Macroeconomic Policy Design Research Articles

Estimation of SAM for India: An Application for India’s Energy Transition Targets

The social accounting matrix (SAM) for India was historically constructed based on the input–output table (IOT). However, since 2011–2012, the Government of India has been publishing the supply–use table, instead of the IOT. While the erstwhile IOT, published by the Government of India, had the same number of products and industries, the supply–use table provides one ‘supply matrix’ and one ‘use matrix’, each of which is a rectangular table with 140 products and 66 industries (for 2018–2019). Converting the supply–use table to a square IOT and subsequently extending it to SAM require the utilisation of various data sources, numerous steps and adjustments. Despite the usefulness of both IO and SAM matrices in macroeconomic policy design, not much literature is available on these. This study aims to bridge the gap by constructing IOT and SAM for India from the supply–use table incorporating information from many other sources and describing the method of construction of the matrices. Our IO and SAM also focus on various energy sectors, including different sources of power generation, biomass and so on, and disaggregate energy-intensive sectors like cement or aluminium, considering the immense usefulness of the energy-extended macro-structure to the research of energy and environment policies. The study focuses on the construction of a 59 × 59 SAM for India, with the base year of 2021–2022 incorporating three factors of production and ten categories of households. As an application of the newly constructed SAM, we have analysed the employment implication of India’s Nationally Determined Contribution emission commitments. JEL Codes: E16, C67, D57

Approximate Nash Equilibria for Discrete-Time Linear Quadratic Dynamic Games

It is generally challenging to determine Nash equilibrium solutions of nonzero-sum dynamic games, even for games characterised by a quadratic cost and linear dynamics, and particularly in the discrete-time, infinite-horizon case. Motivated by this, we propose and characterise a notion of approximate feedback Nash equilibrium solutions for this class of dynamic games, the ϵα,β-Nash equilibrium, which provides guarantees on the convergence rate of the trajectories of the resulting closed-loop system. The efficacy of the results is demonstrated via a simulation example involving macroeconomic policy design.

Pandemic recession and helicopter money: Venice, 1629–1631

We analyse the money-financed fiscal stimulus implemented in Venice during the famine and plague of 1629–31, which was equivalent to a ‘net-worth helicopter money’ strategy – a monetary expansion generating losses to the issuer. We argue that the strategy aimed at reconciling the need to subsidize inhabitants suffering from containment policies with the desire to prevent an increase in long-term government debt, but it generated much monetary instability and had to be quickly reversed. This episode highlights the redistributive implications of the design of macroeconomic policies and the role of political economy factors in determining such designs.

Rising Corporate Market Power

Corporate market power has risen in recent decades, and new estimates in this note suggest that the likely wave of small and medium-sized enterprise bankruptcies from the ongoing pandemic will further strengthen market concentration. Whether and how policymakers should address this issue is hotly debated. This note provides new evidence on the policy relevance of rising market power and highlights possible implications for the design of competition policy frameworks and macroeconomic policies.

Evaluating the impact of violence against women in the macroeconomic Input–Output framework

Violence against women and girls (VAW&G) has progressively become an emergency issue in many European countries and a relevant topic of public discussion. In this paper, we attempt to insert this theme within a model for macroeconomic policy design and evaluation. Special attention is devoted to the assessment of distortions in the allocation of public expenditure generated by VAW&G, in terms of gains and losses in aggregate total output. We adopt a macroeconomic input–output approach by adding to the framework an industry that produces care services to victims of VAW&G. The resulting model is integrated with the public expenditure reallocations that emerge as a result of the progressive elimination of violence. It is, thus, a simulation tool for determining total output gains or losses that emerge from the reallocation of public expenditures as VAW&G fades.

Estimating the household consumption function in Saudi Arabia: an error correction approach

ABSTRACTWe estimate a micro-founded life-cycle consumption model for Saudi Arabia over the period 1970–2017 using error correction model procedures. Dynamic adjustments are significant, and both income and wealth are found to have significant effects, with a long-run marginal propensity to consume out of the income of 0.95 and out of the wealth of 0.06. The sensitivity of consumption to income and wealth, as well as the estimated short-term effects of price and real interest rate, are consistent with the rapidly growing Saudi economy. By capturing the key determinants of the life-cycle model, our approach is useful for the design of macroeconomic policy. We estimate the impact of the recent VAT reform.

The Effect of Insurance Activity on per Capita Income in the Southern Mediterranean: An Empirical Analysis Using Jordan as a Case Study

This study examines the effects of insurance activity on per capita income in the case of a southern Mediterranean country (Jordan) over the period 1990-2017 using an Autoregressive Distributed Lag (ARDL) cointegration analysis to describe the dynamic long relationship between per capita income and insurance activity. It provides empirical evidence that insurance sector activity, measured by insurance investment, had a negative and significant effect on per capita income in Jordan during the studied period. However, it was also found that the negative effects of insurance sector activity on growth were limited by other economic policies which hamper per capita growth, such as inflation. The study recommends that more diversification of insurance products is necessary and that new markets need to be explored in order for insurance companies in southern Mediterranean countries to compete in international markets. Although there are several agreements between Mediterranean countries, negotiations on minimizing restrictions on insurance company activities could be done through easing procedures, reducing costs and enhancing future economic relations by exploring new economic relations or by building on current protocol and trade agreements. Furthermore, the study notes that policymakers in southern Mediterranean countries must aim for a well-developed insurance sector so that its activity can contribute to economic growth through mobilizing national saving to finance long-term investment projects. More attention should be paid throughout the region to insurance sector activities while conducting financial sector analysis and macroeconomic policy design.

Capital Accumulation, Asset Price Dynamics and the Macroeconomy

This article develops a dependent economy model of determination of employment and asset prices that integrates the roles of relative prices, expectations and dynamics of capital accumulation. In this model, money wage is rigid which leads to persistence of unemployment. Labour and capital are used as factors of production in the traded sector while the non-traded sector uses labour and imported intermediate inputs. The article examines macroeconomic implications of selective economic reforms for asset price dynamics, growth and employment. The discussion of comparative static exercises shows that not only the effects of different policies are ambiguous but also the short-run and the long-run effects are qualitatively different. For example, tariff liberalization causes the short-run expansions of both traded and non-traded sectors but overtime it may depress the capital stock leading to contraction of both the sectors and an increase in unemployment. The broad message of this article is that the design of macroeconomic policy should not be purely based on considerations of the short-run effects of policy changes. JEL: E22, F13, F41

Institutional Design, Macroeconomic Policy Coordination and Implications for the Financial Sector in the UK

AbstractThis study has analysed the implications of institutional design of macroeconomic policy making institutions for the macroeconomic policy interaction and financial sector in the United Kingdom. Employing a Vector Error Correction (VEC) model and using monthly data from January 1985 to August 2008 we found that the changes in institutional arrangement and design of policy making authorities appeared to be a major contributing factor in dynamics of association between policy coordination/combination and financial sector. It was also found that the independence of the Bank of England (BoE) and withdrawal from the Exchange Rate Mechanism led to the increase in macroeconomic policy maker’s ability to coordinate and restore financial stability. The results imply that although institutional autonomy in the form of instrument independence (monetary policy decisions) could bring financial stability, there is a strong necessity for coordination, even in Post-MPC (Monetary Policy Committee) and the BoE independence.

Empirical Estimates of Okun’s Law in Malta

This study presents various empirical estimates of Okun’s Law in Malta for the period 2000-2016. A better understanding of Okun’s relationship is important for the design of macroeconomic policies as well as for forecasting purposes. In Malta, the relationship between output and unemployment is relatively weak compared to other European countries. Among the demand components, unemployment is most sensitive to private consumption and exports. The relationship is also asymmetric, with the response of unemployment to output tending to be more pronounced during recessions. Stability tests suggest that Okun’s relationship is not stable, although the link has become more pronounced in recent years, while the unemployment rate consistent with full employment has been on a downward trend. Estimates from an unobserved components model suggests that Okun’s Law is quite robust at cyclical frequency, with potential time-variation in the relationship being ascribed to the trend components.

What drives international remittances to Africa

PurposeThe purpose of this paper is to investigate the macro-economic and institutional drivers of remittance inflows to Africa.Design/methodology/approachThe paper uses an enhanced gravity model in a random effects framework to test two hypotheses dominant in literature as well as the institutional quality hypothesis. A bilateral data set is created from the most recent available remittance data set to afford the capture of the impact of the selected macro-economic variables from both the host and recipient countries.FindingsThe results provide support for the trio hypotheses. A key finding is the co-existence of altruism and self-interest motives. Also, control of corruption, financial development and a reduction in unofficial economic activity are observed to facilitate remittance inflows. The authors confirm the resilience of remittances during the global crisis and document a positive significant relationship between remittance inflows on the one hand and host migration stock, age dependency, etc., on the other.Practical implicationsThis paper generates various insights in the design of relevant macro-economic and institutional policies to enhance remittance inflows and the productive use of the same for purposes of economic growth and development via poverty reduction and secure resource flow.Originality/valueThe majority of previous studies on the determinants of remittance inflows have basically focussed on the microeconomic variables, an approach that could understate the macro-economic impact of remittances and lead to inadequate policy formulation. The use of an enhanced gravity model on a newly created bilateral data set in the analysis is a nuance in the economics of remittances. Besides, previous studies have often ignored the institutional environment as critical in the remittance-determinant model.

International mobility of capital, wage indexation, and the cost of policy mistakes under ambiguity: a CGE evaluation

In this paper we focus on the role institutions and structural parameters play in macroeconomic policy design and test the differential effects of tax policies on two structural parameters: the degree of international capital mobility and the rules of wage indexation practiced in the economy. We evaluate counterfactual changes in taxation in the Argentine economy using a Computable General Equilibrium (CGE) Model with unemployment, calibrated with 2006 data, showing that policy mistakes (diagnosis failures) are costlier when the degree of capital mobility is greater and the rules to determine salaries could amplify the losses. Among other taxes, we evaluate the choice of export taxation, historically one of the preferred revenue sources of Argentine governments. We discuss the choice of taxes that an optimistic and a pessimistic policymaker will make under Knightian uncertainty and find that, in the case of our CGE, an optimistic policymaker prefers to tax export goods, while a more pessimistic one tends to tax imports or non-tradable goods.

Fiscal Stimulus in Economic Unions: What Role for States?

Executive SummaryThe Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy and, particularly, the importance of state and local governments to the center stage of macroeconomic policymaking. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies shows state deficits (in particular from tax cuts) can stimulate state economies in the short run, but that there are significant job spillovers to neighboring states. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? A structural vector autoregression (SVAR) analysis for the US aggregate economy from 1960 to 2010 shows federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower-income assistance both are effectiv...

Open economy macroeconomics of credit, employment and growth: A structuralist approach

In the context of the increasing size and integration of capital markets consisting of bonds, equity, foreign exchange, and financial derivatives and financial intermediaries namely, banks, investment funds, insurance and pension companies; two alternative sources of finance, viz. bank credit and equity finance can be identified to study how the interaction between the real sector and the financial sector occurs and plays an important role in shaping macroeconomic developments. The financial structure of a typical developing country is one in which bank credit plays an important role in the transmission of structural shocks to the macro economy. In this paper we build up a dynamic structuralist macroeconomic model focusing on interaction between the real sector and the monetary sector in an open economy. In its orientation the paper is close to the Blinder-Bernanke (1988) model. In particular we examine both short run and long run effects of expansionary fiscal and monetary policies, capital account liberalization captured by autonomous increase in net capital flow and devaluation. The paper differs from the flexible price, full employment models of open economy macroeconomics. If empirics indicate that financial variables are important for the determination of the real variables such as employment, output and current account, the existence of nominal rigidities provides an explanation for such real effects. Accordingly, we introduce wage indexation which generates unemployment in the long run. The major findings of the paper are these. Capital inflow and monetary expansion may produce favorable macroeconomic outcome, devaluation and fiscal expansion may have deleterious effect on growth potential of a developing country. Moreover the paper establishes conflict between short run and long run effects of policy changes alongside ambiguous relationships between policy shocks and macroeconomic variables. For example a fiscal expansion entails a positive effect on output in the short run and it reduces capital stock and real monetary base over time which nullifies the favorable short run effects. The paper suggests that design of macroeconomic policies is a difficult exercise for a developing country embedded in a globalised world. Given the policy objectives to control inflation, to reduce unemployment and to boost the growth potential of an economy, easy money policy is a viable option since it reduces the bank rate of interest and hence cost of working capital. Though capital account liberalization is a chancy proposition for a developing country we show that it works perfectly well by increasing capital stock.

Final Energy Demand in Portugal: How Persistent it is and Why it Matters for Environmental Policy

ABSTRACTThe objective of this paper is to examine the degree of persistence in final energy demand in Portugal. Our results suggest that when structural breaks are accounted for, aggregate energy demand and all of its components are stationary. Accordingly, the response to shocks is not permanent. We find, however, strong levels of persistence. Demand for electricity is the most persistent component of aggregate demand while the levels of persistence for petroleum and gas are similar and close to the aggregate level. In turn, demand for coal and biomass are also similar and the least persistent. These results have important implications for the design of macroeconomic policies. Indeed, high persistent levels mean that temporary energy shocks translate into persistent changes in energy demand and thereby in less transient shocks to the overall economy. These results are also important for the design of environmental policies. The fact that energy demand is highly persistent means that the effects of environmental policies will tend to be long lasting. Also, the relatively high persistence of electricity, gas and petroleum and the fact that their levels of persistence are similar suggests that fuel switching policies involving these fuels will be relatively easy to implement.

On the Value of Soil Resources in the Context of Natural Capital and Ecosystem Service Delivery

The ecosystem services approach endeavors to incorporate the economic value of ecosystems into decision making. This is because many natural resources are subject to market failure. As a result, many economic decisions omit the impact that natural resource use has on the earth's resources and the life support system it provides. Hence, one of the objectives of the ecosystem services approach is to employ economic valuation of natural resources in micro- and macroeconomic policy design, implementation, and evaluation. In this article we examine valuation concepts, and ask why we might attempt to economically value the contribution of soils to the provision of ecosystem services. We go on to examine economic valuation methods and review economic valuation of soils. By surveying prices of soils on the web we are able to make a first, limited global assessment of direct market value of topsoil prices. We then consider other research efforts to value soil. Finally, we consider how the valuation of soil can meaningfully be used in the introduction of improved resource management mechanisms such as decision support tools on which valuation can be based, within the UN's System of Environmental and Economic Accounts (SEEA) and policy mechanisms like Payments for Ecosystem Services (PES).

Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections

Fiscal multipliers are important tools for macroeconomic projections and policy design. In many countries, little is known about the size of multipliers, as data availability limits the scope for empirical research. This note provides general guidance on the definition, measurement, and use of fiscal multipliers. It reviews the literature related to their size, persistence and determinants. For countries where no reliable estimate is available, the note proposes a simple method to come up with reasonable values. Finally, the note presents options to incorporate multipliers in macroeconomic forecasts.

A Simple Method to Compute Fiscal Multipliers

Fiscal multipliers are important tools for macroeconomic projections and policy design. In many countries, little is known about the size of multipliers, as data availability limits the scope for empirical research. For these countries, we propose a simple method—dubbed the “bucket approach”—to come up with reasonable multiplier estimates. The approach bunches countries into groups (or “buckets”) with similar multiplier values, based on their characteristics. It also takes into account the effect of some temporary factors, such as the state of the business cycle.

Fiscal imbalances and output crises in Europe: will the fiscal compact help or hinder?

The eurozone crisis has involved sharp output declines and has generated much discussion about the appropriate design of macroeconomic policy both in terms of dealing with the contemporary situation and minimising the risks of future crises. Much of the debate surrounding the crisis has focused on fiscal policy. All but two member states of the European Union have signed a draft treaty, the ‘fiscal compact’, that seeks to eliminate structural fiscal deficits. This paper examines the relationship between fiscal balances and output shortfalls amongst the eurozone countries allowing for other factors. In the light of the findings it critically assesses the fiscal compact.

Does structural economic vulnerability matter for public indebtedness in developing countries?

Purpose– The purpose of this paper is to examine the effect of structural economic vulnerability of developing countries on their public indebtedness.Design/methodology/approach– The authors perform the analysis by the use of fixed effects technique where the standard errors are corrected by the Driscoll-Kraay (1998) method. The panel covers 96 developing countries over the period 1980-2008.Findings– The results suggest evidence of a “U-shaped” relationship between the structural vulnerability and the total public debt in developing countries. More particularly in low-income countries (LICs), the structural vulnerability appears to be a strong determinant of the build-up of the total public debt.Research limitations/implications– It would be interesting to extend the research to small Island developing states. Indeed, the authors do not include this group of countries because of lack of data, especially on the variable “quality of governance” for almost all countries of this group. Accordingly, the research should be extended to such countries as well as these data are available.Practical implications– The implications of the study is that international institutions, including those of the Bretton Woods should take into account the structural vulnerability of developing countries when designing development policies, especially the ones related to debt sustainability in developing countries and particularly LICs.Social implications– The fact of the international institutions to take into account the structural vulnerability in the design of international development policy, especially those related to debt issues will have major implications on the macroeconomic policy design by these developing countries as well as on poverty reduction.Originality/value– The added value of this paper is to use recent data on structural vulnerability to analyse the effect of the latter on public indebtdeness of developing countries.