International Differences in Fiscal Policy During the Global Crisis

This is a joint paper with Philip Lane.

Abstract: We examine the cross-country dispersion in fi scal outcomes during 2007-2009. In principle, international diff erences in fi scal policy may be related to differences in optimal fi scal positions, funding constraints, political economy factors and fiscal control problems. We fin d that the decline in the overall and structural fi scal balances have been larger for those countries experiencing larger increases in unemployment and where credit growth during the pre-crisis period was more rapid. However, there is no systematic co-variation between fiscal outcomes and a larger number of other macroeconomic variables and country characteristics.

This paper can be downloaded from here.

Categories: Fiscal Policy Tags: ,

Fiscal Shocks and The Sectoral Composition of Output

This is joint work with Philip Lane.

Abstract: We study the impact of shocks to different types of government spending on the sectoral composition of output for a panel of EMU member countries. We find that fiscal shocks lead to an increase in the relative size of the nontraded sector, with the impact varying across the different spending categories. There is typically no significant impact on the level of production in the tradables sector but the level of imports increases and the level of exports declines in most cases. Overall, the results show that fiscal shocks matter not only for aggregate variables but also for the sectoral composition of output. The sectoral output results are consistent with previous work concerning the impact of fiscal shocks on the real exchange rate and the relative price of nontradables.

This paper is published in Open Economies Review, 21(3): 335-350. It can be downloaded from here.

Categories: Fiscal Policy

How housing slumps end

This is a VOXEU column together with Barry Eichengreen and Kevin H. O’Rourke.

Abstract: The world’s current economic problems started when housing bubbles burst in several advanced economies. Economic recovery without housing market recovery is unlikely to be sustained. This column presents new research on the probability of housing slumps ending. There is at least a one-in-eight chance of housing slumps in the three big economies (US, Japan and Germany) ending imminently, but there is nothing approaching the same probability elsewhere. If things turn out as projected here, we may be about to have a test of the locomotive theory – whether the big economies can pull along their smaller brethren – both for housing markets and generally.

This column can be found here.

Categories: Housing Tags: ,

From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons

This is a joint work with Miguel Almunia, Barry Eichengreen, Kevin O’Rourke and Gisela Rua.

Abstract: The Great Depression of the 1930s and the Great Credit Crisis of the 2000s had similar causes but elicited strikingly different policy responses. While it remains too early to assess the effectiveness of current policy, it is possible to analyse monetary and fiscal responses in the 1930s as a natural experiment or counterfactual capable of shedding light on the impact of current policies. We employ vector autoregressions, instrumental variables, and qualitative evidence for 27 countries in the period 1925–39. The results suggest that monetary and fiscal stimulus was effective — that where it did not make a difference it was not tried. They shed light on the debate over fiscal multipliers in episodes of financial crisis. They are consistent with multipliers at the higher end of those estimated in the recent literature, and with the argument that the impact of fiscal stimulus will be greater when banking systems are dysfunctional and monetary policy is constrained by the zero bound.

This paper is published in Economic Policy 62: 219-265. It can be downloaded from here.

The Impact of Government Spending Shocks on The Irish Economy

This is joint work with Philip Lane.

Abstract: We study the short-run effects of shocks to government spending on Ireland’s output and its real exchange rate. We show that the impact of government spending shocks critically depend on the nature of the fiscal innovation. Our main finding is that there are important differences between shocks to public investment and shocks to government consumption. Moreover, within the latter category, shocks to the wage and non-wage components also have dissimilar effects.

This paper is published in The Economic and Social Review 40(4): 407-434. It can be downloaded from here.

The effectiveness of fiscal and monetary stimulus in depressions

This is a VOXEU column together with Miguel Almunia, Barry Eichengreen, Kevin H. O’Rourke and Gisela Rua.

There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s. This column gathers data on growth, budgets and central bank policy rates for 27 countries covering the period 1925-39 and shows that where fiscal policy was tried, it was effective.

Find the rest of this column here.

The Anatomy of Large Valuation Episodes

Abstract: We examine cases in which there is a large shift in a country’s net foreign asset position due to the re-valuation of its foreign assets and/or foreign liabilities. We highlight the differences in large valuation shocks between countries characterized by large gross stocks of foreign assets and foreign liabilities and countries exhibiting large net external positions. Finally, we analyze macroeconomic dynamics in the neighborhood of large valuation episodes.

Paper published in Review of World Economics 145(3): 489-511, October 2009. It can be downloaded from here.