Paul Hiebert

International trade, technological shocks and spillovers in the labour market: a GVAR analysis of the US manufacturing sector

We empirically analyse the response of labour market related variables in the US manufacturing sector to various shocks, notably to trade openness and technology, as well as examining spillovers from industry-specific labour market shocks. The econometric approach involves an application of the recently developed Global Vector Autoregression methodology of Dées et al. (2007) to 12 manufacturing industries over the period 1977–2003. The framework allows us to analyse the response of a standard set of labour-market related variables (employment, real compensation, productivity and capital stock) to exogenous factors (a sector-specific measure of trade openness, a common technology and oil price shock), along with industry spillovers using specific measures of manufacturing-wide variables for each sector. Generalized impulse responses indicate that increased trade openness negatively affects real compensation, has negligible employment effects and leads to higher labour productivity. These impacts, however, are relatively weaker than those induced by technology shocks, with the latter positively and significantly affecting both real compensation and employment. There is also evidence of positive spillovers across industries from sector-specific employment and productivity shocks. Impact elasticities suggest strong intra-sectoral linkages for employment and capital stock formation, contrasting with weak linkages for what concerns real compensation and productivity.

Characterising the Financial Cycle: A Multivariate and Time-Varying Approach

We demonstrate that financial cycles (identified as common fluctuations in credit and asset prices, proxying balance-sheet leverage) strongly differ across countries, e.g., in duration. This is contradictory to a similar duration assumption inherent in prevalent proxies of financial cycles, such as the Basel III credit-to-GDP gap guiding countercyclical capital buffers. Against this backdrop, we propose a methodology for constructing financial cycles relaxing the similar-duration assumption and observe an improved capacity in predicting financial crises. Specifically, we use credit and asset prices as inputs to our methodology and show that constructed financial cycles significantly outperform the credit-to-GDP gap in predicting financial crises.

Fiscal Policies and Economic Growth in Europe: An Empirical Analysis

The methodological issues and econometric problems in the empirical assessment of the determinants of growth are systematically reviewed in the first part of the paper by Hiebert, Lamo, de Avila and Vidal. In the second part, the authors assess empirically the long-run effects of fiscal policy on growth in the EU countries. As in the previous paper, the authors rely on panel data. They make use of a generalized method of moments estimator to control for the endogeneity of explanatory variables and correlated individual effects. In order to control for the cycle, trend growth is used as dependent variable in the estimation, innovating with respect to the standard practice of taking 5-years averages. The results tend to support the hypothesis that a negative relationship between the level of government revenue and trend growth exists for EU countries. Moreover, they show that improvements in the budget balance tend to enhance long-term growth. Finally, the results suggest that changes in government expenditure, controlling for their financing, have a limited impact on the trend growth rate.

The Impact of Globalisation on the Euro Area Macroeconomy

The general acceleration of trade globalisation over the last decade - or a growing interdependence of economies via trade, production and financial market linkages - has engendered several macroeconomic implications for the euro area. This paper focuses on assessing the key impacts on the euro area macroeconomy through an analysis of prospective channels, stylised facts and review of relevant empirical findings. It takes a long-term perspective over a period predominantly characterised by the rapid growth of globalisation, nothwithstanding the more recent interruption to the growth of global trade and capital flows that emerged towards the end of 2008 associated with the global financial turmoil and the associated downturn in global economic activity. Following an overview of the salient aspects of globalisation, which highlights the increasing openness of the euro area in terms of both trade and capital flows as well as the global reduction in transportation and information costs and the rise in the effective global supply of labour, the paper then assesses the external impacts of globalisation on the euro area, focussing on trade performance, export specialisation and import prices. It then investigates euro area domestic adjustment to globalisation with a supply-side focus, analysing separately impacts on productivity, labour markets and prices.

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.

Designing Model-Based Fiscal Policy Rules

Perez and Hiebert discuss the role of fiscal policy rules in macroeconomic models. They note that rules are designed to guarantee that the intertemporal budget constraint of the government is satisfied. Rules avoid explosive paths for the debt ratio and influence the adjustment of policy variables against shocks and policy changes. Perez and Hiebert note that rules are generally imposed exogenously and that there is little consensus on their most appropriate formulation. Exogenous rules involve backward-looking behaviour on the part of government, may not take into account the specific features of the shocks, and may not be fully consistent with other sectors of the model. The authors offer an alternative specification in the form of an endogenous fiscal rule which requires the presence of forward-looking agents. The rule is forward-looking and consistent with the set-up of the model. It allows shock-specific fiscal policy responses. Only counter-cyclical automatic adjustments are envisaged.

'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.