Transcript Potential output and structural reforms after the crisis

Potential output and structural reforms after
the
crisis: the case of Italy
A. Gerali et al
Discussion by
Henrik Kucsera
Magyar Nemzeti Bank
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Outline
• Disclaimer
• Summary
• Discussion (theoretic)
• Discussion (policy)
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Summary
• DSGE modell with real and nominal frictions (EAGLE)
• Inefficiencies built into the model (monopolistic markets)
• 3 regions (Italy, REA, RW)
• Common currency and monetary policy in EA countries
• Common (efficient) bond market for the whole world
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Summary
• 2 policy changes starting from steady state
• Fiscal consolidation: 10% decrease in public debt/GDP from
119%
• Implemented by fiscal rule using either labour income tax or capital
income tax as instrument
• Competitiveness improvement in nontradables (services
sector): fall in markup by 10%
• Optionally augmented by developements in international bond
markets (bond rate spread) or coordinated policy action in the
whole EA
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Summary
Results
• „the combination of the increase in competition and lower
taxes greatly favours the increase of Italian output and
welfare in the long run”
• „Spillovers of Italian reforms to the rest of the EA are rather
small”
• Coordinated policy change in the EA improves results of
competitiveness reform
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Discussion
• Carefully done exercise, framework has lots of potential
• Incentive compatibility (expectations, optimisation) vs. ‘semistructural’ models ( SVAR,…)
• Takes into account regional interdependence
• Well suited to address welfare questions
• Paper gives a good exposition of the exercises, providing
(some) robustness checks as well
• Topic naturally raises many issues…
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Discussion
• Welfare analysis of policy programs should be quite
straightforward
• E.g. in case of fiscal consolidation via capital income tax,
after 20 years: GDP 0.5%, Cons 0%, Lab 0.2%
• nontraded competitiveness reform, after 20 years: GDP 3.2%,
Cons 1.5%, Lab 1.5%
• Joint program of previous two, after 20 years: GDP 9%, Cons
9%, Lab 3%
• It is not clear that these programs greatly increase welfare
(except in the joint case and the long run)
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Discussion
• Curious nonlinearities in results in case of joint program (see
prev. slide)
• Emphasised as one of ‘main results’ of paper in the Conclusion
part
• The feedback loop could be further explored:
• what elements of the model it depends on
• Robustness checks concerning these elements
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Discussion
• No supply side effects of government expenditure
• Not unusual in fiscal models to introduce productivity
enhancing infrastructure provided by government (e.g GIMF)
• Even if government production is kept constant during tax
changes, lump sum transfers to households are likely to
change to achieve market clearing on the integrated world
bond market.
• Changes in transfers to households can have first order effect
on time spans 12-20 years (via e.g. labour market,
demography).
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Discussion
• Fiscal consolidation exercises started from steady state of
model (?)
• Carrying out fiscal consolidation in an economy in slump
amounts to procyclical policy
• may be hard to justify (connects to welfare analysis issue mentioned
earlier)
• may be hard to obtain/maintain public support
• Fiscal consolidation in a depressed economy may be selfdefeating through a positive feedback in economic activity
and government budget.
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Discussion
• Main traction of refoms comes from nontradeable sector
competitiveness improvement
• The latter is almost always greatly beneficial in this model
setup (at least in terms of GDP)
• Is it also this simple in practice? Why these measures have not
been already carried out?
• Natural monopolies (economies of scale, or unique resources
(tourism)…)
• Measures should aim oligopolistic markets – game theoretic dimension
– improving market may not be trivial
• (Lobbyism)
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Thank you for your attention!
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