Fiscal Cyclicality and EMU

This is joint work with Philip Lane.

Abstract: For the set of EMU member countries, we examine cyclical patterns in fiscal outcomes. We find that there is significant time variation in fiscal cyclicality, with an improvement in the wake of the Maastricht Treaty but a deterioration after the creation of EMU. Furthermore, we show that the fiscal cycle is affected by the financial cycle in addition to the output cycle. The lessons for the current reforms of European economic and fiscal governance are manifest.

This paper can be downloaded from here.

Categories: Fiscal Policy

The Spread of Manufacturing to the Periphery 1870-2007: Eight Stylized Facts

This is a joint paper with Kevin H. O’Rourke and Jeffrey G. Williamson.

Abstract: This paper documents industrial output growth around the poor periphery ( Latin America, the European periphery, the Middle East and North Africa, Asia, and sub-Saharan Africa] between 1870 and 2007. We provide answers to the following questions: When and where did rapid industrial growth begin in the periphery? When and where did peripheral growth rates exceed those in the industrial core? When was the high-point of peripheral industrial growth? When and where did it become widespread? When was the high-point of peripheral convergence on the core? How variable was the growth experience between countries? And how persistent was peripheral industrial growth?

This paper can be downloaded from the IIIS or the NBER.

Categories: Economic History

How Housing Slumps End

This is a joint paper with Barry Eichengreen and Kevin H. O’Rourke commissioned by Economic Policy. It will be presented in the Economic Policy Fifty-Fourth Panel Meeting in Warsaw.

Abstract: We construct a simple probit model of the determinants of real house price slump endings. We find that the probability of a house price slump ending is higher, the smaller was the pre-slump house price run-up; the greater has been the cumulative house price decline; the lower are real mortgage interest rates; and the higher is GDP growth. Slumps are longer, other things being equal, where housing supply is more elastic, but shorter the more developed are financial institutions. For slumps of a given size, shorter sharper slumps are associated with worse macroeconomic performance in the short run, but with better performance in the long run. This suggests that for sufficiently low discount rates, policy makers should not impede the decline in real house prices, and this conclusion is reinforced by the finding that after a certain duration, house price slumps can become self-reinforcing. On the other hand, we also find evidence that during downturns, falling house prices can lead to lower private sector credit flows. Policy makers thus face a delicate balancing act. While they should not intervene to artificially prop up overvalued house prices, they should ensure that their macroeconomic and banking policies are such as to make a bottoming-out more likely. This suggests that they should keep real interest rates low, and ensure that banks are well-capitalised.

You can download the paper from here, here or here.

Categories: Housing Tags:

The Cyclical Conduct of Irish Fiscal Policy

This paper is joint work with Philip Lane prepared for the Irish Economy conference at Lehigh University.

Abstract: This paper provides an overview of the cyclical conduct of …fiscal policy in Ireland both before and during the crisis. It shows that fi…scal policy has been procyclical, with …financial shocks amplifying the fi…scal cycle. In addition, it highlights the importance of institutional reform and outlines the case for a formal …scal framework.

The paper can be downloaded from here.

Financial Cycles and Fiscal Cycles

This is a joint work with Philip Lane prepared for the EUI-IMF conference “Fiscal Policy, Stabilization and Sustainability“.

Abstract: There is a huge literature on the behaviour of fiscal variables in relation to the output cycle. In this paper, we show that fiscal variables also co-vary with the financial cycle, as captured by fluctuations in the current account balance and credit growth. These financial factors affect fiscal outcomes, over and above their influence on the output cycle. We argue that fiscal surveillance and the design of fiscal rules should pay close attention to the interaction between the financial cycle and the fiscal cycle.

The full paper can be downloaded from here.


Fiscal Shocks and Real Wages

Abstract: This paper studies the impact of fiscal shocks in a panel of eleven euro area member countries. It contributes to the existing literature by providing new empirical evidence on the effects of different types of spending shocks on real wages. The main finding is that an increase in government spending raises the real wage. However, its magnitude depends on the spending type. Shocks to government investment and to the number of public employees generate responses that are at the extremes of the wage response spectrum. The former produces the greatest effect, while the latter has zero impact.

This paper is forthcoming in International Journal of Finance & Economics.

An early view of the paper is available here.

International Risk Sharing and the Irish Economy

This paper was written during my IRCHSS postdoctoral fellowship.

Abstract: This paper studies international risk sharing in Ireland focusing on the 1970-2007 period. To this end, we assess how consumption and national income have been affected by idiosyncratic output shocks. The study of the former shows that private consumption was partially insulated from output shocks and that risk sharing was invariant over time. The analysis of national income provides further evidence for international risk sharing. Here, we find that national income fluctuations were not fully affected by output shocks and that income risk sharing improved as Ireland became more integrated with the international financial system.

The current version of this paper can be downloaded from here.