Population ageing and public pension reforms in a small open economy

This paper aims to address the issue of public pension reforms under demographic ageing that is likely to occur in Europe over the next 50 years. Three possible scenarios are analysed in a Blanchard OLG framework. These include: i) a decrease both in public pensions and the lump sum labour income tax, ii) a decrease both in public pensions and the distortionary corporate tax, iii) an increase in the retirement age. The analysis focuses on the effects of these fiscal policies on key economic variables such as consumption, private and public debt, output and wages. Quantitative experiments assess the impact of different fiscal policies in terms of public debt sustainability but most importantly suggest policies that smooth the transition of the economy to the new equilibrium. The main results suggest that the adverse effects of pension reforms on consumption are moderated when they are accompanied by appropriate taxation policies. In particular, when the tax response is rapid most of the adverse movement in consumption is avoided while public and national debt reach lower equilibrium levels. JEL Classification: E6, H3, J1, H55Ageing, overlapping generations, Pension Reforms, Taxation

The impact of macroeconomic uncertainty on inequality: An empirical study for the UK

The role of economic uncertainty on macroeconomic fluctuations has been studied extensively in the literature. In the aftermath of the financial crisis and in the process of its exit from the EU, the UK is facing high levels of uncertainty on future economic growth, investment, financial markets etc. In this paper we investigate whether macro economic uncertainty affects income, wage and consumption inequality. Our findings suggest that the measures of inequality increase in the aftermath of an uncertainty shock but decrease in the medium to long run, converging to lower levels. Macroeconomic uncertainty appears to account significantly for the variation of income and consumption inequality. Using detailed micro data we decompose households' income to investigate transmission channels where uncertainty shocks affect differently the percentiles of income and consumption distributions. The financial segmentation and portfolio channels appear to play an important role in this heterogeneous response

The impact of macroeconomic uncertainty on inequality: An empirical study for the UK

The role of economic uncertainty on macroeconomic fluctuations has been studied extensively in the literature. In the aftermath of the financial crisis and in the process of its exit from the EU, the UK is facing high levels of uncertainty on future economic growth, investment, financial markets etc. In this paper we investigate whether macro economic uncertainty affects income, wage and consumption inequality. Our findings suggest that the measures of inequality increase in the aftermath of an uncertainty shock but decrease in the medium to long run, converging to lower levels. Macroeconomic uncertainty appears to account significantly for the variation of income and consumption inequality. Using detailed micro data we decompose households' income to investigate transmission channels where uncertainty shocks affect differently the percentiles of income and consumption distributions. The financial segmentation and portfolio channels appear to play an important role in this heterogeneous response

The impact of monetary policy on inequality in the UK. An empirical analysis

The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We find that contractionary monetary policy shocks lead to an increase in earnings, income and consumption inequality and contribute to their fluctuation. The response of income and consumption at different quantiles suggests that contractionary policy has a larger negative effect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing may have contributed to the increase in inequality over the Great Recession.The Bank of England Donations Committe

The transmission of international shocks to the UK. Estimates based on a time-varying Factor Augmented VAR

The aim of this paper is to gauge the importance of foreign demand, supply and interest rate shocks on the UK economy and assess how their role has changed over time. To that end we devise a time-varying factor augmented VAR model that captures the relationship between 17 industrialised countries and the UK and accounts for any temporal evolution in this relationship. The response of UK macroeconomic variables to a foreign interest rate shock is estimated to have changed significantly since the early 1990s. International demand shocks play an important role in driving World and UK real activity, especially during the recent recession

Macroeconomic information, structural change, and the prediction of fiscal aggregates

Previous research on the prediction of fiscal aggregates has shown evidence that simple autoregressive models often provide better forecasts of fiscal variables than multivariate specifications. We argue that the multivariate models considered by previous studies are small-scale, probably burdened by overparameterization, and not robust to structural changes. Bayesian Vector Autoregressions (BVARs), on the other hand, allow the information contained in a large data set to be summarized efficiently, and can also allow for time variation in both the coefficients and the volatilities. In this paper we explore the performance of BVARs with constant and drifting coefficients for forecasting key fiscal variables such as government revenues, expenditures, and interest payments on the outstanding debt. We focus on both point and density forecasting, as assessments of a country’s fiscal stability and overall credit risk should typically be based on the specification of a whole probability distribution for the future state of the economy. Using data from the US and the largest European countries, we show that both the adoption of a large system and the introduction of time variation help in forecasting, with the former playing a relatively more important role in point forecasting, and the latter being more important for density forecasting

The Impact of Structural Pension Reforms on the Macroeconomic Performance: An Empirical Analysis

Whether pension reforms lead to an improvement in macroeconomic performance is a controversial question. Some countries, which have implemented reforms, claim better economic performance while in others a positive result has yet to be seen. This paper explores two aspects of this issue further: Firstly, we provide a comprehensive investigation of the impact of pension reforms on output, capital stock and consumption. Secondly, we attempt to uncover the factors which lead to cross country heterogeneity in the impact of reform. Our results suggest that pension reform led to an improvement in macroeconomic performance. However, there is also evidence to suggest that this improvement was more pronounced in countries with lower public debt, lower age dependency ratio, more developed financial markets and a higher rate of privatisations.

International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy

A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialised countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time. In addition, the literature has largely employed small-scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The key results show that a foreign monetary policy tightening resembles the classic beggar-thy-neighbour scenario for the United Kingdom in the period 1975-90. In more recent periods, the response is negative but largely insignificant.Factor augmented VAR; Time-variation; Gibbs sampling.

International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy

A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialized countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time. In addition, the literature has largely employed small-scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The key results show that a foreign monetary policy tightening resembles the classic beggar-thy-neighbour scenario for the United Kingdom in the period 1975-90. In more recent periods, the response is negative but largely insignificant