global finance between rigor and growth: which implications for international governance? lecce, may...
TRANSCRIPT
Global Finance between Rigor and Growth:Which Implications for International
Governance?
Lecce, May 31st 2013
Luca [email protected]
(Università del Salento, Lecce, Italy)
Structure of the presentation
Extent of Debt
Episodes of Fiscal Consolidation and Growth
Relationships between Fiscal Consolidation and Growth
Conclusions
Fiscal Consolidation is necessary….
Costs of capitalDistortionary taxesInflation Greater volatility in macroeconomic
indicators10% higher Debt/GDP implies 0.2%
lower GDP growth (Kumar and Woo, 2010)
Fiscal consolidation is not neutral with respect to growth.
Historically, some episodes have shown a positive linkage between fiscal consolidation and growth
Most simulations imply a negative short term effect of fiscal consolidation on growth
However, economic theory has highlighted few cases in which fiscal consolidation has been associated with strong growth
Denmark (1982-1986), ), Ireland(1987–90), Finland (1992–98) and Sweden (1993–98)
“Small” economiesLarge depreciationSolid growth in trading partners
Fiscal Consolidation and Increased Investments
Level of aggregate demand and monetary variables
More stable exchange ratesInvestors’ confidence and reduction of
probability of financial crises (Bertola and Drazen, 1993)
Expectations of less dramatic tax increases or of tax reductions in the future (Blanchard, 1990)
Reduction of capital flight (Hjelm, 2002)
Critical issues in the current economic situationNo role for external demand given that most
advanced economies are growing slowly or not at all (IMF, 2010)
Fiscal multipliers are significantly larger in downturns than in expansions (Auerbach and Gorodnichenko, 2012; Batini and others, 2012; Baum and others, 2012)
No room for conventional monetary stimulusNo currency depreciation (Monetary Union)
Composition of fiscal consolidation matters….Cuts in transfers and the wage bill tend
to last longer and can be expansionaryTax increases and cuts in public
investment tend to be contractionary and unsustainable (Von Hagen and Strautch, 2001)
Importance to improve the efficiency in service delivery for health and education (Joumard et al, 2010; Sutherland et al, 2007)
ConclusionsNo clear linkage between rigor and
growthEpisodes of positive relationships between
fiscal consolidation and growthMixed results by the theoryCritical issues in the current economic
situationComposition of fiscal consolidation
matters