Antonio Fatás

Regional labor market dynamics in Europe

The paper investigates regional labour markets dynamics in Europe and compares the results to those obtained for the United States. It analyses to what extent regional employment dynamics are common to all regions in Europe and to all states in the United States. It finds that a higher proportion of movements in employment growth is common to all US states than to all EEC regions. Next, the paper studies the adjustment mechanisms that a typical region specific shock triggers. It shows that for Europe, for the first three years, most of the shock is absorbed by changes in the participation rate while, in the United States, it is immediately reflected in migration. Surprisingly, in both cases, the unemployment rate plays a small role, suggesting the presence of natural unemployment rates at the regional level.

The Case for Restricting Fiscal Policy Discretion

This Paper studies how discretionary fiscal policy affects output volatility and the rate of economic growth. Using data on fifty-one countries we isolate five empirical regularities: (1) Governments that use often fiscal policy make their economies volatile; (2) The use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables; (3) The volatility of output induced by discretionary fiscal policy lowers economic growth by 0.6 percentage points for every percentage point increase in volatility; (4) There is evidence that the increase in volatility is in part due to electoral cycles; nevertheless, we do find that political constraints restrain fiscal policy beyond their impact on the traditional election-year volatility; (5) Rules-based fiscal policy identified by the degree of automatic stabilizers in the economy helps to stabilize business cycles. The evidence in the Paper argues in favour of imposing institutional restrictions on governments as a way of reducing output volatility and increasing the rate of economic growth.

Government size and automatic stabilizers: international and intranational evidence

This paper studies the role of automatic stabilizers using a sample of OECD countries and US states. We find that there is a strong and robust negative correlation between measures of government size and the volatility of output. This correlation is robust to the inclusion of a large set of controls as well as to alternative methods of detrending and estimation. The economic significance of this relationship is larger for the US states.

EMU: Countries or Regions? Lessons from the EMS Experience

The future adoption of a single currency among some of the members of the European Union has raised many concerns about the ability of EMU to deal with shocks that are specific to regions or countries. The assumption behind these concerns is that national business cycles in Europe are fairly pronounced and that exchange rates are good stabilizing tools. This paper characterizes regional and national fluctuations within the European Union and studies how the process of integration and the creation of the EMS has affected these patterns. Our results indicate that national borders have seen their economic significance reduced over time as the process of integration has increased cross-border correlations and reduced within-border comovements.

Policy Volatility, Institutions and Economic Growth

In this paper, we present evidence that policy volatility exerts a strong and direct negative impact on growth. Using data for 93 countries, we construct measures of policy volatility based on the standard deviation of the residuals from country-specific regressions of government consumption on output. Undisciplined governments that implement frequent and large changes in government spending unrelated to the state of the business cycle generate lower economic growth. We employ both instrumental variables and panel estimation to address concerns of omitted variables and endogeneity. A 1 standard deviation increase in policy volatility reduces long-term economic growth by about 0.74% in the panel regressions and by more than 1 percentage point in the cross-section.

Does EMU need a fiscal federation

Redistribution vs insurance Does Europe need a fiscal federation? The stabilization provided by the US federal budget has been used as an example of the adjustment mechanisms that are lacking in Europe and which are needed to make a currency area viable. This paper presents four sets of .ndings that suggest that the benefits of a European fiscal federation would be modest. First, we show that some of the previous estimates of the benefits of the US federal budget overestimate the amount of interstate insurance by a factor of 3. Second, Europe already has national tax systems which, according to our estimates, can insure more than 50% of a European fiscal federation. Third, we .nd evidence that the potential insurance benefits of a European fiscal federation have decreased over time. Fourth, there are large cross-country differences in the benefits provided by federation. We conclude that the potential to provide interregional insurance by creating a European fiscal federation is too small to compensate for the many problems associated with its design and implementation. — Antonio Fatas

Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth

Thisarticle explores the links between cyclical fluctuations andlong-run growth in the context of an endogenous growth modelwith aggregate demand externalities. In this model, aggregatedemand and growth rates are positively correlated. In the presenceof exogenous cyclical shocks, the model is able to generate persistentfluctuations through the effects that business cycles have onaggregate demand, profits and technological progress. Persistencebecomes a measure of the response to business cycles of growth-relatedvariables. Empirical evidence from a large sample of countriessuggests that there is indeed a correlation between how persistentfluctuations are and the long-term growth rates of GDP.

The Stabilizing Role of Government Size

This paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. However, in the model, we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output. Given that empirically we also observe a negative correlation between government size and the volatility of consumption, we modify the model by introducing rule-of-thumb consumers. In this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in OECD economies over the last 45 years.

Endogenous Growth and Stochastic Trends

This paper shows that in a cross section of countries there exists a strong positive correlation between long-term growth rates and the persistence of output fluctuations. We argue that the traditional explanation of persistence, an RBC model with exogenous productivity shocks, cannot account for this correlation. What is required is a model where the stochastic nature of the trend is endogenous and growth dynamics is an important component of the transmission of business cycles. We present a stylized endogenous growth model with exogenous cyclical shocks where, despite the cyclical nature of the shocks, output fluctuations are persistent and the degree of persistence is an increasing function of long-term growth rates.

Fiscal Policy as a Stabilization Tool

Abstract We analyze empirically the cyclical behavior of fiscal policy among a group of 23 OECD countries. We introduce a framework to capture the fiscal policy stance in a way that brings together automatic stabilizers and discretionary fiscal policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary fiscal policy. When compared across countries, changes in fiscal policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary fiscal policy more aggressively. For all countries discretionary policy has become more aggressive in recent decades.