Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
Fiscal Policy and the “Great Recession”in the Euro Area
G. CoenenEuropean Central Bank
R. StraubEuropean Central Bank
M. TrabandtFederal Reserve Board of Governors
The views expressed are those of the authors and should not be interpreted as reflecting the views of the ECB or the Board of Governors of the Federal Reserve System.
2
Motivation
• Great Recession triggered large-scale fiscal policy response in the euro area: – Automatic stabilizers– Discretionary fiscal policy
• EERP of 2% of GDP in 2009-10• Financial market support measures
– Consequence: strong deterioration of euro area public finances
• This paper: model-based accounting exercise – What did fiscal policy actually do to euro area GDP
in the Great Recession, quantitatively?
3
What we do
• Point of departure: estimated version of ECB’s New Area-Wide Model (NAWM)
– Small open economy version of CEE (2005) and SW (2003, 2007)
– Stylized fiscal sector:• constant taxes, balanced budget, exogenous
government consumption (only fiscal observable)
4
What we do
• NAWM Fiscal: extension of baseline NAWM to allow for broader scope of fiscal policy
– Empirical extensions:• measure in total 8 fiscal time series
– Theoretical extensions:• rule-of-thumb consumers, public capital, time-to-
build, complementarities, fiscal rules, automatic stabilizers, pre-announcement, …
• Estimate model and study contributions of fiscal policy to real GDP growth
5
Preview: Baseline NAWM
2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1
−12
−10
−8
−6
−4
−2
0
2A
nnua
lized
Qua
rterly
Gro
wth
Rat
esHistorical Decomposition of Real GDP Growth (demeaned)
Real GDP GrowthGov. Consumption ShockNon−Fiscal Shocks
6
Preview: NAWM + Enhanced Fiscal Sector
2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1
−12
−10
−8
−6
−4
−2
0
2A
nnua
lized
Qua
rterly
Gro
wth
Rat
esHistorical Decomposition of Real GDP Growth (demeaned)
Real GDP GrowthFiscal ShocksNon−Fiscal Shocks
7
Outline
• Motivation
• NAWM Fiscal: Theoretical Extensions
• NAWM Fiscal: Empirical Extensions
• Results
• Conclusions
8
NAWM Fiscal: Rule-of-Thumb Consumers
• Gali/Lopez-Salido/Valles (2007); Coenen/Straub (2005)
• Share ω of non-optimizing consumers J– Identical wage and labor supply across groups– Rule-of thumb consumption:
• Aggregate consumption:
9
NAWM Fiscal: Public capital
• Public capital stock for intermediate goods production:
• Composite capital stock (CES):
• Government maintains public capital stock
• Gov. investment subject to time-to-build constraint
10
NAWM Fiscal: Valued Gov. Consumption
• Households utility function:
• Composite consumption (CES):
• Private consumption response after gov. consumption shock depends on degree of complementarity
11
NAWM Fiscal: Fiscal feedback rules
• Feedback rules for fiscal instruments– gov. consumption, investment, transfers, – distortionary taxes on labour income, employer
and employee SSC and lump-sum taxes
• Example:
with
Lagged response
Debt Stabilization, Automatic Stabilizers
Discretionary policy (possibly pre-announced)
<
12
Outline
• Motivation
• NAWM Fiscal: Theoretical Extensions
• NAWM Fiscal: Empirical Extensions
• Results
• Conclusions
13
NAWM Fiscal: Empirical Extensions
• Macro Data:– 17 euro area macro time series of baseline NAWM – Area-Wide model database
• Fiscal Data:– Newly available quarterly fiscal database– 8 euro area fiscal time series
• Government consumption, investment, transfers• Direct and indirect tax revenues• Employee and employer SSC• Government debt
14
NAWM Fiscal: Empirical Specification
• Sample period: 1980Q2 to 2010Q2
• Data treatment:– Expenditure and debt data in real terms– Revenue data as a ratio to consumption or wages
and salaries– Linear- resp. HP-trends removed
• Bayesian estimation
15
Outline
• Motivation
• NAWM Fiscal: Theoretical Extensions
• NAWM Fiscal: Empirical Extensions
• Results
• Conclusions
Selection of Calibrated Parameters
A Selection of Estimated Parameters
18
Historical Decomposition: NAWM Fiscal
2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1
−12
−10
−8
−6
−4
−2
0
2A
nnua
lized
Qua
rterly
Gro
wth
Rat
esHistorical Decomposition of Real GDP Growth (demeaned)
Real GDP GrowthFiscal ShocksNon−Fiscal Shocks
Historical Decomposition: Effects of fiscal shocks on GDP taking parameter uncertainty into account
Ann
ualiz
ed Q
uarte
rly G
row
th R
ates
20
Contribution of Individual Fiscal Shocks
2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1−1
−0.5
0
0.5
1
1.5
Ann
ualiz
ed Q
uarte
rly G
row
th R
ates
Contribution of Fiscal Shocks to Real GDP Growth (demeaned)
Total Contribution to Real GDP GrowthGov. ConsumptionGov. TransfersCons. TaxEmployer SSCEmployee SSCLabor TaxGov. InvestmentLump−sum Tax
21
Inspecting the Mechanism I: Effects of valued/non-separable government consumption (CES)
22
Cross-Check I: Standardized Fiscal Multipliers
23
Cross-Check II: Estimated Fiscal Multipliers
Cross-Check II: Estimated Fiscal MultipliersTaking Parameter Uncertainty into Account
Cross-Check III: Historical DecompositionImportance of Fiscal Rules
Cross-Check IV- Evaluation of European Economic Recovery Package (EERP)
Cross-Check IV: Sensitivity of EERP -Present Value Fiscal Multipliers
28
Cross-Check IV: Effects of Fiscal Shocks vs. EERP
29
Cross-Check IV: Effects Fiscal Shocks vs. EERP (II)
Cross Check V: Nominal Interest Rate, Taylor Ruleand ZLB
31
Outline
• Motivation
• NAWM Fiscal: Theoretical Extensions
• NAWM Fiscal: Empirical Extensions
• Results
• Conclusions
32
Conclusions
• Great Recession triggered large-scale fiscal policy response in the euro area
• Question: How much did expansionary fiscal policy contribute to GDP growth?
• Answer: Up to 1.6p.p. annualized quarterly real GDP growth
• Important:– Incorporate (lots of) fiscal data – Detailed modelling of the fiscal sector
33
Annex
34
Baseline New Area-Wide Model (NAWM)
• Micro-founded estimated DSGE model for euro area– Small open economy version of CEE and SW
• Four types of agents:– Optimizing private households & firms– Monetary and fiscal authority (balanced budget)
• Wealth of nominal and real rigidities (habit preferences, adjustment costs, sticky prices and wages….)
• Estimated on 18 euro area time series– Government consumption only fiscal observable
35
Inspecting the Mechanism II: Share of Rule-of-Thumb Consumers (ω)
0 1 2 3 4 5 6 7 80
0.02
0.04
0.06
0.08
0.1
Priv. Consumption After Lump−Sum Gov. Transfer Shock
Quarters
Per
cent
Dev
. Fro
m S
tead
y S
tate
ω=0.35ω=0.18 (estimate)ω=0.00
36
Inspecting the Mechanism III: Effects of government investment (CES private-public capital)
0 1 2 3 4 5 6 7 8
−0.04
−0.03
−0.02
−0.01
0
0.01
0.02
0.03
0.04
Priv. Investment After Gov. Investment Shock
Quarters
Per
cent
Dev
. Fro
m S
tead
y S
tate
υK=0.25,αK=0.85
υK=0.25
υK=0.84 (estimate)
υK=1.00 (Cobb-Douglas)
υK=1000
Public/private capital substitutes
Public/private capital complements
37
Contribution of Non-Fiscal Shocks
38
Data SHOW ALSO LEVEL DATA
1985 1990 1995 2000 2005 2010−2
0
2
Government ConsumptionP
erce
nt
1985 1990 1995 2000 2005 2010
−10
0
10
Government Investment
Per
cent
1985 1990 1995 2000 2005 2010−5
0
5
Government Debt
Per
cent
1985 1990 1995 2000 2005 2010−5
0
5
Government Transfers
Per
cent
1985 1990 1995 2000 2005 2010−1
0
1
Indirect Tax Revenue / Consumption
Per
cent
1985 1990 1995 2000 2005 2010−0.5
0
0.5
Employer SSC / Wages and Salaries
Per
cent
1985 1990 1995 2000 2005 2010
−0.5
0
0.5
Employee SSC / Wages and Salaries
Per
cent
1985 1990 1995 2000 2005 2010
−2
0
2
Direct Tax Revenue / Wages and Salaries
Per
cent
39
The Great Recession and Euro Area Public Finances