Transcript Raffaela Giordano (Banca d`Italia)

Fiscal Multipliers and Open Economy spillovers in a
Model with Labour Turnover Costs
Discussion by Raffaela Giordano
Banca d’Italia – Research Department
Banco de España Conference “Interactions between monetary and fiscal policies”
Madrid, 25-26 February 2010
PLAN OF THE DISCUSSION
–
–
–
General comments
Brief description of the
summary of main results
More specific comments
model
and
GENERAL COMMENTS (1)
–
–
–
–
Very timely: assessing the size of fiscal multipliers is
crucial in current circumstances
Part of recent and large debate on the effect of fiscal
stimuli on economic activity (based on both empirical
VAR-based and general equilibrium models)
Main contribution: splitting the analysis among
different specific measures (in particular, addressing
labour demand). This is done within an open economy
model that allows to account for int.l spillovers
Very relevant policy implications: the setup allows to
assess not only the size of the multipliers but also the
relative efficacy (e.g. CBO, February 2010)
GENERAL COMMENTS (2)
In order to be able to do this:
– Need (?) of a quite complicated framework
–
–
–
It is difficult to evaluate the role of each
assumption in delivering the results
It is difficult to evaluate how the choice of
calibration parameters (many!) affects the results
Making sure that results (both in terms of size and
ranking of multipliers) are robust to different
assumptions and choices of the parameters is of
course crucial in this kind of analyses
MAIN INGREDIENTS OF THE MODEL
– Open economy (two countries: currency area; RoW)
– Labour market frictions (hiring and firing costs)
– Infinitely living agents maximize utility by allocating wealth
between consumption, domestic and int.l bonds (wealth comes
from labour income, profits, financial assets); distortionary
taxes on consumption, wages, profits
– Monetary policy in currency area follows a rule for interest rate
reacting to average inflation level in the area
– Fiscal policy is conducted independently by each country
– Temporary fiscal shocks financed with future lump sum taxes
– Fiscal packages may include: (1) pure demand stimulus (i.e.
temporary increase in gov.t expenditure), (2) consumption tax
(i.e. VAT) cuts; (3) wage income tax cuts; (4) hiring subsidies
(i.e. reduction in hiring costs); (5) short-term work (temporary
financing part of workers’ wage)
MAIN RESULTS
The size of the multipliers depends on:
– Crowding out effect coming from expected higher future taxes
– Labour market features
– International spillovers coming from:
effect on terms of trade and thus on export demand
effect on CPI/PPI and thus on domestic wages
Fiscal measures can be ranked as follows (in terms of efficacy):
– Hiring subsidy
– Income tax cuts
– Demand stimulus
– Short-time work
– Consumption tax cuts
SPECIFIC COMMENTS (1)
–
Given the relevance of the results, that allows us not only to
assess what is the size of the multiplier but also to rank
alternative fiscal packages in terms of efficacy, one would
like to evaluate to what extent the estimated size and
ranking depend on particular assumptions and on
calibration parameters
–
Look at them in turn
SPECIFIC COMMENTS (2): THE SIZE
Assumptions:
– The model accounts for several relevant real world features
(open economy, frictions, wage bargaining, …)… there is one
important missing feature from the picture:
distortionary future taxation
– Also, it is not clear the transmission mechanism through which
fiscal expansions affect the interest rate and thus the real
economy
–
–
Introducing distortionary taxation to finance fiscal stimuli
would definitely reduce the size of the multiplier (via larger
crowding out effect)
What about the other?
SPECIFIC COMMENTS (3): THE SIZE
Calibration parameters:
– The size of international spillovers crucially depends on η
(elasticity of substitution between home and foreign goods) and γ
(home bias in consumption)
– The labour market frictions are measured by firing (f) and
hiring (h) costs
– Other labour mkt features (unemployment benefits, b, cost for
firm under disagreement, s, workers’ bargaining power) matter
–
–
–
Of course, as η ↑ and γ ↓, int.l spillovers ↑ and multiplier ↓
…as f and h ↓ , multiplier ↓
…as b and s (and workers’ b.p.) ↑ , multiplier ↓
…and, what about the parametrization for foreign country?
SPECIFIC COMMENTS (4): THE RANKING
Assumptions:
– Lump sum taxation …maybe irrelevant for ranking
Calibration parameters:
– As labour market frictions ↓ , relative effectiveness of “supply
side” stimuli should decrease (also as workers’ bargaining
power ↓, …)
– What about the parameters affecting the international
spillovers? …maybe irrelevant for ranking
A robustness check to alternative calibrations would be instructive!
MINOR COMMENTS
–
–
–
–
Monetary policy is not really suitable to address crises: (i) the
parameter bп=1.5 is not calibrated on crises; (ii) policy rate is not
allowed to be constrained by zero lower bound (Christiano et al.
2009; Woodford, 2010) → size of multiplier may be
underestimated
Monetary policy reacting to average inflation level in the area; how
does this “rationalize the behaviour of the stability pact”?
Weird arbitrage condition between nat.l and int.l interest rates →
intermediation costs when investing in international portfolio.
Why? How does this affect the results?
Government expenditure just enters in the resource constraints
(with a minus sign) → pure waste (?) → fiscal stimulus should be
described as a reduction in g
Check for description of fiscal packages adopted in euro area
countries! For Italy, look at
http://www.bancaditalia.it/pubblicazioni/econo/bollec/2009/bolleco58/en_bollec54
SUMMING UP
–
–
–
–
Assessing the effectiveness of fiscal measures as a means of
increasing output and employment is crucial, above all in times
of crisis
The size of fiscal multipliers typically depends on the presence
(and magnitude) of delays in adjustment of prices or wages and
more generally of frictions, and on monetary policy reaction
My impression is that in this paper the effectiveness of fiscal
policy tends to be over-estimated in normal times … maybe
under-estimated during crises
Regardless quantitative assessments, the paper has the merit to
explicitly consider labour market measures and, more
generally, to highlight the usefulness of concentrating efforts
where distortions are highest