João Guerreiro, Sérgio Rebelo, Pedro Teles, 09 September 2020

Immigration policy has become a hot-button issue in both Europe and the US, with questions concerning optimal policy as well as the welfare state dominating discussions. This column revisits the idea of the immigration surplus, exploring a number of possible scenarios in terms of how policymakers should address the challenge. Correctly configuring fiscal policy so as to capture the benefits of both high- and low-skill immigrant (and native) workers is at the heart of optimal policy design and may help to address the swelling anti-immigrant sentiment that continues to exist in many countries today. 

Andrea Presbitero, Ursula Wiriadinata, 05 August 2020

As interest rate-growth differentials (r-g) have turned negative in many countries, now could be the time for governments to pursue fiscal expansions. However, the downside risks of such policies should not be disregarded. Using a large sample of economies, this column finds that high and increasing public debts, especially when denominated in foreign currencies, can lead to more volatile r-g dynamics. In particular, this is associated with higher probabilities of r-g reversals, tail risks, and an increased exposure to domestic and global shocks. Policymakers should take note of these risks when designing future fiscal expansions.

Henrique Basso, Omar Rachedi, 03 August 2020

Advanced and developing economies are experiencing a swift process of population ageing that will shape both long-run macroeconomic trends, such as economic growth, as well as short-term business cycle fluctuations. Although the implications of population ageing on countries’ fiscal capacity have been extensively analysed, this column argues that secular shifts in demographics can also influence the effectiveness of fiscal policy as a demand-management tool. Using a New Keynesian model with a lifecycle structure,  it shows that output fiscal multipliers are larger in younger economies.

Jose Maria Barrero, Nicholas Bloom, Steven Davis, 14 July 2020

One of the most urgent economic impacts of the Covid-19 crisis is on labour markets. Widespread job losses, drastic increases in unemployment benefit claims, and the rise of working from home have dominated the discussion during the pandemic so far. This column presents evidence from the US, arguing that the pandemic itself represents reallocation of labour within the economy. As different sectors and occupations are hit with variable severity, the authors argue that policymakers should be wary of this variation, responding with policies that will hold firm over time.

Yothin Jinjarak, Rashad Ahmed, Sameer Nair-Desai, Weining Xin, Joshua Aizenman, 06 July 2020

There is an importance relationship between prevailing market factors and the dynamics of the COVID-19 pandemic across the euro area. This column presents evidence to suggest that during the pandemic, adjustments in euro area credit default swap spreads diverge substantially from levels implied by theoretical models. Mortality outcomes and fiscal announcements account for a proportion of this divergence. Results also imply ‘COVID dominance’, whereby the widening spreads can lead to unconventional monetary policies that primarily aim to mitigate the short-run distress of the worst economic outcomes, temporarily pushing away concerns over fiscal risk.

Yuliya Kasperskaya, Ramon Xifré, 01 July 2020

In the aftermath of crises, the state of public finances typically regains prominence in policy agendas. This column advances the hypothesis that three properties of the budgetary setup – reliability of projections, openness to scrutiny, and transparency – facilitate the exercise of the ‘budgetary analytical capacities’ of the government, legislature, and the wider public. It constructs an index of such capacities from the OECD Survey on Budget Practices. For the period 2012-2016, a simple measure of fiscal discipline is correlated with the index and is not correlated with other standard political-economy variables that are generally used to explain fiscal discipline.

Aida Caldera, Shashwat Koirala, 30 June 2020

International cooperation amplifies individual countries’ efforts; in the fight against the COVID-19 pandemic, international cooperation is not only useful, but indispensable. This column discusses eight priorities to strengthen international cooperation against COVID-19, both in the short term for crisis response, and to facilitate an inclusive and sustainable recovery. In the short run, cooperation between governments is needed to curb the pandemic and expedite exit from the crisis. In the medium and long run, internationally coordinated policies can facilitate recovery and the rebuilding of socioeconomic systems in inclusive and sustainable ways and help prepare for future risks and pandemics.

Stefania Fabrizio, Vivian Malta, Marina M. Tavares, 20 June 2020

The COVID-19 crisis is depressing growth globally, and lockdown measures are causing widespread job losses. This column illustrates that women are amongst the worst affected. Women are vulnerable not only because of their jobs, but also because of gender inequalities within housework division, education, and health. There is an urgent need to support women, repair gender disparities aggravated by crisis, and to reduce women’s vulnerability going forward. Gender-responsive fiscal measures are viable tools that work in the interests of women, as well as supporting economic growth and reducing poverty and inequality.

Sebastian Barnes, Eddie Casey, 09 June 2020

The Covid-19 crisis has highlighted the role of fiscal policy and transformed the outlook for public finances. This column explores economic and fiscal scenarios for a small euro area country to 2025. Due to the high uncertainty, it argues for a state-contingent approach to policy. Low interest rates, if maintained, along with ‘high-altitude’ debt dynamics could create substantial headroom for the fiscal response and make future adjustments to put the debt ratio on a downward path more manageable.

Çağatay Bircan, Ralph De Haas, Helena Schweiger, Alexander Stepanov, 03 June 2020

As lockdown measures continue, or are relaxed only gradually, many small businesses continue to experience significantly reduced turnover. This column reports on a firm-level analysis across 16 emerging markets, and three Western European comparator countries, in order to gauge the potential risks associated with debt-driven COVID-19 support. The overall goal is to prevent a wave of bankruptcies that could break valuable relationships between firms and their suppliers and employees. However, liquidity support in the form of additional bank lending may create debt-overhang problems in the future and therefore requires careful targeting.

Lilas Demmou, Guido Franco, Sara Calligaris, Dennis Dlugosch, 23 May 2020

There is widespread concern that the COVID-19 induced liquidity shortages may cause firm bankruptcies on a large scale. This column examines the financial vulnerability of firms associated with confinement measures, and discusses the immediate steps that governments can take to reduce the risks of such crisis. Without policy actions, around 30% of European firms would face liquidity shortages after two months of confinement measures. A decisive public intervention, and especially the support to wage payments, is found to be crucial in order to avoid the temporary shock implied by the COVID-19 crisis permanently scarring the corporate landscape.

Jeffrey Chwieroth, Andrew Walter, 23 May 2020

Although necessary, many of the economic policy responses to the COVID-19 crisis may end up damaging political incumbents in the medium and long term. This column presents evidence suggesting that voters expect great things from their leaders in deep crises. Yet the potential for great disappointment arises from the inevitable perceived inequities that will follow from the coronavirus crisis bailouts. As the pandemic exacerbates existing divisions within societies, the political costs predicted implies that only a minority of the most skilled political leaders are likely to survive this crisis.

Marcus Hagedorn, Kurt Mitman, 15 May 2020

Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether ECB measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. This column presents evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate.

Chang Ma, John Rogers, Sili Zhou, 13 May 2020

Forecasting the progress and impact of COVID-19 is central to the planning of policymakers around the world. This column provides a historical perspective by examining the immediate and bounce-back effects from six post-war disease shocks. GDP growth contractions are immediate and sizeable, but vary across countries. Despite an immediate ‘bounce back’, GDP tends to remain below its pre-shock level for several years. The negative effect on GDP is felt less in countries with larger first-year responses in government spending, especially on health care, and the indirect effects on GDP growth from affected trading partners are also important.

Francesco Bianchi, Renato Faccini, Leonardo Melosi, 13 May 2020

Fighting the consequences of the COVID-19 pandemic poses a difficult task for fiscal and monetary authorities alike. The current low interest rate environment limits the tools of central banks while the record high debt levels curtail the efficacy of fiscal interventions. This column proposes a coordinated policy strategy aiming at creating a controlled rise of inflation and an increase in fiscal space in response to the COVID-19 shock. The strategy consists of the fiscal authority introducing an emergency budget while the monetary authority tolerates an increase in inflation to accommodate this emergency budget.

Ceyhun Elgin, Gokce Basbug, Abdullah Yalaman, 07 May 2020

The economic measures that governments around the world have taken in response to the Covid-19 pandemic vary in breadth and scope. This column presents a comprehensive review of the measures adopted by 166 countries. The findings show that the median age of the population, the number of hospital beds per capita, GDP per capita, and the number of total cases are all significantly associated with the extent of the economic policy response.

Stephanie Ettmeier, Chi Hyun Kim, Alexander Kriwoluzky, 09 April 2020

The ongoing COVID-19 pandemic in Europe is severe and spreads economic uncertainty. This column explores the evolution of financial market participants’ expectations during the COVID-19 pandemic, estimating yield curves of bonds in France, Germany, Italy, and Spain. The authors carry out an event study to investigate the potential impact of European fiscal and monetary policy measures on these yields. The results suggest that policy measures must be large and coordinated on the European level, and that fiscal and monetary policy must act jointly to fight the pandemic’s negative economic consequences

Ana Venâncio, Victor Barros, Clara Raposo, 29 March 2020

Corporate tax is often seen as a constraint to entrepreneurial activity. This column uses evidence from a tax reform in Portugal to study the relationship between corporate taxes and the behaviour of entrepreneurs. Lower corporate taxes improve both the quantity and quality of entrepreneurial activity, inducing larger and more productive firms to the market, which are more likely to survive in the long term. The study suggests that, on average, the entrepreneurs who were able to take advantage of the reform are mostly male, relatively older, and well-educated individuals.

Lucrezia Reichlin, Dirk Schoenmaker, 26 March 2020

Fiscal and monetary policy coordination is not working in the euro area. This column argues that in order to rebalance the weight of both during major crises, the asymmetry between decision making at the ECB (by majority voting) and the ESM (by unanimity or qualified majority) must be harmonised. This is urgent since the ESM is the only instrument available to provide the common fiscal capacity needed to fight the COVID-19 pandemic.

Aida Caldera, Alessandro Maravalle, Lukasz Rawdanowicz, Ana Sanchez Chico, 23 March 2020

Global economic growth is expected to remain weak and significant downside risks persist. As room for conventional monetary policy is limited or exhausted, policymakers will need to rely increasingly on fiscal policy to stabilise the economy during the next economic downturn. This column presents new OECD estimates which suggest that automatic stabilisers on average offset 60% of a specific shock to market income across 23 OECD economies. However, there are marked differences across OECD countries leaving scope to make automatic stabilisers more effective.

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