The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance, both in its preventive and corrective arms. The concept corresponds to the budget balance prevailing if the economy was running at potential. After correcting for the one-off and temporary measures, it is called structural budget balance and used to assess the fiscal policy stance. The importance of the CAB has been restated forcefully with the recent reform of the European economic governance. This paper aims at methodologically improving the CAB to better measure the reaction of the balance-to-GDP ratio to cyclical conditions. This was achieved by using a more precise concept of the cyclical-adjustment parameter and by updating the decade-old fiscal elasticities underlying the computation of the CAB. This paper reviews and explains in detail these recent improvements and describes the impact thereof on the CAB results

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The cyclically-adjusted budget balance used in the EU fiscal framework: an update

The goal of this paper is to propose a model to produce nowcasts of GDP growth of Spanish regions, by means of dynamic factor models. This framework is capable to incorporate in a parsimonious way the relevant information available at the time that each forecast is made. We employ a Bayesian perspective to provide robust estimation of all the ingredients involved in the model. Accordingly, we introduce the Bayesian Factor model for Regions (BayFaR), which allows for the inclusion of missing data and combines quarterly data on regional real output growth (taken from the database of the AIReF and from the individual regional statistics institutes, when available) and monthly information associated to indicators of regional real activity. We apply the BayFaR to nowcast the GDP growth of the four largest regions of Spain, and illustrate the real-time nowcasting performance of the proposed framework for each case. We also apply the model to nowcast Spanish GDP in order to be able to assess the relative growth of each region.

An Application of Dynamic Factor Models to Nowcast Regional Economic Activity in Spain

Quantifying the effects of trade policy in the age of ’global value chains’ (GVCs) requires an enhanced analytical framework that takes the observed international input-output relations in due account. However, existing quantitative general equilibrium models generally assume that industrylevel bilateral final and intermediate trade shares are identical, and that the allocation of imported inputs across sectors is the same as the allocation of domestic inputs. This amounts to applying two proportionality assumptions, one at the border to split final goods and inputs, and another behind the border to allocate inputs across industries. In practice, neither assumption holds in available inputoutput data sets. To overcome this limitation of existing models, we consider a richer input-output structure across countries and sectors that we can match with the actual structure reported in inputoutput tables. This allows us to investigate the relation between the effects of changes in trade policies and GVCs. When we apply the enhanced quantitative general equilibrium model to the assessment of the effects of Brexit, we find trade and welfare losses that are substantially larger than those obtained by previous models. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies.

https://cep.lse.ac.uk/pubs/download/dp1682.pdf

Rising protectionism and global value chains: quantifying the general equilibrium effects

Climate change and its management and mitigation are unquestionably among the main risks facing our society in the coming decades. The financial sector plays a key role in this challenge, firstly because of its exposure and the consequent capital shocks if this risk crystallises, and secondly because it has the task of financing the investments needed to transform our economy into a sustainable one. This article reviews various initiatives under way in the private financial sector to introduce the variable “sustainability” into its decision-making process in order to achieve a balance sheet with a smaller carbon footprint (transformation of stock) and to develop a business strategy aligned with responsible investment principles and international standards (transformation of flow). We analyse the innovations emerging along the path to sustainable finance, looking particularly at: 

1) new suppliers and services in the market, 

2) the creation of sustainability-linked financial instruments, 

3) the adaptation of financial risk management policies, and 

4) the interaction of technological progress with climate change.

/pdf/financial-innovation-for-a-sustainable-economy-1f1bpa8o6v.pdf

Financial Innovation for a Sustainable Economy

espanolEste trabajo conjunto de Bundesbank, Banque de France y Banco de Espana analiza en detalle algunos de los numerosos canales a traves de los cuales el brexit afectara a la economia del Reino Unido y a la de sus socios comerciales. En particular, se centra en los canales comercial y migratorio, haciendo una evaluacion mas general de los costes de la salida de la UE utilizando un modelo de gravedad. El canal comercial por si solo puede reducir el PIB del Reino Unido un 2 % a medio plazo si el Reino Unido vuelve a las reglas de la OMC, mientras que un modelo de gravedad mas general apuntaria a que el PIB del Reino Unido se reduciria casi un 6 % en comparacion con el escenario de no salida. Por lo tanto, de acuerdo con nuestro analisis, el «coste de estar fuera de Europa» (como se establecio originalmente en el trabajo seminal de Cecchini en 1988) se encuentra entre el 2 % y el 6 % en terminos de perdidas del PIB real para el Reino Unido. Este impacto es en gran medida asimetrico, ya que el PIB de la zona del euro no se ve practicamente afectado por este evento, al situarse menos de un 1 % por debajo del escenario de no salida en 2023. El estudio tambien pone de manifiesto como los resultados son sensibles a la reaccion de las politicas economicas. En general, las politicas monetarias y fiscales pueden actuar para amortiguar el shock del brexit; sin embargo, su efectividad depende de la fuente subyacente de la perturbacion. EnglishThis joint work by the Bundesbank, the Banque de France and the Banco de Espana highlights some of the numerous channels through which Brexit will affect the UK economy and its economic partners. In particular, it focuses on trade and migration channels, adding a more general assessment of exiting the EU through the use of a gravity model. The trade channel alone may cut UK GDP by 2% over the medium term if the UK reverts to WTO rules, while a more general gravity model would point to UK GDP falling by almost 6% compared to baseline. According to our analysis, the ‘cost of non-Europe’ (such as originally stated by Cecchini’s seminal work in 1988) lies therefore between 2% and 6% in terms of real GDP losses for the UK. With the shock being largely asymmetric, the EA remains relatively unscathed by the UK’s exit, with GDP less than 1% lower than baseline by 2023. The study also shows that results are sensitive to the envisaged policy response. In general, monetary and fiscal policies may act to cushion a Brexit-related shock; however, the potency of the policy response depends on the underlying source of the shock.

/pdf/assessing-the-macroeconomic-impact-of-brexit-through-trade-155pbe7z5p.pdf

Assessing the macroeconomic impact of Brexit through trade and migration channels

espanolLa integracion en la Union Europea (UE) ha impulsado la inversion extranjera directa (IED) hacia el Reino Unido, que mantiene un stock relativamente importante de entradas en forma de IED. Este ha aumentado notablemente desde 2005, alcanzando el 61% de su producto interior bruto (PIB) en 2017. La salida del Reino Unido de la UE y del Mercado Unico probablemente resultara en flujos de IED mas reducidos entre ambos destinos de inversion. El objetivo de este estudio es examinar los efectos que el resultado del referendum del brexit, de junio de 2016, ha podido tener en la actividad de IED relacionada con el Reino Unido. Si bien los flujos de IEA son notablemente volatiles, con presencia de un gran numero de valores atipicos, y con la cautela precisa por la escasa disponibilidad de datos temporales posteriores al referendum, el analisis encuentra cierta evidencia de una disminucion en los flujos brutos de IED entre el Reino Unido y la UE con posterioridad al referendum. Esto se evidencia, en particular, en el caso de las grandes economias de la UE y en el de Irlanda. Con respecto a una forma particular de IED, inversion en nuevos proyectos (greenfield IED), se encuentra evidencia de un descenso en proyectos anunciados y gastos de capital en el Reino Unido por parte de otros paises de la UE en el periodo posterior al referendum, asi como en la inversion proveniente de Estados Unidos, uno de los socios mas importantes no pertenecientes a la UE. Para analizar el efecto de brexit en la actividad de IED, se utiliza tambien un enfoque diferente, basado en estimar el efecto que tuvieron sobre la inversion exterior dos etapas del proceso de integracion europea: la adhesion a la UE de los distintos estados miembros y el comienzo de la moneda unica en la zona del euro. La hipotesis que subyace es que los efectos del brexit pueden considerarse como la reversion del proceso de integracion del Reino Unido en la UE. El analisis utiliza un modelo de gravedad de efectos fijos para estimar los efectos de estos procesos de integracion en la actividad de IED bilateral con el Reino Unido. Los resultados empiricos sugieren que este pais desempeno, por un lado, un papel como puerta de entrada para un conjunto de paises inversores internacionales, fuera de la zona del euro, para entrar en los mercados europeos y, por otro lado, actuo como un centro que reasigno estas entradas y las provenientes de los paises del euro entre toda la zona del euro. Por tanto, la desconexion del Reino Unido de la UE puede tener implicaciones para la ied que van mas alla de la mera reversion de los flujos de IED que, en promedio, se han derivado de la incorporacion de un pais a la UE. Las mayores barreras comerciales y una menor integracion entre el Reino Unido y los mercados de los paises de la zona del euro probablemente tendran un impacto negativo en la actividad de IED en el Reino Unido y podrian tener, a corto plazo, tambien un efecto negativo en la zona del euro. EnglishEuropean Union (EU) integration has boosted inward EU foreign direct investment (FDI) into the United Kingdom (UK). Within the EU, the UK has a relatively significant stock of inward FDI, having reached 61% of its Gross Domestic Product (GDP) in 2017 and risen strongly since 2005. The exit of the UK from the EU and the Single Market will probably result in reduced FDI amongst both investment destinations. The aim of this study is to look at the “real-time” effects of the Brexit June 2016 referendum outcome and its aftermath on UK-related FDI activity. Although FDI flows are notably volatile and biased by periodic non-systematic outliers, and despite some caveats on data sources and availability of time series data, we find tentative evidence of a post-referendum slowdown in gross FDI flows between the UK and the EU, notably involving the big EU economies and Ireland. Regarding a very favoured form of FDI, greenfield FDI, we document a post-referendum fall in announced projects and capital expenditures into the UK by both other EU countries as well as one of the most important non-EU partners, the United States. A different approach is also used to analyse the Brexit effect on FDI activity, based on estimating the effect of two successive stages in the European integration process – EU membership and the Euro area launch – and considering Brexit effects as the reversal of the UK integration into the EU. By using a fixed-effect gravity model to estimate the effects of these integration processes on bilateral FDI activity with the UK, the empirical results suggest that, on the one hand, this country played a role as a gateway for a set of international investor countries outside the Euro area to enter European markets and, on the other, it acted as a hub that reallocated these inflows and those coming from Euro countries across the Euro area itself. Thus the disconnection of the UK from the EU may have further implications for FAI than just reverting the effect of EU membership. Larger trade barriers and lower integration between the UK and the Euro area countries’ markets will likely have a negative impact on FDI activity in the UK and might have, in the short run, a negative effect in the Euro area.

/pdf/a-tentative-exploration-of-the-effects-of-brexit-on-foreign-2wo8c975a6.pdf

A tentative exploration of the effects of Brexit on foreign direct investment vis-à-vis the United Kingdom

This paper summarises the economic analyses of the potential impact of Brexit on the United Kingdom, European Union (EU) and euro area performed by members of and contributors to the Brexit Task Force, a group reporting to the International Relations Committee of the European System of Central Banks. The studies were carried out between 2017 and the initial months of 2019 and have been independently published by the authors. The aim of this Occasional Paper is to present the studies in an organic manner, highlighting common features and results. JEL Classification: F14, F15, F21, F22

https://www.econstor.eu/bitstream/10419/234490/1/ecb-op249.pdf

A review of economic analyses on the potential impact of Brexit

We estimate long-run and short-run elasticities of Value Added Tax and Personal Income Tax revenues with respect to their bases for the Netherlands. We find VAT elasticities around one in the long-run and short-run. The long-run PIT elasticity is significantly below one, while the short-run elasticity is around one. We experiment with alternative definitions of the tax base for both taxes. We first find that elasticity estimates remain unaffected by using a broader base for both taxes. Second, the conclusion on whether elasticities differ between `good' and `bad' times depends whether the definition of these regimes is based on the deviation of tax revenues from the long-run level or on the output gap. Third, stability over time cannot be rejected for all elasticities, except for the long-run PIT elasticity to the broad base.

/pdf/the-stability-of-tax-elasticities-in-the-netherlands-c9wjzwiv0s.pdf

The stability of tax elasticities in The Netherlands

Recently, the unemployment gap in the euro area has fallen markedly. However, wages increased less than predicted by traditional Phillips curves. Using Bayesian methods, we estimate the wage Phillips curve with time-varying parameters. We consider alternative measures for labor market slack, namely the unemployment gap and the European Commission's labor shortage indicator. Using the latter indicator, we find a steepening of the wage Phillips curve in Italy and France, and a stable Phillips curve in the Netherlands after the crisis. In Germany (Spain), both measures suggest a recent flattening (steepening) of the wage Phillips curve.

/pdf/time-varying-wage-phillips-curves-in-the-euro-area-with-a-2p10fd2yig.pdf

Time-Varying Wage Phillips Curves in the Euro Area with a New Measure for Labor Market Slack

https://pure.rug.nl/ws/files/174463485/1_s2.0_S026499932031292X_main.pdf

Duncan van Limbergen

Papers

A tentative exploration of the effects of Brexit on foreign direct investment vis-à-vis the United Kingdom

A review of economic analyses on the potential impact of Brexit

The stability of tax elasticities in The Netherlands

Time-Varying Wage Phillips Curves in the Euro Area with a New Measure for Labor Market Slack

Time-varying wage Phillips curves in the euro area with a new measure for labor market slack