Massimo Rostagno

Electoral Systems and Public Spending

We study the effects of electoral institutions on the size and composition of public expenditure in OECD and Latin American countries. We emphasize the distinction between purchases of goods and services, which are easier to target geographically, and transfers, which are easier to target across social groups. We present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer (public good) spending in proportional (majoritarian) systems. The model also predicts higher total primary spending in proportional (majoritarian) systems when the share of transfer spending is high (low). After defining rigorous measures of proportionality to be used in the empirical investigation, we find considerable support for our predictions.

The Great Depression and the Friedman-Schwartz hypothesis

We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, we first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. We identify a monetary base rule which responds only to the money demand shocks in the model. We solve the model with this counterfactual monetary policy rule. We then simulate the dynamic response of this model to all the estimated shocks. Based on the model analysis, we conclude that if the counterfactual policy rule had been in place in the 1930s, the Great Depression would have been milder.

Electoral System and Public Spending

We study the effects of electoral institutions on the size and composition of public expenditure in OECD and Latin American countries. We present a model emphasizing the distinction between purchases of goods and services, which are easier to target geographically, and transfers, which are easier to target across social groups. Voters have an incentive to elect representatives more prone to transfer spending in proportional systems. The model also predicts higher primary spending in proportional systems when the share of transfer spending is high. After defining rigorous measures of proportionality, we find considerable empirical support for our predictions.

A Monetary Policy Strategy in Good and Bad Times: Lessons from the Recent Past

We evaluate the ECBs monetary policy strategy against the underlying economic structure of the euro area economy, in normal times and in times of severe financial dislocations. We show that in the years preceding the financial crisis that started in 2007 the strategy was successful at ensuring macroeconomic stability and steady growth despite shocks to the supply side and to the transmission mechanism which complicated the policy process. Emphasis on monetary indicators in the ECBs monetary policy strategy JEL Classification: E31, E44, E51, E58

The Role of Money in Monetary Policymaking

In this paper, the conceptual and empirical bases for the role of monetary aggregates in monetary policy making are reviewed. It is argued that money can act as a useful information variable in a world in which a number of indicators are imperfectly observed. In this context, the paper discusses the role of a reference value or benchmark for money growth in episodes of heightened financial uncertainty. A reference value for money growth can also act as an anchor for expectations and policy decisions to prevent divergent dynamics, such as the spiralling of the economy into a liquidity trap, which can occur under simple interest rate rules for policy conduct. The paper concludes that using information included in monetary aggregates in monetary policy decisions can provide an important safeguard against major policy mistakes in the presence of model uncertainty.

Optimal Debt Under a Deficit Constraint

It has been consistently argued by many that European Union member states, in the context of significant demographic change in coming years, should pursue a more rigorous course of accelerated debt abatement in order to reduce the burden on future taxpayers. In this vein, these observers point to the need for a new fiscal paradigm more solidly based on the principles of sustainability and intergener- ational responsibility. One tool to help in generating this outcome is the adoption of a rule-rather than discretion-based fiscal policy, given the success of this approach in the conduct of monetary policy. In order to produce a more credible and predictable path for future fiscal policy, there would be a need to curtail systematic discretionary policy and resuscitate the role of automatic stabilisers in government policy. In the past, the effectiveness of shock absorbers has been often severely reduced as the result of discretionary action, leading to a need for high interest spending and accompanied by recurrent spells of deficit and debt crises.

'Close to Balance or in Surplus': A Methodology to Calculate Fiscal Benchmarks

Paul Hiebert and Massimo Rostagno explore the analytical links between EMU fiscal rules and the theory of fiscal sustainability with a focus on the transition to the equilibrium debt to GDP ratios implied by such rules. The authors argue that such a transition cannot be satisfactorily managed by simply prescribing strict adherence to the safety margins computed by the European Commission for the cyclically adjusted budgets of EMU member countries. This strategy may induce distortions in the way fiscal quantities respond to economic developments. They also point out that indicators like the tax-gap, while useful in signalling a prospective imbalance, do not translate automatically into policy prescriptions. Hiebert and Rostagno therefore explore the properties of a policy rule whereby fiscal variables are adjusted according to the distance between the current and the targeted fiscal position and find that this allows a flexible pattern of fiscal response to both cyclical and structural changes.