Fiscal spillovers in the Euro area

Transcription

1 Fiscal spillovers in the Euro area Fabio Canova, EUI and CEPR Matteo Ciccarelli, ECB Pietro Dallari, UPF November 23

2 Introduction The nancial crisis has put scal policy back in the spotlight of academic research (e.g. Hall, 29, Woodford, 29, Canova and Pappa, 2; Auerbach and Gorodnichenko, 22). Important academic discussion about the eects anticipated vs. unanticipated scal shocks (e.g. Ramey, 2, Leeper et al., 22). Renewed institutional debate on the size of the scal multiplier (e.g. IMF, 22; Mertens and Ravn 22; Blanchard and Leigh, 23). Policy debate regarding the Euro area eects of Mediterranean countries. scal contractions in

3 Theory: eects of scal contractions may depend on the state of the economy, level of debt, monetary policy stance, condence of private agents, exchange rate regime, etc. Empirics: still unclear what are the macroeconomic consequences of scal policy actions, the channels of domestic and international transmission, and the eects of a coordinated scal retrenchment in a situation of high debt, nancial weakness and low condence.

4 Measure the spillovers of scal shocks in the Euro area. - Construct a (historical) measure of the scal stance. - Explore the domestic eects of unexpected expenditure cuts and their international transmission. - Measure (domestic and international) output multipliers. - Investigate the eects of coordinated vs. idiosyncratic changes. - Study the eects of expenditure reducing vs. decit reducing policies. - Compare pre and post crisis transmission.

5 Related literature - Auerbach and Gorodnichenko (23), Faccini et al. (22), Corsetti and Mueller (22): Open economy multipliers. - Beetsma and Giuliodori (2): Multipliers and REE eects in the EU. - Benassy-Quere and Cimodamo (26); Beetsma et al. (26), (28) Trade eects. - Alesina et al. (22); Batini et al. (22); Hall (22): Consequences of scal consolidations. - Corsetti et al. (22), Iltzeski et al. (22), Christiano et al. (2), Caldara and Kemps (22), Erceg and Linde (22), Leeper et al. (2), Woodford (29): What determines the size of the multipliers?

6 Yesterday... Atif Mian: Not enough risk sharing in Europe Rudolfs Bems: Important expenditure switches driven by falls in income not in relative price changes. Jordi Gali: Internal devaluation may not be successful. Emmaneul Farhi: Demand externalities. Same themes come up in this paper.

7 Findings ) Contractionary expenditure shocks in the periphery have heterogeneous domestic eects. Trade balance (import) dynamics key to understand cross-country dierences. 2) The eects on debt and long term yields are small or perverse: the signalling eects of contractionary measures in nancial markets limited. 3) International transmission important also before 28. Trade channel crucial. 4) Decit cuts have larger eects than expenditure cuts, both domestic and internationally.

8 5) Magnitude of the spillovers in perifery changes after 28; responses become more homogeneous. 6) Virtuous domestic eects disappear in periphery after 28; the core seems to benet more - redistribution shock.

9 2 The empirical model Panel VAR model (e.g. Canova and Ciccarelli, 29): y it = D i (L)Y t + F i (L)W it + e it () e it N (; i ) y it : G ; Y t = (y t ; : : : y Nt ) ; i = ; ::; N (countries); t = ; ::; T (time) - Variables are demeaned, standardized, year-on-year growth rates. - Allows for dynamic and static interdependencies. - Allows for cross sectional heterogeneity in dynamic relationships and the variance of the error vector.

10 Model (in regression format): Y t = Z t + E t E t N (; ) (2) - Curse of dimensionality: Factor structure for coecients (shrinkage prior): = u u N(; 2 I) (3) - : movements in the coecient vector which are country-specic; 2 : movements which are variable-specic; etc. Kroneker structure for the variance: = P V, where P is NxN matrix, V is GxG matrix.

11 Fiscal stance indicators An indicator of the scal stance in country i is NF I jit = Z t i i + Z t 2i 2j An indicator of the aggregate scal stance is RF I jt = NX i= Z t i i + Z t 2i 2j - Z t 2i 2j could be either the decit or the debt variable. Eects of exogenous variables netted out - Gives historical record: the stance loose if indicator is positive; it is tight if indicator is negative.

12 Inference Structural changes: Rolling window estimation with 8 years of data. Identication: Blanchard-Perotti style restrictions i.e. domestically, government expenditure is assumed to be predetermined relative to other domestic variables except for local output. - To be changed in future versions: plan to use both sign and (relative) magnitude restrictions. Output Multipliers: computed as in Auerbach and Gorodnichenko (22).

13 3 The data Seven countries (87 percent of the area GDP): Greece, Italy, Spain and Portugal (Periphery); France, Germany and the Netherlands (Core) Eight endogenous variables: real government consumption expenditure (G), total government revenues (T), total gross government debt (D), real gross domestic product (Y), real total private consumption (C), real total xed investment (I), capital account (CA), and -years bond yields (LR). Six exogenous variables (short term rate, GDP and CPI in US and EA) plus G forecasts by OECD - to control for predictable components, see Ramey (2). Sample: 99: to 2:4.

14 4 The Results - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission pre crisis - Post crisis transmission/multipliers - Government vs decit cuts

15 Aggregate debt based fiscal stance

16 Country specific debt based fiscal stance.5.5 Greece Italy Portugal S pain France 95 5 Germ any 95 5 Netherlands 95 5

17 Aggregate deficit based fiscal stance

18 Country specific deficit based fiscal stance 2 2 Greece Italy Portugal S pain France Germ any Netherlands

19 - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission pre crisis - Post crisis transmission/multipliers - Government vs decit cuts

20 NX I C Y G Greece Italy Portug al Spain

21 Greece Spain Italy Portugal

22 CA R Debt G Greece Italy Portugal S pain

23 Large cross country heterogeneities Dynamics of the trade balance crucial to understand domestic eects Eect on long term interest rates initially perverse.

24 - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission pre crisis - Post crisis transmission/multipliers - Government vs decit cuts

25 How big are multipliers? - Spilimbergo et al. (29): Average (domestic) multipliers.5, most values above zero but below the mean. - Gechert and Will (22), Andres and Domenech (22): Average (domestic) multipliers (.5,.), depending on instrument and estimation method. - Size depends: (i) nancial frictions; (ii) instrument and level of debt; (iii) nominal and real rigidities; (iv) monetary policy stance; (v) exchange rate regime; (vi) degree of openness; (vii) individual vs. coordinated actions; (viii) credibility of measure (Iltezky, et al (22), Corsetti et al (22), etc.).

26 Short term multipliers (2 quarters) Greece Italy Portugal Spain Common Greece.35* -.3*.4*.3* 6* Italy.75* -7*.4*.3* 7* Portugal.36* -.32*.9*.3*.5 Spain -.68* 4* 8* -..5 France -2.57* y -.3*.32*.4* -.8* Germany -.44* -.35*.8* -.34* Netherlands.7*.77* -.3* -.6.7* Medium term multipliers (2 quarters) Greece.6.4*.9*.8*.6* Italy -.4 * *.3*.46* Portugal *.*.5*.4 Spain.35 3* 5*.9* 4* France * 4* 8* -.46* Germany *.7*.5* -.4 Netherlands * -.9*..54* *=posterior credible set above, y=posterior credible set above. Sample 99-27

27 Domestic multipliers typically less than.5. Positive short run eects in periphery from Italy consolidation. Spillovers to core more important than spillover to periphery. Medium term multipliers smaller - eect dies out. Multipliers for common and individual shocks similar - externalities due to second round eects small.

28 - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission - Post crisis transmission/multipliers - Government vs decit cuts

29 NX Spread CA Expenditure Impulse in Italy France Germ any.6 Netherlands

30 NX Spread CA Expenditure impulse in Spain France Germ any N etherlands

31 Evidence of contagion (even before 28) Net export in the core generally improves. Current account balance mixed.

32 - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission crisis - Post crisis transmission/multipliers - Government vs decit cuts

33 NX I C Y G Greece Italy Portugal S pain

34 CA R Debt G Greece Italy Portugal S pain

35 Expenditure responses permanent everywhere. Virtuous output eect for outlay disappear, but appears after Spain contraction. Response of output still driven by NX; I generally down, C unchanged. Debt response sticky, declines in medium run. Long rate and current account dynamics mixed.

36 Short term multipliers (2 quarters) Greece Italy Portugal Spain Common Greece.5* * Italy Portugal.56*.59*...4* Spain -.99*. -2* -* -.4* France -.59*.4.6* 5*.55 Germany -.37* -.36*.6* * Netherlands -.67* * * Medium term multipliers (2 quarters) Greece.38* * Italy -.36* Portugal..44*.8..44* Spain -.79* * France *.6. Germany -.43* * Netherlands -.72* 2 -.4* * *=posterior credible set above, y=posterior credible set above. Sample 994-2

37 Multipliers in the periphery generally smaller in this sample. Common shock multiplier much larger than individual shocks - externalities larger. Eect on the core countries now larger and mostly negative, especially on Germany - redistributive shock. Why is the core benetting? Euro depreciates. Germany better o more because of higher productivity and export oriented economy.

38 - Indirect evidence: Broyer, Petersen, Schneider, 23: The impact of the euro crisis on the German economy, Allianz, wp 54. i) The Euro has depreciated 5 percent since 29 ii) Germany merchandise export: widening gap

39 NX R CA Common shock France Germ any N etherlands

40 - Fiscal Indicators - Domestic Transmission pre crisis - Multipliers pre crisis - International Transmission crisis - Post crisis transmission/multipliers - Government vs decit cuts

41 Short term multipliers, Decit consolidation Greece Italy Portugal Spain Common Greece.32*.8* -.4* * Italy.45* -.73* -.4* * Portugal.3*.76* * Spain -2.3* y.65* -.35* -9* -.87* y France 2.4* y.74*.56*.3* 3.67* y Germany -.8*. -.49* -.3* -.58* y Netherlands -2.82* y * * y Medium term multipliers, Decit consolidation Greece.86*.36* -* -.2.9* Italy * -.4-6* Portugal * Spain -.39* y.72* -.4* * France.87*.69*.3..78*y Germany -.82* 8* -.54* * Netherlands -.93*y. -.5* *y *=posterior credible set above, y=posterior credible set above. Sample

42 Much larger multiplier than when expenditure is cut. Italy output up to Italian and common decit cut shock. Spain output up to Greece, Italy, Spain and common shock.

43

44 5 Still to investigate - Large consolidation shocks (as in Canova and Pappa, 2). - Labor market eects. - Why does the trade balance of core improves after a contractionary scal shock in the periphery? Euro rate dynamics. - Conditional forecasts: Consequence of debt decline by 5 percent permanently: immediate or gradual. - Non-Euro area repercussions: UK?, Nordic countries?