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We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly find if fiscal stance matters for the monetary policy conduct. We use GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 with the thick-modelling approach. The results revealed that ECB actions have exhibited desirable stabilising monetary policy properties and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit usually is not statistically significant in explaining ECB monetary policy stance. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These findings speak against the “fiscal dominance” regime in the euro area where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the precise specification of the GMM and SVAR models and if the sample period is shortened from 2012. info:eu-repo/semantics/publishedVersion

In this paper, we describe key problems of the current EU's fiscal framework and offer constructive options for its reform. A comprehensive reassessment of the rules is necessary, as the development of the rules has reached an impasse for both political and technical reasons. In our view, Europe needs fiscal rules to ensure the sustainability of public finances. In order to reconcile the freedom and responsibility of member states' fiscal policies, a balance must be struck in which the rules are simple enough to facilitate monitoring of compliance yet effective enough to mean that the need for cross-country bail-out measures is sufficiently rare. Our conclusion is that the new rules should emphasise the long-term debt sustainability target more clearly, while at the same time making its monitoring more effective through better short-term indicators, in particular the expenditure benchmark. We provide a proposal for a practical implementation option which is largely consistent with the current rules. At the same time, the expenditure benchmark should be reformed in order to further its countercyclical impact on fiscal policy, and it should replace the structural balance as the operational indicator of fiscal policy stance. Responsibility for economic policy decisions and their consequences should be fully restored to the Member States and the role of national supervisory bodies should be strengthened. Cross-country bail-out measures in times of crisis should be accompanied by strict conditionality that, in good times, the fiscal policy must be in line with the reformed EU framework.

In this paper, we describe key problems of the current EU's fiscal framework and offer constructive alternatives to reforming it. A comprehensive reassessment of the rules is necessary, as the development of the rules has reached an impasse for both political and technical reasons. In our view, Europe needs fiscal rules to ensure sustainability of public finances. In order to reconcile the freedom and responsibility of member states' fiscal policies, a balance must be struck in which the rules are simple enough to actually be useful in fiscal policy guidance. This requires that compliance with them can be easily monitored and that the rules are effective enough to allow solidarity to be achieved rarely enough. Our conclusion is that the new rules should emphasize the long-term debt sustainability target more clearly, while at the same time making its monitoring more effective through better short-term indicators, in particular the expenditure benchmark. We provide a proposal for practical implementation option, which is largely consistent with the current rules. At the same time, the expenditure benchmark should be reformed in order to further its countercyclical impact on fiscal policy, and it should replace the structural balance as the operational indicator of fiscal policy stance. Responsibility for economic policy decisions and their consequences should be fully restored to the Member States and the role of national supervisors should be strengthened. Solidarity in times of crisis should be accompanied by strict conditionality that, in good times, the fiscal policy must be in line with the reformed EU framework.

Recently, some attempts to increase the stance for fiscal policies in the European budgetary framework have followed the line of reducing the estimated “structural” unemployment rate (NAIRU), with the ensuing increase in the computation of the output gap. A similar effect can be obtained by increasing the actual participation rate. In this paper, we propose the introduction of a deficit-financed conditional minimum income (CMI) to discouraged people which are outside the labor force. By stimulating participation, this measure would bring about an upward revision of Italy’s potential output, and this in turn will contribute to generate a greater fiscal stance. We empirically assess the reliability of this measure by using both comparative statics and empirical estimations carried out via the simulation procedure used by the Output Gaps Working Group of the European Commission. Assuming one million newcomers in the labor force, our findings indicate that the measure would have produced a greater fiscal space of approximately €19 billion in 2016 and €12 billion in 2017. We also forecast the impact of the introduction of the deficit-financed CMI on real GDP and public finance indicators. We finally discuss the feasibility and the main criticisms of the proposal.

We review the determinants of the discretionary fiscal policy action of governments in the euro area and in other advanced economies during the past 20 years. This is done by estimating fiscal reaction functions using dynamic panel techniques and country-by-country estimates. The results suggest that, on average, discretionary fiscal policy did not deliver economic stabilisation: during good economic times (positive output gaps) it has been on average pro-cyclical both in the euro area and in the other regions. However, the loosening bias during good times has been countered by the presence of efficient public institutions, higher long term interest rates and higher debt-to-GDP ratios. Overall, as a result of various counterbalancing forces, fiscal activism has not been a major feature of policy making in the euro area, nor in other advanced economies during the past 20 years.

This paper analyses the appropriateness of the euro area fiscal stance. In this context, the paper presents the relevant definitions and how the euro area fiscal stance has evolved over time. Furthermore, it contains an evaluation of the appropriateness of the euro area aggregated fiscal stance set out in the European Commission’s Spring 2016 European Economic Forecast, concluding that, while it is broadly appropriate from the stabilisation perspective, it deviates slightly from the sustainability objective. Finally, the paper investigates the impact of a fiscal stimulus in Germany on the main euro area macroeconomic variables under an adverse risk scenario. The analytical exercise conducted in the paper is agnostic about the relative weights of the stabilisation and sustainability objectives and considers them separately. This is distinct from the SGP framework, which synthesises the two, placing a stronger emphasis on the latter. The ultimate aim of this approach is to analyse the possible interactions between the two objectives at the current juncture.

Este documento estudia la forma en que ha incidido el gasto público en la actividad económica de los departamentos en Colombia durante el periodo 2000-2013, a partir de la aplicación de diferentes técnicas derivadas de medición económica cuyos resultados se confrontan para explicar la intencionalidad de la postura fiscal de los gobiernos territoriales en sus economías. En este sentido, se desea representar cómo ha influido el gasto público en el producto regional y en qué magnitud los departamentos han aportado al PIB nacional, identificando los rasgos fiscales distintivos de dicho impacto, con el fin de explicar en qué sentido dicha asignación es eficiente para las regiones. Entre las diferentes herramientas empleadas se combinan técnicas de MCO, con aportes relativos al crecimiento, índices de localización y/o especialización del gasto público, de la formación bruta de capital fijo y del valor agregado, evaluados con su desempeño fiscal particular durante toda la serie. Los resultados muestran que las regiones que han aprovechado mejor la asignación de recursos públicos en Colombia, sin importar el nivel del gasto, han obtenido mejor desempeño de sus economías, contrario a las tesis que plantean que el gasto público por sí sólo es un dinamizador de la actividad. This paper studies how public spending has affected the economic activity of the departments in Colombia during the period 2000-2013, from the application of different techniques derived from economic measurement whose results are compared to explain the intent of the fiscal stance of territorial governments in their economies. In this sense, we want to represent how it has influenced public spending on the regional product; and to what extent departments have contributed to national GDP identifying such impact's distinctive tax traits in order to explain the reason this allocation is efficient for regions. Among the different tools used MCO techniques are combined with contributions related to growth, rates of localization and / or specialization of public expenditure, the fixed capital's gross formation and added value. They are evaluated with its particular fiscal performance throughout the series. The results show that the regions that have better utilized the allocation of public resources in Colombia, regardless of the level of spending, they have obtained better performance of their economies, contrary to the arguments posed that public spending alone is an active catalyst. Este documento estuda a forma como o gasto público incidiu na atividade econômica dos departamentos da Colômbia durante o período entre 2000 e 2013. Tal estudo se realiza a partir da aplicação de diferentes técnicas derivadas da medição econômica, cujos resultados se confrontaram, com o fim de explicar a intencionalidade da postura fiscal dos governos territoriais em suas economias. Neste sentido, deseja-se apresentar como o gasto público influenciou o produto regional e em que magnitude os departamentos contribuíram com o PIB nacional, identificando as características fiscais específicas deste impacto, com o fim de explicar em que sentido esta contribuição é eficiente para as regiões. Entre as diferentes ferramentas utilizadas combinam-se técnicas de MCO, com dados relacionados ao crescimento, índices de localização e/ou especialização do gasto público, da formação bruta de capital fixo e do valor agregado, avaliados a partir de seu desempenho fiscal particular durante toda a série. Os resultados mostram que as regiões que melhor aproveitaram da contribuição de recursos públicos na Colômbia, sem importar o nível da despesa, têm obtido melhor desempenho de suas economias, contrário às teses segundo as quais o gasto público por si só é um dinamizador da atividade.

Ethiopia’s remarkable socio-economic transformation over the last decade has been marked by: a reorientation of expenditure from recurrent to capital; a significant devolution of resources from Federal Government to Regions; and a clear prioritization of infrastructure spending, while protecting spending on education at four percent of GDP. The Government of Ethiopia has also leveraged external resources to boost spending in pro-poor sectors, particularly health and social protection. As a result, Ethiopia is home to the largest social safety net program in Africa, and has also achieved remarkable health outcomes using cost effective approaches. Recent investments have seen a significant build-up of capital stock, with capital spending at sector level pointing towards increased service capacity. The current public investment-led strategy requires to be complemented by increased budgetary provisions in operations and maintenance so that new investments translate into enhanced service coverage and delivery. As Ethiopia lays the foundation to become a middle income country, and the changing global environment implies declining external assistance, it is imperative that domestic taxation activity support this transition. The current tax-to-GDP ratio is low compared to peer countries, and the tax structure would benefit from increased contributions by direct tax sources. Therefore, there is an immediate need for advancing tax reforms and improve capacity and quality of tax administration. Broadening the tax bases, through review of exemptions, as well as review of tax rates might be venues to consider. Additional revenues will create the much-needed fiscal space to increase funding for operations and maintenance for service delivery, and support fiscal sustainability. As a follow-up to this Public Expenditure Review, the Government of Ethiopia has asked the World Bank to provide further analytical support, with a view to enhance domestic revenue mobilization through simpler and more efficient taxation, while retaining equity priorities in public finances.

Despite large automatic stabilizers, the performance of the Euro area as a whole in terms of fiscal stabilization is relatively poor. This report argues that a meaningful fiscal stance for the Euro area should rely on the current account as a complement to the output gap, and be coordinated only in “exceptional” times, the usual bottom-up approach of fiscal policy remaining appropriate for “normal” times. In such setting, the European Fiscal Board would play a key role in advising the Commission on the existence of “exceptional” circumstances, on the adequate aggregate fiscal stance and on its desirable distribution across member states.

The November 8, 2015 elections in Myanmar marked a historic milestone in the country’s political and economic transition that began in 2011. Incoming policy makers are preparing to pick up the baton and deliver on the people’s strong aspirations for a harmonious and prosperous Myanmar. In this series of policy notes, the World Bank Group seeks to promote dialogue on critical development challenges and on options for policies and reforms that can contribute to shared prosperity for the people of Myanmar. The policy notes focus on six interconnected areas that are likely to be high priorities for shared prosperity. The first is on closing the gap in access to social services for improving Myanmar’s human development outcomes. This could help to strengthen the productivity and employability of Myanmar’s current and future labor force, which is the critical input to inclusive growth and a precondition to success in all the other areas. The second policy note is on growing together by reducing poverty in rural areas. Policies to boost agriculture productivity and accelerate the delivery of essential services in rural areas, where they lag the most, could help to supply the much needed labor and food for the rapidly expanding industrial, manufacturing and service sectors.

This paper presents new evidence on the patterns of cyclicality in the fiscal policy stance of developing and industrialized countries over a period of more than three decades covering 180 countries during 1980–2012. First, the paper considers issues of robustness in the choice of the proxy for fiscal cyclicality by using alternative filtering methods to check whether this influences the results and leads to any differences in a country’s reported within-period average, and across-period changes in fiscal stance. Second, a country-specific approach is used to split the sample into sub-periods based on a test for structural break in the series of real gross domestic product per capita. Third, the paper investigates the extent to which countries behave pro-cyclically or counter-cyclically in different phases of the business cycle. In line with earlier findings in the literature, the analysis confirms that there is a causal link running from stronger institutions to less pro-cyclical fiscal policy, even after controlling for the endogeneity of institutions and other determinants of fiscal policy.

The paper considers the impact of the business cycle on Czech fiscal balance in the past decade. The authors employed two different calculation methods in their analysis: an OECD and an ESCB method. Two crucial findings emerged from the analysis. First, the estimates of cyclically adjusted deficits in the Czech Republic proved their robustness, because both our calculation methods, although being philosophically different, provided very similar results. Sharply deteriorating Czech budget deficits are basically structural in nature, i.e., they are independent of the business cycle. Moreover, another hypothesis was confirmed: Czech fiscal policy exhibits mainly pro-cyclical features. As the paper further documents, both basic assessments held true even when quasi-fiscal deficits were included in the analysis.

The paper aims at estimating the existence of a trilemma in the Eurozone, i.e., to assess to what extent the net capital flows, the volatility of bond yields and the fiscal stance are strictly linked to each other constraining countries’ ability to manage the internal policy goals. The existence of constraints on policy alternatives is estimated for 11 Eurozone countries from 2002 till 2012. The sample is then divided into pre- (2002–2008) and post-crisis (2009–2012) periods. A further division between the PIIGS and the non-PIIGS is then applied. The results show the validity of the trilemma for the whole Euro area and for the whole period but with some distinction between the pre- and post-crisis periods and between the PIIGS and the non-PIIGS countries. The existence of the trilemma underlines the presence of national constraints and suggests, for the future of the Eurozone, to push towards centralized fiscal policy instruments. info:eu-repo/semantics/publishedVersion

This study analyses the composition and main determinants of spending dynamics in selected euro area countries between 1999 and 2013. To assess the stance of public spending policies we use the indicators developed in Hauptmeier et al. (2011). Our results indicate that the overall expansionary expenditure stance in 1999-2009 was mainly driven by public consumption. Transfers and subsidies on the other hand were mostly expansionary after 2008 while public investment had boomed just before the crisis and turned restrictive during the crisis. The overall policy stance turned restrictive in 2010 and strongly so in Greece, Ireland, Portugal and Spain. Most consolidation efforts focussed on public investment and on public consumption and while transfers and subsidies were largely spared. Our econometric analysis, which covers the 2000-2013 period, shows a significantly pro-cyclical stance of public consumption which was driving overall spending dynamics. The degree of spending expansion tends to be negatively affected by the size of government debt and the presence of effective fiscal rules. On the other hand, EMU-related interest savings coincided with an expansionary expenditure stance. Revenue windfalls and shortfalls exerted a significant effect on government investment spending.

This study presents results from a quantitative impact evaluation of the Conditional Cash Transfer (CCT) program, Juntos, in Peru. Using instrumental variable techniques, it estimates the overall impact of Juntos five years after its initial rollout and explores the differential impacts among beneficiaries according to the length of time they spent in the program. In so doing, the analysis explores whether it takes time for the program to make significant and sizable impacts; and whether some impacts change in magnitude the longer the beneficiaries spend in the program. The results seem to confirm both hypotheses: almost all indicators of interest are significantly higher among beneficiaries with longer treatment spells. However, in many cases these improvements are too small to be picked up in the analysis of overall effects, when beneficiaries are compared to non-beneficiaries. These findings suggest that while the program has a non negligible impact on welfare, there is room for improvement. Cinco años del programa Juntos: Nuevas evidencias sobre sus impactos de corto y largo plazoEste estudio presenta resultados de la evaluación de impacto cuantitativo del programa de transferencias de dinero condicionales Juntos, aplicado en el Perú. Usando técnicas de variables instrumentales, se estima el impacto promedio del programa cinco años, desde su inicio, y explora los impactos diferenciados entre los beneficiarios, dependiendo de su tiempo de permanencia en el programa. Al hacer esto, el análisis explora si se necesita de tiempo para que el programa tenga impacto significativo, y si la magnitud del impacto depende de la estancia de los beneficiarios en el programa. Los resultados parecen confirmar ambas hipótesis: casi todos los indicadores de interés son significativamente más altos entre los beneficiarios con mayor tiempo en el programa.Sin embargo, en muchos casos estas mejoras son muy pequeñas como para ser tomadas en cuenta en el análisis de los efectos promedio, cuando los beneficiarios son comparados con los no beneficiarios. Estos descubrimientos sugieren que mientras el programa tenga un impacto poco significativo en el bienestar, hay espacio para mejorar.

Sustainable economic growth and strong institutions are interlinked, and the present report summarizes recent economic and fiscal developments in West Bank and Gaza (WB&G) as well as providing a broad overview of institutional accomplishments to date. The present report begins by discussing the apparent slowdown in economic growth in WB&G and the current fiscal crisis facing the Palestinian Authority (PA)-resulting partly from lower-than-expected external support this year. A further drop in donor funding would likely reduce growth, which would in turn further aggravate the fiscal situation in the coming year. A protracted fiscal crisis, in turn, risks jeopardizing the gains made in institution-building and thereby losing what has been painstakingly achieved over the past years. In addition, the report highlights that in order for the PA to sustain the reform momentum and its achievements in institution-building, remaining Israeli restrictions must be lifted and any reductions in international aid flows must be carefully calibrated and managed. Economic growth in WB&G has slowed down in 2011, and together with the shortfall in external financing, this has led to a fiscal crisis for the PA. Economic growth in WB&G remains robust but appears to be slowing due to economic and political uncertainty, so that the International Monetary Fund (IMF) has revised the projected real Gross Domestic Product (GDP) growth rate for 2011 from 9 down to 7 percent. Despite some improvement, unemployment remains stubbornly high and labor force participation low in WB&G.

The study looks at primary expenditure developments in the euro area, its three largest members and four “macro-imbalances” countries for the period 1999-2009. It compares actual expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. It also calculates the implications for debt trends. It finds that, all sample countries except Germany applied expansionary expenditure policies. This resulted in much higher expenditure and debt paths compared to a counterfactual neutral expenditure stance. Simple and prudent rules-based spending policies could have led to much safer fiscal positions much more in line with the EU’s Stability and Growth Pact rules. JEL Classification: E17, E61, E65, H50, H60

The relationship between growth in monetary aggregates and price changes continues to be a subject of considerable debate both in the academic and policy circles. Whereas the more ‘conservative’ policy makers hold that growth in monetary aggregates bear proportionately on prices, ‘liberals’ on the other hand suggest a fairly weak relationship and instead mainly attribute sustained price changes to other innovations (including structural weaknesses and poor productive capacity). This study employed vector autoregression techniques (and its variants) to examine both short term as well as long term interactions between selected macroeconomic aggregates with particular focus on the relationship between money growth and price changes. Results from both the reduced form vector autoregression specification and the contemporaneous structural vector autoregression show a weak causation from growth in monetary aggregates to price changes, but the link between changes in monetary aggregates and prices becomes stronger in the long run. The results also point to a strong relationship between price changes on the one hand and exchange rate depreciation, and past inflation outcomes on the other. The results imply a potential for increased revenue from monetisation, at least up to some feasible as well as the need to focus on other possible sources of price variations. In general, whereas it is possible for the relationship between prices and money to weaken, budget deficits beyond ‘certain financeable limits’ will clearly negate the possibility of attaining other objectives of macroeconomic policy...

The relationship between growth in monetary aggregates and price changes continues to be a subject of considerable debate both in the academic and policy circles. Whereas the more ‘conservative’ policy makers hold that growth in monetary aggregates bear proportionately on prices, ‘liberals’ on the other hand suggest a fairly weak relationship and instead mainly attribute sustained price changes to other innovations (including structural weaknesses and poor productive capacity). This study employed vector autoregression techniques (and its variants) to examine both short term as well as long term interactions between selected macroeconomic aggregates with particular focus on the relationship between money growth and price changes. Results from both the reduced form vector autoregression specification and the contemporaneous structural vector autoregression show a weak causation from growth in monetary aggregates to price changes, but the link between changes in monetary aggregates and prices becomes stronger in the long run. The results also point to a strong relationship between price changes on the one hand and exchange rate depreciation, and past inflation outcomes on the other. The results imply a potential for increased revenue from monetisation, at least up to some feasible as well as the need to focus on other possible sources of price variations. In general, whereas it is possible for the relationship between prices and money to weaken, budget deficits beyond ‘certain financeable limits’ will clearly negate the possibility of attaining other objectives of macroeconomic policy. A natural concern that arises in such a context is one of sustainability and compatibility of the budget deficit with other macroeconomic targets. We also employed the government budget accounting framework to analyse sustainability of Uganda’s current fiscal stance. The results show that the consolidated deficit is consistent with attainment of target outcomes for other macroeconomic variables, most notably the rates of inflation and GDP growth rates. The inflation target has however, been achieved at the cost of an unsustainable domestic debt. From a policy perspective, issuing domestic debt at such a high real interest rates will allow lower money growth but at the cost of future increases in debt service obligations and thus future budget deterioration.