The impact of expenditure rules on budgetary discipline over the cycle

We study the impact of expenditure rules on the propensity for governments to deviate from their expenditure plans in response to surprising cyclical developments. Theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a procyclical bias. However, this tendency may be mitigated by strictly enforced expenditure rules. These hypotheses are tested against data from a panel of EU Member States. Our key findings are that (1) deviations between actual and planned government expenditure tend to be positively related to output gap surprises, and (2) expenditure rules reduce this procyclical bias. These results are particularly pronounced when the analysis is confined to spending items with a high degree of budgetary flexibility.     

Underreporting of Top Incomes and Inequality: A Comparison of Correction Methods using Simulations and Linked Survey and Tax Data

Household surveys do not capture incomes at the top of the distribution well. This yields biased inequality measures. We compare the performance of the reweighting and replacing methods to address top incomes underreporting in surveys using information from tax records. The biggest challenge is that the true threshold above which underreporting occurs is unknown. Relying on simulation, we construct a hypothetical true distribution and a “distorted” distribution that mimics an underreporting pattern found in a novel linked data for Uruguay. Our simulations show that if one chooses a threshold that is not close to the true one, corrected inequality measures may be significantly biased. Interestingly, the bias using the replacing method is less sensitive to the choice of threshold. We approach the threshold selection challenge in practice using the Uruguayan linked data. Our findings are analogous to the simulation exercise. These results, however, should not be considered a general assessment of the two methods.     

Fiscal forecast errors: Governments versus independent agencies?

We present evidence pointing to the fact that international agencies' fiscal forecasts were affected to some extent by the same type of problems that the literature widely acknowledges for governmental ones. Informational shortages may lead independent agencies' staff to internalize “political biases” in governmental forecasts when trying to grasp genuine “private information”. Our study is based on a real-time database of EC, OECD and national governments' public deficit forecasts for 15 European countries over the period 1999–2007 and four vintages of projections per forecasted year. Against this background, independent national fiscal institutions might be a natural option, to the extent that they may have better access to inside national information than international organizations. Our results also provide some support to policy positions that claim a closer monitoring of official budgetary projections, in particular as regards transparency requisites, accountability and the threat of sanctions.     

Optimal monetary policy revisited: does considering US real-time data change things?

The primary goal of this article is to investigate whether properly modelling real-time data and optimal real-time decision-making of a monetary planner provides new insights into monetary policy behaviour and outcomes. This article extends a variant of the asymmetric preference model suggested by Ruge-Murcia to investigate the use of real-time data available to policymakers when making their decisions and revised data which more accurately measure economic performance, but is only available much later. In our extended model, the central banker targets a weighted average of revised and real-time inflation together with a weighted average of revised and real-time output. Moreover, we allow for an asymmetric central bank response to real-time data depending on whether the unemployment rate is high or low. Our model identifies several new potential sources of inflation bias due to data revisions. Our empirical results suggest that the Federal Reserve Bank focuses on targeting revised inflation during low unemployment periods, but it weighs heavily real-time inflation during high unemployment periods. The inflation bias due to data revisions is comparable in magnitude to the bias from asymmetric central banker preferences with the bias being somewhat larger during high unemployment.     

Comments on ‘Forecasting with a real-time data set for macroeconomists’

The effects of data revision as removing measurement error on forecast model building is examined. I show various effects on model building using revised or instead real-time data. These effects include lag length selection and measured persistence. I then argue that in practice that one should include the entire dataset available (real-time and past revised data) in forecast construction.     

Testing EU fiscal surveillance: how sensitive is it to variations in output gap estimates?

Real‐time estimates of potential output are used for the calculation of the cyclically adjusted budget balance, one of the main indicators in the assessment of the fiscal performance of EU member states. The estimation of potential output involves a decomposition of actual output into a cyclical and a structural component based on arbitrary assumptions about the statistical properties of the two unobserved components. With a very high degree of smoothing, variations in GDP are mostly taken to be temporary, as are the ensuing changes in the budget deficit. Conversely, with a low degree of smoothing, variations in GDP are mostly taken to be permanent, leading to different policy conclusions. Our paper examines whether and how different potential output estimates would have supported different decisions in the EU budgetary surveillance in terms of both timing and substance. The results show that only a very high degree of smoothing of potential output would significantly reduce the reliability of the surveillance indicators. We conclude that a higher degree of smoothing compared with current practice would not be harmful for EU fiscal surveillance, while it could contribute to more cautious policies by signalling larger and longer periods of economic ‘good times’.     

Costing the Job Compact*

The budgetary cost of any government program should be measured by its impact on the public sector budget balance, over its effective timeframe. Typically, official cost estimates focus on the value of outlays only, and thus create a misleading impression of the opportunity cost of some policy initiatives. This paper offers estimates of the budgetary cost of the Job Compact, using a simple labour force transition flows model of unemployment. Deadweight, displacement and effectiveness impacts are explicitly addressed. We find that, depending on the values chosen for displacement and effectiveness parameters, budgetary cost can be greater or less than outlay estimates. However, for plausible values of these parameters, the budgetary cost is calculated to be substantially lower than official estimates, and may even be negative.     

Election cycles in mining licensing: theory and evidence from Albania

Most of the literature on political business and budgetary cycles (PBBC) has focused on fiscal and monetary policy variables in advanced-country contexts. We extend this literature by investigating political cycle effects in a non-monetary, non-fiscal policy regime (the allocation of mining licences) in a transition country context. We propose a model of mining licensing that allows for corruption and for both supply and demand effects to determine the outcome. We then estimate this model using time-series data from post-communist Albania. Relying on a dynamic Poisson model, we find evidence of both opportunistic and partisan effects. Based on our theory, we suggest a corruption interpretation of political cycles in non-fiscal/non-monetary variables. This interpretation, we suggest, may be more applicable to the context of developing and transition countries. Our study raises important questions about the unintended (and often pernicious) effects of transition politics on economic regulation and economic performance in post-socialist economies.     

Forecasting GDP at the Regional Level with Many Predictors

In this study, we assess the accuracy of macroeconomic forecasts at the regional level using a large data set at quarterly frequency. We forecast gross domestic product (GDP) for two German states (Free State of Saxony and Baden‐Württemberg) and Eastern Germany. We overcome the problem of a ‘data‐poor environment’ at the sub‐national level by complementing various regional indicators with more than 200 national and international indicators. We calculate single‐indicator, multi‐indicator, pooled and factor forecasts in a ‘pseudo‐real‐time’ setting. Our results show that we can significantly increase forecast accuracy compared with an autoregressive benchmark model, both for short‐ and long‐term predictions. Furthermore, regional indicators play a crucial role for forecasting regional GDP.     

Planning to cheat: EU fiscal policy in real time

Using real-time data from Europe's Stability and Convergence Programs, we explore how fiscal plans and their implementation in the EU are determined. We find that (1) implemented budgetary adjustment falls systematically short of planned adjustment and this shortfall increases with the projection horizon, (2) variability in the eventual fiscal outcomes is dominated by the implementation errors, (3) there is a limited role for 'traditional' political variables, (4) stock-flow adjustments are more important when plans are more ambitious, and (5), most importantly, both the ambition in fiscal plans and their implementation benefit from stronger national fiscal institutions. We emphasize also the importance of credible plans for the eventual fiscal outcomes .
--- Roel Beetsma, Massimo Giuliodori and Peter Wierts     

Inequality,Redistribution, and the Financial Crisis: Evidence from Distributional National Accounts for Austria

In this paper, we provide novel findings regarding the distributional effects of the global financial and economic crisis and how redistribution operated during this time, using detailed data for Austria. We construct distributional national accounts for the period 2004–2016 by combining survey data, tabulated tax data, and detailed national accounts data. The comprehensive data set allows us to analyze the distribution of macroeconomic income growth across the income distribution and to explore the evolution of income inequality over time. Our results suggest that as the distribution of growth changed over time, this had considerable repercussions for inequality, which started to decline at the very beginning of the economic and financial crisis, but increased again after 2012. We find that capital income largely determined both the level and the dynamics of income inequality. Government spending was found to play a key role for redistributive effects across the income distribution. In particular, in-kind transfers redistributed pre-tax income to a large extent. Our results show further that individuals with lower educational levels and younger individuals faced negative growth in pre-tax income over the years and also benefited considerably from redistribution.     

Fifty years of fiscal planning and implementation in the Netherlands

Using real-time data from the annual budgets over the period 1958–2009, we explore budgetary planning and implementation in the Netherlands. Three fiscal policy regimes are distinguished. Our key findings are the following. First, plans are on average unbiased, although they are overoptimistic during earlier parts of our sample and overly pessimistic during the later parts of our sample, when revenues are under-projected. Second, general economic conditions and the state of the public finances are important determinants of both plans and their implementation. Third, this is also the case for political and institutional factors. Expenditure overruns are partly related to political factors, whereas cautious revenue forecasts relate to the institutional setting. Fourth, under the most recent regime of “trend-based budgeting” implementation was strongest relative to planning. In fact, this regime may contain some elements that are useful for designing national fiscal arrangements elsewhere.     

Forecasting REIT volatility with high-frequency data: a comparison of alternative methods

Volatility is a crucial input for many financial applications, including asset allocation, risk management and option pricing. Over the last two decades the use of high-frequency data has greatly advanced the research on volatility modelling. This article makes the first attempt in the real estate literature to employ intraday data for volatility forecasting. We examine a wide range of commonly used methods and apply them to several major global REIT markets. Our findings suggest that the group of reduced form methods deliver the most accurate one-step-ahead forecast for daily REIT volatility. They outperform their GARCH-model-based counterparts and two methods using low-frequency data. We also show that exploiting intraday information through GARCH does not necessarily yield incremental precision for forecasting REIT volatility. Our results are relatively robust to the choice of realized measure of volatility and the length of evaluation period.     

Local government efficiency: determinants and spatial interdependence

We analyse the determinants of local government efficiency taking into account the presence of spatial interactions among neighbouring municipalities. To do so, first we estimate an efficiency index using the robust order-m methodology in Valencian municipalities (Spain). Second, we examine the socio-economic, political and budgetary factors that might influence efficiency levels. Finally, we analyse the spatial interactions present in our data. The results of estimating a spatial autoregressive model show that government efficiency in neighbouring municipalities positively affects the local government’s own efficiency. This highlights the importance of considering spatial dependence structures in studies on efficiency in the public sector.     

Economic growth and budgetary components: a panel assessment for the EU

In this article, we test to determine whether a reallocation of government budgetary components can enhance long-term GDP growth in a set of 15 EU countries. We apply panel data techniques to the period 1971–2006, and use three alternative dependent variables in a growth regression: economic growth, total factor productivity and labour productivity. Our results also identify the distortions induced by public expenditure in the private factors allocation. In particular, we detect a strong crowding-in effect associated to public investment, which has enhanced economic growth by boosting private investment. We also associate a dependence of productivity on public expenditure on social security.     

基于风险偏好的报酬契约与预算松弛研究

风险偏好与预算松弛之间的关系是报酬契约能否有效解决预算松弛问题的重要前提.本文根据报酬契约设计中风险分摊和激励的关系,设计了三种不同类型的报酬契约,采用实验的方法研究在这三种不同类型的报酬契约下,预算下级风险偏好与预算松弛之间的关系.实验结果表明,风险偏好与预算松弛相关,但这种相关性会随着报酬契约的不同而变化.在风险分摊型报酬契约下,预算松弛的程度与预算下级的风险厌恶程度成正比;在激励补偿型报酬契约下,预算松弛程度与预算下级的风险厌恶程度成反比;在风险分摊和激励改善型报酬契约下,无论何种风险偏好的预算下级,预算松弛程度与前两种报酬契约相比会有不同程度的减少.     

The relevance of commuting zones for regional spending efficiency

We use data envelopment analysis (DEA) efficiency scores to show that clustering municipalities into encompassing regional clusters improves spending efficiency of single stand-alone municipalities. We propose a new geographic aggregation based on municipalities-to-municipalities commuting flows, defined using hierarchical cluster analysis. Our example for Portugal shows that from an output-oriented perspective between 83% and 98% of municipalities would increase their efficiency scores, while from an input-oriented perspective between 86% and 98% of municipalities would also be better off in terms of efficiency. Then using a linear regression model, we find that population increases positively affects the efficient scores (via scale economies). Also, increases in the share of high-educated and poorer residents leads to higher efficiency scores.     

Efficiency measurement using a latent class stochastic frontier model

Efficiency estimation in stochastic frontier models typically assumes that the underlying production technology is the same for all firms. There might, however, be unobserved differences in technologies that might be inappropriately labeled as inefficiency if such variations in technology are not taken into account. We address this issue by estimating a latent class stochastic frontier model in a panel data framework. An application of the model is presented using Spanish banking data. Our results show that bank-heterogeneity can be fully controlled when a model with four classes is estimated. This paper was written during Luis Oreas visit to Binghamton University in the summer of 2002. We would like to thank an associate editor of the journal and two anonymous referees for their detailed comments. However, we alone are responsible for any remaining errors.     

THE EFFECTS OF FISCAL AND MONETARY DISCIPLINE ON BUDGETARY OUTCOMES

This article extends the model of Von Hagen and Harden that analyzed the impact of fiscal discipline on budgetary outcomes. We modify the model by adding monetary discipline to interact with fiscal discipline in order to analyze the effects of both on budgetary outcomes. The model predicts that while both inflation and budget deficits are negatively associated with fiscal discipline, they may be positively associated with monetary discipline, proxied by central bank independence. This result obtains due to optimizing agents internalizing the burden of spending: inflation. Although not conclusive due to data limitations, empirical findings also support these predictions. ( JEL D73, E58, H61, H72)     

Unemployment and new business formation – new insights into a complex relationship

The article analyses the interrelation between unemployment and new business formation using panel data for a large cross-section of countries. We find robust evidence for a positive influence of unemployment, domestic credit to the private sector and business-friendly regulation on new business formation. Our examination does, however, indicate no support for the view that new business formation significantly reduces national unemployment rates.