt
E6 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- 12 August 2014
- WORKING PAPER SERIES - No. 1712Details
- Abstract
- The sovereign debt crisis in the euro area has increased the interest in early warning indicators, with the aim to indicate the build?up of fiscal stress early on and to facilitate crisis prevention by a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country?specific approach could strongly increase the signalling power of early warning systems. Finally we draw policy conclusions for the setting?up and application of a system of early warning indicators for fiscal stress.
- JEL Code
- 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
E66 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General Outlook and Conditions
H62 : Public Economics→National Budget, Deficit, and Debt→Deficit, Surplus
H63 : Public Economics→National Budget, Deficit, and Debt→Debt, Debt Management, Sovereign Debt
F34 : International Economics→International Finance→International Lending and Debt Problems
- 23 August 2006
- WORKING PAPER SERIES - No. 670Details
- Abstract
- Given that savings behaviour and worker productivity have strong life-cycle components and given that demographic profiles vary across countries, population age structure should be linked to differences in levels of economic development. In this paper we measure the economic importance of age structure variation for the global economy. We find that even after adjusting for country-specific effects, demographic maturation has been associated with nearly half of the evolution of global per-capita GDP since 1960. We also find that age structure differences can account for just over half of the variation in worldwide per capita GDP (i.e. the lack of sigma convergence) observed since 1960. Taken as a whole, these results complement recent theoretical and empirical work on the importance of population size and economic development and reinforce empirical work linking mature demographic age structures with faster cross-country economic growth rates.
- JEL Code
- J13 : Labor and Demographic Economics→Demographic Economics→Fertility, Family Planning, Child Care, Children, Youth
J22 : Labor and Demographic Economics→Demand and Supply of Labor→Time Allocation and Labor Supply
J24 : Labor and Demographic Economics→Demand and Supply of Labor→Human Capital, Skills, Occupational Choice, Labor Productivity
O11 : Economic Development, Technological Change, and Growth→Economic Development→Macroeconomic Analyses of Economic Development
O40 : Economic Development, Technological Change, and Growth→Economic Growth and Aggregate Productivity→General
- 27 June 2006
- WORKING PAPER SERIES - No. 647Details
- 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 Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H30 : Public Economics→Fiscal Policies and Behavior of Economic Agents→General
- 25 October 2004
- WORKING PAPER SERIES - No. 396Details
- 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.
- JEL Code
- E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
- 1 September 2001
- WORKING PAPER SERIES - No. 77Details
- Abstract
- Estimates of cyclically-adjusted budget balances, correcting actual government budget balances for business cycle fluctuations, are produced by many institutions, including the European Commission, the IMF and the OECD. This paper presents an alternative approach for the cyclical adjustment of budget balances. The approach is based on a disaggregated method for the calculation of the cyclical component of the budget balance. In this approach, the effects of changes in the structure of demand and national income on government revenue and expenditure are captured. Cases where the various macroeconomic bases are in different phases of the cycle or exhibit fluctuations of different magnitude are taken into account in this way. The computation of the cyclical components of these macroeconomic bases is based on the Hodrick-Prescott filter and takes into account the latest evidence presented in the literature about the properties of this filter. The paper also presents new estimates of the elasticities of individual budget items with respect to the relevant macroeconomic variables. The method is used within the ESCB for the estimation of cyclically adjusted budget balances of the EU countries
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E60 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→General
Annexes