2021 Working papers
Ginters Bušs, Patrick Grüning, Oļegs Tkačevs
ABSTRACT
Contributing to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules – the structural balance rule and the expenditure growth rule – using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes, but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by the modifications of the public expenditure definition in the expenditure growth rule, in particular, the removal of debt service payments. Accounting for debt service payments in fiscal rules strengthens the monetary-fiscal policy interaction but it may turn vicious to macroeconomic stability at business cycle frequencies. Strong-enough debt correction for either fiscal rule contains public debt volatility at little expense to macroeconomic stability in the long run. The households' welfare gain from having the expenditure growth rule instead of the structural balance rule is 4% for a small country in a monetary union and 5% for a country with sovereign monetary policy.
Keywords: fiscal policy, DSGE, small open economy, fiscal-monetary policy interaction
JEL code: E0, E2, E3, E6, F4, H2, H3, H6
Andrejs Zlobins
ABSTRACT
This paper (re-)evaluates the effectiveness of central bank asset purchases in the euro area given their prominent role in the ECB's response to the pandemic as well as the evidence from the US suggesting diminishing returns of this policy measure over time. We analyse their macroeco- nomic impact in the euro area using a time-varying parameter structural vector autoregression with stochastic volatility and perform identification via sign and zero restrictions of Arias et al. (2018), their fusion with high frequency information approach akin to Jarocin´ski and Karadi (2020) and a novel method which merges high frequency identification with narrative sign re- strictions of Antolin-Diaz and Rubio-Ramirez (2018). We find that the potency of the ECB's asset purchases to lift inflation has indeed considerably declined over time with several factors contributing to a more muted response of prices to central bank asset purchases. Our results show that the reanchoring channel is no longer active while the counterproductive effects via the mechanism outlined in Boehl et al. (2020), which we dub the capacity utilization channel, have emerged lately and are further complemented with disinflationary effects stemming from the cost channel. Also, the effects passed through more standard transmission channels of central bank asset purchases like portfolio rebalancing and signalling, while still significant, appear to be less persistent recently. Overall, our findings point to a diminishing returns of the ECB's asset purchases to stabilize inflation and its expectations in the euro area.
Keywords: quantitative easing, central bank asset purchases, monetary policy, euro area, non-linearities
JEL code: C54, E50, E52, E583
Boriss Siliverstovs
ABSTRACT
The previous research already emphasised the importance of investigating the predictive ability of econometric models separately during expansions and recessions (Chauvet and Potter (2013), Siliverstovs (2020), Siliverstovs and Wochner (2020)). Using the data for the pre-COVID period, it has been shown that ignoring asymmetries in a model's forecasting accuracy across the business cycle phases typically leads to a biased judgement of the model's predictive ability in each phase. In this study, we discuss the implications of data challenges posed by the COVID-19 pandemic on econometric model estimates and forecasts. Given the dramatic swings in GDP growth rates across a wide range of countries during the coronavirus pandemic, one can expect that the asymmetries in the models' predictive ability observed during the pre-COVID period will be further exacerbated in the post-COVID era. In such situations, recursive measures that dissect the models' forecasting ability observation by observation allow to gain detailed insights into the underlying causes of one model's domination over the others. In this paper, we suggest a novel metric referred to as the recursive relative mean squared forecast error (based on rearranged observations) or R2MSFE(+R). We show how this new metric paired with the cumulated sum of squared forecast error difference (CSSFED) of Welch and Goyal (2008) highlights significant differences in the relative forecasting ability of the dynamic factor model and naive univariate benchmark models in expansions and recessions that are typically concealed when only point estimates of relative forecast accuracy are reported.
Keywords: COVID-19, nowcasting, GDP, euro area
JEL code: C22, C52, C53