Mark Mink

Are there Political Budget Cycles in the Euro Area

This article examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivari ate model for 1999–2004 and various election indicators we find strong evidence that, since the start of the Stability and Growth Pact, fiscal policy-makers in the euro area have pursued expansionary policies before elections. In an elec tion year – but not in the year prior to the election – the budget deficit increases. This result is in line with third-generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes.

A descriptive model of banking and aggregate demand

We integrate a banking sector into an accessible macroeconomic framework, which then provides new insights on developments around the Global Financial Crisis. The analysis shows that growth of banking sector money supply may help explain the secular decline in long-term interest rates before the crisis. A new bank funding channel of monetary transmission clarifies why increases in central bank policy rates could not reverse this trend. Our analysis highlights the distinction between the zero lower bound and the liquidity trap, and shows that bank recapitalizations can be more effective than fiscal expansions in restoring aggregate demand after a banking crisis. We appreciate the valuable comments by an anonymous referee, the editor, Ben Heijdra, as well as Jan Marc Berk, Jan Willem van den End, Jakob de Haan, Skander van den Heuvel, Jan Jacobs, Gerard Kuper, Martien Lamers, Jasper Lukkezen, Steven Ongena, Joost Passenier, Sebastiaan Pool, Kasper Roszbach, João Sousa, Farindokht Vaghefi, Kieran Walsh, Frans de Weert, and Michalis Zaouras, and by participants of the 2016 Research Workshop of the Banking Analysis Task Force of the Eurosystem’s Monetary Policy Committee, the Seminar Series of the Netherlands Bureau for Economic Policy Analysis, the 2017 International Conference on Macroeconomic Analysis and International Finance, and the 2017 IBEFA Summer Meeting. All remaining errors are our own. The views in this paper do not necessarily reflect official opinions of De Nederlandsche Bank (DNB). An earlier version of this paper was circulated as DNB Working Paper 2016-500. B Jochen O. Mierau j.o.mierau@rug.nl Mark Mink m.mink@dnb.nl 1 Faculty of Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands 2 De Nederlandsche Bank (DNB), P.O. Box 98, 1000 AB Amsterdam, The Netherlands

Euro area imbalances

We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states.

Aggregate liquidity and banking sector fragility

As compared to non-banks, banks adopt relatively fragile balance sheet structures characterized by leverage, maturity mismatch, and asset diversification. This paper offers a new potential explanation for this observation, within a model where banks face lower aggregate (funding) liquidity risk than non-banks. This single difference between both provides banks with an incentive to adopt fragile balance sheets, even in the absence of tax distortions, moral hazard, or a special role for banks as liquidity providers. The model implies that banks engage in pro-cyclical risk-taking, are vulnerable to contagion, and will resist regulatory equity and liquidity requirements, while non-banks do not.