I (Could Have) Told You! Early warning indicators and crisis performance of the 12 “old” Euro-countries under the economic crisis 2008–09

The impact of the economic crisis 2008-09 was remarkably different in the 12 “old” member states in the Euro-zone. Five of them were hit especially badly; four of them even had to be bailed out by the rest in one way or another. This paper asks if one could have foretold, based solely on information available prior to 1999, which of the countries then about to enter the Euro-zone would run into economic trouble once a serious economic crisis occurred. The focus is on the (post)predictive power of three kinds of leading indicators: economic indicators, political indicators (indicating quality of governance), and indicators derived from the theory of optimal currency areas (OCA). Since there are more indicators than cases, PLS-regression is used to gauge the (post)predictive strength of the indicators examined. The results show that political indicators have quite some (post)predictive power in this case, whereas indicators derived from OCA-theory do not do too well. Economic indicators perform better than indicators derived from OCA-theory, but generally less well than the political indicators. Thus, the experience from the latest economic crisis in the Euro-zone suggests that more emphasis should be placed on the quality of governance record of a country when deciding if it should be deemed fit to become a member.     

Fiscal rules and budget forecast errors of Italian municipalities

We study the impact of the domestic stability pact on the accuracy of budget forecasts of Italian municipalities. Identification of the causal effect exploits a quasi-natural experiment generated by the removal in 2001 of the fiscal restraints on budget decisions for municipalities with fewer than 5000 inhabitants and by stricter budgetary restrictions and severe penalties for noncompliers in 2002. We find that relaxing fiscal rules had a sizeable impact on budget forecast errors, especially in 2002. In fact, revenue (expenditure) forecast errors for municipalities with fewer than 5000 inhabitants became 26% (22%) larger than in the past.     

Voting with your feet: Political competition and internal migration in the United States

Do people “vote with their feet” in response to a lack of political competition? Since political competition is associated with higher growth and welfare, with the free movement of labour, we argue that it should also encourage inward migration. We test this hypothesis by using data from the US and find a strong positive relation between political competition and net migration. This result is robust to alternative specifications, alternative samples and addressing endogeneity using the Voting Rights Act to instrument for political competition. The effect is economically large, specifically, we find that an increase in political competition in the order of magnitude observed in US Southern states during the post-war period leads to an increase in net migration by between 27 and 44 individuals per 1000 population.     

How do the factors determining terrorist groups’ longevity differ from those affecting their success?

This paper distinguishes a terrorist group’s survivability from its success. Terrorist groups succeed if they join the political process or achieve some of their goals. Based on a sample of 470 terrorist groups, we first estimate the determinants of groups’ ending and, conditional on their demise, we identify factors conducive to their success. We find that religious fundamentalist terrorist groups survive longer than left-wing, nationalist/separatist, or right-wing groups; but religious groups are less apt than other ideologies to attain their objectives or to join the political process. Larger groups survive longer and possess a better success prognosis. Within-country group competition is conducive to survival, but harmful to success. Controls include groups’ goals, groups’ strategic choices, and home country’s characteristics. Robustness tests disaggregate our success measure, provide panel estimates, and incorporate other controls.     

Modelling demand for lotto using a novel method of correcting for endogeneity

Modelling lottery sales as a function of the mean, standard deviation and skewness of the probability distribution of returns potentially gives insights into how the design of a game could be modified to maximise net revenue. But use of OLS is problematic because the level of sales itself affects values of the moments (and insufficient instruments are available for IV regression). We draw on the concept of a rational expectations equilibrium, developing a new regression model which corrects for endogeneity where the causal impact of the dependent variable on the right-hand side variables is deterministic. We apply the model to data on lotto sales from Spain. Using the Spanish data, we show that results provide more reliable guidance to lottery agencies because accounting for endogeneity leads to significantly different results from OLS and these results have superior performance in out-of-sample forecasting of sales. More generally, results prove consistent with the Friedman-Savage explanation of why people buy lottery tickets and with evidence from racetrack data that ‘bettors love skewness’.     

Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework

Tax policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate complex present tax law and proposed reforms. In this paper, we explore the extent to which the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. To do this, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that, while conditioning on idiosyncratic household characteristics, explicitly models key provisions in the Internal Revenue Code applied to labor income. We find that for a debt-constant steady state analysis of a given tax policy change, both approaches generate similar policy-induced patterns of macroeconomic activity despite variation in the underlying patterns of household tax-preferred consumption and labor supply behavior. However, this variation in underlying behavior is associated with significant quantitative and qualitative differences in macroeconomic aggregates along a debt-financed transition path immediately following a policy change. Consequentially, although the use of unconditional smooth tax functions may be a reasonable modeling simplification for steady state analysis of tax policy, caution should be taken for their use in transition path analysis within heterogeneous-agent models.     

Optimum government size and economic growth in case of Indian states: Evidence from panel threshold model

This paper investigates the relationship between optimum government size and economic growth using data of Indian states during 1990-91 to 2017–18. Our results derived from panel threshold regression model show a positive and significant impact of government size on economic growth within the estimated thresholds for both aggregate and sub-panels based on income and regions. Once the government size moves above the upper threshold level, then its impact declines and turns to be insignificant. Thus, our findings suggest the policymakers for maintaining the government size within the thresholds limit.     

Pure rent taxation and allocation of capital in a two-sector open economy: A long-run analysis

In this paper, the long-run incidence of a tax on pure rent is analyzed in an OLG two-sector small open economy, in which one sector produces a capital good and one sector a consumer good. Contrary to what is obtained in a one-sector closed economy, a land rent tax does not necessarily foster nonhumam wealth accumulation and capital formation. The accommodating scheme for the government budget plays a crucial role for the effects of pure rent taxation. A rent tax stimulates nonhuman wealth if distortionary taxes on wealth or on income from nonland inputs are alleviated. The mechanism spurring capital formation is brought into action, instead, only when the rent tax is matched by a fall in capital taxation or, if the capital sector is capital intensive, by an increase in government spending on the capital good.     

Tropical cyclones and post-disaster reconstruction of public infrastructure in developing countries

When natural disasters destroy public capital, these direct losses are exacerbated by indirect losses arising from reduced private output during reconstruction. These may be large in developing countries that lack access to external finance. We develop a general equilibrium model of a small open economy that highlights the relation between public infrastructure and private capital, to examine the effects of natural disasters and alternative reconstruction paths. Calibrating the model to data from the Caribbean Catastrophic Risk Insurance Facility (CCRIF), we examine alternative post-disaster financing mechanisms including reserve depletion, budget reallocation, sovereign disaster insurance, debt and taxation. Disaster insurance is shown to play a limited role in financing reconstruction, while budget re-allocations are potentially damaging especially if they cannibalize operations and maintenance expenditures. Absent donor grants or concessional borrowing, tax financing – where feasible – remains the least damaging financing instrument, particularly if the country risk premium on external debt is high.     

Government size,composition of public spending and economic growth in Brazil

The performance of the fiscal policy is largely affected by the relationship between government size, composition of public spending and economic growth. We use a theoretical framework to find optimal relations among these variables and confront them with a panel data for the Brazilian states. Private capital and government spending are substitute inputs in production as the Brazilian states require provision of public spending to fill gaps in the underdeveloped private sector. Public investment and current government expenditures are combined in fixed ratios in the overall government spending due to strong rigidity of the public budget. The optimal share of public investment is considerably lower than current expenditures, as occurs in developing countries characterized by low economic dynamism. Finally, the average tax burden from the data is below the estimated optimal level, meaning that there is space for increasing tax rate without harming economic growth for some Brazilian states.