Fiscal policy and growth in the context of European integration

The paper considers the issue of whether a supranational fiscal policy in Europe is needed, and, if so what responsibilities it should undertake. The literature on endogenous growth and the principle of subsidiarity suggest that such a policy should be limited to externalities or economies of scale not captured at the national level. These may include spending on research and development and transportation or knowledge networks, and harmonization of social security designed to enhance labor mobility. EU-wide stabilization policy or enhanced EU redistribution does not seem justified, however.

The new multi-polar international monetary system

Backed by rapid economic growth, growing financial clout, and a newfound sense of assertiveness in recent years, the BRIC countries - Brazil, Russia, India, and China - are a driving force behind an incipient transformation of the world economy away from a US-dominated system toward a multipolar one in which developing countries will have a major say. It is, however, in the international monetary arena that the notion of multipolarity - more than two dominant poles - commands renewed attention and vigorous debate. For much of its history, the quintessential structural feature of the international monetary system has been unipolarity - as American hegemony of initiatives and power as well as its capacity to promote a market-based, liberal order came to define and shape international monetary relations. As other currencies become potential substitutes for the US dollar in international reserves and in cross-border claims, exchange rate volatility may become more severe. There are also risks that the rivalry among the three economic blocs may spill over into something more if not kept in check by a strong global governance structure. While the transition will be difficult and drawn out, governments should take immediate steps to prevent financial volatility by enhancing cooperation on monetary policies, currency market intervention and financial regulation.Currencies and Exchange Rates,Debt Markets,Emerging Markets,Fiscal&Monetary Policy,Economic Theory&Research

Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads

We offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding, by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes, and by recognizing non-linearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in the spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios.emerging market spreads, currency crises, global monetary conditions

Les effets à long terme de différentes règles de financement du gouvernement

Le but de ce texte est d’essayer de quantifier les effets de substitution entre travail et loisir induits par les changements d’impôts, et de voir combien ces effets modifient la neutralité du choix de financement du gouvernement. Un modèle basé sur la maximisation de l’utilité de la consommation et du loisir est estimé sur la période 1958 à 1980. Ce modèle sert ensuite à faire des simulations d’une augmentation temporaire des transferts, financée soit par les impôts, soit par les obligations. Les simulations indiquent que le mode de financement peut avoir un effet important sur le comportement de l’économie.The purpose of this paper is to quantify the substitution effects brought about by tax rate changes and to see to what extent they modify the neutrality of the financing choice facing the government, that is, tax increases on borrowing. An intertemporal utility maximisation model of household behaviour is estimated over the period 1958-1980, where utility is a function of both consumption and leisure. The model is then used to simulate a temporary increase in government transfer payments to households, financed either by taxes or by bond issues. The simulation results indicate that the method of financing can have an important effect even in a classical equilibrium model, given the estimated elasticity of substitution between work and leisure

International Coordination of Economic Policies: Scope, Methods, and Effects

This paper discusses the scope, methods, the effects of international coordination of economic policies. In addressing the scope for and of coordination, the analysis covers the rationale for coordination, barriers to coordination, the range and specificity of policies to be coordinated, the frequency of coordination, and the size of the coordinating group. Turning to the methods of coordination, the emphasis is on the broad issues of rules versus discretion, single-indicator versus multi-indicator approaches, and hegemonic versus more symmetric systems. In an attempt to shed some light on the effects of alternative rule- based proposals for coordination, we present some simulations of a global macroeconomic model (MULTIMQD) developed in the International Monetary Fund. The simulations considered range from 'smoothing rules for monetary and fiscal policy that imply only minimal international coordination, to more activist "target-zone" proposals that place greater restrictions on national authorities in the conduct of monetary and/or fiscal policies. The simulation results are compared to the actual evolution of the world economy over the 1974-87 period. Our findings suggest that simple mechanistic rule-based proposals are unlikely to lead to improved performance.

Un modèle mensuel du secteur financier au Canada

In this article we describe preliminary estimates of a model of the Canadian financial system. At the present time, the model explains the behaviour of the authorities, the chartered banks, the public, and the trust and mortgage loan companies. The variables explained include monetary aggregates, several interest rates, and the major assets of the chartered banks and of the trust and mortgage loan companies.The model differs from existing Canadian models in that we use monthly data rather than quarterly or annual data. We think the shorter observation period permits the econometric estimates to capture the dynamic adjustment processes more accurately. In particular, the mean lags implied by our equations tend to be considerably shorter than those in existing models. Another difference with conventional models is the larger influence given to asset and liability management of the chartered banks in the determination of short-term interest rates.The model is intended primarily for forecasting, and results are presented which indicate its usefulness in that regard