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This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.
Recently, monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence. Simultaneously, in the fiscal area, market development has allowed public debt managers to focus more on cost minimization. This “divorce” of monetary and debt management functions in no way lessens the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. This paper analyzes these issues based on a review of the relevant literature and of country experiences from an institutional and operational perspective.
This paper explores how fiscal policy can affect medium- to long-term growth. It identifies the main channels through which fiscal policy can influence growth and distills practical lessons for policymakers. The particular mix of policy measures, however, will depend on country-specific conditions, capacities, and preferences. The paper draws on the Fund’s extensive technical assistance on fiscal reforms as well as several analytical studies, including a novel approach for country studies, a statistical analysis of growth accelerations following fiscal reforms, and simulations of an endogenous growth model.
The concept of fiscal impulse is defined, discussed, and differentiated from measures that attempt to summarize the macroeconomic effects of fiscal policy. Two methodologies are briefly discussed and their corresponding measures presented for the G-7 countries over the ten-year period ending in 1989. Controversies about the measure are highlighted and potential improvements are also discussed.
Imbalances within the euro area have been a defining feature of the crisis. This paper provides a critical analysis of the ongoing rebalancing of euro area “deficit economies” (Greece, Ireland, Portugal, and Spain) that accumulated large current account deficits and external liability positions in the run-up to the crisis. It shows that relative price adjustments have been proceeding gradually. Real effective exchange rates have depreciated by 10-25 percent, driven largely by reductions in unit labor costs due to labor shedding. While exports have typically rebounded, subdued demand accounts for much of the reduction in current account deficits. Hence, the current account balance of the euro area as a whole has shifted into surplus. Internal rebalancing has come with subdued activity—notably very high unemployment in the deficit economies—and made continued adjustment more difficult. To advance rebalancing further, the paper emphasizes the need for: (1) macroeconomic policies that support demand and bring inflation in line with the ECB’s medium-term price stability objective; (2) continued EMU reforms (banking union) to ensure proper financial intermediation; and (3) structural reforms in product and labor markets to improve productivity and support the reallocation of resources to tradable sectors.
The effects of fiscal policy measures, both taxes and public spending, adopted by developing countries in response to the 2009 global crisis are still uncertain. This book discusses them using an analytical framework that allows for distilling possible implications on growth and social welfare.
What are fiscal policy rules? What are the principal benefits and drawbacks associated with various fiscal rules, particularly compared with alternative approaches to fiscal adjustment? Can fiscal rules contribute to long-run sustainability and welfare without sacrificing short-run stabilization? If so, what characteristics of fiscal rules make this contribution most effective? And in what circumstances and contexts, if any should the IMF encourage its member countries to adopt fiscal rules? This paper seeks to identify sensible fiscal policy rules that can succeed, if chosen by a member country, as an alternative to descretionary fiscal rules.
The European economy is emerging from its deepest recession since the 1930s. This volume, which brings together economic analysis from the European Commission services, explains how swift policy response avoided a financial meltdown. Europe also needs an improved co-ordinated crisis-management framework to help it respond to any similar situations that may arise in the future. Economic Crisis in Europe is a much-anticipated volume which shows that the beginnings of such a crisis-management framework are emerging, building on existing institutions and legislation and complemented by new initiatives.
This book explores the role of national fiscal policies in a selected group of Euro-area countries under the European Economic and Monetary Union (EMU). In particular, the authors characterize the response of output to fiscal consolidations and expansions in the small Euro-area open economies affected by high public and private debt. It is shown that the macroeconomic outcome of fiscal shocks is strongly related to debt levels. The Euro-area countries included in the investigation are Greece, Ireland, Italy, the Netherlands, Spain, and Portugal, over the sample period 1999–2016, i.e., the EMU period. The main econometric tools used in this research are structural vector autoregressive (VAR) models, including panel VAR models. The available literature relating to the subject is also fully reviewed. A further closely investigated topic is the potential spillover effects of German fiscal policies on the selected small Euro-area economies. Moreover, in the perspective of the evolution of the Euro Area towards a full Monetary and Fiscal Union, the authors study the effects of area-wide government spending shocks on aggregate output and other macroeconomic variables during the EMU period. The closing chapter of the book considers evidence on the consequences of austerity policies for European labour markets during recent years.