Global imbalances and household savings: the role of wealth

Many claim that fluctuations in US private savings help to create and to sustain global imbalances because of their influence on the current account deficit. To test this claim, this paper investigates the determinants of aggregate household savings using a panel of 18 developed countries for the period 1980-2005. We weave two strands of literature: the first strand from consumer theory, considering specifically the `wealth effect', the second strand from aggregate private savings theory. The original contribution of this paper derives from the main explanatory variables of the household savings function: two measures of household wealth, the first a financial variable and the second a variable for tangible/housing stock. The salience of these variables has not been tested before. The model is then enriched with variables taken from the private savings literature. To find the best technique to estimate the long run savings function, unit root and cointegration tests are carried out, from which evidence of a cointegrating relationship is found. The group means FMOLS is used to estimate the model. The empirical evidence suggests effects consistent with theory: an increase in wealth negatively affects household savings. Furthermore, when important explanatory variables, such as government savings and population dependency ratios, are included in the model, tangible wealth becomes the only kind of wealth to (weakly and negatively) influence household savings in developed countries. In the US however, wealth does not seem to affect household savings negatively, it seems instead that government savings and population changes better explain the decline of savings during the past two decades. This finding provides additional evidence on the issue of global imbalances, and suggests that the recent booms of the stock and the real estate markets should not be blamed for the decline in US household and private savings.Household Savings; Wealth Effect; Panel Cointegration; Global Imbalances; Life Cycle Model.

On the usefulness of government spending in the EU area

We investigate the effects of fiscal policy on private consumption and investment in the European Union. A certain consensus has aroused that fiscal impulses have expansionary Keynesian effects on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR). Our results show that increases in public spending lead to positive and significant effects on private consumption and private investment. According to our baseline estimate, a 1% increase in public spending produces a 0.36% on impact rise in private consumption, and a 0.79% impact rise in private investment. The effects are substantial, and die out slowly (faster in the case of private consumption). A further disaggregation between wage and non-wage components reveals different effects. As for the impact on private consumption, our results show that public salaries have a relatively stronger stimulating role, a result which is probably due to the importance of the public sector especially in continental Europe. On the other hand, the positive impact on private investment is mainly due to the non-wage component of government consumption.

Consumption Multipliers of Different Types of Public Spending: a Structural Vector Error Correction Analysis for the UK

The aim of this paper is to investigate the relationship between government spending and private consumption in the UK, for which there is scarce previous empirical evidence. We disaggregate public expenditure into three categories and search for the corresponding private consumption multipliers. Our analysis includes the estimation of a structural vector error correction (SVEC) model, using quarterly non-interpolated data for the period 1981:1 – 2007:4. Initially, we estimate negative effects on consumption of shocks to total public spending. Then, using the spending decomposition, we find that while shocks to public wages crowd-out private consumption as predicted by neoclassical models, shocks to the non-systematic component of social spending and government purchases of goods and services generate a positive reaction, so to crowd-in private consumption. Thus, the qualitative and quantitative dimensions of fiscal multipliers on private consumption change across different public spending categories. Our findings suggest that any empirical support of competing theoretical models on the issue would benefit from a disaggregation of government expenditure, rather than focusing on the aggregate measure

Productivity and per capita GDP growth: the role of the forgotten factors

Average hourly productivity has often been used to draw conclusions on long run per capita GDP growth, based on the assumption of full utilization of labour resources. In this paper, we argue that a failure to recognize the potentially significant wedges among the two variables – even in the long run - can be misleading. By applying both time series and panel cointegration techniques on data on 19 OECD countries, we fail to reject the hypothesis of absence of a long run common stochastic trend among the two variables in the period 1980-2005. Furthermore, we apply a simple decomposition of GDP growth into five variables, included some related to the supply-side and demographics, so to verify the single contributions to income growth and variance over our period of interest. We conclude that variables that have been so far absent in the growth literature have indeed a non-negligible role in explaining the dynamics of long run per capita GDP growth. In particular, these “forgotten factors” (that we identify with the employment and the activity rates and a demographic ratio) matter more in better performing economies, where we also highlight that productivity has been less important in determining GDP growth than in relatively bad performers.Growth accounting; productivity; panel cointegration; demographics.

On the usefulness of government spending in the EU area

We investigate the effects of fiscal policy on private consumption and investment in the European Union. A certain consensus has aroused that fiscal impulses have expansionary Keynesian effects on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR). Our results show that increases in public spending lead to positive and significant effects on private consumption and private investment. According to our baseline estimate, a 1% increase in public spending produces a 0.36% on impact rise in private consumption, and a 0.79% impact rise in private investment. The effects are substantial, and die out slowly (faster in the case of private consumption). A further disaggregation between wage and non-wage components reveals different effects. As for the impact on private consumption, our results show that public salaries have a relatively stronger stimulating role, a result which is probably due to the importance of the public sector especially in continental Europe. On the other hand, the positive impact on private investment is mainly due to the non-wage component of government consumption.Fiscal policy, private consumption, panel vector autoregression.

Is It Time to Get Radical? A Game Theoritic analysis of Asian Crisis and Capital Control

Policymakers in modern and open economies face a macroeconomic trilemma (Obstfeld, Shambaugh, and Taylor 2005). There are three main sought-after objectives: 1. to stabilize the exchange rate; 2. to enjoy free international capital mobility 3. to engage in a monetary policy oriented toward domestic goals. Three main questions that we try to answer are : How the crisis exacerbated by international investor racing to pull out their capital from affected coutnries? Can capital control reduce it? Can capital control reduce contagion effect and regional financial instability? Using game theoritical framework and insight from behavioral economics, we analyzed herd behaviour of international investors in the time of financial crisis. Under free international capital mobility, uncertainty and lack of coordination among investors with short-horizon, we found prisoner dilemma type of arrangement that exacerbated financial crisis. Applying the anylisis to multi-stage game with government, we found that a credible threat of capital control could reduce herd behaviour and escape the worst of financial crisis. Therefore, fredom to employ capital control is a policy tool that enable escape from the trilemma and pursue all three goals at the same time. We modify the framework to include multiple countries under financial crisis and fear of contagion. We found the ability to impose capital control, under certain conditions, will isolate the crisis and reduce contagion effect. We also explore the critical value when capital control should be enacted with regard to domestic economic condition, on which government political mandate base upon, and differences of reactions in relation to political regime. We conclude by citing incidences of insistance toward comitment against capital control by IMF in loans approcal and US in free trade agreement as misdirected, unncessesary and even harmful in some cases.Asiena crisis; game theory; capital control

Fiscal shocks, public debt, and long-term interest rate dynamics

Public finances worldwide have been severely hit by the 2008-2009 Great Recession, stimulating the debate on the consequences of growing fiscal imbalances. Building on Paesani et al. (2006), this paper focuses on the USA, Germany and Italy over the 1983-2009 period and studies the effects of fiscal shocks and government debt accumulation on long-term interest rates, both nationally and across borders. Based on a a theoretical framework, the empirical analysis disentangles permanent and transitory components of interest rates dynamics .nding that sustained debt accumulation leads, at least temporarily, to higher long-term interest rates. The is particularly true for the Italian case. There is also evidence of signi.cant cross-country linkages, mainly between Italy and the USA.

Fiscal shocks, public debt, and long-term interest rate dynamics

Public Finances worldwide have been severely hit by the 2008-2009 Great Recession, stimulating the debate on the consequences of growing fiscal imbalances. Building on Paesani et al. (2006), this paper focuses on the USA, Germany and Italy over the 1983-2009 period and studies the effects of fiscal shocks and government debt accumulation on long-term interest rates, both nationally and across borders. Based on a atheoretical framework, the empirical analysis disentangles permanent and transitory components of interest rates dynamics finding that sustained debt accumulation leads, at least temporarily, to higher long-term interest rates. The is particularly true for the Italian case. There is also evidence of significant cross-country linkages, mainly between Italy and the USA.Public debt; long-term interest rates; cointegration; common trends.