Sergejs Saksonovs

Exploring the Dynamics of Global Liquidity

This paper explores the concept of global liquidity, its measurement and macro-financial importance. We construct two sets of indicators for global liquidity: a quantity series distinguishing between core and noncore liabilities of financial intermediatires and a corresponding price series. Using price and quantity indicators simultaneously, it is possible to distinguish between shocks to the supply and demand for global liquidity, and isolate their impact on the economy. Our results confirm that global liquidity conditions matter for economic and financial stability, and points to indicators whose regular monitoring could be valuable to policymakers.

Investment in the Euro Area; Why Has It Been Weak?

Investment across the euro area remains below its pre-crisis level. Its performance has been weaker than in most previous recessions and financial crises. This paper shows that a part of this weakness can be explained by output dynamics, particularly before the European sovereign debt crisis. The rest is explained by a high cost of capital, financial constraints, corporate leverage, and uncertainty. There is a considerable cross country heterogeneity in terms of both investment dynamics and its determinants. Based on the findings of this paper, investment is expected to pick up as the recovery strengthens and uncertainty declines, but persistent financial fragmentation and high corporate leverage in some countries will likely continue to weigh on investment.

Youth Unemployment in Advanced Economies in Europe; Searching for Solutions

The SDN will assess the youth unemployment problem in advanced European countries, with a special focus on the euro area. It will document the main trends in youth and adult unemployment in 22 European countries before and after the global financial crisis. It will identify the main drivers of youth and adult unemployment, focusing in particular on the role of the business cycle and structural characteristics of the labor market. It will outline the main elements of a comprehensive strategy to address the problem.

Recognizing the Bias: Financial Cycles and Fiscal Policy

This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

Youth Unemployment in Advanced Europe; Okun’s Law and Beyond

The crisis has intensified what was previously a chronic unemployment problem in Europe; youth unemployment is now at unprecedented highs in some European countries. This paper assesses the main drivers of youth unemployment in Europe. It finds that much of the increase in youth unemployment rates during the crisis can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity than adult unemployment. Labor market institutions also play a significant role in explaining the persistently high levels of youth unemployment, especially the tax wedge, minimum wages relative to the median wage, spending on active labor market policies, the opportunity cost of working (measured by the unemployment benefits), vocational training, and labor market duality. This suggests that policies to address youth unemployment should be comprehensive and country-specific, focused on reviving growth and advancing labor market reforms.

The Right Kind of Help? Tax Incentives for Staying Small

Some countries support smaller firms through tax incentives in an effort to stimulate job creation and startups, or alleviate specific distortions, such as financial constraints or high regulatory or tax compliance costs. In addition to fiscal costs, tax incentives that discriminate by firm size without specifically targeting R&D investment can create disincentives for firms to invest and grow, negatively affecting firm productivity and growth. This paper analyzes the relationship between size-related corporate income tax incentives and firm productivity and growth, controlling for other policy and firm-level factors, including product market regulation, financial constraints and innovation. Using firm level data from four European economies over 2001–13, we find evidence that size-related tax incentives that do not specifically target R&D investment can weigh on firm productivity and growth. These results suggest that when designing size-based tax incentives, it is important to address their potential disincentive effects, including by making them temporary and targeting young and innovative firms, and R&D investment explicitly.

Investment in the Euro Area

For the euro area as a whole, gross domestic fixed capital formation rose by 4.2% in 1998, compared with an increase of around 2% in the previous year. The contribution of investment to real GDP growth rose to 0.8 percentage point in 1998, compared with 0.4 percentage point in 1997. This was the strongest contribution to growth since 1990 and, in conjunction with robust private consumption, it underpinned the overall acceleration in output growth observed last year. However, viewed from a more medium-term perspective, the rise in investment has been relatively subdued for a number of years and it may be regarded as somewhat surprising that investment growth has not responded more strongly to the upturn in activity that has taken place from mid-1995 onwards. Indeed, it appears that, since peaking at around 22% in the early 1990s, the ratio of investment to GDP has fallen significantly, to around 18.5% during 1998 (see the chart below). The ratio of investment to GDP is calculated on the basis of current prices. However, as the relative price of investment goods has tended to fall, the development of investment has been slightly more positive when measured in terms of constant prices. This relative price decline is at least partly due to the strong downward trend in the prices of many high technology investments, such as personal computers and computer software.