This study analyses the profits earned from seignorage by leading world central banks in the course of the experimental monetary policies pursued since the global financial crisis of 2008/9. The analysis brings out the linkages between currency emission and public finances and thus between monetary and fiscal policy. There have been major changes over time, but with substantial differences between countries.
Although some progress has been made, the Euro Area remains on shaky ground. This report discusses the reform options and puts forward a package of reforms to strengthen the institutional architecture of the common currency. The stronger and more effective a preventive approach can be made, the less need there will be to have recourse to area-level emergency measures, and the greater the confidence that such measures, which are necessary, can be introduced without causing “moral hazard”.
Why we need European safe assets ••• current proposals require only a minor modification ••• jointly guaranteed junior tranche would transform proposed structured bonds into a viable stability anchor for the Euro Area.
The economic recovery, Brexit-related tensions in the UK and troubles outside Europe offer a second chance for EMU reform. It has to be taken. Previewing a forthcoming IMK study, on Europe Day Willi Koll and Andrew Watt sketch out a feasible policy proposal that is true to the motto prevention is better than cure. Costly crises can be avoided if social partners are incorporated into an economic governance framework that treats economic policy as a genuine matter of common concern.
Most economists assume that the trade balance reacts in the same way to changes of the nominal exchange rate or the price level. The paper shows however that this might often not be the case. Changes of the price level and of the nominal exchange can lead to quite different changes in the trade balance.
Software documentation: This open-source tool makes it possible to easily evaluate quantitative forecasts and to apply relevant statistical tests from the econometric literature. Forecasts can be assessed with respect to their unbiasedness, efficiency, market timing, direction of change, loss asymmetries and rationality.
A first version of this study was published in March 2015 (Giannitsis and Zografakis 2015). The present edition includes some completely new topics: privileged tax exemptions, structure and taxing of immovable property, contribution of female employment on household’s income, changes in employment patterns, evolution of the top incomes.
The debate on necessary reforms of the Euro Area and on Germany’s position in the event of a renewed Grand Coalition in Berlin are in full swing. The latest issue of “Wirtschaftsdienst” contains a collection of articles dealing with these questions, including a contribution by Andrew Watt, Head of unit European economy policy in the IMK. In it he analyses a recent reform initiative by 14 German and French economists that has pushed the debate forward. He warns that substantial corrections would be needed if the reforms are to bring more, rather than less stability to the Euro Area.
This paper studies the implications of heterogeneous capital gain expectations on output and asset prices. We show that there are two sources of instability arising from the interaction of the financial with the real part of the economy, and from the heterogeneous opinion dynamics.
A downgrading of financial conditions for commodity exporting countries can lead to a more serious decline of their domestic demand as should be expected from the pure income effect of lower export revenues due to lower oil price.
Based on a correspondence experiment the paper identifies and quantifies duration dependence in Germany. Long-term unemployed are up to 35% less likely to be invited for a job interview. The findings are driven by labor market tightness, companies’ access to applicants and screening behavior related to company size, with no evidence for the relevance of the contract type.
This paper proposes the construction of financial cycle measures for the US based on a large data set of macroeconomic and financial variables. In particular, the measure related to financial market participants’ uncertainty and risk aversion seems to serve as an appropriate early warning indicator for policymakers.
There is a significant Granger causality from the US financial cycle to the UK financial cycle, but not the other way around. This relationship has recently intensified, and it is most pronounced for cycles between 8 and 30 years.
What do I care about my chitchat of yesterday? The famous statement of German Chancellor Konrad Adenauer could well have been repeated by French President Emanuel Macron with his decision to initiate a postponement in introducing the European Financial Transaction Tax (EFTT).
Analysis of the relationship between wages, unit labour costs and current account imbalances in the euro area, leading to institutional reform proposals.
By Gustav A. Horn and Andrew Watt.
We use a multi-regional input-output model to estimate the spillover effects of Germany's final demand on Southern European countries. The spillover effects are rather small. A moderate demand boom in Germany will only marginally alleviate the external adjustment process in the South.
We investigate the size of spillover effects of an upswing in Northern Europe on growth and employment in the European South. A Northern expansion does generate sizeable positive growth impulses as long as consumption and investment multipliers are high and not impeded by the economic crisis. In order to achieve a sustainable upswing in the short term, however, the South cannot rely on spillover effects alone but requires less restrictive fiscal policy or larger European transfers spent locally.
There’s no end to the criticism of the excessive German current account surplus. Quite rightly, people suggest that this imbalance has the potential either to unleash violent currency fluctuations on a global scale or to generate a renewed debt crisis in the Euro Area. The consequences of such disruptions would also substantially damage the German economy. So, the question becomes more urgent: what contribution can Germany itself make in overcoming these economic troubles. Article on socialeurope.eu.
A simulation analysis shows how a combination of higher wages and more expansionary fiscal policy may reduce Germanys current account surplus.
Donald Trump is not alone in criticizing Germany for its trade surplus. The European Commission and IMF do so too, but for other reasons. Fabian Lindner of the IMK Macroeconomic Policy Institute talks about trade imbalances and what they might mean.
Interview dw.com 19/06/2017.
A faster pace of wage growth in recent years would have done little to contain Germany’s trade and current account surpluses. In fact, support from an expansionary fiscal policy would have been needed to bring them down. Such a policy would have reduced the surpluses thanks to an increase in imports resulting from stronger domestic growth without hurting exports.
Based on a novel dataset, this paper analyzes the long-term effects of fiscal stimulus and consolidation in Europe in the aftermath of the financial crisis. Early stimulus had long-term positive effects. The turn to austerity came too early and thus imposed a lasting drag on potential output.
This contribution examines the interaction between inequality, private household leverage and financial crises. The panel causality tests suggest that changes in (top-end) personal inequality significantly affect future credit to income of the private household sector.
How can Europe ensure that regional banking problems do not lead to systemic financial stress? Presentation by Thomas Theobald at a joint conference of the Italian trade union confederation CGIL and the Friedrich Ebert Foundation on April 3, 2017.
Not big, as Sebastian Gechert, Christoph Paetz und Paloma Villanueva in a recent project, that has just been published in the Banco de Espana Working Paper Series.
A new IMK working paper by Jorge Uxó, Ignacio Álvarez and Eladio Febrero that analyses alternative paths of fiscal policy in Spain finds that the end of fiscal austerity is feasible and perfectly compatible with sustainability of Spanish public finances.
Compared to other euro area countries, Ireland has been one of the countries most heavily hit by the worldwide financial crisis, yet, also one with the strongest and quickest recovery. Foreign controlled affiliates of multinational companies dominate economic activity, attracted by low corporate taxation rates. Low Irish tax rates contribute to downward competition of taxation in the EU and constitute a beggar-thy-neighbour-policy. Effects on Ireland are neither clearly positive: Profits of foreign affiliates do not necessarily stay in the country.
In the aftermath of BREXIT- what next? A rapprochement?
The report recommends easing the burden on monetary policy by loosening fiscal policy, especially in Germany. The initiative of the EU Commission, wrongly criticized by Finance Minister Schäuble is a step in the right direction, but insufficient.
Other themes covered: addressing inequality, correcting macroeconomic imbalances and stabilising the financial sector.
The EU-budget goes some way to redistributing resources between countries and helping with macroeconomic stabilisation. The effects are very limited in size however, and work mainly on the revenue side, i.e. through the member state contribution.
Christoph Paetz, Katja Rietzler and Achim Truger have just issued an important analysis of experience with the German Schuldenbremse (debt brake) since 2011. We will prepare an English translation, but given the importance of the debt brake for the fiscal policy discussion in Europe (and the fact that quality technical translations take time) here is a short summary of the main points of interest for European readers.
This report presents labour cost trends in the private sector based on Eurostat data, disaggregated for private as well as public services, and in manufacturing industry, for a selection of European countries, the Euro Area and the European Union. A special focus is put on the effects of the statutory minimum wage of €8.5 per hour.
Irregular weather patterns affect the economy. This paper estimates the impact of weather variations for German industrial production and suggests to exploit this relationship for short-term forecasting.
Inflation in the euro area is much too low and economic growth too weak. Expansionary fiscal policy is needed to supplement monetary policy. More fundamentally, the euro area lacks an important stability anchor because politicians failed to safeguard the safe-asset quality of all euro area government bonds.
Has inequality in Germany fallen since the mid of the 2000s? Analyses of administrative tax data that offer a more realistic consideration of top incomes and, hence a more comprehensive coverage of capital incomes challenge the supposed reversal in inequality trends. Reducing uncertainty about the evolution of inequality calls for a matching of survey data with data from the administrative taxpayer panel or from the microcensus or the Federal Employment Agency.
This paper constructs and analyzes a rich dataset of exogenous changes to taxes and the social security system for Germany. The fiscal multipliers we find for these measures are comparably low, implying only muted average short-run output effects of changes to taxes, social security contributions and transfers.
The working paper discusses the introduction of a Golden rule for public investment in the EU. How should public investment be defined? Would a Golden Rule have prevented the austerity crisis? Would it leave sufficient fiscal leeway for expansionary fiscal policy in the current situation?
Tom Palley shows that inequality per se does not impact growth through macroeconomic channels. Instead, both growth and inequality are impacted by changes in the underlying forms and pattern of income payments.
It was wrong from the start. Going on the incorrect assumption that the Eurozone crisis could only be overcome with the help of the crisis-proven IMF, it was the German government above all that insisted on embedding the Fund as an equal partner in the Troika meant to draw up and monitor the rescue programme for Greece.
Article on socialeurope.eu April 7th 2016.
Tom Palley shows that inequality per se does not impact growth through macroeconomic channels. Instead, both growth and inequality are impacted by changes in the underlying forms and pattern of income payments.
This working paper addresses the problem of income and wealth inequality as well as economic policy (New Deal) during the 1930s. The main finding, based on historical documents of President Roosevelt, is that inequality was not the main policy issue at that time.
This analysis shows that in general over the business cycle the intensive margin of labour adjustment (i.e. fluctuations in hours worked per employee) is more important in Germany than in the US. During the Great Recession and afterwards the intensive margin dominates labour adjustment in Germany.
The unconventional monetary policy of the ECB contains risks for financial market stability. A more expansionary fiscal policy will help to limit those risks. What is also needed is an increased vigilance of macroprudential regulation with regard to shadow banks.
The adjustment process in the European crisis countries continued in 2014. Wages in Germany should grow at an above average rate for several years to support the adjustment process in the European crisis countries.
The crisis in Europe drags on. The recovery is fragile and deflationary pressures have not been overcome. There is a risk of longer-term damage if Europe does not lastingly boost public investment. This is one of the conclusions of the fourth independent Annual Growth Survey.
A new IMK Working paper by Daniele Tavani and Luca Zamparelli studies the impact of public investment on long-run growth in a demand-driven model.
The study analyses the causes of housing price bubbles in industrialized countries, with a focus on the role of lax monetary policy versus financial innovation. Theoretical models cannot clearly answer this question, although a number do assign a role to financial innovation. Our case studies of selected countries point to changes in regulatory settings as important bubble contributors, and our regression results also stress the role of financial market developments.
Presentation by Andrew Watt at the Austrian National Bank conference on EMU reform, proposing monetary financing of public investment in the euro area.
Crisis-induced pessimism notwithstanding, European voters want an effective EU. Andrew Watt argues that the way to achieve this is to integrate economic policymaking of the countries sharing the euro, not by following an illusory path of renationalisation.
A sovereign insolvency regime is likely to have serious side effects: it makes governments dependent on the whims of financial markets, is likely to increase the economic and financial polarization in Europe and would further strengthen Germany’s hegemony, writes Fabian Lindner on Social Europe.
Greece could surely use some economic growth - badly. But how? An evaluation of more than a hundred studies has revealed that public investment, even on credit, may just hold the key to long-term success. Article on dw.com 2015/08/05.
The agreement reached in Brussels between EU governments and Greece came only with a huge loss of mutual trust. It remains to be seen whether the deal in these circumstances will win majority political support. Economically, it would at least offer a small opportunity for a recovery in the Greek economy. Statement from Gustav Horn on socialeurope.eu on 2015/07/15.
Invited by the IMK and the HUMBOLDT-VIADRINA Governance Platform, on June 8th Greek finance minister Yanis Varoufakis talked about Greece's future in the European Union. Here you can watch the video of the event (Yanis Varoufakis' speech is in English, the following debate mainly in German).
At the European Dialogue 2015 Nobel prize laureate Paul Krugman talked on inequality and Europe's failed economic policy. The event was organized by the Hans-Böckler-Foundation and the European Trade Union Institute (ETUI).
The Research Network Macroeconomics and Macroeconomic Policies announces its 19th annual conference to be held in Berlin October 22-24, 2015. The conference title is: “The Spectre of Stagnation? Europe in the World Economy.” Submissions are welcome (deadline July 14 2015). More...
There is a drastic imbalance between the high economic risks of Grexit and the low costs of giving Greece's economy enough time to get back on a growth path. Only the latter would can assure that structural reforms work and that the country continues to service its debts. By Andrew Watt.
Using a unique data set of 104 studies on fiscal multiplier effects Sebastian Gechert finds public spending multipliers to be much higher than tax and transfer multipliers. Public investment multipliers are even larger than those of spending in general.
Andrew Watt shows that investment in Greece has strongly decreased with austerity. Structural reforms will hardly help to increase investment - without such reforms, the investment share was higher in Greece before the crisis than it was in Germany.
The economist Steve Keen claims that credit always drives aggregate demand. Severin Reissl critizizes that Keen's theory overreaches. Credit can play an important role but the link between credit and demand is much more complicated than Keen makes it out to be.
In this Policy Brief Sebastian Gechert and Ansgar Rannenbert show that the drastic austerity measures implemented in Greece have led to an historically unique economic slump - so that the debt-to-GDP ratio has even increased.
Austerity in Greece led to drastic income reductions for private households. Households with medium or low income were hit hardest. This is what Tassos Giannitsis and Stavros Zografakis show in their study "Greece: Solidarity and Adjustment in Times of Crisis".
Andrew Watt proposes a way to permit monetary financing of public investment in the EMU. This would stimulate growth reliably and sustainably, help avoid a deflationary trap while at the same time safeguarding the independence of the ECB.
The summer school aims at providing an introduction to post-Keynesian economics and to the problems of European economic policies It takes place from July, 26th to August 2nd in Berlin. Deadline for applications is March, 15th. more...
Sebastian Gechert, Andrew Hughes Hallett and Ansgar Rannenberg have calculated to what extent the euro area’s fiscal consolidation depressed GDP. They find that the negative impact on GDP was substantial and that this made deficit reduction much harder.
In a new working paper Patrick Grüning, Thomas Theobald and Till van Treeck analyze the effect of changes in income distribution on current account balances in Germany. The paper is part of a research project funded by the Institute for New Economic Thinking (INET).
Fabian Lindner shows that Greece’s economy has contracted more since 2008 than Germany’s economy did in the Great Depression of the 1930s. This is why Germans today should be open to Greece’s new government.
Greece has to leave the Eurozone or a new debt “haircut” is necessary – this is what many pundits think. But there are alternatives. Andrew Watt shows that with a little help the country could grow out of its debts.
Andrew Watt on the ECB's plans for quantitative easing, on why QE is - contrary to many media comments - a logical further step to fight deflation and what will be QE's likely effects on economic growth.
TTIP is often advertised as bringing about more growth and employment. Many “independent” studies draw this conclusion. However, a comparison of three influential studies shows that even if a wide ranging free trade agreement were to be reached the expected effects on growth and employment are minimal. Contribution by Sabine Stephan for the Friedrich-Ebert-Stiftung.
The private investment share is very low in Germany when compared to other European countries. This is mainly due to low real estate investment after the burst of a real estate bubble at the end of the 1990s. Investment in equipment is low in historical perspective because demand is not sufficient and already existing capacity is not fully used. Contribution by Fabian Lindner for the Friedrich-Ebert-Foundation.
The independent Annual Growth Survey for 2015, produced by researchers at the OFCE, the ECLM and the IMK, offers an alternative economic policy strategy for Europe: stronger quantitative easing would help to reduce differences in interest rates substantially; today’s trajectory of deficit reduction must be relaxed, and a public investment programme needs to be launched; the reduction of poverty and inequality must be at the heart of economic policy; and brakes need to be put on wage deflation.
The NAIRU is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates - in the case of Spain from 26.6% to 20.7% for 2015. We find that the NAIRU is largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures. By Sebastian Gechert, Katja Rietzler and Silke Tober.
Fiscal policy in the Euro area is still dominated by austerity measures implemented under the institutional setting of the 'reformed' stability and growth pact, and the even stricter 'fiscal compact'. At the same time, calls for a more expansionary fiscal policy to overcome the economic crisis have become more frequent, recently. Therefore, the article tries to assess the remaining leeway for a truly expansionary fiscal policy within the existing institutional framework. By Achim Truger.