Massimo Giuliodori

THE EFFECTS OF PUBLIC SPENDING SHOCKS ON TRADE BALANCES AND BUDGET DEFICITS IN THE EUROPEAN UNION

We investigate the consequences of an increase in public spending for trade balances and budget deficits in the European Union, using a panel vector auto-regression approach. Whereas the literature tends to treat the trade balance/GDP ratio as a single variable, we include exports and imports as separate variables. This allows us to track in more detail the sources of trade balance movements. Further, we use annual rather than quarterly data. This facilitates the interpretation of the shocks and reduces potential anticipation effects of fiscal policy changes. However, the identification assumptions become stronger, and we extensively check their validity. According to our baseline estimate, a 1% GDP increase in public spending produces a 1.2% on impact rise and a 1.6% peak rise in GDP. Rising imports and falling exports are responsible for a fall of the trade balance by 0.5% of GDP on impact and a peak fall of 0.8%. In addition, the spending increase produces a 0.7% impact (and peak) budget deficit, thereby pointing to the potential relevance of the twin deficits hypothesis for the European Union. (JEL: E62, H60) (c) 2008 by the European Economic Association.

Trade Spill-Overs of Fiscal Policy in the European Union: A Panel Analysis

We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings).

The Effects of Government Purchases Shocks: Review and Estimates for the EU

In this article, we review the theoretical consequences of government purchases shocks for both closed and open economies, followed by a discussion of the empirical literature. Next, we provide our own estimates for the EU countries. We find that an increase in government purchases raises output, consumption and investment and reduces the trade balance. However, the stimulating effect is weaker and the trade balance reduction is larger for the more open EU economies, consistent with larger leakage effects. Further, we show that government purchases shocks in large EU economies have non-negligible consequences for economic activity in the main trading partners.

The Role of House Prices in the Monetary Transmission Mechanism across European Countries

This paper provides a discussion of the ‘housing market’ channels of the monetary transmission mechanism and offers some evidence of institutional differences in the European housing and mortgage markets. Using a number of Vector Autoregressive models, estimated individually for nine European countries over the pre‐EMU period, we find that house prices are significantly affected by interest rate shocks. The relative role of these interest‐rate‐induced fluctuations in house prices for private consumption is then investigated. We show that house prices may enhance the effects of interest rate shocks on consumer spending in those economies where housing and mortgage markets are relatively more developed and competitive.

Nominal shocks and the current account: A structural VAR analysis of 14 OECD countries

This paper provides some empirical evidence on one of the most controversial theoretical implications of the new open economy literature, which refers to the role of the current account in the international monetary transmission mechanism. In order to throw some light on this issue, two structural VAR models are estimated separately for 14 industrialized countries. The main empirical results highlight the importance of the role of nominal disturbances for current account fluctuations. Additionally, it is found that expansionary nominal shocks generate temporary current account surpluses, whose size is positively correlated with the openness of the individual countries. JEL no. C32, E40, F41, F42

From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU

This paper explores the determinants of deviations of ex-post budget outcomes from first-release outcomes published towards the end of the year of budget implementation. The predictive content of the first-release outcomes is important, because these figures are an input for the next budget and the fiscal surveillance process. Deviations of ex-post from first-release fiscal figures may arise for political and strategic reasons. In particular, Ministries of Finance control the production of first-release figures, and may have an incentive to be over-optimistic at this stage. Our results suggest that an improvement in the quality of institutions, whether measured by the tightness of national fiscal rules, the medium-term budgetary framework or budgetary transparency, reduces the degree of optimism at the first-release stage, thereby making first-release figures more informative about the eventual outcomes. This supports the European Commission proposals for minimum standards for national fiscal frameworks and amendments by the European Parliament for improving national ownership. It also strengthens the case for a close monitoring by the Commission of the first-release production of fiscal figures.

FROM BUDGETARY FORECASTS TO EX POST FISCAL DATA: EXPLORING THE EVOLUTION OF FISCAL FORECAST ERRORS IN THE EUROPEAN UNION

This paper splits the ex post error in the budget balance, defined as the final budget figure minus the planned figure, into implementation and revision errors, and investigates the determinants of these errors. The implementation error is the difference between the nowcast, published toward the end of the year of budget implementation, and the planned budget, while the revision error is the difference between the final figure and the nowcast. The split takes account of differences in reporting incentives at the different budgeting stages. The predictive content of fiscal plans is important, because it determines the reliability of the budget, while that of the nowcasts is important also because these figures are an input for the next budget and may contain important signals about the fiscal stance. Implementation and revision errors may arise for political and strategic reasons. Our results suggest that an improvement in the quality of institutions, whether measured by the tightness of national fiscal rules, the medium‐term budgetary framework or budgetary transparency, increases the quality of budgetary reporting at both the planning and the nowcast stage. This supports the recently adopted requirements on national fiscal frameworks. It also strengthens the case for a close monitoring by the European Commission of national budgeting.

Portfolio Separation and the Dynamics of Bank Interest Rates

We develop a dynamic model of the interest rates of a monopolistic bank, providing both intermediation and payment services. We obtain testable restrictions on portfolio separation from the dynamic terms of the reduced‐form solutions, and test the model using balance‐sheet data from large banks of 17 OECD countries, over the period 1988–2007. We find strong evidence against the portfolio separation hypothesis. In line with the predictions of the model, interest margins rise with higher market interest rates, lower revenues from fees, and higher industrial costs and loan loss provisions.

Financial liberalization and house price dynamics in Europe

This article investigates the determinants of house prices in a sample of European countries over the period 1970 to 2004. Focusing on the role of financial liberalization, we find that it has mainly affected the short-term dynamics of residential prices. In particular, the impulse effects on house prices of income and mortgage debt have become smaller. On the other hand, the effects of interest rates, past house prices and, to a lesser degree, stock market have strengthened. In other words, there seems to have been a certain ‘de-linking’ of short-term house price dynamics from income, whereas the housing market may have become more similar to a financial asset market, with interest rates and expectations of capital gains playing a more prominent role.

Private and Public Risk Sharing in the Euro Area

This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.