Matthieu Lemoine

The Growth-Volatility Relationship: New Evidence Based on Stochastic Volatility in Mean Models

This paper models the relationship between growth and volatility for G7 economies in the time period 1960-2009. It delivers for the first time estimates of this relationship based on a logarithm variant of stochastic volatility in mean (SV-M) models. The relationship appears significantly positive in Germany and Italy, but insignificant in other countries. We also show that output volatility has increased in all countries since the beginning of the financial crisis, which illustrates the end of the great moderation. For comparison, the paper also delivers estimates based on a logarithm variant of GARCH in mean (log-GARCH-M) models, the class of time series models previously used in the literature to estimate the growth-volatility relationship. We show that SV-M models deliver results preferable to those of log-GARCH-M models, despite the high computational cost of their estimation. SV-M models fit generally better data than log-GARCH-M ones. As their residuals do not violate distribution assumptions, they do not deliver dubious conclusions concerning the significance of the relationship, which is the case of the log-GARCH-model for France, the UK and the US. Finally, SV-M models suggest a positive impact of unexpected volatility on output growth, which is not taken into account by log-GARCH-M models.

Measuring the NAIRU: a complementary approach

Estimates of the Nairu generally suffer from a large uncertainty, which can be reduced by adopting a bivariate framework and assuming that shifts of the Phillips curve share a common trend with the unemployment rate. We consider in this paper if this common trend assumption is empirically relevant or not for seven economies over the sample 1973-2010. First, it appears that the Nairu can substantially differ from the unemployment trend. Second, relaxing the common trend assumption improves the fit of the inflation equation. Third, this assumption is necessary for getting an important reduction of uncertainty in a bivariate framework.

Which Size and Evolution of the Government Expenditure Multiplier in France (1980-2010)?

The importance of the stimulus packages that were injected in most advanced economies from the start of the financial crisis and the speed at which budgets are now being consolidated in Europe has revived the long-lasting debate on the size of fiscal multipliers. In this study, we focus on government expenditures on goods and services. Our conclusion following Blanchard and Perotti (2002) for the identification of government spending shocks is that the multiplier is significant and not far from 1 on impact and becomes statistically insignificant after about 3 years in France. We provide numerous robustness checks concerning the definition of expenditures, assumptions about data stationarity, the role of expectations and the choice of the sample. Moreover, using a time-varying SVAR model, our main findings are (1) that the multiplier did not evolve significantly at any horizon since the beginning of the 1980s and (2) that the variance of shocks hitting the economy evolves a lot more than the model autoregressive parameters. Even in alternative specifications where the Bayesian priors are pushed towards time-variation, the main evolution that we uncover is a (non-significant) decrease of the medium term expenditure multiplier, partly linked to a more aggressive monetary policy since the 1990s. We do not find evidence of an increase of the multiplier during every recession in France, contrary to the finding of Auerbach and Gorodnichenko (2012) for the United States. At least, business cycle conditions do not seem to be the main driver of the evolution of the expenditure multiplier in the last 30 years in France.

Assessing the Losses in Euro Area Potential Productivity Due to the Financial Crisis

In this paper, we show that the recent financial crisis has significantly affected the potential total factor productivity (TFP) of the four largest euro area economies, as well as that of the rest of the euro area. We used a reduced-form equation of TFP, based on an approach recently developed by Cahn and Saint-Guilhem (2010). Our empirical findings show that the permanent impact on potential TFP varies across countries from -3.9 points to -1.3 points in Q2 2012. When these losses are incorporated, TFP gaps develop closely in line with capacity utilisation rates (CUR). Moreover, in the case of France, including CUR in our TFP model improves the quasi real-time reliability of TFP gap estimates.

Fiscal Consolidation Under Imperfect Credibility

This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.

Impact of the Crisis on Potential Growth: An Approach Based on Unobserved Component Models (in French)

This article aims at evaluating potential growth for France, Germany and the euro area during the period from after the 2007-2008 credit crisis until 2012. Such an assessment plays a central role in the determination of the structural deficit and therefore in the definition of consolidation plans. After presenting the possible effects of the crisis on potential growth identified by the literature, we use for our evaluations an unobserved component model. This helps to reconcile the so-called traditional approaches, based on the use of a production function and the statistical approaches based on filtering methods. Our evaluations show for the different areas that the crisis has had a significant impact on potential growth starting in 2009; by 2012, potential growth should remain weak. The low potential growth is caused in part by a sharp decline in labor input, particularly in France and the euro area. This decline stems mainly from an increase of structural unemployment, except in Germany.

The Size and Evolution of the Government Spending Multiplier in France

Focusing on government spending on private goods and services from 1980 to 2010, we nd that the scal multiplier in France is signi cant and close to 1 on impact, and becomes statistically insigni cant after about 3 years. Moreover, using a time-varying SVAR model, we conclude (1) that this multiplier does not evolve signifi cantly over any time horizon from the beginning of the 1980s onwards and (2) that the variance of shocks hitting the economy evolves more than the model autoregressive parameters. Even in alternative speci cations where Bayesian priors are pushed towards time variation, the main evolution that we uncover is a (nonsignifi cant) decrease in the medium-term spending multiplier, partly linked to the implementation of a more aggressive monetary policy since the 1990s. We fi nd no evidence of an increase in the multiplier during recessions in France. At the very least, business cycle conditions do not seem to be the main driver of the evolution of the government spending multiplier from 1980 to 2010.