Fiscal consolidations in a low inflation environment: pay cuts versus lost jobs

We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public-sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.E. Pappa acknowledges the support of FCT as well as the ADEMU project, funded by the European Union's Horizon 2020 Program under grant agreement No. 649396. The views expressed here in no way reflect those of the Bank of England or the Bank of Spai

Fiscal Consolidation in a Low-Inflation Environment : Pay Cuts versus Lost Jobs

We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive

Fiscal consolidation in a low-inflation environment : pay cuts versus lost jobs

First published: June 2018We construct a model of a monetary union to study fiscal consolidation in the periphery of the euro area, through cuts in public-sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low-inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.FCTEuropean Union's Horizon 2020 Program [649396

Global value chains and international risk sharing

Unlike final-goods trade, intermediate-input trade through Global Value Chains (GVCs) creates supply-side linkages across borders. We show that, even when GVCs themselves are efficient, they have welfare implications because these linkages affect countries’ ability to share risks in incomplete financial markets. This novel interaction between trade and finance arises from a distinct channel of cross-border transmission with GVCs, the marginal cost effect. Productivity shocks, by moving relative prices, impact the marginal cost of production both at home and abroad, and therefore, in equilibrium, their relative supply. When international financial markets are incomplete, these supply side linkages will affect household wealth in both countries, and, in turn, the degree of international risk sharing. The direction and strength of this effect varies with the trade elasticity and the degree of GVC integration, with non-monotonic effects leading to ‘fragmentation traps’ in which small increases in GVC integration reduce risk sharing, while large increases would improve it. We show that in the quantitatively relevant case, GVCs reduce cross-border misalignments, and so endogenously support international risk sharing

Global age-sex-specific mortality, life expectancy, and population estimates in 204 countries and territories and 811 subnational locations, 1950–2021, and the impact of the COVID-19 pandemic: a comprehensive demographic analysis for the Global Burden of Disease Study 2021

Background Estimates of demographic metrics are crucial to assess levels and trends of population health outcomes. The profound impact of the COVID-19 pandemic on populations worldwide has underscored the need for timely estimates to understand this unprecedented event within the context of long-term population health trends. The Global Burden of Diseases, Injuries, and Risk Factors Study (GBD) 2021 provides new demographic estimates for 204 countries and territories and 811 additional subnational locations from 1950 to 2021, with a particular emphasis on changes in mortality and life expectancy that occurred during the 2020–21 COVID-19 pandemic period. Methods 22 223 data sources from vital registration, sample registration, surveys, censuses, and other sources were used to estimate mortality, with a subset of these sources used exclusively to estimate excess mortality due to the COVID-19 pandemic. 2026 data sources were used for population estimation. Additional sources were used to estimate migration; the effects of the HIV epidemic; and demographic discontinuities due to conflicts, famines, natural disasters, and pandemics, which are used as inputs for estimating mortality and population. Spatiotemporal Gaussian process regression (ST-GPR) was used to generate under-5 mortality rates, which synthesised 30 763 location-years of vital registration and sample registration data, 1365 surveys and censuses, and 80 other sources. ST-GPR was also used to estimate adult mortality (between ages 15 and 59 years) based on information from 31 642 location-years of vital registration and sample registration data, 355 surveys and censuses, and 24 other sources. Estimates of child and adult mortality rates were then used to generate life tables with a relational model life table system. For countries with large HIV epidemics, life tables were adjusted using independent estimates of HIV-specific mortality generated via an epidemiological analysis of HIV prevalence surveys, antenatal clinic serosurveillance, and other data sources. Excess mortality due to the COVID-19 pandemic in 2020 and 2021 was determined by subtracting observed all-cause mortality (adjusted for late registration and mortality anomalies) from the mortality expected in the absence of the pandemic. Expected mortality was calculated based on historical trends using an ensemble of models. In location-years where all-cause mortality data were unavailable, we estimated excess mortality rates using a regression model with covariates pertaining to the pandemic. Population size was computed using a Bayesian hierarchical cohort component model. Life expectancy was calculated using age-specific mortality rates and standard demographic methods. Uncertainty intervals (UIs) were calculated for every metric using the 25th and 975th ordered values from a 1000-draw posterior distribution. Findings Global all-cause mortality followed two distinct patterns over the study period: age-standardised mortality rates declined between 1950 and 2019 (a 62·8% [95% UI 60·5–65·1] decline), and increased during the COVID-19 pandemic period (2020–21; 5·1% [0·9–9·6] increase). In contrast with the overall reverse in mortality trends during the pandemic period, child mortality continued to decline, with 4·66 million (3·98–5·50) global deaths in children younger than 5 years in 2021 compared with 5·21 million (4·50–6·01) in 2019. An estimated 131 million (126–137) people died globally from all causes in 2020 and 2021 combined, of which 15·9 million (14·7–17·2) were due to the COVID-19 pandemic (measured by excess mortality, which includes deaths directly due to SARS-CoV-2 infection and those indirectly due to other social, economic, or behavioural changes associated with the pandemic). Excess mortality rates exceeded 150 deaths per 100 000 population during at least one year of the pandemic in 80 countries and territories, whereas 20 nations had a negative excess mortality rate in 2020 or 2021, indicating that all-cause mortality in these countries was lower during the pandemic than expected based on historical trends. Between 1950 and 2021, global life expectancy at birth increased by 22·7 years (20·8–24·8), from 49·0 years (46·7–51·3) to 71·7 years (70·9–72·5). Global life expectancy at birth declined by 1·6 years (1·0–2·2) between 2019 and 2021, reversing historical trends. An increase in life expectancy was only observed in 32 (15·7%) of 204 countries and territories between 2019 and 2021. The global population reached 7·89 billion (7·67–8·13) people in 2021, by which time 56 of 204 countries and territories had peaked and subsequently populations have declined. The largest proportion of population growth between 2020 and 2021 was in sub-Saharan Africa (39·5% [28·4–52·7]) and south Asia (26·3% [9·0–44·7]). From 2000 to 2021, the ratio of the population aged 65 years and older to the population aged younger than 15 years increased in 188 (92·2%) of 204 nations. Interpretation Global adult mortality rates markedly increased during the COVID-19 pandemic in 2020 and 2021, reversing past decreasing trends, while child mortality rates continued to decline, albeit more slowly than in earlier years. Although COVID-19 had a substantial impact on many demographic indicators during the first 2 years of the pandemic, overall global health progress over the 72 years evaluated has been profound, with considerable improvements in mortality and life expectancy. Additionally, we observed a deceleration of global population growth since 2017, despite steady or increasing growth in lower-income countries, combined with a continued global shift of population age structures towards older ages. These demographic changes will likely present future challenges to health systems, economies, and societies. The comprehensive demographic estimates reported here will enable researchers, policy makers, health practitioners, and other key stakeholders to better understand and address the profound changes that have occurred in the global health landscape following the first 2 years of the COVID-19 pandemic, and longer-term trends beyond the pandemic

Essays on macroeconomic policy

Defence date: 18 April 2016Examining Board: Prof. Fabio Canova, EUI, Supervisor; Prof. Carlo Favero, Bocconi University; Prof. Andrea Ferrero, University of Oxford; Prof. Evi Pappa, EUI.This thesis looks at the interactions between fiscal, monetary and structural policies along three dimensions. The first paper looks at the dynamic effects of structural reforms when monetary policy is constrained. Structural reforms entail short run output costs that can be o set by a demand expansion. When monetary policy cannot carry out this short run expansion, there is a role for fiscal policy. In this case, reforms imply a fiscal cost in the short run, which can be justified by a long run improvement in public finances. This paper quantifies the short run costs and long run benefits of potential reforms in Europe. Results show that output losses from reforms can be fully o set with a modest fiscal stimulus. While for product market reforms this cost is justified by the long run fiscal gains, labour market reforms alone do not provide a sufficient boost to long run tax revenues. The second paper looks at the transmission of fisscal policy in an economy characterised by tax evasion and corruption. Cross-country evidence highlights the importance of these features in determining fiscal multipliers, and VAR evidence suggests that spending cuts reduce tax evasion, while tax hikes increase it. In a model with an underground sector, spending cuts reallocate production towards the formal sector, thus reducing tax evasion. Tax hikes increase incentives to produce in the less productive informal sector, implying higher output losses. Embezzlement of public revenues further amplifies these losses by requiring larger tax hikes to reduce debt. The model corroborates the evidence of increased levels of tax evasion during recent fiscal consolidations in southern Europe. The final paper compares price-based and quantity-based fiscal adjustments when in action is low. Focusing on the public wage bill, this translates to fiscal consolidation through cuts to public wages or public employment. In both cases, low inflation eliminates the expansionary e ects of the consolidation for the private sector. The drag in economic activity is substantially amplified, with increased debt-to-GDP levels during the consolidation

Fiscal rules and structural reforms

Implementation of fiscal surveillance rules relies heavily on the proper interpretation of legal terms, creating a need to infuse economic insight into legal analysis. Rigid legal application of fiscal deficit rules may curtail structural reforms, as reforms can go against fiscal consolidation in the short run. However, if reforms are expected to improve public finances in the long run, they should not be viewed as incompatible with the legal framework. Focussing on the case of EU fiscal surveillance, this paper identifies the circumstances under which the positive budgetary long-term effect of structural reforms materialize in such a way that the legal rules should be applied with a degree of leniency, allowing for a short-term deterioration of the fiscal position. To that end, we quantify the short-run fiscal costs and long-run fiscal benefits of reforms, and investigate how the design of reforms can affect this trade-off. Results suggest that as short run output losses of reforms are alleviated by fiscal stimulus, long run output gains from the reforms imply that fiscal viability can be reached within a reasonable period of time. Product market reforms are generally preferable over labour market reforms, as they have a larger impact on fiscal revenues. These insights inform the legal analysis in several regards. First, the economic analysis is in line with teleological interpretation of legal rules aimed at ensuring long-term fiscal stability, while allowing short-term fiscal leniency. Second, the economic analysis can give contours to vague legal terms, such as 'prompt' positive budgetary effects and the legal requirement of 'major' structural reforms, showing that the type of reform matters as much as the size of the reform, and that while larger reforms have larger long run budgetary effects, they also require greater leniency in the short run. More generally, our analysis calls for the design and interpretation of legal fiscal regimes with reference to the interdependency between fiscal policy and structural economic policies.The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396

Fiscal rules and structural reforms

Implementation of fiscal surveillance rules relies heavily on the proper interpretation of legal terms, creating a need to infuse economic insight into legal analysis. Rigid legal application of fiscal deficit rules may curtail structural reforms, as reforms can go against fiscal consolidation in the short run. However, if reforms are expected to improve public finances in the long run, they should not be viewed as incompatible with the legal framework. Focussing on the case of EU fiscal surveillance, this paper identifies the circumstances under which the positive budgetary long-term effect of structural reforms materialize in such a way that the legal rules should be applied with a degree of leniency, allowing for a short-term deterioration of the fiscal position. To that end, we quantify the short-run fiscal costs and long-run fiscal benefits of reforms, and investigate how the design of reforms can affect this trade-off. Results suggest that as short run output losses of reforms are alleviated by fiscal stimulus, long run output gains from the reforms imply that fiscal viability can be reached within a reasonable period of time. Product market reforms are generally preferable over labour market reforms, as they have a larger impact on fiscal revenues. These insights inform the legal analysis in several regards. First, the economic analysis is in line with teleological interpretation of legal rules aimed at ensuring long-term fiscal stability, while allowing short-term fiscal leniency. Second, the economic analysis can give contours to vague legal terms, such as ‘prompt’ positive budgetary effects and the legal requirement of ‘major’ structural reforms, showing that the type of reform matters as much as the size of the reform, and that while larger reforms have larger long run budgetary effects, they also require greater leniency in the short run. More generally, our analysis calls for the design and interpretation of legal fiscal regimes with reference to the interdependency between fiscal policy and structural economic policies.The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396

Fiscal consolidation in a disinflationary environment: price vs. quantity-based measures

An important feature of the current economic conditions in the EU, which challenges the design and implementation of macroeconomic policy, is inflation uncertainty. With monetary policy at the zero lower bound, and inflation well below its target, a key issue for policy makers is the effect /nthis has on the transmission of fiscal policy. We aim to address this question, in particular comparing the effects of price-based and quantity-based fiscal instruments. In this paper we focus on the public wage bill, and consider a model of a monetary union in which the government can /nconsolidate their debt through reductions in the public wage or public employment. We find that in both cases the low inflation environment eliminates the expansionary effects of the reduction in the public wage bill for the private sector. The drag in economic activity is substantially amplified/nin the low inflation environment, with increased debt-to-GDP levels during the consolidation process

Fiscal consolidation in a disinflationary environment : price vs. quantity-based measures

An important feature of the current economic conditions in the EU, which challenges the design and implementation of macroeconomic policy, is inflation uncertainty. With monetary policy at the zero lower bound, and inflation well below its target, a key issue for policy makers is the effect /nthis has on the transmission of fiscal policy. We aim to address this question, in particular comparing the effects of price-based and quantity-based fiscal instruments. In this paper we focus on the public wage bill, and consider a model of a monetary union in which the government can /nconsolidate their debt through reductions in the public wage or public employment. We find that in both cases the low inflation environment eliminates the expansionary effects of the reduction in the public wage bill for the private sector. The drag in economic activity is substantially amplified/nin the low inflation environment, with increased debt-to-GDP levels during the consolidation process