Infrequent Fiscal Stabilization

This paper studies discretionary non-cooperative monetary and fiscal policy stabilization in a New Keynesian model, where the fiscal policymaker uses a distortionary taxe as the policy instrument and operates with long periods between optimal time-consistent adjustments of the instrument. We demonstrate that longer fiscal cycles result in stronger complementarities between the optimal actions of the monetary and fiscal policymakers. When the fiscal cycle is not very long, the complementarities lead to expectation traps. However, with a sufficiently long fiscal cycle — one year in our model — no learnable time-consistent equilibrium exists. Constraining the fiscal policymaker in its actions may help to avoid these adverse effects.

Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime

This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the UK. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intra-period leadership, we demonstrate that the past policy in the UK is better explained by optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers. We demonstrate that fiscal policy plays an important role in identifying the monetary policy regime.

Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive

We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household's risk sensitivity, but not by the fiscal authority's. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decisionmakers.

Cyclical and Welfare Effects of Public Sector Unions in a Real-Business-Cycle Model

Motivated by the highly-unionized public sectors, the high public shares in total employment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model generates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a signifi cant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary e ffect of contractionary tax reforms by generating greater tax rate changes, thus producing signi ficantly higher welfare losses.

Picking the Right Budget Constraint for Scotland

This position paper considers the devolution of further fiscal powers to the Scottish Parliament in the context of the objectives and remit of the Smith Commission. The argument builds on our discussion of fiscal decentralization made in our previous published work on this topic. We ask what sort of budget constraint the Scottish Parliament should operate with. A soft budget constraint (SBC) allows the Scottish Parliament to spend without having to consider all of the tax and, therefore, political consequences, of that spending, which is effectively the position at the moment. The incentives to promote economic growth through fiscal policy – on both the tax and spending sides are weak to non-existent. This is what the Scotland Act, 1998, and the continuing use of the Barnett block grant, gave Scotland. Now other budget constraints are being discussed – those of the Calman Commission (2009) and the Scotland Act (2012), as well as the ones offered in 2014 by the various political parties – Scottish Conservatives, Scottish Greens, Scottish Labour, the Scottish Liberal Democrats and the Scottish Government. There is also the budget constraint designed by the Holtham Commission (2010) for Wales that could just as well be used in Scotland. We examine to what extent these offer the hard budget constraint (HBC) that would bring tax policy firmly into the realm of Scottish politics, asking the Scottish electorate and Parliament to consider the costs to them of increasing spending in terms of higher taxes; or the benefits to them of using public spending to grow the tax base and own-sourced taxes? The hardest budget constraint of all is offered by independence but, as is now known, a clear majority of those who voted in the referendum did not vote for this form of budget constraint. Rather they voted for a significant further devolution of fiscal powers while remaining within a political and monetary union with the rest of the UK, with the risk pooling and revenue sharing that this implies. It is not surprising therefore that none of the budget constraints on offer, apart from the SNP’s, come close to the HBC of independence. However, the almost 25% fall in the price of oil since the referendum, a resource stream so central to the SNP’s economic policy making, underscores why there is a need for a trade off between a HBC and risk pooling and revenue sharing. Ranked according to the desirable characteristic of offering something approaching a HBC the least desirable are those of the Calman Commission, the Scotland Act, 2012, and Scottish Labour. In all of these the ‘elasticity’ of the block grant in the face of failure to grow the Scottish tax base is either not defined or is very elastic – meaning that the risk of failure is shuffled off to taxpayers outside of Scotland. The degree of HBC in the Scottish Conservative, Scottish Greens and Scottish Liberal Democrats proposals are much more desirable from an economic growth point of view, the latter even embracing the HBC proposed by the Holtham Commission that combines serious tax policy with welfare support in the long-run. We judge that the budget constraint in the SNP’s proposals is too hard as it does not allow for continuation of the ‘welfare union’ in the UK. We also consider that in the case of a generalized UK economic slow requiring a fiscal stimulus that the Scottish Parliament be allowed increased borrowing to be repaid in the next economic upturn.

Fiscal multipliers in a two-sector search and matching model

This paper evaluates the effects of policy interventions on sectoral labour markets and the aggregate economy in a business cycle model with search and matching frictions. We extend the canonical model by including capital-skill complementarity in production, labour markets with skilled and unskilled workers and on-the-job-learning (OJL) within and across skill types. We first find that, the model does a good job at matching the cyclical properties of sectoral employment and the wage-skill premium. We next find that vacancy subsidies for skilled and unskilled jobs lead to output multipliers which are greater than unity with OJL and less than unity without OJL. In contrast, the positive output effects from cutting skilled and unskilled income taxes are close to zero. Finally, we find that the sectoral and aggregate effects of vacancy subsidies do not depend on whether they are financed via public debt or distorting taxes.

US Monetary and Fiscal Policies - Conflict or Cooperation?

Most of the literature estimating DSGE models for monetary policy analysis ignores fiscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both fiscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We find that US monetary and fiscal policy have often been in conflict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing fiscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing fiscal regime may actually be welfare improving.

Fiscal Federalism at the Ballot Box : The Relevance of Expressive Voting

This paper explores the impact of citizens' motivation to vote on the pattern of fiscal federalism. If the only concern of instrumental citizens was outcome they would have little incentive to vote because the probability that a single vote might change an electoral outcome is usually minuscule. If voters turn out in large numbers to derive intrinsic value from action, how will these voters choose when considering the role local jurisdictions should play? The first section of the paper assesses the weight that expressive voters attach to an instrumental evaluation of alternative outcomes. Predictions are tested with reference to case study analysis of the way Swiss voters assessed the role their local jurisdiction should play. The relevance of this analysis is also assessed with reference to the choice that voters express when considering other local issues. Textbook analysis of fiscal federalism is premised on the assumption that voters register choice just as 'consumers' reveal demand for services in a market, but how robust is this analogy.

Linkages of dietary patterns, international trade and land use: the case of olive oil in the European Union

Within only two decades olive oil developed from a niche product which could hardly be found in food stores outside the producing regions towards an integrated component in the diets of industrial countries. This paper discusses the impacts of the promotion of the “healthy Mediterranean diet” on land use and agro-ecosystems in the producing countries. It examines the dynamics of olive oil production, trade and consumption in the EU15 in the period 1972 to 2003 and the links between dietary patterns, trade and land use. It analyses the underlying socio-economic driving forces behind the increasing spatial disconnect between production and consumption of olive oil in the EU15 and in particular in Spain, the world largest producer during the last three decades. In the observed period olive oil consumption increased 16 fold in the non-producing EU15 countries. In the geographically limited producing regions like Spain, the 5 fold increase in export production was associated with the rapid industrialization of olive production, the conversion of vast Mediterranean landscapes to olive monocultures and a range of environmental pressures. High amounts of subsidies of the European Common Agricultural Policy and feedback loops within production and consumption systems were driving the transformation of the olive oil system. Our analysis indicates the process of change was not immediately driven by increases in demand for olive oil in non-producing countries, but rather by the institutional setting of the European Union and by concerted political interventions.

El Régimen de amortización fiscal del Fondo de Comercio Financiero Internacional: su tratamiento jurídico como Ayuda de Estado. Problemas jurídicos planteados

El Dret Financer-Tributari d’un estat membre es doblega a les directrius i als objectius d’harmonització contemplats al bloc normatiu comunitari de la Unió Europea. La incidència i l’impacte del Dret Comunitari sobre la sobirania fiscal dels seus integrants és evident, sotmetent i delimitant determinantment les mesures fiscals a finalitats extrafiscals. Un clar exemple d’aquest fenomen el constitueix la qualificació del règim espanyol d’amortització fiscal del Fons de Comerç Financer Internacional (previst a l’article 12.5 del TRLIS) com ajut d’Estat per part de la Comissió Europea. L’anàlisi jurídic que aborda aquest treball sobre l’evolució i Decisió final d’aquest expedient d’ajut d’Estat en particular, permet concloure que, l’existència, d’una banda, d’una concepció genèrica i indeterminada de la institució d’ ajut d’Estat i, de l’altre, d’un soft law comunitari que dóna contingut a l’esmentada institució i que ha estat evacuat per el propi organisme encarregat de decidir sobre aquests expedients (la Comissió Europea), esbossen un instrument discrecional d’harmonització fiscal negativa en seu de la imposició directa al marc de la Unió Europea. En efecte, la presència de la regla d’unanimitat en la presa de decisions en matèria tributaria des de els organismes comunitaris i l’absència d’una norma d’harmonització comunitària en seu d’imposició directa, propicien una notable inseguretat jurídica a l’hora de dissenyar beneficis fiscals per part dels legisladors d’un Estat. Mesures fiscals, que en cas de ser qualificades contràries a l’ordenament comunitari per part de la Comissió Europea, com al cas que ens ocuparà aquí, despleguen conseqüències especialment greus per als operadors econòmics que s’han beneficiat d’aquesta i que distorsionen la seva voluntat a la presa de decisions a posteriori i amb efectes retroactius. És necessari als efectes de dotar una major seguretat jurídica al sistema comunitari d’imposició directa, la substitució de la regla d’unanimitat per la de majories simples o qualificades, la voluntat de cedir parcel•les de sobirania fiscal per part dels Estats membre i Reglaments, per tal d’evitar d’arrel el fenomen de la desharmonització en aquest àmbit, així com l’ús abusiu d’instruments arbitraris d’harmonització fiscal negativa.