Professional Documents
Culture Documents
Willi Semmler
Remark 1: Joint projects with Peter Flaschel, Stefan Mittnik, Christian Proano, Ekkehard Ernst (ILO), Pu Chen, Frauke Schleer, Econ students Remark 2: Google entries: 2.5 Mill, Wikipedia has 480 reference on European debt crisis, many conferences on crises in EU, EU break up, Future of EU.
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In spite of great heterogeneity (GDP per capita: Lux/Portugal; 5/1, Lux/Romania: 15/1) there was a period of tranquility (convergence of inflation rates, interest rates and an high value of the Euro (2000-2007) Since 2010 double crises: financial market and sovereign debt crises (triggering fiscal austerity), divergent forces re-emerge
2007/2009
Causes
Government Structural Imbalances (% of GDP) Spain Ireland Portugal Greece -1.28 -2.24 -4.5 -4.76
Government Interest Capital Gains Net Debt (% Payments (Annual of Real of GDP) (% of GDP) Estate Prices) 43.73 27.3 50.08 80.25
Source: Stein (2011)
-9.5
(-9.0) 170 (19.6)
Aggregate effect of the EU fiscal consolidation. Austerity is here measured as a reduction in public consumption Source: EU Report 2012.
Social Social Security Investment & Public Sector Wages Security Projection Privatization Consumption wage freeze, 2009 table 5 79.5=>69.5 EU, 2012 2010: -5% 72.4=>57.6 09-10//13:-14.0//-17% table 8 10/11: -5% 56.9=>51.2 table 9 40.5=>34.5
Cut in Public
I.
20092010
LTRO: First short term then longerterm liquidity provisions, 2012, to reduce uncertainty and encourage banks to provide credit to the economy
20112012
2012Future
Outright Monetary Transaction program created to purchase sovereign bonds on the secondary market (Conditional on EFSF/ESM Agreement)
Expansion of eligible asset, e.g. ABS to enable refinancing of illiquid assets through ECB to overcome liquidity shortages
Banking Union: The ECB is now leading the discussion on supervision of EU Banking Union
10
-4 1/1/2002 4/1/2002 7/1/2002 10/1/2002 1/1/2003 4/1/2003 7/1/2003 10/1/2003 1/1/2004 4/1/2004 7/1/2004 10/1/2004 1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 FSI PCA GER FSI PCA FR FSI PCA IRE FSI PCA ITA FSI PCA ESP FSI PCA BEL FSI PCA FIN FSI PCA GRE FSI PCA NDL FSI PCA AUT FSI PCA PRT
-2
1/1/2008
4/1/2008
7/1/2008
10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 10/1/2011 1/1/2012 4/1/2012 7/1/2012 When the hasty austerity was enacted: Reemergence of financial crisis
II. Regime Dependence of the Multiplier=> Traditional empirical results: For a review of earlier studies, see Mittnik and Semmler, JEBO (2012a): Earlier literature, Keynesian >1, Romer and Bernstein (2009): 1.5, ; Ramey (2009):>1 New literature, quite small in RBC, DSGE models < 1, Cogan/Taylor (2009): 0.7; expected higher interest rates and wealth effects (expected taxation) => New Empirics: Multiplier depends on situations/environment/timing
A) Fiscal stimulus has strong expansionary effects (strong multiplier): If monetary policy decreases the interest rate (but zero bound), see Christiano et al (2009), Hall (2009), Woodford (2010), and also reduces credit spreads
Households face income and employment constraints in a recessions which are relaxed (see also the fraction of rule of thumb consumers increases, Gali et al 2007)
Also stated now in IMF studies: Multiplier triggered by austerity can be strongly contractionary when enacted in a recession, see Baum et al (2012), defined in terms of output gap, and Benati et al (2012), defined in terms of output growth. The latter consider both expenditure shocks as well as revenue shocks
IMF study (2012: 23): In all countries, a fiscal consolidation is substantially more contractionary if made during a recession than during an expansion; see also the Blanchard et al study (2013) on a computational error
II. Why is there a Regime Dependence of the multiplier? What happens in the two Regimes?
(see asymmetries of booms and busts in Keynes, and Neftci 1982)
In Recessions much greater contraints on employment and income greater constraints in product markets greater financial market stress: liquidity, credit constraints and greater credit spreads
In Booms less constraints on employment and income less constraints in product markets less constraints in financial markets, less financial stress: liquiditiy, and credit
0.4
0.2 0 -8 -6 -4 -2 0 2 4 6 Transition variable: imf_fsi_ger(-1) 8 10 12 14
One uses a pre-defined threshold for a regime change at r (growth or financial stress regimes) rather than estimating (best-fitting) thresholds Advantages: (i)Piecewise linearization around interesting locations (ii)Straightforward linear least-squares estimation (iii) Multi-Regime Impulse-Response
=>The interest rate r is fixed and credit spreads close to zero (see US, UK, Japan, Germany)
Point of Convergence
Initial condition 2
Initial condition 1
Capital Stock
Capital Stock
=>The ECB did not suffciently reduce the interest rate spread in the Euro area for periphery countries, see Grauwe (2012)
No convergence
Sovereign debt / Capital Stock
Capital Stock Remark: Regime switch from low financial stress to high financial stress and stronger macro feedback effects can occur
Wealth Effects and Aggregate The share of Demand: Fall of Capital Gains, households that Consumption are income and credit and Investment constrained due to increases increasing credit spread
A fraction of Due to banking households stress, the starts central bank deleveraging, may have no reducing income instruments and liquidity of available to other reduce risk households and premia and firms credit spreads
A weak financial sector, holding risky sovereign debt, may come under stress because sovereign bonds may go into default and banks reduce lending
VI. Conclusion
There is clear evidence on regime (business cycle) dependence of the multiplier: Fiscal consolidation in a recessionary period, particularly if coupled with high financial stress, is dominantly contractionary The hasty (panic-driven?) EU program with up-front austerity did not only economically fail but had large social cost, with lasting effects on the EU Welfare State.
It is now more likely that a larger fraction of population opts for default rather than austerity, which could bring countries closer to default. So not only the consolidation is rejected, but the entire EU as project is rejected. Politicians in the EU now suggest: structural and labor market reforms, the employment effects are very slow, and this could just end up in segmented labor markets, as in Germany after the Agenda 2010 Another issue: Our above results may require to re-think the Keynesian text book multiplier (the Kahn version), but actually Keynes points to three dynamic components in macro, see Chiarella et al (2012)
At the night of the Italian Elections, February 25: Italy's 10-year bond yields jumped from 4.4 to 4.9 percentd
rose to 4.87 percent on Tuesday from 4.448 percent rose to 4.87 percent on Tuesday from 4.448 close on Monday. The spread between safe-haven German bunds and Italian bonds jumped 57 basis points to 336 basis points.
Draghi Super-multiplier
Whatever it takes: the Italian determined to save the euro
The Eurozone policy is driven by market sentiments ,,,and the austerity was a panic driven austerity. (www.voxeuorg)
Second stage of decision making: with labor market not cleared, there is constrained choice, consumption depends on actual employment, and firms` production depends on actual demand