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This paper investigates, in the case of the euro area, the standard assumption that the liquidity trap steady state, which arises from the existence of the zero lower bound on the nominal interest rate, is locally unstable. We show that the policy function of the European Central Bank (ECB) is described by a nonlinear Taylor rule. Then, using our estimations, we show that around the liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. Finally, we find that an inflation shock is more efficient than a demand shock to escape the liquidity trap steady state.
Alors que les politiques d'austérité et les réformes budgétaires décidées par la zone euro ont un impact de plus en plus perceptible sur les millions de citoyens européens, ce livre tente d'offrir une réponse aux questionnements qui traversent l'opinion publique. Au-delà d'un état des lieux de la zone euro, ce livre interroge la pertinence des choix d austérité et pose la question des ajustements à mettre en oeuvre dans une union monétaire entre pays hétérogènes.
This paper presents a continuous time stochastic growth model to study the effects of tax evasion and tax corruption on the level and volatility of private investment and public spending that are both factors of growth. The model highlights several channels through which the mean and volatility of these variables are affected. We first stress the role of equity markets, showing that the evasion outcome for the private sector is not necessarily viewed as a burden. Equity market performs here have the same role as a policy of tax exemption. In societies in which the share of private investment in percentage of GDP is growing, in which tax cheaters usually choose to shelter the proceeds of their illegal activities from the official financial institutions, and in which the productivity of public spending is often low, tax evasion and tax corruption may contribute to the development of private capital if people find an opportunity to invest the proceeds of their illegal activities in equity markets.
This note provides an overview on recent theoretical and empirical developments in decision-making under uncertainty, monetary policy and financial markets. It introduces in particular a special issue that contains a selection of papers presented at the third International Symposium in Computational Economics and Finance (ISCEF) in April 2014 in Paris (www.iscef.com). The papers, both theoretical and empirical, discuss issues that improve our understanding of how computational tools can be used to facilitate our understanding of the agents' behaviors and policies.
This paper tries to identify the macro-financial imbalances that exposed the euro area countries to fiscal stress before the outbreak of the European debt crises. Contrary to conventional wisdom that interprets fiscal stress in terms of fiscal sustainability, we focus on short-term fiscal vulnerability as reflected by the conditions of debt refinancing in the sovereign bond markets. We find that market-based indicators capturing risk perceptions of sovereign debts have been influenced by the indicators defined in the European Macroeconomic Imbalance Procedure (MIP) and by variables of financial vulnerability. When pricing the risk of sovereign bonds, the holders of government debts take into account, not only the macroeconomic imbalances, but also factors such as banking distress, corporate bond risk, liquidity risks in the interbank market or the volatility of stock prices.
This paper discusses the monetary and exchange policies followed by Latin American countries during the financial crises that have appeared each decade since the beginning of the 1980s. We examine the implications of a phenomenon defined by Reinhart as “this time is different”. In particular, we report errors in the diagnosis of the structural causes of past financial crises, and the damages caused by the choice of fixed exchange rates. The article also looks at the problems facing the countries today: the resource curse, the dilemma between currency appreciation and financial bubbles, inflation targeting policy. We suggest that governments have learned from past crises, by further anchoring their financial policies to the reality of their economies: the exchange rate regime is no longer the guiding element of inflation policy, loans in local currency have increased due to the rise in domestic bond markets, monetary policies have remained accommodative during the 2008 financial crisis, and central banks have used swap agreements to meet their needs of international currencies. Classification JEL: E52, F14, F31, F33, F42, O11, O54.
This paper provides evidence of various reactions of growth rates to changes in the composition of taxes and public spending in Europe. We use a quantile estimator to allow different slopes of fiscal variables, across countries and years. We find that sovereign spending should be encouraged in the medium term if growth is low, but the medium-term effect on the economic activity is not positive in situations of moderate or rapid growth. Human capital expenditure jeopardizes growth, if a country belongs to the group of under-performers, while the initial costs are progressively transformed into growth-friendly factors for the group of over-achievers. Welfare expenditure is unproductive in the medium term, but only above a given growth threshold. Higher direct taxes are more harmful for low-growth countries, since their effects are more persistent than for countries with high growth. Our findings are contrary the idea that one size fits all.
This paper proposes a regime-dependent model to estimate fiscal multipliers in the US. Output, consumption and investment are assumed to respond to tax and spending changes in a nonlinear manner. Fiscal multipliers are time-varying because their size and sign depend upon the state of the economy (upturns and downturns). Keynesian effects appear essentially during downturns, while anti-Keynesian effects are observed during expansions. Transfer payments contributes to a higher private consumption when they are given to consumers in bad times. Reducing taxes boosts consumption in good times. Investment responds positively to lower taxes during downturns, but negatively in the upturn regime. Our results thus suggest that Keynesian effects have been associated to expansionary policies during recessions, while anti-Keynesian effects were observed during expansions illustrating situations of expansionary fiscal consolidation. The effectiveness of fiscal positive impulses increases in downturns relative to upturns. A corollary is therefore that austerity measures during recessions would have detrimental effects on the GDP and its components.
We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-à-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.