Showing papers in "Economic Policy in 2012"

What determines government spending multipliers

Abstract: This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis. — Giancarlo Corsetti, Andre Meier and Gernot J. Muller

The eurozone crisis: how banks and sovereigns came to be joined at the hip

Abstract: The eurozone sovereign and banking crisis evolved in three phases. Following the onset of the subprime tremors in July 2007, the risk premia (spreads) on bonds issued by eurozone sovereigns rose from historically low levels; but they rose largely in tandem across the eurozone membership along with global banking stresses. The rescue of the US investment bank, Bear Stearns, in March 2008, oddly enough, marked the start of a distinctively European banking crisis accompanied by increased differentiation of countries within the eurozone. With the greater expectation of public support for distressed banks, the spreads that a sovereign paid tended to rise following evidence of stress in its domestic financial sector. This was especially so in countries with lower growth prospects and higher debt burdens. But there was as yet no feedback from banks to sovereigns. Finally, as the limits of fiscal support for domestic banks became clearer, and coinciding with the nationalization of Anglo Irish in January 2009 but gathering steam with evidence of the Greek sovereign’s distress in May 2010, sovereign weaknesses also came to be quickly transmitted to a more pessimistic assessment of the financial sector’s prospects, creating the potential of mutual destabilization. — Ashoka Mody and Damiano Sandri

Sovereign spreads in the eurozone : which prospects for a Eurobond?

Abstract: In this paper, we provide new evidence on the determinants of sovereign yield spreads and ‘market sentiment’ effects in the eurozone in order to evaluate the rationale for a common Eurobond jointly guaranteed by eurozone Member States. We find that default risk is the main driver of yield spreads, suggesting small gains from greater liquidity. Fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries’ yield spreads; that is, with the global risk that the market perceives. More importantly, the impact of this global risk variable is not constant over time, a clear sign of contagion driven by shifts in market sentiment. This evidence points to a discontinuity in the disciplinary role of financial markets. If markets can stay irrational longer than a country can stay solvent, then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened, and issuing Eurobonds can be economically justified. — Carlo Favero and Alessandro Missale

Financial frictions, financial integration and the international propagation of shocks

Abstract: The recent Great Recession has been particularly remarkable not only for its unprecedented severity, but also for the exceptional degree of global interdependence in financial and real variables. A much-discussed channel of propagation hinges on the international exposure of the balance sheet of highly leveraged players to ‘toxic’ US assets. Yet, existing evidence on the role of exposure is mixed at best. This paper argues that under financial integration, the fact that leveraged investors face the same returns across internationally traded assets, would tend to equalize their borrowing cost across countries. Model simulations show that an unexpected increase in credit spreads in one country generates a similar increase in credit spreads in other financially integrated countries bringing about a global contraction, quite independently of the exposure to foreign assets in the balance sheet of leveraged investors. Our analysis thus suggests some caution in assessing the risks of ‘contagion’ on the exclusive basis of quantitative measures of integration based on cross-border balance sheet exposure. — Luca Dedola and Giovanni Lombardo

Finance and employment

Abstract: How does finance affect employment and inter-industry job reallocation? We present a model that predicts that financial development (i) increases employment and/or labour productivity and wages, with a smaller impact at high levels of the equilibrium wage and financial development; (ii) may induce either more or less reallocation of jobs depending on whether shocks to profit opportunities or to cash flow predominate; (iii) amplifies the output and employment losses in crises, firms that rely most on banks for liquidity being hit the hardest. Testing these predictions on international industry-level data for 1970–2003, we find that standard measures of financial development are indeed associated with greater employment growth, although only in non-OECD countries, and are not correlated with labour productivity or real wage growth. Moreover, they correlate negatively with inter-industry dispersion of employment growth. Finally, there is some evidence of a ‘dark side’ of financial development, in that during banking crises employment grows less in the industries that are more dependent on external finance and those located in the more financially developed countries. — Marco Pagano and Giovanni Pica

Educational achievement of second-generation immigrants: an international comparison

Abstract: This paper compares the educational attainment of second-generation immigrants with that of children born to native parents in several OECD countries. We show that the average gap in test scores of children of immigrants and natives differs widely across countries, and is strongly related to achievement differences in the parent generation. The disadvantage of immigrant children reduces, and even disappears for some countries, once we condition on parental background characteristics. A foreign language spoken at home is the single most important factor associated with the achievement gap. An alternative reference group to native children are children born to non-emigrants in the country of origin. We compare mathematics test scores of children of Turkish immigrants in several destination countries, to those of Turkish children in Turkey whose parents have not emigrated. We find that in most host countries, the test score achievement of the children of Turkish immigrants (although being lower than that of their native peers) is higher than that of children of their cohort in the home country. This is conditional and unconditional on parental background characteristics. The higher school- and peer- quality relative to that in the home country is a main determinant of the educational advantage of immigrant children. — Christian Dustmann, Tommaso Frattini and Gianandrea Lanzara

Foreign banks and foreign currency lending in emerging Europe

Abstract: Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the relationship between bank ownership, bank funding and foreign currency (FX) lending across emerging Europe. Our results contradict the widespread view that foreign banks have been driving FX lending to retail clients as a result of easier access to foreign wholesale funding. Our cross-sectional analysis shows that foreign banks do lend more in FX to corporate clients but not to households. Moreover, we find no evidence that wholesale funding had a strong causal effect on FX lending for either foreign or domestic banks. Panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in FX lending to households. However, this is driven by faster growth in household lending in general not by a shift towards FX lending.

Venture capital and patented innovation: evidence from Europe

Abstract: We provide the first cross-country evidence of the effect of venture capital investment on patented inventions. Using a panel of 21 European countries and 10 manufacturing industries covering the period 1991–2005, we study the effect of venture capital (VC), relative to R&D, on the number of granted patents. We address concerns about causality by exploiting variations across countries and over time in private equity fundraising and in the structure of private equity funds. We find that the effect of VC is significant only in the subsample of high-VC countries, where the ratio VC/R&D has averaged around 3.9% between 1991 and 2005 and VC has accounted for 10.2% of industrial innovation during that period. We also find that VC is relatively more successful in fostering innovation in countries with lower barriers to entrepreneurship, with a tax and regulatory environment that welcomes venture capital investment, and with lower taxes on capital gains. — Alexander Popov and Peter Roosenboom

What does a financial shock do? First international evidence

Abstract: In this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions. We focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis. We estimate a panel VAR for 21 advanced economies based on quarterly data between 1985 and 2011, where financial shocks are identified through sign restrictions. We find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as GDP and (particularly) investment, but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact. The financial development and structure of a given country is found not to matter much for the intensity of the propagation of financial shocks. Moreover, we generally find that these shocks play a role not only in crisis times, but also in normal conditions. Finally, we discuss the implications of our findings for monetary policy. — Fabio Fornari and Livio Stracca

Capital access bonds: contingent capital with an option to convert

Abstract: This paper argues that there is a Coasean bargain available to banks, long-term investors, and bank regulators around a particular form of “contingent capital”. By purchasing rights to issue equity in crisis events at a pre-specified price from long-term investors, banks can ensure that they will have sufficient regulatory capital available when they need it most: in a crisis. By selling these rights (effectively, a form of crisis insurance) long-term investors can monetize their counter-cyclical investments strategies in banks and, thus, obtain an adequate return as long-term investors. Bank regulators, in turn, gain as they can thereby implement a more efficient (transparent and flexible) form of equity-capital regulation. The form of contingent capital we propose (capital access bond) reflects a balance between investors’ preferences, issuers’ constraints, and regulators’ objectives. — Patrick Bolton and Frederic Samama

The international experience of minimum wages in an economic downturn

Abstract: What should governments do with the level of the minimum wage (MW) in times of recession? In an economic downturn when most workers face falling real wages is it appropriate to let the MW fall or are the positive effects of the MW on inequality enough to justify its uprating – and if so what might be the consequences on a country’s employment level? This paper reports new estimates of the employment effects of the MW by focusing on the recessionary experiences across countries. Using international data we exploit: cross-national variation in the level and timing of the MW uprating and the exact timing of the recessionary experiences in different countries with a panel data set comprising 33 OECD over the period 1971–2009. Our panel data allow us to differentiate the effect of MWs on employment in periods of economic downturn as well as periods of economic growth. We also account for institutional and other policy related differences that might have an impact on employment other than the MW. We find that the answer depends on whether one considers adults or young people, and to some extent, on what measure of the MW is considered. The answer is also somewhat sensitive to whether one considers that the MW level is a choice option of the government which is inextricably interrelated to the determination of employment – that is, the extent to which the MW is endogenous. Using a ‘political complexion of the government’ instrumental variable (IV) we find that the MW only has a negative impact on youth employment. This leaves each government with the dilemma of raising the MW and reducing inequality or increasing the MW and accepting that this will reduce employment levels amongst young people and those on the margins of work. — Peter Dolton and Chiara Rosazza Bondibene

Reassessing the fiscal mix for successful debt reduction

Abstract: This paper assesses the determinants of the duration of debt reduction episodes in a large sample of countries over the last three decades using a survival model. Results show that increases in the primary balances are the main source of debt reduction. Expenditure-based fiscal adjustments are key for reducing the length of debt consolidation spells, including in the aftermath of financial crises. Political fragmentation and the proximity of elections make debt sustainability more difficult to achieve, while structural reforms that help spur growth decrease the duration of debt reduction. In contrast to previous findings, however, we show that when adjustment needs are large – as in many advanced economies today – fiscal consolidations that rely also on revenue-enhancing measures are more likely to accelerate debt reduction. We label it as the ‘Rebalancing Adjustment Effect’. This result is particularly strong when countries experience a financial crisis. — Emanuele Baldacci, Sanjeev Gupta and Carlos Mulas-Granados

Financial liberalization and reversals: political and economic determinants

Abstract: What accounts for the dynamics of financial reforms? This paper identifies the political regime as one of the main factors. Focusing on democratization and financial reform, it puts forward novel evidence for a U-shaped relation, across countries and over time, for different reform measures and a wide range of estimators. Partial democracy is a main obstacle to financial reforms and democratization, when incomplete, may lead to severe financial reform reversals. —Nauro F. Campos and Fabrizio Coricelli

Comparative advantage and the welfare impact of European integration

Abstract: This paper investigates the welfare gains from European trade integration, and the role of comparative advantage in determining the magnitude of those gains. We use a multi-sector Ricardian model implemented on 79 countries, and compare welfare in the 2000s to a counterfactual scenario in which East European countries are closed to trade. For West European countries, the mean welfare gain from trade integration with Eastern Europe is 0.16%, ranging from zero for Portugal to 0.4% for Austria. For East European countries, gains from trade are 9.23% at the mean, ranging from 2.85% for Russia to 20% for Estonia. For Eastern Europe, comparative advantage is a key determinant of the variation in the welfare gains: countries whose comparative advantage is most similar to Western Europe tend to gain less, while countries with technology most different from Western Europe gain the most. — Andrei A. Levchenko and Jing Zhang

How Housing Slumps End

Abstract: We construct a simple model of the end of housing slumps. We show that the probability that real housing prices stop falling is higher the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline, the faster is GDP growth, and, most importantly, the lower are mortgage interest rates. Slumps are longer where the construction sector is more responsive, allowing booms to create larger supply overhangs, but shorter the more developed are financial markets and institutions, enabling new buyers to access credit and enter the market. Falling house prices can lead to lower private sector credit flows, in turn limiting the scope for new home purchases and creating the danger of a vicious spiral of slumping housing prices and distressed financial institutions. This suggests that policymakers should take steps to break the link between the housing market problems and banking problems by intervening to recapitalize distressed banking systems while using quantitative easing and credit easing to lower mortgage interest rates and help revive the housing market directly. — Agustin S. Benetrix, Barry Eichengreen and Kevin H. O'Rourke

Recapitalization, credit and liquidity

Abstract: This paper documents the characteristics of public recapitalizations of banks undertaken since 2008 and examines their relationship with bank lending. The analysis covers the 15 OECD countries whose banking sectors were most severely hit by the crisis and that provided the largest public bailouts relative to their national gross domestic product (GDP). We show that the design of the interventions varied considerably across banks and countries. Larger and higher loss-absorbing capital injections were targeted at weaker banks and at banks of ‘systemically relevant’ size, when the state of public finances allowed. Our results encourage theoretical research with respect to non-linear and potentially adverse effects of bailouts, as well as further investigation into the link between the loss absorbing properties of bank capital and loan growth. With respect to bank lending, we find that only large recapitalizations and infusions of common equity are associated with higher total regulatory capital ratios and sustained loan growth. We find no significant relationship between public capital provisions and interbank lending and challenge the view that local banks increase loan growth relatively more in response to a recapitalization. — Mike Mariathasan and Ouarda Merrouche

Modernisation or Conservation: the Role of Export Duties on Oil and Oil Products

Abstract: The paper deals with the analysis of the consequences of the abolition of export duties on crude oil and petroleum products as a necessary measure to create incentives to improve energy efficiency of the Russian economy and the elimination of underdevelopment caused by the unprecedented long-term subsidies to inefficient Russian oil refining. The authors consider three possible scenarios for the abolition of export duties on crude oil and petroleum products in addition to involving the removal of significant price distortions in the domestic market and the conservation of tax revenues at a constant level.

Antitrust in Russia: To Be or Not to Be?

Abstract: The article presents risks and mechanisms of dysfunctional mutation of open social order antimonopoly norms under transplantation to social orders of restricted access. There are following issues discussed: antimonopoly policy within the structure of competition policy; adapting concepts of open and restricted access social orders for studies of antimonopoly effects; basics and functions of antitrust in open access orders as a source of antimonopoly norms for restricted access orders; modification mechanisms of antimonopoly policy instruments transplanted to restricted access orders; opportunities to block dysfunctional mutation of antitrust.

Marxian Economics as Economics

Abstract: In apaper devoted to the 100th anniversary of publication of «Capital» by Karl Marx, the author considers his economic theory, and notes that it is just as controversial as Marx himself was controversial. Researchers of his works hold the opposite view of its place in the history of economic thought — from «the greatest sociologist of all times» to «an insignificant post-Ricardian, interesting predecessor of Leontief’s input-output theory». According to the author, prognostic features of Marx’s theory is not high, its value lies in the fact that it is superior to modern economic theory in the analysis of institutional data on the basis of which the theory of capitalist development can be formed.

Errors of I and II Types in Antimonopoly Mergers Control

Abstract: Issues of ex post evaluation of mergers and antitrust bodies prescriptions are discussed. Among them: interrelation of enactment and enforcement from the perspectives of errors of I and II types in antitrust mergers control; probable consequences of mergers for competition; comparative advantages and failures of decision variants available for antitrust bodies; ways of decision-making in expected merger. Also there are issues on efficacy of antimonopoly body decisions taking into account cost of monitoring, sanctioning of mergers participants, including influence on competition condition on relevant markets.

Achieving Higher Levels of Life Expectancy in Russia

Abstract: In 2011 Russia had reached the highest life expectancy in its history — 70.3 years. The author analyzes the dynamics of this indicator over the past half-century, carries out comparative studies with other countries especially of the developed world. In conclusion, the proposals for further improvement of this important indicator of quality of life are put. The use of management by objectives is proposed for radical reduction of mortality in Russia.

Nominal Yields on the Russian Government Bond Market: The Analysis of the Fisher Effect

Abstract: The article investigates the Fisher effect on the domestic Russian government bond market during the period from 2003 to 2011. Via using a spectrum of econometric methods (ARDL-bounds test, Johansen test) the authors try to evaluate the long-run dynamics of the nominal yield as a long-run co-integrating relationship with inflationary expectations, and to outline the features of inflationary shocks’ influence in the short-run.

The Movement of Jobs in the Russian Economy: in Search of «Creative Destruction»

Abstract: This work solves several problems. It discusses some problems of the standard methodology for analyzing the creation and destruction of jobs in the Russian economy, presents the methodology used by Rosstat, and enters into scientific empirical assessment of the movement of jobs for the Russian economy, and outlines ways of improving the statistical methodology for Russia. The presented empirical analysis confirms the low rate of assessment to create new jobs in the Russian economy.

Are There Any Changes Brought by the Trade Law: An Analysis of Quantitative Data

Abstract: The paper estimates the first consequences of the new Trade Law aimed at restoring a«balance of market power» in retailer-supplier relationships. Empirical data were collected in November-December 2010 from the grocery sector and home electronic appliances sector. 512 filled questionnaires were received from managers of retail chains and their suppliers in five Russia’s cities. The author argues that proclaimed goals of the Trade Law have not been achieved. Contract relationships have not changed for three quarters of retailers and suppliers. There are no significant effects on conditions of market entry, frequency of vertical restraints, and general estimations of the level of contract requirements.

Merger Remedies: Federal Antitrust Service and European Competition Commission Compared

Abstract: The article examines the practice of pre-merger notification and merger remedies by Russian antimonopoly authority FAS (on the example of the largest mergers approved in2006—2008) based on a comparison with the practice of the EU Competition Commission. Analysis of markets competition by FAS is shifted towards the straightforward assessment of structure (primarily— measurement of concentration). The structure of remedies isdominated by behavioral (conduct) requirements, many of them cannot be effective andsome may impose on unreasonably high risks on market participants.

What We Expect from a New Government

Abstract: New government to be formed after the inauguration of newly elected President of Russia, must solve a number of tasks. The priorities, in authors opinion, are: macroeconomic stability, public administration reform, decentralization policy, the reduction of excessive state presence in the economy etc. The real progress in these areas, supported by at least a partial success in the areas that go beyond the actual authority of the government (reducing corruption, improving the judicial system), will provide significant progress toward creating sustainable, competitive economy.

Effect of Tax Loss Compensation for Investment Decisions: Theoretical Aspects

Abstract: The article deals with the distribution of tax burden and tax compensation of losses when making investment decisions. The author investigates the effect of asymmetry of tax laws on investment decisions, analyzes a mathematical model that most objectively calculate the tax loss compensation. Foreign experience of assessing the impact of imperfect compensation of losses on the limit effective tax rates is considered.

The Factors of Stability of Russian Banks during the Crisis of 2008—2009

Abstract: This paper discusses different approaches to theoretical and empirical models of bank defaults. Through constructed binary probabilistic models of default the paper reveals key factors, which have an impact on the viability of Russian banks during the financial crisis of 2008 to 2009. Policy recommendations of the Central Bank of Russia and the banking supervision and regulation aimed at preventing bank defaults in the event of such crises in the future are formulated based on the model results.

Ex Post Assessment of Mergers and Remedies as a Part of the Administrative Procedure of Competition Authority

Abstract: Article is devoted to theex postassessment of effects of mergers in the activities ofthe Russian competition authority. Evaluatedex posteffects till now was not carried outby Federal Antitrust Service, despite the fact that even in the international rankings ofcompetition authorities, this practice is specifically taken into account as evidence of thevalidity of decisions. The paper offer recommendations forex postevaluation as an organicpart of the administrative procedures of merger approval in the framework of preliminaryanalysis, design solutions and remedies and assessment of compliance.