Macroeconomic Policy Coordination Research Articles

An Empirical Study of the Impact of the Euro on Cross-Country Diversification

The euro was launched, on 1 January 1999, as a common currency for members of the European Union that complied with the Maastricht Treaty. The Maastricht Treaty calls for the coordination of major macroeconomic policies, such as inflation, budget balance, public debt, and long-term interest rates. Theoretically, the coordination of these policy issues and the launch of a common currency will increase the degree of market integration among member countries. This paper empirically tests the impact of the euro on the degree of market integration by looking at the comovement of the European equity markets and a sample of OECD equity markets. Weekly stock market indices for the period covering seven years before the euro and seven years after the euro was implemented was used. The results show that cross-country divergences in stock markets continued after the euro. There is no evidence of cointegration after the adoption of the euro. Cross-country portfolio diversification continues to be beneficial even among euro countries.

Public debt in Colombia: a post-Keynesian and institutionalist analysis

This article studies the institutional framework and the empirical evolution of Colombian public debt for the period 2001-2020 within a post-Keynesian approach. The objective is to render clear the potential that debt emission has as a macroeconomic policy instrument, and consequently to propose various policy routes for Colombian government. These policy routes suggest a different path than the one indicated by the orthodox economic tradition that has ruled the policy practiced in Colombia. In particular, taking into account the institutional and external limitations of fiscal policy, the revival of the ‘Development Bank’ inside the Central Bank of Colombia, and insist in and the need of cooperation and coordination of macroeconomic policies with the countries of the region are insisted.

Risk spillover effect of global financial markets in the context of novel coronavirus epidemic

ABSTRACT Since the outbreak of COVID-19 pandemic, the financial markets of many countries have been impacted severely. In this context, based on the event study method and orthogonal decomposition method, this paper studies the impact of the novel coronavirus epidemic on the spillover effect of global financial risk, and further analyses the financial risk transmission channels of various countries. The results suggest that the novel coronavirus significantly increases the overall risk level of global financial markets, and exacerbates the contagion effects of financial risk through the global risk spillover network. In addition, the analysis of transmission channels reveals the source and direction of the financial risks in each country, manifesting as the unidirectional risk transmissions from developed countries to developing countries and the bidirectional risk contagion paths of countries with similar level of development. Therefore, facing the challenges of public health emergencies such as novel coronavirus epidemic, the major economies should strengthen multilateral cooperation and promote the coordination of macroeconomic policies to jointly defuse global systemic financial risk.

Effects of Capital Control Actions on Cross-Border Trade

The evidence that capital controls adversely affect cross-border trade is debatable. This study proves that capital controls may support international trade by mitigating the negative effect of macroeconomic volatility. We use quarterly data from a sample of 25 emerging countries over the period 2011-2019. Using long- and short-standing capital controls dynamic panel models, and diversifying robust estimations techniques, our results show that capital controls alleviate the adverse effect of the exchange rate, interest rate differential, and inflation volatilities. The long-lasting capital controls «walls» are more effective than short-lasting capital control «gates». Besides, the effects of these controls are asymmetric regarding the financial development level and category of flows for which are applied, inflows or outflows. The study highlights the beneficial role of the macroprudential policy in supporting capital control actions. The results of this study have two main policy implications, the effectiveness of ‘walls’ controls and the importance of macroeconomic policy coordination.

The Volatility Lowering Effects of Capital Controls

The evidence that capital controls adversely affect cross-border trade is debatable. This study shows that capital controls may support international trade by mitigating the negative effect of macroeconomic volatility. We use quarterly data from a sample of 25 emerging countries over the period 2011–2019. Using long- and short-standing capital control dynamic panel models, and diversifying robust estimation techniques, our results show that capital controls alleviate the adverse effects of the exchange rate, interest rate differential, and inflation volatilities. The long-lasting capital controls (walls) are more effective than short-lasting capital controls (gates). Besides, the effects of these controls are asymmetric regarding the financial development level and category of flows. The study highlights the beneficial role of macroprudential policy in supporting capital control actions. The results of this study have two main policy implications, the effectiveness of “walls” controls and the importance of macroeconomic policy coordination.

Macroeconomic policy coordination and the European business cycle: Accounting for model uncertainty and reverse causality

AbstractThis study established the relationship between macroeconomic policy coordination and business cycle synchronization, considering a dynamic panel framework that accounts for model uncertainty and reverse causality. The results show that uncoordinated fiscal policy is a source of idiosyncratic shocks, but coordinated monetary policy leads to business cycle divergence. Furthermore, ongoing monetary integration is going to be associated with lower business cycle synchronization. Establishing fiscal union can mitigate this effect by eliminating a source of asymmetric shocks associated with fiscal policy differences, and provide a substitute for independent monetary policy in the form of interregional transfers.

Issues of macroeconomic policy coordination

In this article, we have learned that coordination of monetary and fiscal policy is one of the most important indicators of country economy regulation and economic growth, and it has been achieved in several ways. Taking into account the views of the above economists, the author considered it expedient to develop his own scientific definition of the concept of “harmonization of macroeconomic policy”. The state budget deficit and the use offiscal and monetary rules in public debt management have certain advantages.

An Introduction: “Macroeconomic Policy Coordination and Domestic Politics: Policy Coordination in the EU from the European Semester to the Covid‐19 Crisis”*

AbstractThe Next Generation EU (NGEU) and the Recovery and Resilience Facility (RRF) encompassed the European Semester. To understand how and why this happened we apply different theoretical approaches so as to emphasize different aspects of this process. The contributions in this collection discuss three main questions: (1) Is the Semester successfully implemented in the domestic arena? (2) Do domestic institutions and stakeholders play a crucial role in the success (or lack thereof) of the Semester? (3) What lessons can we learn from past economic policy coordination for the challenges ahead? In answering these questions, one's lens needs to be focused at both the EU and the domestic levels. Various factors play a role: solidarity, mutual understanding, relations between the ‘South’ and the ‘North’, questions about democracy, the rule of law, the interaction between economic and social issues, and even the need to address the climate crisis (the Green Deal).

The European Semester as Goldilocks: Macroeconomic Policy Coordination and the Recovery and Resilience Facility

AbstractHow and why did the European Semester end up as the main institutional vehicle of the Recovery and Resilience Facility (RRF)? To what extent did this new set‐up change the power balance among key actors (for example, financial and economic actors versus social affairs actors)? Drawing on historical institutionalism and based on 28 semi‐structured interviews and document analysis, our assessment suggests that while social actors were initially side‐lined and national executives strengthened, over time the pendulum is swinging back. The usual actors are strategically using the institutional structures of the revised Semester as a vehicle to ‘have a say’ in the RRF. Having more carrots and sticks suggests further strengthening the pivotal role of the European Commission. Yet having the option of submitting national plans gives member states options too. The EU institutional response to the Covid‐19 pandemic built on, and further cemented, the EU's socio‐economic governance architecture.

Saving and Investment in the Twenty-First Century: The Great Divergence – some comments from a post-Keynesian perspective*

This contribution discusses the book Saving and Investment in the Twenty-First Century: The Great Divergence by von Weizsäcker/Krämer (2021). It touches upon the underlying theoretical perspectives, von Weizsäcker’s neo-Austrian view and Krämer’s short-run Keynesian theory, and it proposes an alternative based on post-Keynesian distribution and growth theory. It also reviews the economic policy proposals of the book with respect to government deficits and debt, as well as international coordination of current-account balances, and finds broad agreement with modern post-Keynesian proposals, with some deviation when it comes to macroeconomic policy coordination among monetary, fiscal and wage/incomes policies. It concludes that these economic policy agreements should not be taken as a surprise. The requirements of stabilising government deficits and debt, in the face of an excess of private saving over private investment at full employment, and an excess of the private desire to hold net financial assets over the private-sector supply of financial liabilities, are based on solid national income and financial accounting. They are thus compatible with different macroeconomic theories regarding long-run equilibrium and adjustments towards it.

Cross-Country Connectedness in Inflation and Unemployment: Measurement and Macroeconomic Consequences

We bring the notion of connectedness (Diebold and Yilmaz, 2012) to a set of two critical macroeconomic variables as inflation and unemployment. We focus on the G7 economies plus Spain, and use monthly data –high-frequency data in a macro setting– to explore the extent and consequences of total and directional volatility spillovers across variables and countries. We find that total connectedness is larger for prices (58.28%) than for unemployment (41.81%). We also identify asymmetries per country that result in higher short-run Phillips curve trade-offs in recessions and lower trade-offs in expansions. Besides, by exploring time-varying connectedness (resulting from country-specific shocks), we find that volatility spillovers magnify in periods of common economic turmoil such as the Global Financial Crisis. Our results call for an enhancement of international macroeconomic policy coordination.

The Question of ECO Stowage: A Response from the Study of the Misalignment of the CFA Franc in WAEMU

The objective of our work is to provide an answer to the question of whether or not to link ECO to EURO. For this, we assume that CFA franc is constantly misaligned. Based on WAEMU’s equation of the real exchange rate estimated, we obtain the series of the real exchange rate of balance and the level of misalignment through the HP approach. We use annual WAEMU data for the period 1980-2017 from the World Bank, the International Monetary Fund and the Central Bank of West African States. This result questions the effectiveness of a fixed stowage of the new currency, the ECO to the EURO. However, before the adoption of this new currency, the evaluation of the position of exchange reserves in ECOWAS is necessary. In addition, strengthening productive capacity and better coordination of macroeconomic policies within the ECOWAS economies is highly recommended. It would also be wise to reconsider the budgetary management of ECOWAS states member in order to achieving more convergence.

Operational aspect of the policy coordination for financial stability: role of Jeffreys\u2013Lindley\u2019s paradox in operations research

This study analyses the implications of Jeffery–Lindley’s paradox and Global Financial Crisis (GFC) for the operational aspect of macroeconomic policy coordination for financial stability. Using a Bayesian Vector Auto-regressive model and data from Jan 1985 to June 2016, our key findings suggest that the claim of macroeconomic policy interaction, interdependence and significance of coordinated policy operations for the financial stability holds its ground. The argument in the support for policy coordination for financial stability was found to be robust against the Jeffreys–Lindley’s paradox and in the Post-GFC era. A profound practical, operational and philosophical implication of this study is the positive aspects of Jeffreys–Lindley’s paradox and the possibility of employing the Frequentist and Bayesian estimation techniques as complementing rather competing frameworks.

International Financial Crisis: Expectation Transmission and Policy Synchronisation

In recent years, the economic and financial linkages of major economies have become intertwined, and the cross-market contagion effect of the global financial crisis has become more apparent. This paper mainly studies the expectation transmission and policy synchronisation in international financial crisis, netting out influence of fundamental-based factors. Contributions of this paper are two folds. First, we innovatively calculate and utilize expectation gap and policy gap. We apply Taylor Rule regression to different expectation and monetary policy stance variables, and uses respective residuals as expectation gap and policy gap. We measure expectation transmission and policy synchronisation by correlation of expectation gap/policy gap between originating economy and affected economies. Second, we innovatively propose financial accelerator in open economy and Taylor Rule augmented by international factors as respective theoretical basis of expectation transmission and policy synchronisation. Our empirical study covers four international financial crises and 24 economies, and finds that expectation transmission and policy synchronisation are generally significant in the four crises. Transmission efficiency varies because of financial openness, financial stability and regional integration. Economic weight of the originating economy also exerts influences. These results convincingly support the theoretical analysis in this paper. Based on above results, this paper proposes relevant policy recommendations, such as to strengthen expectation management, to strike balance between domestic and international equilibrium, and to strengthen international macroeconomic policy coordination.

Fiscal-Monetary Policy Interactions and Macroeconomic Performance in a Small Open Economy: A GMM Approach

The study investigates the nature and the effect of fiscal and monetary policy interactions on major macroeconomic variables in a small open economy of Nigeria between 1981 and 2018. The paper employs the generalized method of moment as technique of analysis due to its potential to address the endogeneity issues among the explanatory variables. Findings from the study reveals that interest rate and government expenditure have significant effect on output and inflation. Also, the study finds that fiscal and monetary policy interact as strategic substitutes in Nigeria. This implies that when one policy authority pursues a contractionary measure, the other policymaker counteracts the action using an expansionary policy. It is also revealed that the effect of fiscal and monetary policy interactions on output and inflation is negative and significant. This implies that the two policies perform better when combined in achieving price stability and sustained output growth in the country. Based on the findings, there is a need for macroeconomic policy coordination in Nigeria to optimise the macroeconomic objectives of the country.

Twenty years of the G20: Has it changed global economic governance?

The G20 has become the preeminent forum for international economic coordination. Twenty years after its creation, the paper reviews its performance with respect to the coordination of macroeconomic policies. The retrospective assessment focuses on two main questions: (i) Have the G20 summits succeeded in promoting macroeconomic policies with positive cross-border consequences, while preventing the opposite? (ii) To what extent has expanding the G7 to a diverse group of emerging and developing economies significantly changed the discourse and affected substantive outcomes? We argue that the G20 played a key role during the crisis of 2008, but policy coordination has been problematic since. Our review suggests that the G20 Presidencies of the emerging economies have made considerable efforts to shape the agenda toward issues of their interest, but have not always prevailed, notably on issues of global financial governance.

EVOLUTION AND CONTEMPORARY TRENDS OF THE INTERNATIONAL MONETARY SYSTEM

The growth dynamics of international exchange and capital flows is conditioned by the efficiency of the international monetary system whose basic task is to provide for international liquidity and smooth international payments. The tendencies in international economic relations in the time of globalisation have determined further directions for the development of the international monetary system. The breakup of the Bretton-Woods System initiated  the establishment of a new European monetary system with the aim to stabilise the exchange rates and  improve further process of integration and international economic relations. In this research paper we have pointed out to the  fact  that economic interdependence of souvereign countries leads to coordination of macroeconomic policies, and that it  can motivate  monetary integration within the monetary policy. The objective of this research paper is to emphasize the stability of the international monetary system as a prerequisite for sustainable growth of national economies and monetary union. The contemporary international monetary system is characterised by the trend of reduced number of national currencies, as this is  a  logical conseqence of increasing European integrations, but also beacuase of significant economic advanatages. Simultaneously, the costs of the euro changeover and introduction of a common currency are lower if economic performances of member countries mutualy converge.

Is Employment Globalizing?

We investigate the claim that national labor markets have become more globally interconnected in recent decades. We do so by deriving estimates over time of three different notions of interconnection: (i) the share of labor demand that is export induced (i.e., all labor demand created by foreign entities buying products exported by the home country)—we provide estimates for 40 countries; (ii) the share of workers employed in sectors producing tradable goods or services—68 countries; and (iii) the ratio of the number of jobs that are either located in a tradable sector, or that are involved in producing services that are required by these tradable sectors, to all jobs in the economy, which we call the trade-linked employment share—40 countries. Our estimates lead to the conclusion that the evidence of a large increase in the interconnections between national labor markets is far weaker than commonly asserted: levels of inter-connectivity, and the direction of changes over time, vary across notions of interconnection and countries. The main reasons for this are labor-displacing productivity growth in tradable sectors of each economy and the diminishing fraction of national labor forces hired into manufacturing jobs worldwide. We also discuss the implications of our results for different policy debates that each of the three measures is associated with: international coordination of macroeconomic policies (export-induced labor demand), currency devaluations (share of workers producing tradables), and education and labor protection (trade-linked share).

Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.

Intergovernmental or supranational integration? A quantitative analysis of pension recommendations in the European Semester

The European Semester, launched in 2011, enhances the coordination of macroeconomic policies among European Union member states. This article contributes to the lively scholarly debate on whether this policy-making cycle has empowered more the European supranational or intergovernmental institutions. Drawing on a new dataset covering all pension-related country-specific recommendations between 2011 and 2016, and employing an original quantitative method, we show that the Commission mainly follows a ‘technocratic’ approach in drafting its recommendations, which are grounded in objective indicators. As the Council refrains from systematically altering the recommendations’ logic, we conclude that, at least in pension policy, the Commission’s role in macroeconomic surveillance has been significantly strengthened in the aftermath of the Great Recession.