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  • E62  (146)
  • Frankfurt a. M.: European Central Bank (ECB)  (145)
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  • 1
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    Expectations-driven liquidity traps: Implications for monetary and fiscal policy (2019)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2019-12-06
    Description: We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence can give rise to persistent liquidity trap episodes. Unlike in the case of fundamental-driven liquidity traps, there is no straightforward recipe for mitigating the welfare costs and the systematic in ation shortfall associated with expectations-driven liquidity traps. Raising the in ation target or appointing an in ation-conservative central banker improves in ation outcomes away from the lower bound but exacerbates the shortfall at the lower bound. Using government spending as an additional policy tool worsens stabilization outcomes both at and away from the lower bound. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society can eliminate expectations-driven liquidity traps altogether.
    Keywords: E52 ; E61 ; E62 ; ddc:330 ; Effective Lower Bound ; Sunspot Equilibria ; Monetary Policy ; Fiscal Policy ; Discretion ; Policy Delegation
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
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  • 2
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    Do public wages in the euro area explain private wage developments? An empirical investigation (2019)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2019-12-06
    Description: This paper investigates the relationship between public and private wages in the five largest euro area countries for the period 1997-2017. The analysis shows that there exists a positive and significant response of private wages to a public wage shock. This effect is found to be temporary and to differ across countries (positive and significant in France, Spain, Italy and non-significant in Germany and the Netherlands). Interestingly, the response of private wages is found to be asymmetric: a positive and statistically significant response is found in case of a positive shock to public wages, while no statistically significant effects are detected in case of a cut to public wages. As the public wage containment policies adopted during the sovereign debt crisis are expected to be gradually lifted in several euro area countries, the findings of this paper suggest that knock-on effects on private sector wages cannot be excluded in the years to come.
    Keywords: E24 ; E62 ; J30 ; C33 ; C11 ; ddc:330 ; government wages ; private sector wages ; asymmetries ; spillovers
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 3
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    Modelling yields at the lower bound through regime shifts (2019)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2019-12-06
    Description: We propose a regime-switching approach to deal with the lower bound on nominal interest rates in dynamic term structure modelling. In the "lower bound regime", the short term rate is expected to remain constant at levels close to the effective lower bound; in the "normal regime", the short rate interacts with other economic variables in a standard way. State-dependent regime switching probabilities ensure that the likelihood of being in the lower bound regime increases as short rates fall closer to zero. A key advantage of this approach is to capture the gradualism of the monetary policy normalization process following a lower bound episode. The possibility to return to the lower bound regime continues exerting an influence in the early phases of normalization, pulling expected future rates downwards. We apply our model to U.S. data and show that it captures key properties of yields at the lower bound. In spite of its heavier parameterization, the regime-switching model displays a competitive out-of-sample forecasting performance. It can also be used to gauge the risk of a return to the lower bound regime in the future. As of mid-2018, it provides a more benign assessment than alternative measures.
    Keywords: E31 ; E40 ; E44 ; E52 ; E58 ; E62 ; E63 ; ddc:330 ; zero lower bound ; term premia ; term structure of interest rates ; monetarypolicy rate expectations ; regime switches
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 4
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    Fiscal multipliers and foreign holdings of public debt (2019)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2019-12-06
    Description: This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign markets to place their debt, increasing the size of multipliers. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980's to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for a large set of advanced economies. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950's and 1960's and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today.
    Keywords: E62 ; F32 ; F34 ; F36 ; F41 ; F62 ; F65 ; G15 ; H63 ; ddc:330 ; sovereign debt ; fiscal multiplier ; foreign holdings of public debt
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 5
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    Economic structures 20 years into the euro (2019)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2019-12-04
    Description: Well-functioning economic structures are key for resilient and prospering euro area economies. The global financial and sovereign debt crises exposed the limited resilience of the euro area's economic structures. Economic growth was masking underlying weaknesses in several euro area countries. With the inception of the crises, significant efforts have been undertaken by Member States individually and collectively to strengthen resilience of economic structures and the smooth functioning of the euro area. National fiscal policies were consolidated to keep the increase in government debt contained and structural reform momentum increased notably in the second decade, particularly in those countries most hit by the crisis. The strengthened national economic structures were supported by a reformed EU crisis and economic governance framework. However, overall economic structures in euro area countries are still not fully commensurate with the requirements of a monetary union. Moreover, remaining challenges, such as population ageing, low productivity and the implications of digitalisation, will need to be addressed to increase economic resilience and long-term growth.
    Keywords: E31 ; E32 ; E60 ; E62 ; F10 ; J11 ; O43 ; ddc:330 ; economic structures ; euro area ; resilience ; growth
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 6
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    Learning about fiscal multipliers during the European sovereign debt crisis: Evidence from a quasi-natural experiment (2018)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-11-02
    Description: Identifying fiscal multipliers is usually constrained by the absence of a counterfactual scenario. Our new data set allows overcoming this problem by making use of the fact that recommendations under the EU's excessive deficit procedure (EDP) provide both a baseline no-policy-change scenario and a fiscal-adjustment EDP scenario that entails a forecast of the macroeconomic impact of fiscal consolidation over the EDP horizon. For a sample of 24 EU countries to which 48 EDP recommendations were applied between 2009 and 2015, we derive country-specific fiscal multipliers as actually applied by forecasters during the crisis. Our results confirm Blanchard and Leigh's (2013, 2014) presumption that forecasters learned during the crisis. According to our findings, fiscal multipliers as applied by the European Commission increased over time - from about 1/4 in the early years of the crisis to about 2/3 in the later years. However, different from Blanchard and Leigh (2013, 2014), we do not find evidence for the hypothesis that ex-post fiscal multipliers have been substantially above 1 during the crisis.
    Keywords: E32 ; E62 ; H20 ; H5 ; ddc:330 ; fiscal consolidation ; fiscal multipliers ; business cycle
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 7
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    Revenue- versus spending-based consolidation plans: The role of follow-up (2018)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-11-02
    Description: The literature on fiscal multipliers finds that spending-based fiscal consolidations tend to have more benign macro-economic consequences than revenue-based consolidations. By directly comparing ex-post data with consolidation plans, we present evidence of a systematically weaker follow-up of spending-based consolidation plans. Next, using a newly-developed dataset of consolidation announcements, panel VAR regressions confirm the weaker follow-up of spending-based plans and their more benign macro-economic effects compared to those of revenue-based plans. We disentangle the role of the difference in follow-up from that of the difference in the composition of revenue- and spending-based consolidations. While the latter channel, which works through the difference between revenue and spending multipliers, explains the largest fraction of the difference in economic trajectories, the difference in follow-up plays a non-negligible role as well.
    Keywords: E21 ; E62 ; H5 ; ddc:330 ; fiscal consolidation announcements ; follow-up ; fiscal multipliers ; panel vector auto-regression ; narrative identification
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 8
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    Managing the sovereign-bank nexus (2018)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-11-02
    Description: This paper identifies the various channels that give rise to a "sovereign-bank nexus" whereby the financial health of banks and sovereigns is intertwined. We find that banks and sovereigns are linked by three interacting channels: banks hold large amounts of sovereign debt; banks are protected by government guarantees; and the health of banks and governments affect and is affected by economic activity. Evidence suggests that all three channels are relevant. The paper concludes with a discussion of the policy implications of these findings.
    Keywords: E62 ; F34 ; G01 ; G21 ; ddc:330 ; fiscal policy ; sovereign risk ; financial stability ; financial crisis ; sovereign-bank nexus
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 9
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    Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: A structural model-based approach (2018)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-06-02
    Description: 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.
    Keywords: E24 ; E32 ; E52 ; E62 ; F45 ; ddc:330 ; DSGE models ; labour taxes ; unemployment ; monetary union ; open-economy macroeconomics
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 10
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    A minimal moral hazard central stabilisation capacity for the EMU based on world trade (2018)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-06-02
    Description: Recent debate has focused on the introduction of a central stabilisation capacity as a completing element of the Economic and Monetary Union. Its main objective would be to contribute cushioning country-specific economic shocks, especially when national fiscal stabilisers are run down. There are two main potential objections to such schemes proposed so far: first, they may lead to moral hazard, i.e. weaken the incentives for sound fiscal policies and structural reforms. Second, they may generate permanent transfers among countries. Here we present a scheme that is relatively free from moral hazard, because the transfers are based on changes in world trade in the various sectors. These changes can be considered as largely exogenous, hence independent from an individual government's policy; therefore, the scheme is better protected against manipulation. Our scheme works as follows: if a sector is hit by a bad shock at the world market level, then a country with an economic structure that is skewed towards this sector receives a (one-time) transfer from the other countries. The scheme is designed such that the transfers add up to zero each period, hence obviating the need for a borrowing capacity. We show that the transfers generated by our scheme tend to be countercyclical and larger when economies are less diversified. In addition, since transfers are based on temporary changes in world trade, the danger of permanent transfers from one set of countries to the other countries is effectively ruled out. Finally, we show that transfers are quite robust to revisions in the underlying export data.
    Keywords: E32 ; E62 ; E63 ; ddc:330 ; EMU ; central fiscal capacity ; exports ; moral hazard
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 11
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    Business investment in EU countries (2018)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2019-02-20
    Description: The article analyses recent developments in business investment for a large group of EU countries, using a broad set of analytical tools and data sources. We find that the assessment of whether or not investment is currently low varies across benchmarks and countries. At the euro area level and for most countries, the level of business investment is broadly in line with the level of overall activity. However rates of capital stock growth have slowed down since the crisis. The main cyclical determinants of investment developments in the euro area include foreign and domestic demand, uncertainty and financial conditions. Uncertainty seems to have played a negative role during the financial and sovereign debt crises; however, given its low levels more recently, it has not acted as a drag on business investment overall during the recovery. Credit constraints appear to have hindered investment during the twin crises, especially in stressed countries. Aside from cyclical developments, important secular factors - relating to demographics, the changing nature and location of production, and the business environment - have influenced investment. Another factor that may have amplified the decline in private investment, particularly in countries that were hit hardest by the sovereign debt crisis, is the low level of public investment. This is because when public investment enhances the productivity of the private sector, there may be positive spillovers from the former to the latter, including across countries. Finally, intra-sector capital misallocation, measured as the within-sector dispersion across firms in the marginal revenue product of capital, has been increasing in Europe since 2002, which may in turn have exerted a significant drag on total factor productivity dynamics, and hence on aggregate output growth.
    Keywords: E32 ; E52 ; E62 ; D24 ; D61 ; ddc:330 ; business investment ; uncertainty ; monetary policy ; capital misallocation
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 12
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    Private and public risk sharing in the euro area (2018)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-11-02
    Description: This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone's sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.
    Keywords: C23 ; E62 ; G11 ; G15 ; ddc:330 ; risk sharing ; time-variation ; financial integration ; international financial assistance
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 13
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    Sources of borrowing and fiscal multipliers (2018)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2019-12-06
    Description: This paper finds that debt-financed fiscal multipliers vary depending on the location of the debt buyer. In a sample of 33 countries fiscal multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to when they are financed by issuing debt to home investors (residents). In a theoretical model, the location of the government creditor produces these differential responses through the extent that private investment is crowded out. International capital mobility of the resident private sector decreases the difference between the two types of financing both in the model and in the data.
    Keywords: E62 ; F41 ; H3 ; ddc:330 ; Fiscal multipliers ; structural vector autoregressions ; sign restrictions ; proxy-SVAR ; investment crowding in ; debt financing ; small open-economy model
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 14
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    Leverage interactions: a national accounts approach (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: The policy focus on excessive leverage in the euro area has raised interest in developing comprehensive analytical approaches to better understand the interrelationship between leverage and deleveraging processes across economic agents. In particular, the interplay between government debt and private leverage is attracting increasing attention in the current context of simultaneous deleveraging adjustments. However, analyses of the subject are generally partial in that they fail to take into account feedback effects on balance sheet positions across economic agents. This paper attempts to clarify these cross-agent interlinkages by examining concepts, relationships and restrictions taken from the national accounts framework. Hence, the paper presents a mechanism that captures how increased leverage in certain agents contributes, ceteris paribus, to a reduction in leverage in the rest of the economy. The novelty of the underlying framework for leverage behaviour is that it takes the financial assets held by agents into consideration.
    Keywords: E01 ; E62 ; H3 ; H6 ; ddc:330 ; balance sheet approach ; indebtedness ; leverage ; national accounts
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 15
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    The impact of constrained monetary policy on fiscal multipliers on output and inflation (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-02-05
    Description: This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary policy, taking into account alternative agents’ expectations about future monetary policy. We illustrate that those expectations are even more important for the size of the fiscal multipliers than the difference between exogenously versus endogenously modelled constraints. We confirm the well-known finding that fiscal multipliers exhibit an over-proportional reaction when monetary policy is constrained. The novelty of our results is that this over-proportionality is stronger for the fiscal multiplier on inflation than on output. We relate this finding to the structural parameters of the models by means of a Global Sensitivity Analysis.
    Keywords: E31 ; E43 ; E52 ; E62 ; E63 ; ddc:330 ; constrained monetary policy ; fiscal multipliers ; zero lower bound
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 16
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    Debt sustainability analysis for euro area sovereigns: A methodological framework (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-06-20
    Description: The euro area sovereign debt crisis has highlighted the importance of reducing public debt levels and building up sufficient fiscal buffers during normal and good times. It has also reaffirmed the need for a thorough debt sustainability analysis (DSA) to act as a warning system for national policies. This paper introduces a comprehensive DSA framework for euro area sovereigns that could be used for analysis of fiscal risks and vulnerabilities. Specifically, this framework consists of three main building blocks: (i) a deterministic DSA, which embeds debt simulations under a benchmark and various narrative shock scenarios; (ii) a stochastic DSA, providing for a probabilistic approach to debt sustainability; and (iii) other relevant indicators capturing liquidity and solvency risks. The information embedded in the three main DSA blocks can be summarised in a heat map, which can provide guidance on the overall assessment of risks to debt sustainability. This method reflects the need to have a broad-based assessment, cross-checking information and perspectives from various sources with a view to deriving a robust debt sustainability assessment.
    Keywords: E62 ; H62 ; H63 ; H68 ; ddc:330 ; sovereign debt sustainability analysis ; fiscal policy ; public debt ; euro area ; fiscal risks
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 17
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    Fiscal reaction function and fiscal fatigue: Evidence for the euro area (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-06-29
    Description: This paper estimates a fiscal reaction function (FRF) framework for euro area countries and derives a novel approach to measure fiscal fatigue. As in previous studies, we find evidence that euro area sovereigns abide, on average, by (weak) sustainability constraints. The primary balance improves by about 0.03-0.05 for every 1 percentage point increase in the debt-to-GDP ratio after controlling for other relevant factors. The positive reaction of primary surpluses to higher debt strengthened over the crisis. Based on this framework, we propose a simple, practical measure of fiscal fatigue that can be used to assess the capacity of sovereigns to maintain primary surpluses over extended periods of time. This measure can be derived by comparing simulated primary balance paths in the context of debt sustainability analyses with countries' track-record, adjusted for the change in debt with the estimated fiscal reaction coefficient. The evidence of fiscal fatigue in non-linear FRF specifications is weaker for our euro area sample.
    Keywords: H60 ; E62 ; F41 ; C33 ; ddc:330 ; fiscal fatigue ; fiscal reaction function ; financial crisis ; debt sustainability ; euro area
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 18
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    The effect of public investment in Europe: A model-based assessment (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-06-29
    Description: We consider the effect of an increase in public investments on output in Europe against the background of a sharp drop of public investments in a number of EU countries during the crisis and subsequent policy discussions on the need to stimulate public investments. We start with a brief overview of recent developments in public investments, including some methodological issues, and provide a literature overview of the effect of public investments on growth. On the basis of updated estimates of the public capital stock, we estimate the output response to a public capital impulse, using VAR models. In addition, using a structural model, we investigate the sensitivity of the macroeconomic impact of an increase in public investments to alternative assumptions about economic structures and policy implementations.
    Keywords: E32 ; E62 ; C30 ; ddc:330 ; fiscal policy ; public investment ; euro area ; general equilibrium modelling
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 19
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    Revenue elasticities in euro area countries (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-02-05
    Description: Revenue elasticities play a key role in forecasting, monitoring and analysing public finances under the European fiscal framework, which largely builds on cyclically adjusted indicators. This paper investigates whether there is evidence for dynamic – instead of the currently used static – elasticities in euro area countries. Applying country-specific error correction models we reveal important differences across countries. For a majority of euro area Member States we find evidence for dynamic revenue elasticities. We show that the application of such dynamic elasticities could substantially reduce forecast errors in several countries – with the evidence being stronger based on ex-post than based on real-time data.
    Keywords: E62 ; H68 ; ddc:330 ; error correction models ; EU fiscal surveillance ; real-time data ; revenue elasticities ; tax forecasts
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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  • 20
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    Subsidising car purchases in the euro area: Any spill-over on production? (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-03-15
    Description: Due to input-output linkages, an industry level shock can widely transmit to the rest of the economy. We identify government policies on the automobile industry, which change final prices and estimate their effect on sales and production. An example could be the scrappage schemes that many European governments introduced at the start of the Great Recession. In line with previous studies, we confirm that the effect on car sales is positive. More interestingly, we extend the literature that explores the effects of these policies on domestic and foreign production to disentangle the potential spill-overs.
    Keywords: C32 ; C54 ; E23 ; E62 ; H25 ; ddc:330 ; Bayesian GVAR ; Fiscal Policy ; Production ; Automotive Industry ; Spill-overs
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  • 21
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    The political economy of fiscal transparency and independent fiscal councils (2017)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2018-03-15
    Description: The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFCs' role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are "partisan" and "opportunistic." If voters only care about policymakers' competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers' competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.
    Keywords: E62 ; H6 ; ddc:330 ; independent fiscal councils ; fiscal transparency ; public debt ; partisan bias ; opportunistic bias ; competence ; congruence
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  • 22
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    Is fiscal consolidation self-defeating? A Panel-VAR analysis for the Euro area countries (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper studies the effects of fiscal consolidation on the debt-to-GDP ratio of 11 Euro area countries. Using a quarterly fiscal Panel VAR allows us to trace out the dynamics of the debt-to-GDP ratio following a fiscal shock and to disentangle the main channels through which fiscal consolidation affects the debt ratio. We define a fiscal consolidation episode as self-defeating if the debt-to-GDP ratio does not decrease compared to the pre-shock level. Our main finding is that when consolidation is implemented via a cut in government primary spending, the debt ratio, after an initial increase, falls to below its pre-shock level. When instead the consolidation is implemented via an increase in government revenues, the initial increase in the debt ratio is stronger and, eventually, the debt ratio reverts to its pre-shock level, resulting in what we call self-defeating austerity.
    Keywords: E62 ; H6 ; C33 ; ddc:330 ; debt trajectory ; fiscal consolidation ; fiscal stress ; panel VAR
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    On the cost of opportunistic behavior in the public sector: A General-Equilibrium approach (2016)
    Wiley
    Details
    Publication Date: 2017-03-07
    Description: This paper studies the wasteful effect of bureaucracy on the economy by addressing the link between opportunistic behavior of government bureaucrats and the public sector wage bill. In particular, public officials are modeled as individuals competing for a larger share of those public funds. A simple extraction technology in the government administration is introduced in a standard Real-Business-Cycle (RBC) setup augmented with detailed public sector. The model is calibrated to German data for the period 1970-2007. The main findings are: (i) the model performs well vis-a-vis the data; (ii) Due to the existence of a significant public sector wage premium and the high public sector employment, a substantial amount of working time is spent in opportunistic activities, which in turn leads to significant losses in terms of output; (iii) The model-based loss measures obtained for the EU-12 countries are highly-correlated to indices of bureaucratic inefficiency.
    Description: in press
    Keywords: E62 ; J45 ; E69 ; E32 ; ddc:330 ; rent-seeking ; opportunism ; public employment ; government wages
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Credit subsidies (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: In a model with costly financial intermediation and financial disturbances, credit subsidies are desirable, irrespective of how they are financed. They are especially useful when the zero lower bound constraint is reached. They are superior to other credit policies such as direct lending.
    Keywords: E31 ; E40 ; E44 ; E52 ; E58 ; E62 ; E63 ; ddc:330 ; banks ; costly enforcement ; credit policy ; credit subsidies ; monetary policy ; zero-lower bound on nominal interest rates
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Does slack influence public and private labor market interactions? (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-03-14
    Description: We empirically analyze the impact of public employment and wages' shocks on private labor market outcomes by studying if policies operate differently in periods of economic slack than in normal times. We use local projection methods and focus on the Spanish and euro area aggregate cases. We find that the degree of economic slack is key to determine: (i) if public employment crowds-out private employment, and (ii) the degree and extent of public wage influence on the private sector. In addition, we find that the specific features of the economy also count. In the case of Spain, when fiscal consolidation is implemented at times of economic distress, the contractionary effects of public employment cuts appear more damaging for the economy than those of public wage cuts, while the opposite happens for the euro area as a whole. These differences are likely to be related to specific features of the labor markets in both cases.
    Keywords: E62 ; E65 ; H6 ; C3 ; C82 ; ddc:330 ; fiscal policies ; public employment ; unemployment ; wages
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The fiscal and macroeconomic effects of government wages and employment reform (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-03-31
    Description: This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms.
    Keywords: H50 ; E62 ; J45 ; ddc:330 ; fiscal consolidation ; fiscal policies ; labour market ; public employment ; public wages
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Macroeconomic stabilization, monetary-fiscal interactions, and Europe’s monetary union (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-02-05
    Description: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: E31 ; E62 ; E63 ; ddc:330 ; eurobond ; government bonds ; joint analysis of fiscal and monetary policy ; lower bound on nominal interest rates ; self-fulfilling sovereign default
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Determinants of sub-sovereign bond yield spreads: the role of fiscal fundamentals and federal bailout expectations (2016)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2018-02-05
    Description: This paper investigates to what extent yield spreads on bonds issued by sub-sovereign entities within federations are driven by bailout expectations and investors’ risk appetite, as opposed to fundamental values related to default risk. The question is analysed both across and within federations using a novel dataset for sub-sovereign governments that includes Australian states, Canadian provinces, Swiss cantons, German Länder, US states, Spanish communities, and Indian states. The paper finds that, regardless of the prevailing set-up of the federal system, sub-sovereign debt levels relative to GDP and global risk aversion are important drivers of sub-sovereign spreads. Moreover, within federations, the market’s expectation of a federal bailout of the sub-sovereign entity and the capacity of the federal government to provide support to the weaker members of the federation affect the extent to which fundamental factors are priced into spreads. In particular, the paper shows that the positive link between debt and risk premia tends to break down when sub-sovereign government debt rises above certain thresholds. This could reflect the market’s expectation of a federal bailout as fundamentals deteriorate. Additionally, larger sub-sovereign entities tend to pay higher premia as fundamentals worsen which could be linked to the limited capacity of the federal government to provide support as the size of the expected bailout increases. A pattern of rising risk premia as fundamentals worsen is also found for sub-sovereign entities when the central government faces borrowing constraints.
    Keywords: E62 ; G12 ; H7 ; ddc:330 ; fiscal federalism ; government debt ; sovereign bond spreads ; sub-national governments
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal rules, fiscal space and procyclical fiscal policy (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: In this paper we analyse the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. A similar effect can be observed for the procyclicality of fiscal policy, which is significantly higher in an environment of ample fiscal space, while this difference is reduced with fiscal rules. Regarding the different types of fiscal rules, we find the strongest results for expenditure rules and to a lesser extent for balanced budget rules, but none for debt rules.
    Keywords: E61 ; E62 ; H60 ; ddc:330 ; discretionary fiscal policy ; fiscal rules ; fiscal space ; procyclicality
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal multipliers during consolidation: evidence from the European Union (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper investigates the impact of fiscal consolidation on economic growth in European Union countries, between 2004 and 2013. We construct a new dataset of exogenous fiscal adjustments, relying on legally binding recommendations issued to countries under Excessive Deficit Procedure, and we identify exogenous policy changes by using this dataset as instrumental variable in a GMM framework. We estimate the size of the fiscal multiplier both in a linear setting as well as in a state-dependent setting, considering four different circumstances: the state of the business cycle, the degree of openness to trade, the composition of the fiscal adjustment and the presence of a stressed credit market, as manifested by an impaired monetary policy transmission. We find that the size of the multiplier varies significantly under the various states: the distribution of multipliers is quite asymmetric, and a few consolidation episodes yield multipliers above one. We find that the composition of the fiscal adjustments is crucial in containing the output cost of consolidation, and in determining its persistence. Fiscal adjustments made via cuts to transfers and subsidies, or via tax increases, are usually associated with multipliers at or below unity, even when the economy is in recession. We also find evidence of confidence effects when consolidation is made under stressed credit markets and high interest rates. In a small number of episodes, involving open economies benefitting from confidence effects, we find that fiscal adjustments seem to be expansionary.
    Keywords: C33 ; E62 ; ddc:330 ; fiscal multiplier ; fiscal policy and growth ; panel data
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Comparing fiscal multipliers across models and countries in Europe (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper employs fifteen dynamic macroeconomic models maintained within the European System of Central Banks to assess the size of fiscal multipliers in European countries. Using a set of common simulations, we consider transitory and permanent shocks to government expenditures and different taxes. We investigate how the baseline multipliers change when monetary policy is transitorily constrained by the zero nominal interest rate bound, certain crisis-related structural features of the economy such as the share of liquidity-constrained households change, and the endogenous fiscal rule that ensures fiscal sustainability in the long run is specified in terms of labour income taxes instead of lump-sum taxes.
    Keywords: E12 ; E13 ; E17 ; E62 ; E63 ; ddc:330 ; fiscal policy ; model comparison ; output multipliers ; zero lower bound
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    A new identification of fiscal shocks based on the information flow (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: Can discretionary increases in government spending stimulate the economy? We answer this question by taking into account both the information flow on fiscal measures and the role played by information frictions. Using a novel set of empirical proxies for fiscal news and agents’ misperceptions, our approach identifies three types of innovations to government spending that modify the agents’ information set at different horizons: before, upon and after the actual change materialises. Borrowing from the psychological literature, we name them expected, unexpected and misexpected fiscal changes. By missing this important distinction, we show that standard identification strategies blend unexpected and misexpected changes in a way that leads to significant underestimation of the effects of fiscal policy. An application to US data reveals that once information rigidities are fully accounted for, expected fiscal changes stimulate economic activity and private investments with a cumulative output multiplier around 1.5.
    Keywords: C32 ; E32 ; E62 ; ddc:330 ; fiscal foresight ; fiscal shocks ; government spending ; government spending news ; large Bayesian VARs ; structural VARs ; Survey of Professional Forecasters
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal targets. A guide to forecasters? (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: Should rational agents take into consideration government policy announcements? A skilled agent (an econometrician) could set up a model to combine the following two pieces of information in order to anticipate the future course of fiscal policy in real-time: (i) the ex-ante path of policy as published/announced by the government; (ii) incoming, observed data on the actual degree of implementation of ongoing plans. We formulate and estimate empirical models for a number of EU countries (Germany, France, Italy, and Spain) to show that government (consumption) targets convey useful information about ex-post policy developments when policy changes significantly (even if past credibility is low) and when there is limited information about the implementation of plans (e.g. at the beginning of a fiscal year). In addition, our models are instrumental to unveil the current course of policy in real-time. Our approach complements a well-established branch of the literature that finds politically-motivated biases in policy targets.
    Keywords: C54 ; H30 ; H68 ; E61 ; E62 ; ddc:330 ; fiscal policy ; forecasting ; learning ; policy credibility
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    Combining time-variation and mixed-frequencies: an analysis of government spending multipliers in Italy (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: In this paper, we propose a time-varying parameter VAR model with stochastic volatility which allows for estimation on data sampled at different frequencies. Our contribution is twofold. First, we extend the methodology developed by Cogley and Sargent (2005), and Primiceri (2005), to a mixed-frequency setting. In particular, our approach allows for the inclusion of two different categories of variables (high-frequency and low-frequency) into the same time varying model. Second, we use this model to study the macroeconomic effects of government spending shocks in Italy over the 1988Q4-2013Q3 period. Italy - as well as most other euro area economies - is characterised by short quarterly time series for fiscal variables, whereas annual data are generally available for a longer sample before 1999. Our results show that the proposed time-varying mixed-frequency model improves on the performance of a simple linear interpolation model in generating the true path of the missing observations. Second, our empirical analysis suggests that government spending shocks tend to have positive effects on output in Italy. The fiscal multiplier, which is maximized at the one year horizon, follows a U-shape over the sample considered: it peaks at around 1.5 at the beginning of the sample, it then stabilizes between 0.8 and 0.9 from the mid-1990s to the late 2000s, before rising again to above unity during of the recent crisis.
    Keywords: C32 ; E62 ; H30 ; H50 ; ddc:330 ; government spending multiplier ; mixed-frequency data ; time variation
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    New and timely statistical indicators on government debt securities (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: New monthly statistical indicators on government debt securities for euro area countries have now been developed on the basis of the information contained in the Centralised Securities Database (CSDB), an internal database available to the European System of Central Banks (ESCB). The CSDB is jointly operated by the ESCB and contains timely and high-quality security-by-security reference data on debt securities, equities and investment funds. The new indicators on government debt securities provide an indication of the expected disbursements made for the servicing of issued debt securities together with the associated interest rate (nominal yield), broken down by country, original and remaining maturity, currency and type of coupon rate. This paper describes in detail the newly compiled statistical information and thus contributes to further describing the euro area government bond markets. The new indicators on euro area government debt securities are also highly relevant for policy-making and monetary and fiscal analyses. They indicate that, as at December 2014, the debt service scheduled for such securities in 2015 stood at approximately 15.9% of GDP (€1.6 trillion). This is associated with an average nominal yield on outstanding government debt securities for the euro area as a whole of 3.1% per annum. Both of these indicators have followed a decreasing path in recent periods. The new indicators also reveal some heterogeneity within the euro area: Italy shows the highest debt service and Luxembourg the lowest, while the debt securities issued by Germany have the lowest average nominal yield and Lithuanian ones the highest.
    Keywords: E62 ; H63 ; H68 ; ddc:330 ; debt securities ; euro area ; Government debt
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Public debt, population ageing and medium-term growth (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-03-31
    Description: This paper analyses the challenges that high public debt and ageing populations pose to medium-term growth. First, macroeconometric model simulations suggest that medium-term growth can benefit from credible fiscal consolidation, partly through reductions in sovereign risk premia. Second, a disaggregated growth accounting exercise suggests that the impact of population ageing on medium-term growth can be mitigated by structural reforms boosting labour force participation. Finally, general equilibrium models suggest that pay-as-you-go public pension systems will require reforms combining lower benefits, a later retirement age and higher social contributions. These findings suggest several policy recommendations: (a) “fiscal space” should be preserved to counter adverse shocks, (b) credible fiscal plans can benefit growth through the sovereign risk channel, (c) the demographic transition increases the need for improved fiscal policy coordination and more flexible labour migration policies, and (d) fiscal consolidation should avoid perverse incentive effects that could lower labour supply and medium-term growth.
    Keywords: E17 ; E23 ; E24 ; E62 ; F47 ; J1 ; ddc:330 ; ageing ; fiscal consolidation ; medium-term growth ; pensions ; sovereign debt ; structural reforms
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The impact of fiscal policy announcements by the Italian government on the sovereign spread: a comparative analysis (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper attempts to evaluate the impact of fiscal policy announcements by the Italian government on the long-term sovereign bond spread of Italy relative to Germany. After collecting data on relevant fiscal policy announcements, we perform an econometric comparative analysis between the three administrations that followed one another during the period 2009-2013. The results indicate that only fiscal policy announcements made by members of Monti's cabinet had a significant impact on the Italian spread. We argue that these findings may be partly explained by a credibility gap between Monti's technocratic administration and Berlusconi's and Letta's governments.
    Keywords: E43 ; E62 ; G01 ; G12 ; ddc:330 ; fiscal policy announcements ; GARCH models ; interest rate spread ; political communication ; sovereign debt crisis
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The determinants of sovereign bond yield spreads in the EMU (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, on top of the fundamentals themselves, changes in the sensitivity of bond prices to fundamentals are also necessary to explain yields over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including international financial risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited.
    Keywords: C23 ; E62 ; H50 ; ddc:330 ; credit ratings ; Government debt ; panel analysis ; sovereign yields
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Lack of confidence, the zero lower bound, and the virtue of fiscal rules (2015)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: In the presence of the zero lower bound, standard business cycle models with a Taylor-type monetary policy rule are prone to equilibrium multiplicity. A drop in confidence can drive the economy into a liquidity trap without any change in fundamentals. Using a prototypical sticky-price model, I show that Ricardian fiscal spending rules that prevent real marginal costs from declining in the face of a confidence shock insulate the economy from such expectations-driven liquidity traps.
    Keywords: E52 ; E62 ; ddc:330 ; government spending ; liquidity trap ; multiple equilibria ; Ricardian fiscal policy ; sunspots
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal activism and the zero nominal interest rate bound (2014)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policy-maker who cares less about the stabilisation of government spending relative to inflation and output gap stabilisation than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policy-maker uses government spending more aggressively to stabilise inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policy-maker corrects for discretionary authorities’ disregard of the expectations channel, thereby reducing the welfare costs associated with zero bound events.
    Keywords: E52 ; E62 ; E63 ; ddc:330 ; discretion ; fiscal policy ; monetary policy ; zero nominal interest rate bound
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The impact of news and the SMP on realized (co)variances in the eurozone sovereign debt market (2014)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: We use realised variances and co-variances based on intraday data from Eurozone sovereign bond market to measure the dependence structure of eurozone sovereign yields. Our analysis focuses on the impact of news, obtained from the Eurointelligence newsflash, on the dependence structure. More news raises the volatility of interest rates of financially distressed countries and decreases the covariance of distressed countries' yields with German bond yields, suggesting a flight-to-quality effect. Common news about the euro crisis and news about specific countries itself tend to raise the covariance of yields between distressed countries, indicating potential crisis spillover effects. However, we do not detect spillover effects from news about third countries to the covariance between other country pairs. Bond purchases by the ECB under its Securities Markets Programme (SMP) mitigate the negative crisis spillovers among the distressed countries and reduce the flight-to-safety from the distressed countries to Germany.
    Keywords: E62 ; G01 ; G12 ; G15 ; H63 ; ddc:330 ; crisis ; eurozone ; realized covariances ; SMP ; sovereign debt ; Spillovers ; Rendite ; Öffentliche Anleihe ; Varianzanalyse ; Wirtschaftsinformation ; Schuldenkrise ; Offenmarktpolitik ; Eurozone ; EU-Staaten
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Signalling fiscal stress in the euro area - a country-specific early warning system (2014)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: 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.
    Keywords: E62 ; E65 ; E66 ; H62 ; H63 ; F34 ; ddc:330 ; debt management ; deficit surplus ; fiscal policy ; general outlook and conditions ; international lending and debt problems ; sovereign debt ; studies of particular policy episodes
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    How do financial institutions forecast sovereign spreads? (2014)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper assesses how financial market participants form their expectations about future government bond spreads. Using monthly survey forecasts for France, Italy and the UK between January 1993 and December 2011, we test whether respondents consider the expected evolution of the fiscal balance—and other economic fundamentals—as significant drivers of the expected bond yield differential over a benchmark German 10-year bond. Our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads. Overall, the findings suggest that credible fiscal plans affect expectations of market experts, reducing the pressure on sovereign bond markets.
    Keywords: E62 ; G10 ; H30 ; ddc:330 ; Consensus Economics Forecast ; market expectations ; sovereign bond spreads ; survey data
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Measuring bilateral spillover and testing contagion on sovereign bond markets in Europe (2014)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: The global financial crisis rapidly spread across borders and financial markets, and also distressed EU bond markets. The crisis did not hit all markets in the same way. We measure the strength and direction of linkages between 16 EU sovereign bond markets using a factor-augmented version of the VAR model in Diebold and Yilmaz (2009). We then provide a novel test for contagion by applying the multivariate structural break test of Qu and Perron (2007) on this FAVAR detecting significant sudden changes in shock transmission. Results indicate substantial spillover, especially between EMU countries. Differences in bilateral linkages are due to a combination of fiscal trouble and a large banking sector, as Belgium, Italy and Spain are central to shock transmission during the financial crisis. Contagion has been a rather rare phenomenon limited to a few well defined moments of uncertainty on financial assistance packages for Greece, Ireland and Portugal. Most of the frequent surges in market co-movement are driven by larger shocks rather than by contagion.
    Keywords: G12 ; C14 ; E43 ; E62 ; H62 ; H63 ; ddc:330 ; Contagion ; eurozone ; FAVAR ; financial crisis ; fiscal policy ; spillover
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The effects of government spending in a small open economy within a monetary union (2014)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: 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.
    Keywords: E22 ; E62 ; H54 ; ddc:330 ; fiscal policy ; imbalances ; public capital ; trade
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    The euro exchange rate during the European sovereign debt crisis - dancing to its own tune? (2013)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions.
    Keywords: E52 ; E62 ; F31 ; F42 ; G14 ; ddc:330 ; announcements ; Exchange Rates ; fundamentals ; sovereign debt crisis
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    The design of national fiscal frameworks and their budgetary impact (2013)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This study analyses the link between fiscal frameworks and their budgetary impact. We look at different features of national numerical fiscal rules in combination with fiscal councils and medium-term budgeting frameworks. We construct our own time-varying dataset for national fiscal frameworks for the period 1990-2012 covering all 27 EU Member States and estimate a dynamic panel on aggregate and disaggregated fiscal policy variables. We find strong support that numerical fiscal rules help to improve the primary balance, and that the budgetary impact can be further strengthened when supported by independent fiscal councils and an effective medium-term budgeting framework.
    Keywords: E61 ; E62 ; H60 ; ddc:330 ; fiscal council ; fiscal framework ; Fiscal Policy ; fiscal rules ; medium term budgeting framework
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    Fiscal stimulus in times of high debt: reconsidering multipliers and twin deficits (2013)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: We investigate the impact of fiscal stimuli at different levels of the government debt-to-GDP-ratio for a sample of 17 European countries from 1970 to 2010. This is implemented in an interacted panel VAR framework in which all coefficient parameters are allowed to change continuously with the debt-to-GDP ratio. We find that responses to government spending shocks exhibit strong non-linear behaviour. While the overall cumulative effect of a spending shock on real GDP is positive and significant at moderate debt-to-GDP ratios, this effect turns negative as the ratio increases. The total cumulative effect on the trade balance is negative at first but switches sign at higher levels of debt. Consequently, depending on the degree of public indebtedness, our results accommodate long-run fiscal multipliers which are greater and smaller than one or even negative as well as twin deficit and twin divergence behaviour within one sample and time period. From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed.
    Keywords: E62 ; F32 ; F41 ; C32 ; C11 ; ddc:330 ; Bayesian estimation ; debt dynamics ; Fiscal Policy ; non-linearities ; panel-VAR ; trade account
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    Fiscal composition and long-term growth (2013)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: We assess the fiscal composition-growth nexus, using a large country panel, accounting for the usually encountered econometric pitfalls. Our results show that revenues have no significant impact on growth whereas expenditures have negative effects. The same is true for the OECD with the addition that government revenue has a negative impact on growth. From our results, taxes on income are not growth enhancing, as well as public wages, interest payments, subsidies and government consumption. Spending on education and health boosts growth; and there is weak evidence supporting causality running from expenditures and revenues to output.
    Keywords: C23 ; E62 ; H50 ; ddc:330 ; budget decomposition ; budget deficit ; panel analysis ; panel causality
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    Forecasting fiscal time series using mixed frequency data (2013)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: Given the increased importance of …fiscal monitoring, this study amends the existing literature in the …field of intra-annual fi…scal data in two main dimensions. First, we use quarterly fi…scal data to forecast a very disaggregated set of …fiscal series at annual frequency. This makes the analysis useful in the typical forecasting environment of large institutions, which employ a "bottom-up" or disaggregated framework. Aside from this practical type of consideration, we fi…nd that forecasts for total revenues and expenditures via their subcomponents can actually result more accurate than a direct forecast of the aggregate. Second, we employ a Mixed Data Sampling (MiDaS) approach to analyze mixed frequency …fiscal data, which is a methodological novelty. It is shown that MiDaS is the best approach for the analysis of mixed frequency fi…scal data compared to two alternative approaches. The results regarding the information content of quarterly …fiscal data con…rm previous work that such data should be taken into account as it becomes available throughout the year for improving the end-year forecast. For instance, once data for the third quarter is incorporated, the annual forecast becomes very accurate (very close to actual data). We also benchmark against the European Commission’s forecast and fi…nd the results fare favorably, particularly when considering that they stem from a simple univariate framework.
    Keywords: C22 ; C53 ; E62 ; H68 ; ddc:330 ; aggregated vs disaggregated forecast ; Fiscal Policy ; Mixed frequency data ; short-term forecasting
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    Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy (2013)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
    Keywords: E31 ; E52 ; E62 ; E63 ; D11 ; ddc:330 ; deficit spending ; discretion ; monetary and fiscal policy ; new Keynesian model ; zero nominal interest rate bound
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal consolidations and bank balance sheets (2013)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very large data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities should increases relative to other assets.
    Keywords: E62 ; G11 ; G21 ; H30 ; ddc:330 ; bank balance sheets ; banking stability ; Fiscal consolidations ; portfolio re-balancing
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Fiscal regimes in the EU (2013)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: We assess the existence of fiscal regime shifts in the U.K., Germany, and Italy, using Markov switching fiscal rules. On the basis of a newly built quarterly data set, our results show the existence of fiscal regimes shifts, sometimes coupled with regime switches also regarding monetary developments. While in the UK “active” and “passive” (Leeper, 1991) fiscal regimes are somewhat clearer cut, in Germany fiscal regimes have been overall less active, supporting more fiscal sustainability. For Italy, a more passive fiscal behaviour is uncovered in the run-up to EMU.
    Keywords: C22 ; E62 ; H62 ; ddc:330 ; EU ; fiscal regimes ; Markov-switiching
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries (2012)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration – absence of sustainability – between government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings.
    Keywords: C32 ; E62 ; H62 ; H63 ; ddc:330 ; breaks ; causality ; debt ; fiscal regimes ; FMOLS ; Panel Cointegration ; primary balance ; stationarity
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    Cost of borrowing shocks and fiscal adjustment (2012)
    Frankfurt a. M.: European Central Bank (ECB)
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    Publication Date: 2017-02-24
    Description: Do capital markets impose fiscal discipline on governments? We investigate the responses of fiscal variables to a change in the interest rate paid by governments on their debt in a panel of 14 European countries over four decades. This is done in the context of a panel vector autoregressive (PVAR) model, using sign restrictions via the penalty function method of Mountford and Uhlig (2009) to identify structural cost of borrowing shocks. Our baseline estimation shows that a one percentage point rise in the cost of borrowing leads to a cumulative improvement of the primary balance-to-GDP ratio of approximately 1.9 percentage points over 10 years, with the fiscal response becoming significantly evident only two years after the shock. We also find that the bulk of fiscal adjustment takes place via a rise in government revenue rather than a cut in primary expenditure. The size of the total fiscal adjustment, however, is insufficient to avoid the gross government debt-to-GDP ratio from rising as a consequence of the shock. Sub-dividing our sample, we also find that for countries participating in Economic and Monetary Union (EMU) the primary balance response to a cost of borrowing shock was stronger in the period after 1992 (the year in which the Maastricht Treaty was signed) than prior to 1992.
    Keywords: C33 ; E43 ; E62 ; H60 ; ddc:330 ; Fiscal Policy ; long-term interest rates ; sign restrictions ; vector-autoregressive models
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
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    A global perspective on inflation and propagation channels (2012)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments.
    Keywords: E31 ; E51 ; E62 ; C32 ; F42 ; ddc:330 ; global house prices ; global inflation ; global money ; VAR
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    Fiscal policy and the 'Great Recession' in the euro area (2012)
    Frankfurt a. M.: European Central Bank (ECB)
    Details
    Publication Date: 2017-02-24
    Description: How much did fiscal policy contribute to euro area real GDP growth during the Great Recession? We estimate that discretionary fiscal measures have increased annualized quarterly real GDP growth during the crisis by up to 1.6 percentage points. We obtain our result by using an extended version of the European Central Bank’s New Area-Wide Model with a rich specification of the fiscal sector. A detailed modeling of the fiscal sector and the incorporation of as many as eight fiscal time series appear pivotal for our result.
    Keywords: C11 ; E32 ; E62 ; ddc:330 ; Bayesian inference ; DSGE modelling ; euro area
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