The Role of Fiscal PolicyThe Macro-Economics of European Economies

MSc in Economic Policy StudiesJohn FitzGerald, March 2015

Course Outline

1. How does an economy work? JF 16-1-2015

2. The genesis of macroeconomics AM 23-1-2015

3. Modern macroeconomics AM 30-1-2015

4. Banks and financial markets AM 6-2-2015

5. The recent crisis AM 13-2-2015

6. The labour market JF 20-2-2015

7. Fiscal Policy and forecasting JF 6-3-2015

8. Trade JF 13-3-2015

9. The economics of global warming JF 20-3-2015

10. The future of the Irish economy AM and JF 27-3-2015

Outline of Lecture

• Theory• Objectives of fiscal policy• How fiscal policy affects the economy• What is the “stance” of fiscal policy?• Sustainability• Fiscal Rules• Micro-economics of fiscal policy

• Applied - examples of fiscal policy in operation• Irish fiscal policy since 1970• Fiscal adjustment in 1983-93 in Finland and Ireland• Fiscal policy since 2008• Fiscal multipliers

Objectives of Fiscal Policy

• Finance public expenditure on necessary goods and services• Keep actual output close to potential

• Keynesian policy. Fiscal stimulus/tightening when below/above potential• Is fiscal fine tuning possible?

• Sustainability of government debt• Ensure that the debt can be services and rolled over, if not repaid

• In EMU: manage bubbles where interest rates not appropriate

• Public Finance• Choose mix of instruments (taxes and expenditure cuts/increases) to achieve

objectives at minimum cost to the economy

Government Sector

• Revenue and Expenditure• Revenue

• Economic costs of taxation – effects on the economy• Economic impact of taxation – who pays?• Other Revenue

• Expenditure• Government Consumption – employment of public servants• Government Transfers• Subsidies• Investment

• Measure of imbalance – Deficit or Surplus• Debt - sustainability

The goods market

• Y=C+I+G (+X-M)• Y= GDP, output = expenditure = income; I= investment; G= government consumption

• C=a + b(Y - T)• C= consumption;T=Government revenue; a and b are coefficients, where b is 0<b<1

• Y=a + bY – bT + I + G + (X - M) • Y(1-b)= a + I + (X - M) + G - bT

• Assumes output will respond to an increase in demand• is the “multiplier” for G and for T• Why are they different?

Fiscal Policy & Macro-Economy - 1

• Change in G – change in Y of where b<1• Implies “multiplier” > 1; e.g. b=.8 multiplier is 5

• Change in T – change in Y of where b<1• Implies “multiplier” < for G; e.g. b=.8 multiplier is -4

• Because of leakage through imports, crowding out etc. crude multiplier much lower:• e.g. a multiplier of 1.1

Fiscal Policy & Macro-Economy - 2

• W=f(P, Uf–U) Philips curve• W=Wage rates; P=Prices; U=unemployment rate; Uf= “full employment” • If U>Uf then it pulls down wages. If U<Uf this pushes up wages

• P=f(W,Pi,ti)• Pi= import prices; ti = indirect tax rate

• L=f(Y,W,Pk,Pm)• Where L=employment; Y=output; W= wage rate; Pk=price of capital; Pm=price

of materials and other inputs;

Crowding out -1

• Government stimulates economy• G ; This raises Y; This raises L, which reduces U• Lower U leads to higher wages (W) and higher prices (P).• Higher W leads to less exports (X) and employment in export industries

• This is one way that a government stimulus can “crowd out” exports

Crowding out - 2

• Government stimulates economy• G ; This raises Y; This raises L which reduces U• Lower U leads to higher wages (W) and higher prices (P).

• Central Bank (ECB) targets inflation• If P>P*; where P* is the target rate of inflation• Then Central Bank raises interest rates r• Higher interest rates affects the cost of investing• Lower investment has negative multiplier effects• Higher interest rates may also raise the exchange rate and affect competitiveness

• Crowding out:• Through wages affecting exports and • Interest rates affecting investment (and also consumption)

The stance of fiscal policy - 1

• If unemployment benefit rises in a recession is it a fiscal stimulus?• If no change in rates or conditions it is not a policy change – not stimulatory.• The increase is due to the “automatic stabilising” role of the public finances

• If tax revenue rises because of economic growth is that deflationary?• If no change in rates or conditions it is not a policy change.• The increase is due to the “automatic stabilising” role of the public finances

• Distinguish between policy changes and changes induced by developments in the wider economy• A fiscal stimulus is an increase in the deficit or reduction in the surplus due to

policy action by the government• It is the CHANGE in the (structural) deficit surplus, NOT the LEVEL of the surplus or

a deficit, that effects change in demand

The stance of fiscal policy - 2

• Neutral if keep burden of state unchanged in face of growth• Defining a neutral fiscal policy• Keep tax rates unchanged

• Unchanged direct tax rate – index bands and credits?• Unchanged VAT rate but index excise rates to prices.• Property tax – a % of value – revenue will rise with prices

• Expenditure• Welfare rates (index to price or wage rates?)• Public service wage rates – link to private sector• Employment and volume of investment – constant? Indexed price

• For an example of indexation rules:• http://www.esri.ie/UserFiles/publications/QEC2012AUT_SA_Kearney.pdf

The stance of fiscal policy - 3

• Government definitions:• Tied to legislative change• Welfare rates – assume unchanged• Income tax bands and credits – unchanged• Where a tax is covered by a “sunset clause” – assume it will end

• e.g. the levy on pension funds.

• It is the change in the structural deficit / surplus that matters for management of the economic cycle• When government raises (cuts) taxes or (raises) expenditure the effect on

borrowing is less than the direct impact.• Because cuts deflate the economy – other sources of revenue / expenditure affected• In Budget allow for revenue “buoyancy”

Potential Output and Structural Deficit• Related to stance of fiscal policy – but not identical• Identify what is potential output of the economy? • To extent actual output is below potential – cyclical downturn (or opposite)• Without government intervention the cycle will return actual output so it is in line

with potential output.• The deficit due to the fact that output is below potential is cyclical – it will go away

without government intervention• What is left of the deficit is then “structural” – it needs a tightening of fiscal policy• Example: if GDP 5% below potential and the deficit rises by 0.6*GDP

• Then the cyclical deficit is 3%. If the actual deficit is 4% then the structural deficit is 1% of GDP; the 5% deficit less the effects of the economic cycle of 3%.

EU methodology for structural deficit• Potential output Y=AKαL(1-α)t

• Where Y=output, K=capital, and L= employment; A and α are parameters

• In the EU methodology L is defined as the level of employment consistent with the “non-accelerating wage rate of unemployment” or NAWRU.• For Ireland currently assume NAWRU over 10% - higher than actual

unemployment so Actual output is above Potential output• This does not make sense. There is no sign of inflationary pressures even

though the unemployment rate is below the EU definition of NAWRU• Need a sensible definition of the structural deficit (as it is in the

constitution). (Bergin and Fitzgerald, 2014)

Sustainability

• Ensuring that the state is solvent. • Possibility of multiple equilibria.• Multiple equilibria:• If interest high enough – debt cannot be serviced –default• However, if interest rate low enough any debt is supportable

• What determines the national interest rate?• National rate = world rate + risk premium• Risk premia depend on expectations• Expectations are unstable – they depend on humans!

Sustainability

• • Where D= public debt; Y= nominal GDP; r=interest rate; B=government primary

deficit

• Where lower case means that it is a ratio of nominal GDP: e.g. =

• Where is the rate of growth in nominal GDP

• For the debt GDP ratio to be stable =• 0=; then borrowing, b, must satisfy: =• E.g if r=.03; g=.05; d=.6; then b=.012 + interest paid or a deficit of 3% of GDP

Fiscal Rules

• Stability and growth pact (SGP)• Balanced budget over the cycle; maximum deficit 3%; debt/GDP ratio of 60%• Neither observed (Germany and France) nor adequate for the crisis

• New rules to ensure solvency (creditors get paid)• Treaty on Stability, Coordination and Governance (TSCG)• Maximum deficit 1% and take measures to get debt back to 60% of GDP

• Macro-economic imbalances procedure• No rules on using fiscal policy to manage the business cycle• Are they enforceable? Will they make a difference?• See http://www.iiea.com/ftp/Publications/IIEA-Economic-Governance-Paper-1_IIEA_2013.pdf

Fiscal adjustment in the “great recession”• How fast?• Credibility• What instruments should be used?

• Expenditure cuts v tax increases?• Expenditure: multiplier effects, credibility effects• Taxes: tend to be “easier” and are often reversed – credibility• See IMF 2010 in references

• Expectations – Ricardian equivalence• If people expect the cuts to produce lower taxes in the future, spend today• Questionable in practise (Giavazzi and Pagano, 1990, Bradley and Whelan, 1997, IMF 2010)

• Distributional effects important• Because equity matters• Because “Fairness” may affect success of the adjustment

Fiscal Policy under EMU

• EMU members governed by rules SGP etc.• Interest rates are set by the ECB to manage euro area inflation• However, inflation rates in individual members may deviate• For UK or Sweden, if a housing bubble is developing: use interest rates• In EMU must use fiscal policy• Run a contractionary policy – increase structural surplus/ reduce deficit• Also can target housing / property sector through tax system

Micro-economics of fiscal policy

• Efficiency Considerations• Choosing between different tax and welfare instruments.• Deadweight losses resulting from taxation (and subsidies).• Incidence• Types of taxation

• Direct• Indirect• Lump sum• Pigovian taxes

Deadweight losses

• If a tax changes behaviour so output falls – that is a loss.• For example, if the marginal tax rate rises:

• People will want higher pay or they will work less• This will reduce employment and output

• High deadweight in the 1980s tax system (Honohan and Irvine 1987)• Direct taxes (on labour) often have highest deadweight• Indirect taxes raise prices and reduce the value of wages.

• However, payment is shared with those out of the labour force

• Lump sum taxes• Cannot escape them so limited change in behaviour

• Pigovian taxes e.g. on tobacco and carbon emissions• While output may fall there is a societal benefit from the reduction in consumption• The problem is that the price does not reflect the cost to society

Incidence

• The person or company who pays the tax to the revenue may not suffer from the full effects of the tax.• If employees pass on some or all of the tax to the employer as higher wages• If companies pass on the tax on their product as higher prices.

• Incidence depends on the supply and demand for a product or service• Depends of the market power of the individual or company on whom the tax

is levied.

• Example: Tax on labour in Ireland

Wage Rates

• The tax wedge:• Employers pay W*(1+te); Employees get W*(1-tp)• Where te=employers taxes (rate) and tp=employees taxes (rate)• The higher the tax wedge the bigger the difference between the 2 wage rates

• Who pays the taxes on labour – where is the incidence?• Depends on the shape of the labour supply and demand curves

Tax incidence: affected by labour supply & demand

• Impose a tax on labour of W1-W3. • Labour bargains in terms of after tax wages

• Labour supply moves from S1 to S2

• Labour demand downward sloping• Employment falls from L2 to L1• Wage rates rise from W1 to W2 – that share of the tax is paid by employer• The part of the tax W2-W3 is paid by the employee

• The flatter – more elastic – labour supply the bigger the share of the tax is paid by employers – increasing the employment effect• Partnership in Ireland 1987 – trade off tax cuts for wage moderation

• This reflected the behaviour of the market with an elastic labour supply

• Other countries – labour supply less elastic because limited migration

Elastic Labour Supply

DL

S1L

W

L

W1

L2

Wage Rates

Employment

Elastic Labour Supply

DL

S1L

W

L

W1

L1

W2

L2

Wage Rates

Employment

S2L

W3

Distributional Effects

• Very Important• Because society cares about equity• Because an unfair tax may come unstuck politically

• Need a model to determine the effects• Because there are no typical families or individuals• Also need to take account of incidence

Distributional effect of Budgets

Impact of Budgetary Policy 2009-2015 - Percentage Change in Disposable Income by Income Decile

Applied

• Irish Fiscal Policy since 1970• Fiscal adjustment in Finland and Ireland in the 1980s/1990s• Fiscal adjustment in this crisis

31

Fiscal Policy

• 1970s – Keynesian bias• Economics v public perception

• 1980s – Recognition of supply side• Economics v public perception• Impetus to demand leaks out in current account

• 1980s – fiscal adjustment – 1• 1990s – order restored• 2009-14 – fiscal adjustment - 2

32

Fiscal Policy 1970-77

• 1972-3 Stimulated growing economy• Because forecasts suggested low growth• Suggested danger of fine tuning

• Mistaken interpretation of oil price shocks• Treated as a demand shock not a supply shock

• Fiscal adjustment• Budget for 1977 – toughest in 50 years

33

Fiscal Policy

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Incremental Measure of Fiscal Stance(% of GNP +ve expansionary -ve contractionary)

34

1977-1981 Fiscal Stimulus

• Election promises – major tax cuts & spending• Simplistic Keynesian model

• No consciousness of what drives real output

• Limited media or independent assessment• Exception: Geary, April 1978

• Consequences: • e.g. Moneypoint and public service hiring• Build up of borrowing and debt when real interest rates low

• There was a “black hole” which was not seen• Things even worse than they looked on BOP current account

• Then….

35

Fiscal Policy

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Incremental Measure of Fiscal Stance(% of GNP +ve expansionary -ve contractionary)

36

1980s Fiscal Adjustment

• Problems partly tackled 1983-4• Too much reliance on tax and not enough on cuts• Delayed adjustment• 1985-6 eased off – too early

• 1987-9 adjustment completed• More reliance on expenditure cuts

• Lessons?• External environment very important• Get it over with faster• More on expenditure than taxation• De facto co-operation between 82-87 and 87-89 govts.• Myth of an “Expansionary Fiscal Contraction”

Ireland 1980s, Finland 1990s

1 2 3 4 5 6 7 8 9 10 11 12-20

-15

-10

-5

0

5

10

Ireland Current Account Ireland Government Borrowing Finland Current AccountFinland Government Borrowing

Years of adjustment

% o

f GDP

Ireland 1980s, UK end of 1980s

-20

-15

-10

-5

0

5

1 2 3 4 5 6 7 8 9 10 11 12

% o

f GD

P

Years of adjustmentIreland Current Account Ireland Government Borrowing

UK Current Account UK Government Borrowing

Comparison of Adjustments

• In each case the adjustment in current a/c of BOP occurs first• Success of fiscal adjustment takes time to be realised• When take tough budgetary action• Deflate economy – cuts consumption and imports• Lower growth – tends to push deficit back up (but by less than cuts)• Reduces inflationary pressures; Private sector gradually crowded in

• Exports respond gradually – return to growth• When no longer deflating economy growth strengthens

40

Fiscal Policy in the 1990s

• Economy very competitive & ready to grow in 1990s• Signs of rapid growth commencing in 1989

• German unification & German monetary policy• Delayed the Celtic Tiger, which was purring 1989-90

• Fiscal policy broadly stimulatory in 1990s• Economy began decade well below potential

• Fine tuning seen to be difficult

41

Fiscal Policy

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Incremental Measure of Fiscal Stance(% of GNP +ve expansionary -ve contractionary)

42

Managing the 2000s boom

• From 2001 economy began to move too fast• Turning point probably 2003

• Monetary policy• Not able to manage property boom

• Fiscal policy – an answer• Belief that fiscal policy no longer useful – fine tuning• Needed to run an increasing surplus to take steam out• Make housing more expensive to reduce demand• Irish housing supply squeezed rest of economy

• Either or both fiscal policy or regulation could have worked• Economic advice concentrated on fiscal policy. • Lack of attention to financial economics and regulation• See http://www.esri.ie/UserFiles/publications/JACB201142.pdf

43

Restoring Order – 2009-2015

• Size of banking problem underestimated• Only clear from autumn 2010

• There was a huge hole in the public finances• Also a massive increase in welfare expenditure

• c. €30 billion of cuts, using Dept. Finance (legislative) definitions• €9 billion to increase welfare expenditure – automatic stabilisers• €1 billion to pay for interest on banking debt• €20 billion to plug the hole in the public finances

Government Transfers as % of GDP

Change

2007 2008 2009 2010 2011 2012 2013 2007-2011

Germany 16.0 15.8 17.4 16.7 15.7 15.6 15.7 -0.3

France 17.4 17.6 19.2 19.2 19.1 19.5 19.9 1.7

Netherlands 9.7 9.7 10.7 11.0 11.1 11.5 11.9 1.4

UK 12.1 12.6 14.3 14.2 14.2 14.6 14.5 2.1

Ireland 11.5 13.8 17.7 17.6 17.5 17.5 16.3 6.0

Greece 14.6 16.1 17.6 17.8 19.3 19.8 18.5 4.7

Spain 11.5 12.3 14.4 15.1 15.3 16.0 16.3 3.8

Portugal 14.1 14.6 16.4 16.4 17.0 17.5 18.4 2.9

Source: EU AMECO database. GNP is used for Ireland, not GDP.

45

Fiscal Policy

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Incremental Measure of Fiscal Stance(% of GNP +ve expansionary -ve contractionary)

Spanish v Irish approach to adjustment

2010 2011 2012 2013Plan of: SpainSpring 2010 9.8 7.5 5.3 3Spring 2011 9.2 6 4.4 3Spring 2012 5.3 3Latest 9.4 9.4 10.3 6.8Plan of: IrelandWinter 2009 11.6 10 7.2 4.9Winter 2010 10.6 8.6 7.5Latest 10.7 8.5 7.9 5.7

47

Restoring Order – 2009-2015

• Apart from avoiding a crisis!• Caution in fiscal policy important, asymmetric risks• Regulation – better safe than sorry

• Ireland - Tackling the Crisis• Under-promise and over-deliver• Ireland’s plan – not the Troika’s

• For EU• Bail-outs worked (except Greece). • Need EU banking system: EU regulation – being delivered• Need an appropriate EU fiscal Policy – not happening

Fiscal stance for euro area

• Measure by cyclically adjusted deficit• Take out effects of recession - a measure of structural deficit

• Deficit continuously cut 2011-2014• A measure of the EA12 fiscal stance – pro-cyclical

Euro 12, Cyclically adjusted deficit, % of GDP

-6

-5

-4

-3

-2

-1

2006 2007 2008 2009 2010 2011 2012 2013 2014

UBLGAP_103190_EA12

The Latvian fiscal adjustment

Latvia – current account of BOP

-25

-20

-15

-10

-5

0

5

10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

BP_LVA/GDPV_LVA*100

Latvia – government borrowing as % of GDP

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

GB_LVA/GDPV_LVA*100

Latvian Adjustment

-.25

-.20

-.15

-.10

-.05

.00

.05

.10

2006 2007 2008 2009 2010 2011 2012 2013 2014

BP_LVA/GDPV_LVA GB_LVA/GDPV_LVA

Latvia – Debt as % of GDP

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

30

35

40

45

50

Debt share of GDP

Fiscal Multipliers

• Uses HERMES model• Many channels through which economy adjusts• Look at public sector employment cut by €1 billion

Public sector employment shock, €1 billion

2013 2014 2015 2016 2017 2018 Growth, prices, employment GDP %Δ -0.7 -0.8 -0.8 -0.8 -0.7 -0.7 GNP %Δ -0.8 -1.0 -1.0 -1.0 -0.9 -0.8 Consumption %Δ -0.2 -0.7 -0.8 -0.9 -0.8 -0.7 Investment %Δ -0.3 -0.8 -1.0 -0.9 -0.7 -0.5 Exports of Goods and Services %Δ 0.0 0.0 0.0 0.1 0.1 0.1 Consumption deflator %Δ 0.0 0.0 -0.1 -0.1 -0.1 -0.1 Wages (non-agricultural) %Δ 0.0 -0.3 -0.3 -0.4 -0.4 -0.5 Total employment %Δ -1.2 -1.2 -1.2 -1.2 -1.1 -1.1 Balances Unemployment Rate (ILO) Δ 1.0 0.9 0.8 0.8 0.7 0.6 Current account of BOP as % of GDP Δ 0.1 0.2 0.3 0.3 0.3 0.2 General Government Deficit as % of GDP

Δ -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 General Government Debt as % of GDP Δ 0.6 0.5 0.4 0.2 0.0 -0.3 Welfare GDP per capita %Δ -0.7 -0.7 -0.7 -0.6 -0.5 -0.4 Consumption per capita %Δ -0.2 -0.6 -0.7 -0.7 -0.6 -0.4 Net Emigration Δ 0.0 4.0 3.3 1.8 1.1 0.5 The shock Public Sector Wage Bill €bn -1.0 -1.1 -1.1 -1.1 -1.2 -1.2

Income tax shock, +€1 billion 2013 2014 2015 2016 2017 2018 Growth, prices, employment GDP %Δ -0.2 -0.4 -0.4 -0.4 -0.4 -0.3 GNP %Δ -0.3 -0.4 -0.5 -0.4 -0.3 -0.3 Value added in industry %Δ -0.1 -0.3 -0.4 -0.4 -0.4 -0.4 Value added in market services %Δ -0.3 -0.4 -0.5 -0.5 -0.4 -0.4 Consumption %Δ -0.8 -1.0 -1.1 -1.0 -0.8 -0.7 Investment %Δ -0.9 -1.6 -1.7 -1.3 -0.9 -0.7 Exports of Goods and Services %Δ 0.0 0.0 -0.1 -0.1 -0.2 -0.2 Consumption deflator %Δ 0.0 0.1 0.1 0.1 0.1 0.1 Wages (non-agricultural) %Δ 0.0 0.4 0.6 0.7 0.7 0.8 Total employment %Δ -0.1 -0.3 -0.5 -0.5 -0.5 -0.5 Employment in services sector %Δ -0.1 -0.2 -0.3 -0.3 -0.3 -0.4 Balances Unemployment Rate (ILO) Δ 0.1 0.1 0.2 0.2 0.2 0.2 Current account of BOP as % of GDP Δ 0.3 0.4 0.5 0.4 0.4 0.3 General Government Deficit as % of GDP

Δ -0.5 -0.4 -0.3 -0.4 -0.4 -0.5 General Government Debt as % of GDP Δ -0.2 -0.6 -0.9 -1.2 -1.7 -2.1 Welfare GDP per capita %Δ -0.2 -0.3 -0.3 -0.3 -0.2 -0.2 Consumption per capita %Δ -0.8 -0.9 -1.0 -0.9 -0.7 -0.6 Net Emigration Δ 0.0 3.4 1.7 0.8 0.5 0.1 The shock Income Tax Receipts €bn 1.0 1.1 1.1 1.2 1.3 1.4

Overview of shocks, €1 billionYEAR 1 2 5 1 2 5 1 2 5

GDP Unemployment

Rate

Deficit as % GDP

% of GDP %Δ Δ Δ

Growth and competitiveness shocks:World growth +1% 0.8 0.9 1.1 -0.2 -0.4 -0.4 -0.1 -0.2 -0.3Foreign prices +1% 0.5 0.6 0.8 -0.1 -0.2 -0.2 -0.1 -0.2 -0.2Domestic wage rates +1% 0.0 0.0 -0.1 0.2 0.3 0.4 0.0 0.0 0.1Domestic interest rates +1pp 0.0 -0.2 -0.5 0.0 0.1 0.2 0.0 0.3 0.5House Prices -10% -0.5 -0.6 -0.3 0.4 0.7 0.3 0.5 0.9 0.5Standardised policy shocks:Income tax +€1bn -0.2 -0.4 -0.4 0.1 0.1 0.2 -0.5 -0.4 -0.4Public sector wage -€1bn -0.2 -0.3 -0.3 0.1 0.0 -0.2 -0.3 -0.3 -0.3Public sector employment -€1bn -0.7 -0.8 -0.7 1.0 0.9 0.7 -0.2 -0.2 -0.2 Current transfer Payments -€1bn -0.2 -0.3 -0.3 0.1 0.2 0.1 -0.5 -0.4 -0.4Capital expenditure -€1bn -0.3 -0.4 -0.3 0.5 0.5 0.3 -0.4 -0.4 -0.4

Questions

• Was the speed of adjustment right?• Was the composition of the adjustment right?• Will EU rules make a difference in the future?• What should be the target for fiscal policy over rest of decade?• Priorities for relaxing public finances?

AMECO Database

• Many annual variables for EU economies, US, Japan etc.• Don’t assume that the data are always right!• Where available, runs from 1960. Includes EU forecasts to 2016• Be careful that 2014 onwards are EU forecasts!

• Three approaches to accessing it:1. Online: http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm

2. Excel File: AMECONov14.xlsx plus list_of_variables.pdf

3. Excel File: AMECOTCD.xlsx – a limited number of variables, 1 variable per sheet

• House prices from BIS database:• Online: http://www.bis.org/statistics/pp_detailed.htm#selected

Future Presentations

1. The origins and resolution of the current crisis in Estonia, Bulgaria, Greece and Spain (20th March)• What were the origins? How is it resolving? Look at disequilibria in markets

2. The origins and resolution of the current crisis in Latvia, Portugal, Spain and Italy (20th March)• What were the origins? How is it resolving? Look at disequilibria in markets

3. The crisis in Scandinavia (Finland, Sweden, Denmark) 1988-1995 (13th March)• What were the origins? How was it resolved? Look at disequilibria in markets

Reading for this lecture

• Basic text:• “Macroeconomics a European Perspective”, Blanchard, Amighini and

Giavazzi. Probably more theory than you need, but provides the basics• Chapters 8&9, and 24

• The rest of the reading discusses real economic situations.On past experience with fiscal adjustments:• https://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf Chapter 3

Look at one or two of these publications for the EU and its component economies• IMF World Economic Outlook, October 2014. http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/text.pdf• OECD Economic Outlook, November 2014,

http://www.oecd.org/eco/outlook/General-assessment-of-the-macroeconomic-situation.pdf• European Commission: European Economic Forecast, Winter 2014

http://ec.europa.eu/economy_finance/publications/european_economy/2014/pdf/ee2_en.pdf

Possible additional reading

• Fiscal Rules

• http://www.iiea.com/ftp/Publications/EU%20Economic%20Policy%20Surveillance%20of%20Member%20States-IIEA%20Economic%20Governance%20Paper%206%20_Michael%20G%20Tutty.pdf

• http://www.iiea.com/ftp/Publications/IIEA-Economic-Governance-Paper-1_IIEA_2013.pdf

• Irish fiscal adjustment• http://www.esri.ie/UserFiles/publications/JACB201142.pdf

• Examples of multipliers for Ireland• http://www.esri.ie/UserFiles/publications/WP460/WP460.pdf Pp. 48-54 gives fiscal multipliers for Ireland

• The Stance of fiscal policy in Ireland and the Structural Balance• http://www.esri.ie/UserFiles/publications/QEC2014SPR_SA_Bergin.pdf

• http://www.esri.ie/UserFiles/publications/QEC2012AUT_SA_Kearney.pdf

• http://www.esri.ie/UserFiles/publications/JACB201239/BP201301.pdf

• Distributional effects• http://www.esri.ie/UserFiles/publications/QEC2014Win_SA_Keane.pdf

Possible additional reading

• Deadweight losses in taxation:• http://www.tara.tcd.ie/bitstream/handle/2262/68590/v19n11987_2.pdf?sequence=1&isAllowed=y

• Impact of different types of taxes:• http://www.esr.ie/article/view/93/73