Financial Markets, Fiscal Policies and Taxation 3 rd Annual JRC Modelling Conference, Petten, October 2013 Joint Research Centre www.jrc.ec.europa.eu Serving society Stimulating innovation Supporting legislation
Policy issues and JRC contribution PAST 3 YEARS Major policy issues JRC deliverables Financial Markets Strengthening banking regulation Commission proposal for a Single Resolution Mechanism, 2013 (SYMBOL) IA of Bank Recovery & Resolution Directive, 2012 (SYMBOL) IA of Capital Requirement Directive, 2011 (SYMBOL) IA of Deposit Guarantee Schemes Directive, 2010 (SYMBOL) 2
Policy issues and JRC contribution PAST 3 YEARS Major policy issues JRC deliverables Fiscal Policy Surveillance of MS Fiscal Sustainability Report, 2012 (SYMBOL, economic trends GAP) (studies on PT,ES,DE) Current account surpluses in the EU. Dec. Sustainability of public 2012 (QUEST: study of Germany surplus) finances Public Finances in EMU, 2011 (SYMBOL, GAP, Fiscal surveillance QUEST), 2010 (QUEST), 2009 (QUEST) Quarterly report on the Euro Area, Dec 2009, Mar 2010, Jun 2010, Oct 2012 (QUEST, GAP) European Economy Forecast, Autumn 2011 (QUEST) 3
Policy issues and JRC contribution PAST 3 YEARS Major policy issues JRC deliverables Taxation Growth-friendly tax reforms Fair tax reforms Annual Tax Reports (GEM-E3) o 2011 Edition (MCPF) o 2012 Edition (MCPFdisaggregated) Forthcoming (Euromod + Firm micro-model) o o Housing taxation Corporate taxation 4
Operated in-house Overview of main models Microeconomic Macroeconomic Under development External Financial Markets SYMBOL QUEST Fiscal policies QUEST GAP Taxation EUROMOD GEM-E3 5
Model description: SYMBOL Objective To assess the consequences of bank failures in EU Member States, and evaluate the implications of policy options for banks Technical description SYMBOL is a Monte Carlo simulation model implemented into a C code Using input data from ~4000 EU banks Each simulation takes a few hours + post-processing (parallel version under testing) Validation / peer review - Published in Journal of Financial Services Research, 2011 - Presented at several international conferences - Presented to ECB, EIB, EBA, ESM Output Bank s losses Probability of a systemic crisis Banks contributions to systemic risk Link to other models Coupled with a simple Bank of England model, to estimate Basel III macroeconomic net benefits 6
Aspirations major developments planned Modeling in SYMBOL: - the vicious loop between sovereign and banking risk - the macro-financial linkages (e.g. linking SYMBOL with QUEST) - additional contagion channels in the banking systems - market risk - the financial sector deleveraging process 7
Model description: QUEST Objective To monitor macroeconomic developments and the economic situation in the EU and MS Technical description DSGE model, heterogeneous agents, financial frictions, 100 dynamic eqn s Estimated with quarterly national account data Simulation time few minutes, estimation several hours Validation / peer review Joint ECFIN-JRC papers Journal of Economic Dynamics and Control 37 (2013) European Economic Review 55 (2011) Economic Modeling 26 (2009) Output shocks driving the cycle (supply, demand, bubbles, monetary, fiscal) Projections of main macro variables Link to other models Fully endogenous model 8
Aspirations major developments planned Modeling extensions in QUEST: - financial market: role of credit constraints in the private sector (so far only for household/mortgages); endogenous riskiness in loans (default decisions of the borrower; loan-to-value-ratio set by the lender and their links with the real economy); - allow a better link between model variables and available financial data to: (i) analyze determinants of loan dynamics, (ii) develop forecasting equations for financial variables, (iii) identify credit crunch episodes 9
Model description: GAP Objective To monitor compliance of EU Member States to the Stability and Growth Pact Technical description Production function approach Structural model to estimate NAWRU and potential productivity growth Inference: max. likelihood and Bayesian EXCEL user-interface, FORTRAN for numerical computing Validation / Peer review Journal of Economic Dynamics and Control (2013, 2007) European Economy (2010) Journal of Business & Economic Statistics (2008) Journal of Applied Econometrics (2004) Output NAWRU* and potential Total Factor Productivity Model coefficients and standard errors Diagnostic checks Link to other models Fully endogenous model * Non-accelerating wage rate of unemployment 10
Aspirations major developments planned Increase the stability of the estimates of Trend Total Factor Productivity, Trend Labor Force Participation, and Average Hours Worked. Upgrade the labor market model used for NAWRU* calculations by taking into account the agents expectation of price inflation. Develop and implement a new model for investment in order to improve the medium-term forecasts of potential output. * Non-accelerating wage rate of unemployment 11
Model description: GEM-E3 Objective Technical description Output Multisectoral CGE addressing policy and exogenous shock scenarios Focusing on carbon/ener gy-intensive sectors CGE model, world and EU-wide coverage. GTAP-based Dynamic over investments, 5-year timesteps. Validation / peer review Coordinated by Univ. Athens, Univ. Leuven Built over several FPs for more than 20 years Widely used in EC impact assessments Welfare analysis, terms of trade, GDP impact, impact on production factors demand, etc. Link to other models I & O: Global and EU energy/land use models, climate change impact models 12
Aspirations major developments planned Review & improvement of the taxation database coupled with the SAMs (cooperation with GTAP) Improvement of the structure of labour markets Depletable resources characterization for long-term growth accounting analyses Improving the dynamic dimension by better description of the savings and investment functions 13
Model description: EUROMOD Objective Technical description Output Budgetary impact of tax reforms Matching tax modeling capacity of National Ministries of Finance Microsimulation model Detailed direct income tax & benefits codes (incl. Social security & pensions) for all countries & 500.000 individuals Allows tax policy swapping between countries. Validation / peer review Coordinated by Univ. Essex (ISER) Built over several FPs for more than 15 years National teams (3-4 people / country) Extensive use by academic community 1 st round impact of tax & ben. reforms on Gov. revenues Impact on households income Link to other models Macro-models to get 2 nd round impacts Micro-models for thematic studies, e.g. housing tax, labour market 14
Aspirations major developments planned Analysis of the redistributive impact of tax reforms (ongoing) Extension of the model to housing tax analysis (ongoing) Possible future extension for indirect tax analysis Possible future use for tax revenues projections 15
Conclusions JRC continuously updates its tools and competences to fulfill policy needs JRC maintains close contact with the scientific community to also validate its methodologies and tools externally JRC maintains close contact with the main institutional actors (ECB, EBA, EIB, ESM,BIS, ESRB, OECD, ) on research developments 16