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Alessandra Anna Palazzo
- 19 September 2022
- OCCASIONAL PAPER SERIES - No. 306Details
- Abstract
- This article surveys the literature on consumption risk sharing, focusing on the findings for the euro area and for the United States, but also presenting evidence for other countries. The literature examined found that risk sharing is higher in more mature federations, such as the United States, than in the euro area. The papers surveyed suggest that state/country-specific output shocks are primarily smoothed out through the capital and credit channel, whereas the fiscal channel as a minor role, especially in the euro area. Overall, about 70% of shocks is smoothed in the United States while just 40% in the euro area. At the same time, our analysis of the response to the COVID-19 crisis indicates that risk sharing in the euro area has been more resilient than it was during the global financial crisis of 2008-09. Overall, our results point to the need for further improvements to the private and public risk-sharing channels in the euro area to ensure more effective cushioning against asymmetric shocks and to boost progress towards the completion of European Monetary Union (EMU).
- JEL Code
- C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
- 18 December 2019
- WORKING PAPER SERIES - No. 2344Details
- Abstract
- We review the determinants of the discretionary fiscal policy action of governments in the euro area and in other advanced economies during the past 20 years. This is done by estimating fiscal reaction functions using dynamic panel techniques and country-by-country estimates. The results suggest that, on average, discretionary fiscal policy did not deliver economic stabilisation: during good economic times (positive output gaps) it has been on average pro-cyclical both in the euro area and in the other regions. However, the loosening bias during good times has been countered by the presence of efficient public institutions, higher long term interest rates and higher debt-to-GDP ratios. Overall, as a result of various counterbalancing forces, fiscal activism has not been a major feature of policy making in the euro area, nor in other advanced economies during the past 20 years.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H6 : Public Economics→National Budget, Deficit, and Debt
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
- 30 January 2019
- WORKING PAPER SERIES - No. 2231Details
- Abstract
- This paper investigates the relationship between public and private wages in the five largest euro area countries for the period 1997-2017. The analysis shows that there exists a positive and significant response of private wages to a public wage shock. This effect is found to be temporary and to differ across countries (positive and significant in France, Spain, Italy and non-significant in Germany and the Netherlands). Interestingly, the response of private wages is found to be asymmetric: a positive and statistically significant response is found in case of a positive shock to public wages, while no statistically significant effects are detected in case of a cut to public wages. As the public wage containment policies adopted during the sovereign debt crisis are expected to be gradually lifted in several euro area countries, the findings of this paper suggest that knock-on effects on private sector wages cannot be excluded in the years to come.
- JEL Code
- E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
J30 : Labor and Demographic Economics→Wages, Compensation, and Labor Costs→General
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
- 10 May 2018
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 3, 2018Details
- Abstract
- This article discusses the concept of risk sharing, which generally refers to the notion that economic agents, such as households and firms, attempt to insure their consumption streams against fluctuations in the business cycle of their country, i.e. they try to “smooth out” changes in their consumption resulting from economic shocks. The article then considers what proportion of an economic shock in the euro area can be smoothed, and compares this with the situation in the United States. While a comparison of the degree of risk sharing between the euro area and the United States needs to be seen against the background of different institutional and political architectures, it nevertheless offers potentially interesting economic insights. The article shows that, while in the euro area around 80% of a shock to GDP growth in a given country remained unsmoothed over the period 1999-2016, thus resulting in sizeable differences in consumption growth across countries, in the United States at most 40% of a shock to state-specific GDP was unsmoothed over the same period. The article also evaluates the relative importance of the main risk sharing channels, i.e. the credit, capital and fiscal channels, as well as the role of European institutions. It shows that, in the euro area, risk sharing takes place mainly via the capital channel, i.e. through cross-border holdings of financial assets. Finally, the article puts the empirical results into the perspective of the ongoing debate on enhancing the institutional architecture of Economic and Monetary Union (EMU). It calls for euro area countries to make their economies, banking sectors and public finances less vulnerable to macroeconomic shocks. The article explains how efficient and integrated financial markets are a core prerequisite for effective private risk sharing in the euro area. It also shows how the euro area would benefit from a central fiscal stabilisation function to support national economic stabilisers in the presence of large economic shocks and thereby make EMU more resilient.
- JEL Code
- E21 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Consumption, Saving, Wealth
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
F15 : International Economics→Trade→Economic Integration
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
- 22 March 2018
- ECONOMIC BULLETIN - BOXEconomic Bulletin Issue 2, 2018Details
- Abstract
- The box looks at the fiscal policy stance in the euro area during past expansionary periods and the extent to which good economic times have been used to build fiscal buffers. It argues that the midly countercyclical or broadly netrual stance that prevailed during the expansionary phase before the financial crisis was not sufficient to built adequate buffers fo the following recession.
- JEL Code
- E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H60 : Public Economics→National Budget, Deficit, and Debt→General