multilevel governance in fiscal consolidation and stabilisation waltraud schelkle...

Multilevel governance in Multilevel governance in fiscal consolidation and fiscal consolidation and

stabilisationstabilisation Waltraud Schelkle Waltraud Schelkle

([email protected]) ([email protected]) Deborah Mabbett Deborah Mabbett

([email protected])([email protected]) Practitioners’ Forum , 30-31 March Practitioners’ Forum , 30-31 March

2006, LSE: 2006, LSE: ‘‘Policy learning and experimentation in Policy learning and experimentation in

EU economic governance’EU economic governance’

LSE, 30-31 March 2006LSE, 30-31 March 2006 Practitioners' Forum on policy learning anPractitioners' Forum on policy learning and experimentation in EU economic governd experimentation in EU economic governanceance

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OverviewOverviewA.A. What comparative fiscal federalism tells What comparative fiscal federalism tells

us and misses..us and misses..

B.B. What the empirical data show us..What the empirical data show us..• How great is the need for differential fiscal How great is the need for differential fiscal

responses?responses?• How adequate are member states’ responses?How adequate are member states’ responses?• Do the responses add up to a consistent fiscal Do the responses add up to a consistent fiscal

policy for EMU?policy for EMU?

C.C. How our findings differ from received How our findings differ from received wisdom.. wisdom..


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What comparative fiscal federalism What comparative fiscal federalism tells us..tells us..

Agents in fiscal federations have little Agents in fiscal federations have little incentive to keep financial discipline (eg incentive to keep financial discipline (eg von Hagen et al 2001)von Hagen et al 2001) • Implicit bail-out guarantee of a political unionImplicit bail-out guarantee of a political union• Incentives for tax competition and more debt Incentives for tax competition and more debt

finance in a monetary unionfinance in a monetary union

Therefore, fiscal discipline has to be Therefore, fiscal discipline has to be imposed by balanced budget rules (SGP); imposed by balanced budget rules (SGP);

But these may produce pro-cyclical fiscal But these may produce pro-cyclical fiscal policy (Hallerberg and von Hagen 1999).policy (Hallerberg and von Hagen 1999).


44

What comparative fiscal federalism What comparative fiscal federalism misses..misses..

Little incentive for free-riding due to lack Little incentive for free-riding due to lack of fiscal transfers and an explicit no bail-of fiscal transfers and an explicit no bail-out clause. out clause.

Agents, ie the member states, have Agents, ie the member states, have signed themselves up to fiscal discipline.signed themselves up to fiscal discipline.

Instead, problems may arise because Instead, problems may arise because constraints on agents/MS are not constraints on agents/MS are not matched by collective risk pooling matched by collective risk pooling (Schelkle 2005).(Schelkle 2005).


55

What the empirical data What the empirical data shows us (1)..shows us (1)..

How much need is there for a How much need is there for a differential response of differential response of macroeconomic policies?macroeconomic policies?

Required interest rates according to Required interest rates according to Taylor ruleTaylor rule (cf. Gramlich and Wood 2000) (cf. Gramlich and Wood 2000)i* = r* + 0.5(output gap + excess inflation)i* = r* + 0.5(output gap + excess inflation)

r* = 2% r* = 2%

Output gap = Actual minus trend GDP in percent Output gap = Actual minus trend GDP in percent of GDP at 1995 market pricesof GDP at 1995 market prices

Excess inflation = inflation rate above 1.5%Excess inflation = inflation rate above 1.5%


66

Need for a differential Need for a differential response of macroeconomic response of macroeconomic policy (1)?policy (1)?

Taylor Rules for EMU-11, 1999-2006

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005 2006

Belgium

Greece

Germany

Spain

France

Ireland

Italy

Netherlands

Austria

Portugal

Finland


77

Need for a differential Need for a differential response of macroeconomic response of macroeconomic policy (2)?policy (2)?

Taylor Rules for EMU-4 and actual ECB rates

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1999 2000 2001 2002 2003 2004 2005 2006

Germany Spain France Italy actual ECB rate


88


How well did member states’ fiscal How well did member states’ fiscal policies respond?policies respond?

Correlation between changes in budget Correlation between changes in budget deficits and changes in output gaps (cf. deficits and changes in output gaps (cf. Gramlich and Wood 2000):Gramlich and Wood 2000):

• Actual deficits: Pro- or countercyclical?Actual deficits: Pro- or countercyclical?• Structural deficits: Discretionary stance?Structural deficits: Discretionary stance?• Volatility of GDP and budget responses: Volatility of GDP and budget responses:

Fiscal activism up or down?Fiscal activism up or down?


99

Actual deficits: counter-Actual deficits: counter-cyclical (positive cyclical (positive correlations)?correlations)?

Responsiveness of actual deficits (based on trend GDP) to output gap changes

-1.50

-1.00

-0.50

0.00

0.50

1.00

1983-92 1993-99 2000-05


1010

Structural deficits: counter-Structural deficits: counter-cyclical (1)?cyclical (1)?

Responsiveness of structural deficits (incl. interest) to changes in output gaps

-1.20

-1.00

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1983-92 1993-99 2000-05


1111

Structural deficits Structural deficits excluding excluding interest:interest: counter-cyclical counter-cyclical (2)?(2)?

Responsiveness of structural deficits (excl. interest) to changes in output gaps

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1983-92 1993-99 2000-05


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Fiscal activism: Paralysed Fiscal activism: Paralysed or adequate?or adequate?

Volatility of GDP and responsiveness of fiscal policy in different periods (standard deviations)

0.001.002.003.004.005.006.007.00

Euro area

Belgium

FR. Germany

Greece

Spain

France

Ireland

Italy

Netherlands

Austria

Portugal

Finland


1313


Do member states’ responses Do member states’ responses add up to the right policy mix add up to the right policy mix and an appropriate aggregate and an appropriate aggregate fiscal stance?fiscal stance?

Policy mixPolicy mix: Taylor rule for the Euro : Taylor rule for the Euro area and actual ECB interest rates.area and actual ECB interest rates.

Aggregate fiscal stanceAggregate fiscal stance: sum of : sum of actual and structural deficits.actual and structural deficits.


1414

The policy mix for EMUThe policy mix for EMU

Taylor rule for the Euro area and actual ECB interest rates in relation to Euro area output gap

0

1

2

3

4

5

1999 2000 2001 2002 2003 2004 2005 2006

-1-0.5

00.511.5

22.5

Euro area Taylor Rule (LHS)

ECB rate (LHS)

discrepancy between TR for Euro area and actual ECB rate

Euro area output gap (based on trend)


1515

Aggregate fiscal stanceAggregate fiscal stance

Euro area aggregate deficit indicators (%)

-4

-3

-2

-1

0

1

2

3

Actual aggregatedeficit

Structural aggregatedeficit (potential

GDP)

Structural aggregatedeficit (trend GDP)

Structural aggregatedeficit (trend GDP)

excl interest ofgeneral gov't

1999

2000

2001

2002

2003

2004

2005

2006


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How our findings differ from received How our findings differ from received wisdom (1)..wisdom (1)..

The sub-central (MS) level is less of a The sub-central (MS) level is less of a problem.problem.

• Fiscal discipline of MS does not appear Fiscal discipline of MS does not appear to have deteriorated. to have deteriorated.

• Stabilisation policies of MS have, if Stabilisation policies of MS have, if anything, improved.anything, improved.

• Asymmetries seem to have become Asymmetries seem to have become smaller (supported by recent findings smaller (supported by recent findings on the synchronisation of business on the synchronisation of business cycles).cycles).


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How our findings differ from received How our findings differ from received wisdom (2)..wisdom (2)..

But the central (EMU) level is not But the central (EMU) level is not fulfilling its function.fulfilling its function.

• Monetary policy seems to be too Monetary policy seems to be too tight.tight.

• The aggregate fiscal stance hardly The aggregate fiscal stance hardly moves with the Euro area output gap.moves with the Euro area output gap.

• The aggregate fiscal stance provides The aggregate fiscal stance provides little stimulus. little stimulus.


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Conclusion (1)Conclusion (1)

Research focus in fiscal federalism has Research focus in fiscal federalism has been on the agents’ incentives and how been on the agents’ incentives and how they can be constrained.they can be constrained.

An alternative interpretation of the An alternative interpretation of the governance framework is that national governance framework is that national governments have sought to get better governments have sought to get better control over their domestic fiscal policies, control over their domestic fiscal policies, using EMU as a lever (using EMU as a lever (laboratory laboratory federalismfederalism). ).

We find signs of success with this.We find signs of success with this.


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Conclusion (2)Conclusion (2)

But the governance framework does But the governance framework does not provide for adjusting the aggregate not provide for adjusting the aggregate fiscal position in the light of the fiscal position in the light of the required macroeconomic stance. required macroeconomic stance.

This omission becomes a more This omission becomes a more pressing issue with the vanishing of pressing issue with the vanishing of asymmetries and the synchronisation asymmetries and the synchronisation of cycles.of cycles.

multilevel governance in fiscal consolidation and stabilisation waltraud schelkle...

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