This paper estimates the long-term effects of the global recession of 2008-2009 on output in 23 countries I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 84% Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time

Long-Term Damage from the Great Recession in OECD Countries

This paper proposes a new methodology to evaluate the economic effect of state-specific policy changes, using bank-branching deregulations in the U.S. as an example. The new method compares economic performance of contiguous counties on opposite sides of state borders, where on one side restrictions on statewide branching were removed relatively earlier, to create a natural regression discontinuity setup. The study uses a total of 285 pairs of contiguous counties along 38 segments of such regulation change borders to estimate treatment effects for 23 separate deregulation events. To distinguish real treatment effects from those created by data-snooping and spatial correlations, fictitious placebo deregulations are randomized (permutated) on another 32 segments of non-event borders to establish empirically a statistical table of critical values for the estimator. The method determines that statistically significant growth accelerations can be established at a >90% confidence level in five out of the 23 deregulation events examined. Hinterland counties within the still-regulated states, but farther away from the state borders, are used as a second control group to consider and reject the possibility that cross-border spillover of deregulation effects may invalidate the empirical design.

Evaluating the Real Effect of Bank Branching Deregulation: Comparing Contiguous Counties across U.S. State Borders

We use a Bayesian time-varying parameters structural VAR with stochastic volatility for GDP deflator inflation, real GDP growth, a 3-month nominal rate, and the rate of growth of M4 to investigate the underlying causes of the Great Moderation in the United Kingdom. Our evidence points toward a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades. Results from counterfactual simulations, in particular, show that (i) “bringing the Monetary Policy Committee back in time” would only have had a limited impact on the Great Inflation episode, at the cost of lower output growth; (ii) imposing the 1970s monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes; and (iii) the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lesser extent—especially in 1973 and 1979—to supply shocks.

/pdf/the-great-moderation-in-the-united-kingdom-uzssh58msf.pdf

The “Great Moderation” in the United Kingdom

Recent micro studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but the effect on aggregate variables remains disputed. Using data for hourly nominal wages, we explore the existence of DNWR on wages at the industry level in 19 OECD countries, over the period 1973-1999. Based on a novel method, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low, union density is high, and employment protection legislation is strict.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID999521_code485639.pdf?abstractid=999521&mirid=2

Downward Nominal Wage Rigidity in the OECD

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Models Of Business Cycles

The influential work of Obstfeld and Rogoff argues that a closing-up of the US current account deficit involves a large exchange rate adjustment. However, the Obstfeld–Rogoff model works exclusively via demand-side channels and abstracts from possible supply-side changes. We extend the framework to allow for endogenous supply-side changes and show that this fundamentally alters the mechanism of the adjustment process. Allowing for such an extension attenuates quite significantly the implied exchange rate adjustment. The paper also provides some empirical evidence of variations in the supply-side structure and correlations with the exchange rate and the current account. The policy implications are that measures to foster a supply-side reaction would facilitate the external adjustment by alleviating an exclusive reliance on demand and exchange rate changes, with the latter being potentially destabilizing for the global financial system.

/pdf/external-imbalances-and-the-us-current-account-how-supply-3flyxavn2q.pdf

External Imbalances and the US Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment*

This paper studies the bank-sovereign link in a dynamic stochastic general equilibrium set-up with strategic default on public debt. Heterogeneous banks give rise to an interbank market where government bonds are used as collateral. A default penalty arises from a breakdown of interbank intermediation that induces a credit crunch. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. This lowers the penalty from an interbank freeze and feeds back into default risk. The arising amplification mechanism propagates aggregate shocks to the macroeconomy. The model is calibrated using Spanish data and is capable of reproducing key business cycle statistics alongside stylized facts during the European sovereign debt crisis.

/pdf/sovereign-risk-interbank-freezes-and-aggregate-fluctuations-4cequ0irez.pdf

Sovereign Risk, Interbank Freezes, and Aggregate Fluctuations

Given that exchange rate devaluations are no longer available in a monetary union, fiscal devaluations are one potential way to address divergence in competitiveness and trade imbalances. Employing a DSGE model calibrated to the euro area, we quantify the international effects of a fiscal devaluation implemented as a revenue-neutral shift from employers’ social contributions to the value added tax. We find that a fiscal devaluation carried out in the South has a strong positive effect on output, which is five times larger than under a wage tax cut. However, the effect on the trade balance and the real exchange rate is mild. The negative effect on the North’s output is weak.

/pdf/fiscal-devaluation-in-a-monetary-union-3kinrz0698.pdf

Fiscal Devaluation in a Monetary Union

https://www.econstor.eu/bitstream/10419/149129/1/875644198.pdf

Hysteresis and fiscal policy

https://refubium.fu-berlin.de/bitstream/fub188/19756/1/discpaper06_10.pdf

Philipp Engler

Papers

External Imbalances and the US Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment*

Sovereign Risk, Interbank Freezes, and Aggregate Fluctuations

Fiscal Devaluation in a Monetary Union

Hysteresis and fiscal policy

Beggar-thyself or beggar-thy-neighbour? The welfare effects of monetary policy