The paper examines the extent to which current account imbalances of euro area countries are related to intra‐euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis‐a‐vis the rest of the world x96 in particular vis‐a‐vis China, Central and Eastern Europe, and oil exporters x96 on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis‐a‐vis the rest of the world increased, they were financed mostly by intra‐euro area capital inflows (in particular by the purchase of government and financial institutions' securities, and cross‐border interbank lending) which permitted external imbalances to grow over time.
{"title":"External Imbalances in the Eurozone","authors":"Ruo Chen, G. Milesi-Ferretti, T. Tressel","doi":"10.1111/1468-0327.12004","DOIUrl":"https://doi.org/10.1111/1468-0327.12004","url":null,"abstract":"The paper examines the extent to which current account imbalances of euro area countries are related to intra‐euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis‐a‐vis the rest of the world x96 in particular vis‐a‐vis China, Central and Eastern Europe, and oil exporters x96 on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis‐a‐vis the rest of the world increased, they were financed mostly by intra‐euro area capital inflows (in particular by the purchase of government and financial institutions' securities, and cross‐border interbank lending) which permitted external imbalances to grow over time.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122897778","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract: This paper analyzes the distortions that banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. Empirical analysis using bank-level data from the recent crisis provide support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. We discuss several implications for the supervision of cross-border banks in Europe.
{"title":"Supervising Cross�?Border Banks: Theory, Evidence and Policy","authors":"R. Todorov, T. Beck, W. Wagner","doi":"10.1111/1468-0327.12001","DOIUrl":"https://doi.org/10.1111/1468-0327.12001","url":null,"abstract":"Abstract: This paper analyzes the distortions that banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. We find that while each individual dimension of cross-border activities distorts the incentives of a domestic regulator, a balanced amount of cross-border activities does not necessarily cause inefficiencies, as the various distortions can offset each other. Empirical analysis using bank-level data from the recent crisis provide support to our theoretical findings. Specifically, banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state, reflecting the distorted incentives of national regulators. We discuss several implications for the supervision of cross-border banks in Europe.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129159251","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-07-01DOI: 10.1111/j.1468-0327.2012.00287.x
Carlos Mulas�?Granados, S. Gupta, E. Baldacci
This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure‐based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large – as in many advanced economies today – fiscal consolidations that rely also on revenue‐enhancing measures are more likely to accelerate debt reduction. We label it as the ‘Rebalancing Adjustment Effect’. This result is particularly strong when countries experience a financial crisis.
{"title":"Reassessing the Fiscal Mix for Successful Debt Reduction","authors":"Carlos Mulas�?Granados, S. Gupta, E. Baldacci","doi":"10.1111/j.1468-0327.2012.00287.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2012.00287.x","url":null,"abstract":"This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure‐based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large – as in many advanced economies today – fiscal consolidations that rely also on revenue‐enhancing measures are more likely to accelerate debt reduction. We label it as the ‘Rebalancing Adjustment Effect’. This result is particularly strong when countries experience a financial crisis.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"2020 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129515744","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-07-01DOI: 10.1111/j.1468-0327.2012.00288.x
N. Campos, F. Coricelli
What accounts for the dynamics of financial reforms? This paper identifies the political regime as one of the main factors. Focusing on democratization and financial reform, it puts forward novel evidence for a U-shaped relation, across countries and over time, for different reform measures and a wide range of estimators. Partial democracy is a main obstacle to financial reforms and democratization, when incomplete, may lead to severe financial reform reversals.
{"title":"Financial Liberalization and Reversals: Political and Economic Determinants","authors":"N. Campos, F. Coricelli","doi":"10.1111/j.1468-0327.2012.00288.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2012.00288.x","url":null,"abstract":"What accounts for the dynamics of financial reforms? This paper identifies the political regime as one of the main factors. Focusing on democratization and financial reform, it puts forward novel evidence for a U-shaped relation, across countries and over time, for different reform measures and a wide range of estimators. Partial democracy is a main obstacle to financial reforms and democratization, when incomplete, may lead to severe financial reform reversals.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122154963","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-04-01DOI: 10.1111/j.1468-0327.2012.00282.x
Carlo A. Favero, A. Missale
In this paper, we provide new evidence on the determinants of sovereign yield spreads and contagion effects in the euro area in order to evaluate the rationale for a common Eurobond jointly guaranteed by euro-area Member States. We find that default risk is the main driver of yield spreads, suggesting small gains from greater liquidity. Fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries’ yield spreads; i.e. with the global risk that the market perceives. More important, the impact of this global risk variable is not constant over time, a clear sign of contagion driven by shifts in market sentiment. This evidence points to a discontinuity in the disciplinary role of financial markets. If markets can stay irrational longer than a country can stay solvent, then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened, and issuing Eurobonds can be economically justified.
{"title":"Sovereign Spreads in the Eurozone: Which Prospects for a Eurobond?","authors":"Carlo A. Favero, A. Missale","doi":"10.1111/j.1468-0327.2012.00282.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2012.00282.x","url":null,"abstract":"In this paper, we provide new evidence on the determinants of sovereign yield spreads and contagion effects in the euro area in order to evaluate the rationale for a common Eurobond jointly guaranteed by euro-area Member States. We find that default risk is the main driver of yield spreads, suggesting small gains from greater liquidity. Fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries’ yield spreads; i.e. with the global risk that the market perceives. More important, the impact of this global risk variable is not constant over time, a clear sign of contagion driven by shifts in market sentiment. This evidence points to a discontinuity in the disciplinary role of financial markets. If markets can stay irrational longer than a country can stay solvent, then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened, and issuing Eurobonds can be economically justified.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123178821","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-01-01DOI: 10.1111/j.1468-0327.2011.00276.x
M. Pagano, Giovanni Pica
How does finance affect employment and inter-industry job reallocation? We present a model that predicts that financial development (i) increases employment and/or labor productivity and wages, with a smaller impact at high levels of the equilibrium wage and financial development; (ii) may induce either more or less reallocation of jobs depending on whether shocks to profit opportunities or to cash flow predominate; (iii) amplifies the output and employment losses in crises, firms that rely most on banks for liquidity being hit the hardest. Testing these predictions on international industry-level data for 1970-2003, we find that standard measures of financial development are indeed associated with greater employment growth, although only in non-OECD countries, and are not correlated with labor productivity or real wage growth. Moreover, they correlate negatively with inter-industry dispersion of employment growth. Finally, there is some evidence of a “dark side” of financial development, in that during banking crises employment grows less in the industries that are more dependent on external finance and those located in the more financially developed countries.
{"title":"Finance and Employment","authors":"M. Pagano, Giovanni Pica","doi":"10.1111/j.1468-0327.2011.00276.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00276.x","url":null,"abstract":"How does finance affect employment and inter-industry job reallocation? We present a model that predicts that financial development (i) increases employment and/or labor productivity and wages, with a smaller impact at high levels of the equilibrium wage and financial development; (ii) may induce either more or less reallocation of jobs depending on whether shocks to profit opportunities or to cash flow predominate; (iii) amplifies the output and employment losses in crises, firms that rely most on banks for liquidity being hit the hardest. Testing these predictions on international industry-level data for 1970-2003, we find that standard measures of financial development are indeed associated with greater employment growth, although only in non-OECD countries, and are not correlated with labor productivity or real wage growth. Moreover, they correlate negatively with inter-industry dispersion of employment growth. Finally, there is some evidence of a “dark side” of financial development, in that during banking crises employment grows less in the industries that are more dependent on external finance and those located in the more financially developed countries.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133788729","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-01-01DOI: 10.1111/j.1468-0327.2011.00278.x
P. Dolton, Chiara Rosazza Bondibene
What should governments do with the level of the minimum wage (MW) in times of recession? In an economic downturn when most workers face falling real wages is it appropriate to let the MW fall or are the positive effects of the MW on inequality enough to justify its uprating – and if so what might be the consequences on a country’s employment level? This paper reports new estimates of the employment effects of the MW by focusing on the recessionary experiences across countries. Using international data we exploit: cross‐national variation in the level and timing of the MW uprating and the exact timing of the recessionary experiences in different countries with a panel data set comprising 33 OECD over the period 1971–2009. Our panel data allow us to differentiate the effect of MWs on employment in periods of economic downturn as well as periods of economic growth. We also account for institutional and other policy related differences that might have an impact on employment other than the MW. We find that the answer depends on whether one considers adults or young people, and to some extent, on what measure of the MW is considered. The answer is also somewhat sensitive to whether one considers that the MW level is a choice option of the government which is inextricably interrelated to the determination of employment – that is, the extent to which the MW is endogenous. Using a ‘political complexion of the government’ instrumental variable (IV) we find that the MW only has a negative impact on youth employment. This leaves each government with the dilemma of raising the MW and reducing inequality or increasing the MW and accepting that this will reduce employment levels amongst young people and those on the margins of work.
{"title":"The International Experience of Minimum Wages in an Economic Downturn","authors":"P. Dolton, Chiara Rosazza Bondibene","doi":"10.1111/j.1468-0327.2011.00278.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00278.x","url":null,"abstract":"What should governments do with the level of the minimum wage (MW) in times of recession? In an economic downturn when most workers face falling real wages is it appropriate to let the MW fall or are the positive effects of the MW on inequality enough to justify its uprating – and if so what might be the consequences on a country’s employment level? This paper reports new estimates of the employment effects of the MW by focusing on the recessionary experiences across countries. Using international data we exploit: cross‐national variation in the level and timing of the MW uprating and the exact timing of the recessionary experiences in different countries with a panel data set comprising 33 OECD over the period 1971–2009. Our panel data allow us to differentiate the effect of MWs on employment in periods of economic downturn as well as periods of economic growth. We also account for institutional and other policy related differences that might have an impact on employment other than the MW. We find that the answer depends on whether one considers adults or young people, and to some extent, on what measure of the MW is considered. The answer is also somewhat sensitive to whether one considers that the MW level is a choice option of the government which is inextricably interrelated to the determination of employment – that is, the extent to which the MW is endogenous. Using a ‘political complexion of the government’ instrumental variable (IV) we find that the MW only has a negative impact on youth employment. This leaves each government with the dilemma of raising the MW and reducing inequality or increasing the MW and accepting that this will reduce employment levels amongst young people and those on the margins of work.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131679135","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2012-01-01DOI: 10.1111/j.1468-0327.2011.00275.x
C. Dustmann, T. Frattini, G. Lanzara
This paper investigates the educational achievements of second generation immigrants in several OECD countries in a comparative perspective. We first show that the educational achievement (measured as test scores in PISA achievement tests) of children of immigrants is quite heterogeneous across countries, and strongly related to achievements of the parent generation. The disadvantage considerably reduces, and even disappears for some countries, once we condition on parental background characteristics. Second, we provide novel analysis of cross-country comparisons of test scores of children from the same country of origin, and compare (conditional) achievement scores in home and host countries. The focus is on Turkish immigrants, whom we observe in several destination countries. We investigate both mathematics and reading test scores, and show that the results vary according to the type of skills tested. For mathematics, in most countries and even if the test scores achievement of the children of Turkish immigrants is lower than that of their native peers, it is still higher than that of children of their cohort in the home country - conditional and unconditional on parental background characteristics. The analysis suggests that higher school quality relative to that in the home country is important to explain immigrant children's educational advantage.
{"title":"Educational Achievement of Second�?Generation Immigrants: An International Comparison","authors":"C. Dustmann, T. Frattini, G. Lanzara","doi":"10.1111/j.1468-0327.2011.00275.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00275.x","url":null,"abstract":"This paper investigates the educational achievements of second generation immigrants in several OECD countries in a comparative perspective. We first show that the educational achievement (measured as test scores in PISA achievement tests) of children of immigrants is quite heterogeneous across countries, and strongly related to achievements of the parent generation. The disadvantage considerably reduces, and even disappears for some countries, once we condition on parental background characteristics. Second, we provide novel analysis of cross-country comparisons of test scores of children from the same country of origin, and compare (conditional) achievement scores in home and host countries. The focus is on Turkish immigrants, whom we observe in several destination countries. We investigate both mathematics and reading test scores, and show that the results vary according to the type of skills tested. For mathematics, in most countries and even if the test scores achievement of the children of Turkish immigrants is lower than that of their native peers, it is still higher than that of children of their cohort in the home country - conditional and unconditional on parental background characteristics. The analysis suggests that higher school quality relative to that in the home country is important to explain immigrant children's educational advantage.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115278688","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2011-11-01DOI: 10.1111/j.1468-0327.2012.00281.x
A. Mody, D. Sandri
We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.
{"title":"The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip","authors":"A. Mody, D. Sandri","doi":"10.1111/j.1468-0327.2012.00281.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2012.00281.x","url":null,"abstract":"We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"107 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131591132","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2011-10-01DOI: 10.1111/j.1468-0327.2011.00270.x
Vito Polito, M. Wickens
The huge increases in debt-GDP ratios following the 2007–2009 global financial crisis, which are unprecedented except in times of war, has focused attention on the viability of the fiscal positions of EU countries and the US, how to assess this and the likely future evolution of these positions. This paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt-GDP targeted given the forecasts of future deficit and interest rates obtained from an unrestricted (recursively-estimated) VAR model. The index is easy to compute and can be decomposed to disclose the different contribution of revenue, expenditure, nominal yields, inflation and growth to the fiscal stance. For this reason it provides a transparent and detailed measure of the fiscal stance, particularly suitable for multi-country surveillance. As a result, the index improves on the tax-gap indicators widely used by governments and international agencies, and is far more informative than formal econometric tests of fiscal sustainability. The time series of the indicator for individual EU countries and the US show that their fiscal position has fluctuated considerably over the last 40 years, and has particularly deteriorated since 2007. The index predicts that the adjustment required to restore pre-crisis debt-GDP levels are higher for high debt countries like Greece, Italy and Portugal. They become more severe the shorter is the time horizon for the adjustment. As a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run, we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator.
{"title":"Assessing the Fiscal Stance in the European Union and the United States, 1970–2011","authors":"Vito Polito, M. Wickens","doi":"10.1111/j.1468-0327.2011.00270.x","DOIUrl":"https://doi.org/10.1111/j.1468-0327.2011.00270.x","url":null,"abstract":"The huge increases in debt-GDP ratios following the 2007–2009 global financial crisis, which are unprecedented except in times of war, has focused attention on the viability of the fiscal positions of EU countries and the US, how to assess this and the likely future evolution of these positions. This paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt-GDP targeted given the forecasts of future deficit and interest rates obtained from an unrestricted (recursively-estimated) VAR model. The index is easy to compute and can be decomposed to disclose the different contribution of revenue, expenditure, nominal yields, inflation and growth to the fiscal stance. For this reason it provides a transparent and detailed measure of the fiscal stance, particularly suitable for multi-country surveillance. As a result, the index improves on the tax-gap indicators widely used by governments and international agencies, and is far more informative than formal econometric tests of fiscal sustainability. The time series of the indicator for individual EU countries and the US show that their fiscal position has fluctuated considerably over the last 40 years, and has particularly deteriorated since 2007. The index predicts that the adjustment required to restore pre-crisis debt-GDP levels are higher for high debt countries like Greece, Italy and Portugal. They become more severe the shorter is the time horizon for the adjustment. As a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run, we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator.","PeriodicalId":236508,"journal":{"name":"Wiley-Blackwell: Economic Policy","volume":"10 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124537488","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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