Output effects of fiscal consolidations
Carlo Favero, Francesco Giavazzi 07 September 2012
The austerity debate hangs on the question of how fiscal policy affects economic output – but answering that question is no easy task. This column presents a paper that, it argues, overcomes some of the problems with identifying cause and effect.
The austerity debate turns on a central economic logic – how does fiscal policy affect output? This is a tricky question since declining output can affect fiscal policy just as much as fiscal policy can affect growth. Governments, after all, don’t make policy in a vacuum.
The key to estimating the effects of fiscal policy on output is this identifying shifts in fiscal policy that are 'exogenous'. Policy changes that are not a response to the state of output – as would be the case, for instance, of a fiscal expansion induced by a fall in output.
Global crisis Macroeconomic policy
fiscal policy, fiscal crises, austerity
Fiscal consolidation and reforms: Substitutes, not complements
Coen Teulings 13 September 2012
Many OECD countries suffer from high sovereign debts. Sooner or later, this problem must be addressed. Many argue that this will require some form of fiscal retrenchment or institutional reform or a combination of the two. This column argues that the two are not complements as many suggest – they are instead substitutes.
Many OECD countries suffer from high sovereign debts. Sooner or later, this problem must be addressed. That will require some form of fiscal retrenchment.
Quite often the fiscal problems are due to market rigidities, barriers to entry, and distortive tax systems. A programme of reform must therefore include both fiscal consolidation and institutional reform to enhance future growth. Growth and the larger tax base that goes with it provides the best prospect for solving the fiscal problems.
Macroeconomic policy Taxation
Institutional reform, fiscal crises, Fiscal retrenchment, austerity
Rethinking austerity: Introducing a new Vox eCollection
Giancarlo Corsetti 23 June 2012
The French and Greek elections, together with a softer than expected Eurozone macroeconomy, are forcing a rethink of the austerity-only solutions embraced by political leaders across Europe. This column introduces an ‘eCollection’ that brings together analysis by a dozen leading thinkers on austerity. The book also launches ‘eCollection’ , a new VoxEU.org vehicle for disseminating research-based policy analysis by the world’s top economists.
Even as the first Vox eCollection is going online, the global economy is being shaken by events ranging from a Chinese economic slowdown to the possibility of a delayed Greek Eurozone exit. The fact that such events can be viewed as dangerous for the world economy as a whole is a powerful testimony to how profoundly fragile are macroeconomies and financial sectors in the mature economies – four and half years after the eruption of the global crisis.
fiscal crises, austerity
A tale of two overhangs: The nexus of financial sector and sovereign credit risks
Viral Acharya, Philipp Schnabl, Itamar Drechsler 15 April 2012
The deadliest aspect of the Eurozone crisis is the tripwire linking the riskiness of banks and governments. This column provides evidence of the link and explains how it arose. It argues that given the near-chaos-like interaction, the zero risk weights on sovereign bonds should be revisited.
From 2007 to 2010, the Irish public debt-to-GDP ratio rose roughly 20% annually, taking it from among the lowest among OECD countries in 2007 (25%) to among the highest in 2010 (96%). Irish banks had looked increasingly vulnerable in the autumn of 2008 with their credit default swap (CDS) spreads – which is just the cost of buying protection against bond default – having reached a peak (on average across the four largest banks) of over 400 basis points in September 2008.
Global crisis International finance
sovereign debt, Bailouts, fiscal crises, Eurozone crisis
What can Europe learn from Sweden? Four lessons for fiscal discipline
Lars Calmfors 12 March 2012
Several Eurozone countries are currently struggling with acute fiscal crises. This column argues that Sweden provides an example that fiscal transparency and a high-quality economic policy debate may be more important for budget discipline than formally binding rules and automatic correction mechanisms as being envisaged in the European fiscal compact.
Several Eurozone countries are currently struggling with acute fiscal crises (eg Corsetti and Müller 2012). At the same time, the new fiscal compact is an attempt to beef up fiscal frameworks for the future. In order to judge both the fiscal consolidation efforts and the reforms, comparisons with economies that have in the past carried through such processes successfully are helpful.
Sweden, fiscal policy, fiscal crises
The ECB’s trillion euro bet
Charles Wyplosz 13 February 2012
Spreads on public debts in the Eurozone – with the exception of Greece – are falling hard and fast. This column argues that this is in large part because the ECB is now effectively guaranteeing Eurozone government debts. But it cautions that in doing so, the central bank is taking enormous risks.
With immense modesty, the President of the ECB Mario Draghi is giving the credit for falling spreads on Eurozone government debt to the courageous reforms announced in a number of countries, especially those where former academic economists act as prime ministers. Oh, how we would love to buy Mario Draghi’s interpretation! While simultaneity is not causality, it is hard not to see a link between the impressive decline in bond spreads and the ECB’s long-term refinancing operations (LTROs).
EU policies Europe's nations and regions
ECB, fiscal crises, Eurozone crisis
The unexplained part of public debt
Camila FS Campos, Dany Jaimovich, Ugo Panizza 17 January 2012
How do countries get into debt? And how does this debt rise so fast? The short answer may be obvious, but this column shows that the longer answer certainly isn’t.
The answer to the question “How do countries get into debt?” seems trivial. The stock of debt is equal to the sum of past budget deficits. Countries accumulate debt whenever they run a budget deficit and reduce their debt when they run a budget surplus.
sovereign debt, fiscal crises
The global saving glut will hold bond yields down
Heleen Mees 08 August 2011
As fears mount of another phase in the global crisis, this column points out that despite the growing uncertainty, US Treasury and German Bund yields have actually declined in recent weeks. The reason, it argues, is the global saving glut theory.
The saving glut theory has gone out of fashion – unjustly so. In spite of twin financial crises looming on either side of the Atlantic, US Treasury and German Bund yields have declined in recent weeks. This can be explained by not only the dismal economic growth of the US economy in the first semester of 2011, but also the unrelenting build-up in total debt securities outstanding.
US, global imbalances, China, global crisis, fiscal crises, Eurozone crisis
Is Greece different? Adjustment difficulties in southern Europe
Daniel Gros, Cinzia Alcidi 22 April 2010
The fiscal crises faced by countries in southern Europe have led many commentators to group them together in their analysis. This column argues that the causes of these overvalued currencies and twin deficits are different. For Greece and Portugal the problem is insolvency; for Ireland and Spain, illiquidity. Italy has a higher savings rate and its foreign imbalances are much smaller.
The Southern members of the Eurozone are often lumped together because they all have overvalued currencies and twin deficits – fiscal and external current account (De Grauwe 2010).
Europe's nations and regions
Southern Europe, fiscal crises, Eurozone crisis