EMU Member States Research Articles

A VAR model for Fiscal Multipliers and the Future of Fiscal Policy in European Monetary Union

Abstract Fiscal multipliers have been a core issue for the effectiveness of fiscal policy. During the financial economic crisis of 2007–8 there has been a revival of interest in re-estimating the size of the multipliers. Empirical literature showed that fiscal multipliers are dependent either on structural characteristics of the economy (exchange rate regime, openness, etc.), or on business cycles or on fiscal characteristics (level of debt, the choice between expenditures and taxes, etc.) of the economies. The aim of this paper is to contribute to this discussion by developing a VAR model to compute the effects of fiscal policy to output for the 19 member states of EMU for the period 2002-2019. Controlling for size of the countries, level of Debt to GDP ratio and openness. Based on these findings we will discuss the difficulties of fiscal consolidation in EMU economies. We argue that EMU is facing a deadlock, the necessity of fiscal consolidation on the one hand and the unavoidable risk of uneven results of fiscal contraction in the member states due to different size of multipliers on the other hand. The only alternative for EMU is to take a step forward towards a fiscal union. In this case fiscal policy should be balance different political priorities and preferences and at the same time be timely and effective. JEL classification numbers: F35, O53. Keywords: Fiscal policy, European Monetary Union, debt, Fiscal cooperation, Fiscal multipliers.

A VAR model for Fiscal Multipliers and the Future of Fiscal Policy in European Monetary Union

Abstract Fiscal multipliers have been a core issue for the effectiveness of fiscal policy. During the financial economic crisis of 2007–8 there has been a revival of interest in re-estimating the size of the multipliers. Empirical literature showed that fiscal multipliers are dependent either on structural characteristics of the economy (exchange rate regime, openness, etc.), or on business cycles or on fiscal characteristics (level of debt, the choice between expenditures and taxes, etc.) of the economies. The aim of this paper is to contribute to this discussion by developing a VAR model to compute the effects of fiscal policy to output for the 19 member states of EMU for the period 2002-2019. Controlling for size of the countries, level of Debt to GDP ratio and openness. Based on these findings we will discuss the difficulties of fiscal consolidation in EMU economies. We argue that EMU is facing a deadlock, the necessity of fiscal consolidation on the one hand and the unavoidable risk of uneven results of fiscal contraction in the member states due to different size of multipliers on the other hand. The only alternative for EMU is to take a step forward towards a fiscal union. In this case fiscal policy should be balance different political priorities and preferences and at the same time be timely and effective. JEL classification numbers: F35, O53. Keywords: Fiscal policy, European Monetary Union, debt, Fiscal cooperation, Fiscal multipliers.

Why Do Regions Differ in Growth? The Productivity of the Eurozone and Its Contribution to the Added Value of Its European Neighbors

Despite the fact that the European integration process has intensified cooperation among European partners, the significant impact on growth represented by the recent lengthy periods of productivity stagnation in European countries still remains unexplained, as are the growing disparities among the more advanced countries of the integrated economy. This paper focuses on long-term economic growth based on productivity and its components, as well as on the effects of integration of EMU and non-EMU member states. The use of spatial econometric models allows us to incorporate the interactions among European countries into growth models. In line with neoclassical growth models, our results contribute to explaining how the growth of a eurozone country is related to the economic growth of its neighbors. Moreover, we confirm the relevance of eurozone countries’ interactions in times of crisis (2009–2018), as European countries generate spatial spillover effects that link their economic cycles. Although capital stock (i.e., investment) has a positive effect on the eurozone’s growth, its slowdown cannot compensate for the effect of declining labor-force participation, which is proven to be a crucial factor for growth. Likewise, immigration flows affect economic growth, but this differs according to the workers’ level of education.

Book review: EMU Integration and Member States’ Constitutions, edited by Stefan Griller and Elisabeth Lensch. (Oxford: Hart Publishing, 2021)

Book review: <i>EMU Integration and Member States’ Constitutions</i>, edited by Stefan Griller and Elisabeth Lensch. (Oxford: Hart Publishing, 2021)

Macroeconomic asymmetry in the Eurozone before and after the Global Financial Crisis: An appraisal of the role of the ECB

The launch of the euro in 1999 was assumed to enhance macroeconomic convergence among EMU economies. We test this hypothesis from a comparative perspective, by calculating different indices to measure the degree of macroeconomic dispersion within the Eurozone, the UK and the USA (1999–2019). We use common factor models to produce a single index for each monetary area out of different measures of dispersion. These indices can be used to inform on the degree of optimality of a monetary area. Our results show that macroeconomic dispersion in the Eurozone increased notably even before 2007 and it took significantly longer to return to pre-crisis levels, as compared to the UK and the USA. The paper shows the critical role played by the ECB’s asset purchases programmes in reducing macroeconomic divergences among EMU member states since 2015.

Realized volatility spillovers between US spot and futures during ECB news: Evidence from the European sovereign debt crisis

We study the simultaneity impact of the European Central Bank news on the daily realized volatility transmission mechanism (spillovers) among various US spot and futures markets. To this end, we apply a bias-corrected vector autoregressive model via Wild bootstrap simulation. We use minute-by-minute intraday data to construct daily realized volatility. We consider 429 news form the ECB as important events employing two major classifications, namely, a country classification with the highest total number of days related ECB news and a type of ECB news classification. We find that investors in futures markets react more vigorously and mainly for the ECB news that is associated with the group of EMU member states applied structural reforms. Yet, more importantly, we show that the US stock markets response heterogeneously to the ECB news, as we find key disagreements in the reactions both across the US markets and the types of ECB news studied. Such evidence is consistent with the explanation of the differential interpretation of information among market participants. From a practical point of view, we suggest that investors in the US spot market can effectively use two or more futures contracts to minimize their exposure to volatility risk associated with that news.

EMU risk-synchronisation and financial fragility through the prism of dynamic connectedness

This study employs dynamic connectedness as a measure of financial risk synchronization considering government bond yields in 11 EMU member states. In particular, large values of the relevant index can be an indication of comparable levels of risk further implying that the common currency area consists of a financially sensible set of countries. By contrast, small connectedness values can be an indication of fragmentation whereupon certain countries are considered to be safer than others. The latter would be detrimental for the EMU as it fuels financial fragility, which practically stipulates that crises occur as a result of self-fulfilling market fears. The results are based on a daily dataset which spans between 1st September 2003 and 31st August 2018. Findings show that fragmentation was present at the height of the European sovereign debt crisis and that the interconnectedness has not yet reverted to its pre-2009 levels. In addition, core countries appear to transmit shocks to periphery countries although, occasionally, there are noteworthy disparities. Further investigating these disparities on a pairwise connectedness level – which helps to identify sensible pairs of countries in terms of financial risk – shows that core countries dominate this exercise, with the exception of the bilateral relation between Italy and Spain. The fact that most periphery countries of our sample are not included in these pairs raises concerns and calls for a more substantial integration.

Output-volatility reducing effects of automatic stabilizers: Policy implications for EMU member states

In this paper, we empirically explore the output-volatility reducing impact of automatic stabilizers and look in detail at their policy implications for selected EMU member states comprising Austria, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, and Spain for the period 1995–2017. Overall, the results suggest that automatic stabilizers deliver a statistically significant, but fairly weak, counter-effect on output volatility in the short run. More specifically, output-volatility responses to automatic stabilizers by a reduction between −0.012 and −0.097 percentage points depending on the proxy measure used for automatic stabilizers. However, the automatic stabilizing impact from taxes and government spending is statistically insignificant in the long run. The results point to two main policy implications: i) automatic stabilizers are an important fiscal mechanism just for the short-run output stabilization, but their output-volatility offsetting role and power are largely subject to proxy measures used for automatic stabilizers; ii) no matter what proxy measures are used, automatic stabilizers largely produce a weak stabilizing performance in dampening short-term output volatility. So, from a macroeconomic policy standpoint, it can be safely claimed that automatic stabilizers can just be an integral part of discretionary fiscal policy rather than being an alternative to it.

Fiscal discipline in EMU? Testing the effectiveness of the Excessive Deficit Procedure

The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, has been criticized from opposite ends. Some blame the EDP for imposing too much fiscal austerity. Others question whether the EDP has any disciplining power at all. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. Overall, we find that a 1% of GDP larger EDP recommendation leads to 0.8–0.9% of GDP of additional fiscal consolidation plans, and 0.6–0.7% of actual consolidation. This result does not extend to countries subject to financial support programs: we find that, while they did implement substantial consolidation measures, in these countries required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped fiscal policies in the euro area, especially in the years 2010–2014, when EDP recommendations were most frequent.

Inequality in EMU: is there a core periphery dualism?

Income inequality has had a minor role in the European integration process’ institutional framework. This is unfitting given that reducing disparities has been one of the most explicit goals of EU, which has consequently devoted an increasing share of its budget to regional policy. This issue has potentially relevant policy implications because if the European integration has a role in increasing inequalities within member countries it is harmful for social cohesion. This paper intends to assess inequality determinants in EMU countries and whether the European integration process has been itself among them. It performs an empirical investigation on a panel of 12 EMU member States in the period 1980-2015. The contribution of this paper to the literature is twofold: first, it focuses on the effects of European integration on inequality in EMU countries over the last 25 years, on which the evidence is still scarce. Second, it tries to disentangle the European integration impact on inequality in core and periphery EMU countries. The empirical evidence suggests that the effects of the European integration process, captured by trade and financial openness indicators, on income inequality was heterogeneous across country groups. Once disentangling the country sample in core and periphery groups, as identified by the relevant literature, estimate results seem to support the hypothesis of a core periphery dualism also for what concerns income inequality trends within the EMU.

A Simple Post-Crisis EMU Phillips Curve — Implications for Monetary Policy

The persistently low wage and price growth in the EMU after the Great Recession of 2009 led some economic observers to conclude that the Phillips Curve has broken down and that the ECB should therefore reconsider its infl ation target. This study makes use of the considerable cross-country and cross-time heterogeneity in terms of infl ation and capacity utilisation of EMU member states after the Great Recession to investigate whether these claims are corroborated by empirical evidence. The results point to the conclusion that the Phillips Curve is alive and well in the EMU and centred at or only slightly below the ECB’s inflation target. Therefore, a readjustment of the infl ation target seems unjustified. Furthermore, as the ECB can expect inflation to return to its target, it possibly can accelerate tapering its unconventional monetary policy measures as the recovery continues.

Deficient EMU’s Tasks: As to Asymmetric Transmission Effects of An United Eurosystem’s Monetary Policy

Abstract （399words） This paper aims to clarify and partially solve what tasks ongoing EMU has actually confronted since its establishment, mainly focusing on clarifying asymmetric transmission effects of an united Eurosystem’s monetary policy and on finding conditions of establishing value convergence among EMU and/or EU. Research design of this paper bases on both theoretical innovations （Control Engineering to achieve convergence） and empirically verifiable methods （Panel Fixed VARSARAR model: Panel Fixed Effects Vector AutoRegressive and Spatial AutoRegressive with Additional AutoRegressive Error Model）, which enables us to discuss EMU’s convergence tasks quantitatively. Accordingly, this paper consists of two parts. One is a verification part of EMU’s interrelated transmission effects of monetary policy, which clarifies how we can explain its asymmetric effects among EMU utilizing direct transmission and spatial indirect effects. Asymmetric effects of an united monetary policy have stemmed from idiosyncrasy of economic structures, spatial spillovers of its economic policy and human-made institutional spatial customs governing EMU and Euro among within and occasionally without EMU member states. This paper verifies whether inclusive theory of monetary policy explains variations of real and interrelated EMU’s convergent criterion indicators by which monetary channels have affected HICP and fiscal resilience by such as Quantitative Easing and Fiscal Theory of the Price Level （FTPL） channels. The other is a part of establishment conditions of multibody-made convergence system through control by human utilizing methods of Control Engineering or state-space model, which enables us to lead EMU from divergence toward convergence of European values. This paper also discusses how to procced EMU’s policy convergence by human-made innovations through diagonalization of both direct and indirect matrix through introduction of single-peakedness or stratification of national priority issues among EMU members or Euro, which means that EMU’s or EU’s convergence of values needs some form of stratification without fail. The results of this paper are as follows: VARSARAR model implies that indirect spatial lags which seem to represent crisis-driven fragility and distance-based neglectedness as core-periphery structures within the EU, and among-countries-linked financial contagion in Europe that are possibly but not completely verified as background reasons of distance-based European spatial lags, have actually large effects on inflation and fiscal position during crisis, and have also less effects on them after mitigation of the European crisis. Also, Control Engineering implies that One Europe necessarily requires stratification of member states’ sovereignty or euro in order to proceed and establish convergence of European view of values, say EMU and Euro.

Fiscal Discipline in EMU? Testing the Effectiveness of the Excessive Deficit Procedure

The Excessive Deficit Procedure (EDP), central to the Stability and Growth Pact, is criticized for both its procyclical effects and – in contrast – a perceived lack of enforcement. To test its actual effects, we construct a real-time database of EDP recommendations and estimate augmented real-time and ex-post fiscal reaction functions for a panel of EMU member states. We find that a 1% of GDP larger EDP recommendation leads to close to 1% of GDP of additional fiscal consolidation plans, and around 0.8% of actual consolidation. For countries in financial support programs we find that, while they did implement substantial consolidation measures, required and delivered consolidation efforts are less connected. Overall, our results suggest that EDP recommendations have substantially shaped euro area fiscal policy, especially in the years 2010-2014, when EDP recommendations were both largest and most frequent.

Insolvency Mechanism for EMU Member States

Die weiterhin hohen Schulden in einigen Staaten der Europaischen Wirtschafts- und Wahrungsunion lassen nach wie vor staatliche Insolvenzen befurchten. Um die entstandenen Probleme zu bewaltigen, aber auch damit eine solche Situation erst gar nicht eintritt, halt der Autor eine staatliche Insovenzordnung — mit Bail-out durch die anderen Mitgliedstaaten nur in Notfallen — fur erforderlich. Er schlagt einen staatlichen Abwicklungsmechanismus fur uberschuldete Euro-Lander vor, der auf einem Konzept des Sachverstandigenrates fur Wirtschaft von 2016 beruht.

Benefits of EMU Participation: Estimates Using the Synthetic Control Method

This paper investigates quantitatively the benefits from participation in the Economic and Monetary Union for individual Euro area countries. Using the synthetic control method, we estimate how real GDP per capita would have developed for the EMU member states, if those countries had not joined the EMU. The estimates show that most countries have profited from having the euro, though the crisis leads to negative effects of EMU membership. The PIGS countries, in particular, would have been better off if they had not been an EMU member during the crisis, however, Greece, Portugal and Spain experienced the largest benefits of EMU participation in the pre-crisis period.

The impact of supranational fiscal rules on public finance: the case of EMU member states

The following paper deals with the topical issue of fiscal surveillance in the EMU. We focus on analysing the impact of the EU's supranational fiscal rules [i.e., the Maastricht criteria for entering the EMU and the subsequent stability and growth pact (SGP)] on the fiscal behaviour of EMU member states in order to acquire new insights into solutions needed to ensure fiscal discipline in the future. With the regression of fiscal reaction functions for the panel of euro area countries, we estimate the changes occurring in discretionary fiscal policy in the Maastricht period and in the period after entering the EMU when the policy became governed by the SGP. Estimates show that EMU member states' discretionary fiscal policy was procyclical in the 1980s, but turned countercyclical in the Maastricht period. In the SGP period, the countercyclical behaviour decreased and fiscal policy became acyclical. We conclude that the difference in fiscal behaviour before and after entering the EMU is the result of a change in the incentives and that solutions should thus also be looked for in creating certain forms of positive incentives for fiscal discipline.

The impact of supranational fiscal rules on public finance: the case of EMU member states

The following paper deals with the topical issue of fiscal surveillance in the EMU. We focus on analysing the impact of the EU's supranational fiscal rules [i.e., the Maastricht criteria for entering the EMU and the subsequent stability and growth pact (SGP)] on the fiscal behaviour of EMU member states in order to acquire new insights into solutions needed to ensure fiscal discipline in the future. With the regression of fiscal reaction functions for the panel of euro area countries, we estimate the changes occurring in discretionary fiscal policy in the Maastricht period and in the period after entering the EMU when the policy became governed by the SGP. Estimates show that EMU member states' discretionary fiscal policy was procyclical in the 1980s, but turned countercyclical in the Maastricht period. In the SGP period, the countercyclical behaviour decreased and fiscal policy became acyclical. We conclude that the difference in fiscal behaviour before and after entering the EMU is the result of a change in the incentives and that solutions should thus also be looked for in creating certain forms of positive incentives for fiscal discipline.

Revisiting Sovereign Bond Spreadss Determinants in the EMU

We study the determinants of 10-year sovereign bond yield spreads of 11 EMU member states, covering the lifetime of the euro, up until the end of 2014. Panel and SUR analyses coupled with qualitative variables show that the pricing of European debt has not been static across time and EMU countries, and market participants became increasingly aware of macro-economic and fiscal fundamentals.

Budget-Neutral Labour Tax Wedge Reductions: A Simulation-Based Analysis for Selected Euro Area Countries

Budget-neutral tax wedge reductions rank high in the policy agenda of several EMU member states. Using a New Keynesian DSGE model of a monetary union with a complex labour market structure and a comprehensive public sector, we evaluate the macroeconomic and welfare effects of reducing the firms' and workers' labour tax rates under alternative financing instruments. Overall, a tax wedge reduction is beneficial in terms of both welfare and output, as long as the financing measure does not harm private-sector productivity and/or the incentive for private capital investments over-proportionately. While financing the labour tax wedge reduction by an increase in consumption taxation yields most favourable output effects, financing it by a reduction in government spending is more beneficial in terms of welfare as the latter does not imply a policy-induced increase in private consumption costs. We also show that, when we assume that firms can adjust the ex- and intensive labour margin in response to policy changes, a reduction in the workers' and not the firms' burden is most beneficial.

Proces doskonalenia oceny równowagi budżetowej w Unii Gospodarczej i Walutowej

Fiscal discipline is one of fundamental requirements of the Economic and MonetaryUnion as specified in the provisions of the Maastricht Treaty (1992) and laterelaborated on in the Stability and Growth Pact (1997). EMU Member States fromthe beginning had serious difficulties in adhering to the fiscal rules, which ledto the first reform of the SGP in 2005 resulting in more flexible fiscal rules. Despitegood economic situation, EMU’s economies still had budget deficits which furtherincreased with the global financial crisis causing government debts to soar overacceptable limits. In due time, two further reforms of SGP were enacted, in 2011and 2013, introducing new indicators and improvements in the assessment of thegovernment budget balance in the euro area. Nevertheless, enforcement of newrules still will depend on EMU governments political will.