Real-time determinants of fiscal policies in the euro area: Fiscal rules, cyclical conditions and elections

We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle

Did Growth and Reforms Increase Citizens' Support for the Transition?

How did post-communist transformations affect people's perceptions of their economic and political systems? We model a pseudo-panel with 89 country-year clusters, based on 13 countries observed between 1991 and 2004, to identify the macro and institutional drivers of the public opinion. Our main findings are: (i) When the economy is growing, on average people appreciate more extensive reforms; they dislike unbalanced reforms. (ii) Worsening of income distribution and higher inflation interact with an increasing share of the private sector in aggravating nostalgia for the past regime. (iii) Cross-country differences in the attitudes towards the present and future (both in the economic and political dimensions) are largely explained by differences in the institutional indicators for the rule of law and corruption. (iv) Cross-country differences in the extent of nostalgia towards the past are mainly related to differences in the deterioration of standards of living.economic performance, economic reforms, post-communist transition, political economy, support for reforms, public opinion

Modelling Inflation in EU Accession Countries: The Case of the Czech Republic, Hungary and Poland

Inflation in Central and East European countries varied considerably over the transition phase, and econometric relationships between prices, money, wages and exchange rates are said to have been unstable during this period. In order to shed some light on the issue, this paper analyses some empirical models of the inflation process in the three earliest east European transition economies: the Czech Republic, Hungary and Poland. Since the end of the 1980s these economies have experienced high rates of inflation, although significant disinflation measures were introduced during the mid-nineties to enhance these countries’ chances of joining the EU, and they succeeded in getting inflation under control without high costs in terms of lost output. Given this, the determinants of inflation need to be empirically analysed not only in order to understand the disinflation measures, but also to assess the possible effects of future pressure on prices. Price stabilisation is an essential complement to the success of transition. Policies to contain inflation are necessary for transition economies to grow and firms to restructure. In the present paper, we first look at inflation within the context of multivariate cointegration, where domestic and foreign price determinants are initially assessed in separate blocks (each single-theory based) in order to obtain a number of long-term attractors. We then formulate consumer and producer inflation equations from more general VEqCMs for each country. The importance of theory-based imbalances (from previous cointegration experiments) in explaining inflation can be assessed at this stage. Our most significant empirical findings seem to substantiate the idea that many, if not all, theoretical determinants of inflation are of importance in those countries in question: the exchange rate and the output gap would appear to be of particular importance in explaining the phenomenon.Inflation modelling, transition economies, European Union enlargement

Fatti stilizzati e metodi econometrici «moderni»: una rivisitazione della curva di Phillips per l’Italia (1951-1996)

A quarant’anni dalla sua introduzione, la curva di Phillips riveste ancora un ruolo importante negli studi applicati, nonostante le critiche cui è stata sottoposta dalla successiva letteratura. In questo lavoro, utilizzando tecniche di modellazione econometrica di serie storiche non stazionarie per l’Italia dal dopoguerra ad oggi, si evidenzia la stabilità di una relazione di lungo periodo fra il tasso di variazione del salario reale e il tasso di disoccupazione; questo risultato è robusto all’uso di stimatori alternativi. Nel breve periodo si propone un modello interpretativo caratterizzato da un meccanismo non lineare di correzione dell’errore

What is this thing called confidence? A comparative analysis of consumer confidence indices in eight major countries

The paper examines the evolution of consumer confidence indices in Australia, Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America since the 1970s, by modelling them in a multivariate framework of common macroeconomic variables for each country. Results suggest that: (a) the main economic determinants of consumer confidence cannot be summarized only on the basis of some macroeconomic variables; (b) consumer confidence indices have some ability to forecast economic activity, provided that both their coincident nature is taken into account and that a number of data-coherent parameter restrictions are imposed. A number of analyses (both insample and out-of-sample) are devoted to assessing the robustness of previous findings.consumer confidence determinants, GDP indicator, in-sample and out-of-sample forecasting ability

Fatti stilizzati e metodi econometrici "Moderni": una rivalutazione della Curva di Phillips per l'Italia (1951-1996)

A quarant’anni dalla sua introduzione, la curva di Phillips riveste ancora un ruolo importante negli studi applicati, nonostante le critiche cui è stata sottoposta dalla successiva letteratura. In questo lavoro, utilizzando tecniche di modellazione econometrica di serie storiche non stazionarie per l’Italia dal dopoguerra ad oggi, si evidenzia la stabilità di una relazione di lungo periodo fra il tasso di variazione del salario reale e il tasso di disoccupazione; questo risultato è robusto all’uso di stimatori alternativi. Nel breve periodo si propone un modello interpretativo caratterizzato da un meccanismo non lineare di correzione dell’errore

Forecasting Industrial Production in the Euro Area

The creation of the Euro area has increased the importance of obtaining timely information about short-term changes in the area's real activity. In this paper we propose a number of alternative short-term forecasting models, ranging from simple ARIMA models to more complex cointegrated VAR and conditional models, to forecast the index of industrial production in the euro area. A conditional error-correction model in which the aggregate index of industrial production for the area is explained by the US industrial production index and the business confidence index from the European Commission harmonised survey on manufacturing firms achieves the best score in terms of forecasting capacity.

Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries

In 1991, the rate of inflation in the Czech Republic, Hungary and Poland was between 35% and 70%. At the end of 2001, it is below 8%. We setup a small structural macro model of these economies to explain the process of disinflation. Contrary to a widespread skepticism, which permeated a large part of previous research on these issues, we show that a simple open macroeconomic model, along the lines of Svensson (2000, Journal of International Economics), with forward-looking inflation and exchange rate expectations, can adequately characterize the relationship between the output gap, inflation, the real interest rate and the exchange rate during the course of transition. We use the estimated models to interpret the main features of monetary policy in each country and identify the channels of policy transmission. We characterize the policy rules and assess the relative importance of the interest rate channel (on aggregate demand) and the exchange rate channel (which affects both aggregate demand and supply) in determining the path of (dis)inflation. In the same context, we also tentatively analyze the consequences of attempting a faster path of disinflation. Finally, we evaluate the appropriateness of the inflation targeting framework which has been adopted recently in all three countries, and discuss to what extent it represents a discontinuity with the past.Disinflation policy, Interest rate rules, Inflation targeting, Transition economies, Small open-economy macro models.

Inflation Expectations and the Two Forms of Inattentiveness

The purpose of the present paper is to investigate the structure and dynamics of professionals' forecast of inflation. Recent papers have focused on their forecast errors and how they may be affected by informational rigidities, or inattentiveness. In this paper we extend the existing literature by considering a second form of inattentiveness. While showing that both types of inattentiveness are closely related, we focus on the inattentiveness that forecasters face when undertaking multi-period forecast and, thereby, the expected momentum of inflation. Using number survey-based data for the US and UK, we establish a new structure for the professional's forecast error with direct implications for the persistence of real effect

Testing for structural change in cointegrated relationships Analysis of price-wages models for Poland and Hungary

In previous studies concerning short and long run relationships for price-wage models, the cointegration analysis has been developed assuming the existence of a unique cointegration parametrisation. These empirical results reveal the presence of significant relationships, both in the short and in the long run, among prices, wages, labour productivity and exchange rate. In this paper we intend to develop the possibility of a more general type of cointegration, allowing for a change at an unknown time period in the sample. At this end we will consider mainly the long run relationship among these variables using the testing procedure suggested by Gregory and Hansen (1996a, 1996b). This permits us to consider a multivariate extension of the endogenous break univariate approach and in the meanwhile this enables to test for cointegration in the presence of possible structural breaking cointegrated relationships under the alternative. The empirical analysis of a multivariate model for price-wage relationship both for Poland and Hungary, over the period 1970-1996, is presented and discussed