Boosting confidence: Is there a role for fiscal policy?

This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, with the effect being more pronounced when the Debt to GDP ratio is high, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.     

The economics of crowd out under mixed public/private health insurance

It is well known that public insurance sometimes crowds out private insurance. Yet, the economic theory of crowd out has remained unstudied. Here, I show that crowd out causes two countervailing effects: (a) the intensive margin effect-since high demanders are crowded out, the private market now has a larger proportion of low demanders on the intensive margin (The intensive margin are those who have already bought private insurance), and so will drop quality to lower the price to the low demanders liking; and (b) the extensive margin effect-before the public insurance expansion, the private sector had lowered quality to make insurance more affordable at the extensive margin (The extensive margin is the next group of people who would buy private insurance if the price decreased), but now that public insurance crowds out the extensive margin, quality can then be raised back up to the high demanders liking.If the extensive margin effect dominates, then a new phenomenon of push out occurs, in which crowd out causes the private sector to raise quality and to increase the number of uninsured low demanders not eligible for public insurance. If the intensive margin effect dominates, then crowd out will cause the private sector to lower quality, causing the phenomenon of crowd-in, in which the number of uninsured low demanders that take-up private insurance increases.These two countervailing effects have important implications for any government policy that desires to eradicate all uninsurance. First, if push out is dominant, then the private sector will respond to the public insurance by pushing out and leaving some people newly uninsured. If crowd-in is dominant, then all people can be insured and the government can do it at a lower-than-anticipated level of expansion due to the private sector crowding in.Received: April 2002, Accepted: February 2003, JEL Classification: I11, I38The views herein do not necessarily reflect the views or policies of AHRQ, nor the U.S. Department of Health and Human Services. I thank Pedro Pita Barros, Hugh Gravelle, and Lise Rochaix-Ranson, and participants at the 2nd Health Economics Workshop at the Universidade Nova de Lisboa for helpful comments.     

Central bank forecasts and private expectations: An empirical assessment from three emerging economies

As part of their monetary policy strategy, many central banks are attempting to manage private sector expectations about key macroeconomic variables. In this article, we investigate whether forecasts provided by central banks in three inflation targeting emerging economies (Brazil, Mexico, and Poland) affect the expectations of private forecasters. In particular, we analyze whether the disagreement between the central bank and private sector forecasts applies to explain changes in private sector expectations regarding inflation and economic growth. The findings show that while central bank forecasts are higher than those made by private sector forecasters, the result is an update upwards of private forecasts and that this effect is stronger for GDP growth forecasts than for inflation forecasts.     

Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area

Abstract. This paper analyzes the dynamic response of loans to the private sector and of economic activity to aggregate supply, demand and monetary policy shocks in Germany and the euro area based on a standard macroeconomic VAR using sign restrictions to identify the structural shocks. The main results of this analysis are that (i) with the exception of the response to the supply shock in Germany, the response of loans to the three macroeconomic shocks is rather weak and in most cases insignificant; (ii) the 2000–05 credit slowdown and weak economic performance in Germany were primarily driven by adverse supply shocks; and (iii) the marked slowdown in credit creation in Germany over this period actually represents a realignment of the outstanding stock of loans with its deterministic level. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we further perform counterfactual simulations and analyze the dynamic responses of German loan subaggregates in order to test the distributional implications of potential credit market frictions. These exercises do not indicate that credit market frictions play an amplifying role in the transmission of macroeconomic fluctuations.     

R&D subsidies and private R&D expenditures: evidence from Italian manufacturing data

This paper uses a comprehensive firm level data set for the manufacturing sector in Italy to investigate the effect of government support on privately financed R&D expenditure. Estimates from a non‐parametric matching procedure suggest that public assistance has a positive effect on private R&D investment in the sense that the recipient firms achieve more private R&D than they would have without public support. This indicates that the possibility of perfect crowding out between private and public funds can be rejected. Furthermore, in this sample of Italian firms, tax incentives appear to be more effective than direct grants. The paper also examines whether public funding affects the financial sources available for R&D and finds that grants encourage the use of internal sources. The results also show some evidence of positive effects on credit financing for R&D.     

Basel II procyclicality: The case of South Africa

This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) “financial accelerator” model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.     

The role of financial sector competition for monetary policy

Abstract In this paper, we examine the impact of competition in the banking industry on financial market activity. In particular, we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing. In addition, spatial separation and private information generate a transactions role for money. Interestingly, we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy. Under perfect competition, higher rates of money growth lead to lower interest rates and a higher volume of lending activity. In contrast, in a monopoly banking sector, money growth restricts the availability of funds and raises the cost of borrowing.     

Fiscal deficits,banking crises and policy reversal in a semi-open economy

We study the effect of domestic policies and external shocks in a semi-open economy characterized by incomplete liberalization of the financial sector. We argue that in such transition economies stabilization programs can have a negative impact on the fiscal imbalances, offsetting to some extent the very achievement of the stabilization program. We develop a simple general equilibrium model which allows propagation of shocks in the presence of government guarantees and imperfect capital mobility. We also empirically test the impact of positive foreign interest shock on the Indian economy using a reduced form VAR approach. The econometric evidence, though broadly consistent with the main predictions of the model, suggests no significant impact of foreign interest rate shock on output and credit. We conclude that incomplete liberalization of the financial sector in transition economies has two effects. It reduces i) exposure to external financial shocks (like the current credit crisis) and ii) ability to deal with real sector shocks (which may arise from global recession in the medium term) due to endogenous policy reversals and presence of government guarantees.     

The extension of social security coverage in developing countries

We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risks. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion.     

The dynamics of wage determination in Romania

This article examines wage developments in Romania over the last 20 years, discusses the evolving role of government wage policy and structural labour market changes, and analyses the dynamics of the wage determination process. It finds that government wage policy has had a significant demonstration effect on private sector wages, driven mainly by policy decisions over the past few years. The article also finds strong causality from private sector wages to wages in state‐owned enterprises (SOEs) and government. No causality was found for changes in government wages to wages in SOEs or from SOE wages to private sector wages.     

Innovation and productivity in the food vs. the high-tech manufacturing sector

ABSTRACT

The food sector is considered a mature industry characterized by low research and development (R&D) intensity. Nevertheless, food companies face numerous challenges and cannot do without innovation activity if they want to keep their competitiveness. In this study, we examine the impact of innovation on labor productivity in European food companies and compare it to results for firms operating in high-tech sectors. The central motivation of our study is that the low R&D intensity observed in the food sector should be mirrored in different productivity effects of innovation when compared to the high-tech sector. We use microdata from the European Union's ‘Community Innovation Survey’ (CIS) and apply an endogeneity-robust multi-stage model that has been applied by various recent studies. Our results point out major differences between the examined subsectors. While we find strong positive effects of innovation on labor productivity for food firms, we find insignificant effects in the high-tech sector. This might suggest that the returns to innovation might be best evaluated separately by sector rather than for the manufacturing sector as a whole.     

Monetary Policy,Expectations and Commitment*

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest‐rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

Financial imbalances and gradualism

In the last years, in the major OECD economies, while inflation has become lower and more stable, episodes of financial instability and large cycles in asset prices have shown up with (often) non-negligible effects on economic activity. These facts should call for a larger concern with financial imbalances by the central bank. Adapting the model by Caplin and Leahy (1996)—where a central bank, which is uncertain about the state of the economy and its reaction to policy, seeks an optimal search strategy to influence private agents' responses—by substituting the central bank's price stability objective with a financial stability one, we find that the monetary authority should follow a less aggressive policy than the one suggested by the original model. However, initial conditions play a crucial role in determining the degree of gradualism by the policy maker with the policy becoming more and more aggressive as the initial interest rate shrinks.     

Inflation-targeting rules: History-dependent or forward-looking?

This note discusses the inflation-targeting strategy if price setting gives rise to a hybrid Phillips curve. The strategy is inverted relative to private sector pricing behavior: if private sector price setting is backward-looking, policy should be forward-looking, and vice versa.     

Public or Private Sector Wage Leadership? An International Perspective*

Whether a government acts as a wage leader, placing pressure on private‐sector wages (more open to competition), or whether it plays a passive role and merely follows wage negotiations in the private sector, there are important implications for macroeconomic development, particularly in small open economies and/or countries that are members of a monetary union, such as those of the European Monetary Union. With the notable exception of the case of Sweden, opinion on this issue is still divided. In this paper, we look at public‐ and private‐sector wage interactions from an international perspective (18 OECD countries). We focus on the causal two‐way relationship between public and private wage setting, confirming that the private sector, on the whole, appears to have a stronger influence on the public sector, rather than vice versa. However, we also find evidence of feedback effects from public wage setting, which affect private‐sector wages in a number of countries. When the private sector takes the lead on wages, there are few feedback effects from the public sector, while public wage leadership is typically accompanied by private‐sector feedback effects.     

Search, money, and inflation under private information

I study monetary exchange and inflation when buyers have private information about their willingness to pay for certain goods. Introducing imperfect information in the Lagos-Wright [A unified framework for monetary theory and policy analysis, J. Polit. Economy 113(3) (2005) 463-484] economy shows that the existence of monetary equilibrium is a more robust feature of the environment. In general, my model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright's model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different.     

Monetary policy in the BOF3 quarterly model of the Finnish economy

This paper describes the modelling of monetary policy in BOF3, a quarterly econometric model of Finland built at the Research Department of the Bank of Finland. BOF3 is a 198-equation, ‘amended Keynesian’ model which is used regularly in policy analysis and forecasting at the Bank. The modelling of the Finnish monetary sector has been complicated by the fact that most interest rates applied by the banks have so far been institutionally regulated. In spite of this, model builders have attempted to follow the conventional IS-LM approach as closely as possible, assuming that interest rates equilibrate financial markets outside the banking sector. The reported simulation experiments describe the effects of a change in nomical interest rates, of a change in the domestic money supply, and of a fiscal stimulus with and without monetary accomodation.     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

积极财政政策与私人投资关系的区域差异——基于中国东、中、西部面板数据的检验与分析

本文利用面板数据模型分别考察了积极财政政策对我国东、中、西部私人投资增长和差异的影响.分析表明,积极财政政策对东、中、西部的私人投资具有一定的正向影响,从而证实了积极财政政策的有效性.本文通过地方财政各项支出对私人投资产生的影响分析,表明东、中、西部要根据自身的经济发展水平来安排财政支出的结构.