The macroeconomic effects of fiscal policy in Greece

Transcription

1 The macroeconomic effecs of fiscal policy in Greece Dimiris Papageorgiou Economic Research Deparmen, Bank of Greece Naional and Kapodisrian Universiy of Ahens May 22, 23 and Disclaimer: The views expressed here are hose of he auhor and should no be inerpreed as reflecing he views of he Bank of Greece.

2 Wha his sudy does This paper quanifies he impac of he 2-2 fiscal adjusmen programme on he Greek macroeconomy in he conex of a micro-founded Dynamic Sochasic General Equilibrium (DSGE) model In Greece, we have spen oo much ime debaing on he coss versus he benefis of he ongoing fiscal consolidaion effor on he economy, bu have failed o provide quaniaive answers o quesions relaed o he effecs of differen policy insrumens on economic aciviy The goal if his paper is o fill his gap 2

3 A brief overview of he fiscal consolidaion measures Table : Planned and Acual Impac of he Fiscal Measures 2 Planned impac of he fiscal measures / GDP (%) Acual impac of he fiscal measures / GDP (%) Revenues Indirec axes Direc axes Toal Expendiures Governmen consumpion Governmen wages Governmen invesmen Governmen ransfers Toal Source: Auhor s calculaions, Minisry of Finance (2, 2), European Commission (2a,b, 2,22a), IMF (2). Noes: (i) The acual impac is compued as he change in he level of he policy variables found in daa beween 2 and 29 divided by GDP in 2. 3

4 Table 2: Planned and Acual Impac of he Fiscal Measures 2 Revenues Planned impac of he fiscal measures / GDP (%) Acual impac of he fiscal measures / GDP (%) Indirec axes Direc axes.2.4 Toal Expendiures Governmen consumpion Governmen wages -.8 Governmen invesmen Governmen ransfers Toal Source: Auhor s calculaions, Minisry of Finance (2, 2), European Commission (2a,b, 2,22a), IMF (2). Noes: (i) The acual impac is compued as he change in he level of he policy variables found in daa beween 2 and 2 divided by GDP in 2. 4

5 Mehodology We use a small-open economy DSGE model in he RBC radiion augmened wih a relaively rich menu of sochasic fiscal (ax-spending) policy insrumens DSGE models are micro-founded and provide a useful, widely-acceped framework for sudying he effecs of changes in fiscal (ax-spending) policy. Some ypical elemens of hese models are: Uiliy maximizing households Profi maximizing firms A governmen ha ses fiscal (ax-spending) policy Calibraion of he model environmen (explained below) We calibrae he model for he Greek economy and simulae i in order o accoun for he fiscal consolidaion measures adoped in Greece since 2 We quanify he impac on key macroeconomic variables such as real GDP, consumpion, employmen, he budge defici and he curren accoun. 5

6 Final consumpion and invesmen goods Households Liquidiy consrain households (no access o he financial and capial markes) Capial Labour Uiliy maximizing households (have access o he financial and capial markes) Governmen Labour marke in he privae secor Wages respond sluggishly o labour marke condiions Impored inermediae goods Foreign economy Final goods firm Inermediae goods Monopolisically compeiive inermediae goods firms Impored inermediae goods Expors 6

7 The heoreical model Opimizing households Preferences i c i 2 i 2 g ( C C ) ( L ) Y i c i i g u C C, L, Y () Time consrain L H H (2) i i, p i, g Budge consrain P C I B Q F w H w H c c i i i i l p i, p g i, g r u K R B R Q F G k k i i, p i b i i i, r lu (3) 7

8 Law of moion of privae capial I K u K S I i i, p p i, p i i I (4) Liquidiy consrained households Budge consrain P C w H w H G (5) c c j l p j, p g j, g j, r 8

9 Firms Final goods producers A perfecly compeiive final good producer maximizes profis, aking he price of each inermediae good as given: max Y f subjec o d f f Y p Y df (6a) d f Y Y df (6b) The inverse demand funcion for he inermediae good f is: p f Y Y f d 9

10 The consumpion good producer chooses oupu, maximize profis: d m C, and inpus, C, C, o c c c c d m P C C QC (7a) subjec o c d ( ) m C C C (7b) The implied demand funcions for domesic and impored consumpion goods are: C C C C d c m c P c P c Q (7c) (7d)

11 Inermediae goods producers Each inermediae goods chooses f K, f H, f IM, in order o maximize profis: f f f k f p f f p Y r K w H Q IM (8a) subjec o a f f f f a g 2 3 Y A K IM H K (8b) a The firs-order condiions are f k f p a f K r w Q Y Y Z f p f p a2 f H Y Z f f p a f IM Z (8c) (8d) (8e)

12 Wage seing in he privae secor We assume ha real wages respond sluggishly o labour marke condiions: p p n n w w MRS (9) where n is an index of real wage rigidiies. The basic idea behind his specificaion is o capure a number of possible sources of imperfecion ha have been found o characerize he Greek labour marke, e.g. insiuional and legal rigidiies, safey nes ec 2

13 Governmen Governmen budge consrain B Q F P C w H w H r K g g c c l p p g g k k G G G w H R B R Q F c i r g g b g g lu () Producion of public goods g c x g x Y A G H () Law of moion of public capial sock: K K G (2) g g g i 3

14 World capial markes We assume ha domesic households and he governmen pay a risk-premium when hey paricipae in he inernaional markes: D Q F R R ( d ) ( f ) * d f Y Y (3) Foreign demand Foreign demand for he domesically produced good, deermined by foreign income and he real exchange rae: X, is assumed o be x X Q Y, (4) * 4

15 Sochasic environmen We assume ha each of he exogenous fiscal policy insrumens c l k c i r g g {,,, G, G, G, w, H } evolve according o he sochasic process: Z Z Z Z (5)

16 Soluion of he model We solve for a decenralized compeiive equilibrium in which (i) households maximize uiliy, (ii) firms maximize profis, (iii) all consrains are saisfied and (iv) all markes clear Solve for he economy in he long run (seady-sae) Calibraion of he model enviromen 6

17 Policy Reforms Mehodology We follow he approach in Uhlig (2)-AER. The approach is summarized as follows: The saring poin of our model economy is he second quarer of 2 (firs Memorandum). In urn, deparing from he benchmark calibraed economy we examine he effecs of changes in he exogenous fiscal policy insrumens. The fiscal policy insrumens follow a sochasic AR (2) process and we choose he roos and he iniial shock so ha he simulaed daa o mimic as close as possible he acual daa for he fiscal policy variables over he period 2q2-22q4. 7

18 % Poin Deviaion % Poin Deviaion % Poin Deviaion. Macroeconomic impac of an increase in he labour income ax rae Real Oupu Employmen-Privae Secor Privae Invesmen Toal Privae Consumpion Real Exchange Rae Expors Impors Curren Accoun Balance / GDP Primary Balance / GDP Tax Rae on Labour Income Trade Balance / GDP

19 % Poin Deviaion % Poin Deviaion % Poin Deviaion 2. Macroeconomic impac of an increase in he capial income ax rae Real Oupu Real Exchange Rae Curren Accoun Balance / GDP Employmen-Privae Secor Expors Primary Balance / GDP Privae Invesmen Impors Tax Rae on Capial Income Toal Privae Consumpion Trade Balance / GDP 9

20 % Poin Deviaion % Poin Deviaion % Poin Deviaion 3. Macroeconomic impac of an increase in he consumpion ax rae Real Oupu Real Exchange Rae Employmen-Privae Secor Curren Accoun Balance / GDP Expors Primary Balance / GDP Privae Invesmen Impors Tax Rae on Consumpion Toal Privae Consumpion Trade Balance / GDP 2

21 % Poin Deviaion % Poin Deviaion % Poin Deviaion 4. Macroeconomic impac of a decrease in governmen consumpion Real Oupu Employmen-Privae Secor Privae Invesmen Toal Privae Consumpion Real Exchange Rae Expors Impors Trade Balance / GDP Curren Accoun Balance / GDP Primary Balance / GDP Governmen Consumpion / GDP

22 % Poin Deviaion % Poin Deviaion % Poin Deviaion 5. Macroeconomic impac of a decrease in public secor wage raes Real Oupu Employmen-Privae Secor Privae Invesmen Toal Privae Consumpion Real Exchange Rae Expors Impors Trade Balance / GDP Curren Accoun Balance / GDP Primary Balance / GDPReal Wage Rae in he Public Secor

23 % Poin Deviaion % Poin Deviaion % Poin Deviaion 6. Macroeconomic impac of a decrease in governmen ransfers Real Oupu Employmen-Privae Secor Privae Invesmen Toal Privae Consumpion Real Exchange Rae Curren Accoun Balance / GDP Expors Impors Trade Balance / GDP Primary Balance / GDP Governmen Transfers / GDP

24 % Poin Deviaion % Poin Deviaion % Poin Deviaion 7. Macroeconomic impac of a decrease in governmen invesmen Real Oupu Real Exchange Rae Curren Accoun Balance / GDP Employmen-Privae Secor Expors Primary Balance / GDP Privae Invesmen Impors Governmen Invesmen / GDP Toal Privae Consumpion Trade Balance / GDP

25 Magniude of shor-run impac on Real GDP We compue presen-value cumulaive fiscal mulipliers for oupu of each consolidaion measure. Presen-value mulipliers, embody he full dynamics associaed wih exogenous fiscal acions and properly discoun macroeconomic effecs in he fuure. The presen-value cumulaive muliplier is defined as: T j T j R R b j Y j b j F j where Y j and F j are respecively level changes in oupu and he fiscal variable of ineres relaive o heir pre-policy reform equilibrium values, while is he governmen bond reurn. R b j 25

26 Year Policy Insrumen Table 3: Presen-value cumulaive mulipliers Governmen consumpion Governmen invesmen Governmen wages Governmen ransfers Tax rae on consumpion Tax rae on labour income Tax rae on capial income Toal governmen spending muliplier Toal ax muliplier

27 % Poin Deviaions from 2-Q2 % Poin Deviaions from 2-Q2 s from 2-Q2 s from 2-Q2 s from 2-Q2 s from 2-Q2 8. Combined impac of he 2-22 fiscal consolidaion measures in Greece -2 Real GDP (y) Real Privae Consumpion (c) Real Privae Invesmen (i) -2 Employmen in he privae secor (h p ) Curren Accoun Balance / GDP.5 Trade Balance / GDP

28 ly Average GDP Growh Rae Conribuion of fiscal policy o real GDP growh.5 Conribuion of Fiscal Policy o Real GDP Growh Average Real GDP Growh Rae: Acual daa Average Real GDP Growh Rae: Simulaed daa Conribuion of Fiscal Policy

29 Conribuion of Fiscal Policy Insrumens o Real GDP Growh (2Q2-22Q4) 5 Governmen Consumpion Governmen Invesmen Governmen Wages Governmen Transfers Tax rae on Consumpion Tax rae on Labour Income Tax rae on Capial Income

30 6 5 4 Conribuion of Fiscal Policy (2Q2-22Q4) Privae Consumpion Privae Employmen Privae Invesmen Trade Balance / GDP Curren Accoun /GDP

31 Policy recommendaions and concluding remarks Deb consolidaion policies based upon cus in governmen wages and ransfers are relaively less cosly in erms of oupu losses. A fiscal consolidaion based on increases in he capial and labour income ax raes seems o be he mos harmful opion in erms of oupu losses. Abou 5% of he GDP growh slowdown observed in Greece during 2q2-22q4 can be aribued o he fiscal auseriy measures adoped since 2. The goal of increasing revenue from income axes should be addressed by improving ax compliance and adminisraion raher han by discreionary ax rae hikes, in order o minimize he adverse effecs on economic aciviy. A change in he disribuion of ax revenue by ype of ax, achieved by increasing he effecive axaion of consumpion and reducing he ax burden on labour and capial income, can promoe employmen and growh, hereby helping deb dynamics. 3