25.01.2021 • 2/2021
High public deficits not only due to the pandemic – Medium-term options for fiscal policy
According to the IWH’s medium-term projection, Germany's gross domestic product will grow more slowly between 2020 and 2025 than before, not only because of the pandemic crisis, but also because the work force will decline. The resulting structural public deficits are, if the legal framework remains unchanged, likely to be higher than the debt brake allows. Consolidation measures, especially if they relate to government revenues, entail economic losses in the short term. “There is much to be said, also from a theoretical point of view, for not abolishing the debt brake, but for relaxing it to some extent,” says Oliver Holtemöller, head of the Department of Macroeconomics and vice president at Halle Institute for Economic Research (IWH).
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Lack of Selection and Limits to Delegation: Firm Dynamics in Developing Countries
American Economic Review,
Delegating managerial tasks is essential for firm growth. Most firms in developing countries, however, do not hire outside managers but instead rely on family members. In this paper, we ask if this lack of managerial delegation can explain why firms in poor countries are small and whether it has important aggregate consequences. We construct a model of firm growth where entrepreneurs have a fixed time endowment to run their daily operations. As firms grow large, the need to hire outside managers increases. Firms’ willingness to expand therefore depends on the ease with which delegation can take place. We calibrate the model to plant-level data from the U.S. and India. We identify the key parameters of our theory by targeting the experimental evidence on the effect of managerial practices on firm performance from Bloom et al. (2013). We find that inefficiencies in the delegation environment account for 11% of the income per capita difference between the U.S. and India. They also contribute to the small size of Indian producers, but would cause substantially more harm for U.S. firms. The reason is that U.S. firms are larger on average and managerial delegation is especially valuable for large firms, thus making delegation efficiency and other factors affecting firm growth complements.
Involuntary Unemployment and the Business Cycle
Review of Economic Dynamics,
Can a model with limited labor market insurance explain standard macro and labor market data jointly? We construct a monetary model in which: i) the unemployed are worse off than the employed, i.e. unemployment is involuntary and ii) the labor force participation rate varies with the business cycle. To illustrate key features of our model, we start with the simplest possible framework. We then integrate the model into a medium-sized DSGE model and show that the resulting model does as well as existing models at accounting for the response of standard macroeconomic variables to monetary policy shocks and two technology shocks. In addition, the model does well at accounting for the response of the labor force and unemployment rate to these three shocks.
High public deficit not only because of Corona - Medium-term options for action for the state
According to the IWH's medium-term projection, Germany's gross domestic product will grow by an average of ½% in price-adjusted terms in the years to 2025, which is 1 percentage point slower than in the period from 2013 to 2019. This is due not only to the sharp slump in 2020, but also to the fact that the labour force will decline noticeably. Government revenues will be expanding much more slowly than in previous years. Even after the pandemic crisis is overcome, the state budget is likely to have a structural deficit of about 2% relative to GDP if the legal framework remains unchanged, and the debt brake will continue to be violated. Consolidation measures to reduce this deficit ratio to ½ % would push production in Germany below the normal rate of capacity utilization. Simulations with the IWH fiscal policy model show that consolidation on the expenditure side would reduce production by less than consolidation on the revenue side. There is much to be said, also from a theoretical point of view, for not abolishing the debt brake, but for relaxing it to some extent.
IWH Bankruptcy Update: Still No Indication of Impending Bankruptcy Wave Considerably faster than the official...
IWH Bankruptcy Research
IWH Bankruptcy Research The Bankruptcy Research Unit of the Halle Institute for...
Finance and Wealth Inequality
Journal of International Money and Finance,
Using a global sample, this paper investigates the determinants of wealth inequality capturing various economic, financial, political, institutional, and geographical indicators. Using instrumental variable Bayesian model averaging, it reveals that only a handful of indicators robustly matters and finance plays a key role. It reports that while financial depth increases wealth inequality, efficiency and access to finance reduce inequality. In addition, redistribution and education are associated with lower inequality whereas wars and openness to international trade contribute to greater wealth inequality.
East Germany Rearguard Only investments in education will lead to a further catch-up ...
Dynamic Equity Slope
Working Papers University of Venice "Ca' Foscari",
The term structure of equity and its cyclicality are key to understand the risks drivingequilibrium asset prices. We propose a general equilibrium model that jointly explainsfour important features of the term structure of equity: (i) a negative unconditionalterm premium, (ii) countercyclical term premia, (iii) procyclical equity yields, and (iv)premia to value and growth claims respectively increasing and decreasing with thehorizon. The economic mechanism hinges on the interaction between heteroskedasticlong-run growth — which helps price long-term cash flows and leads to countercyclicalrisk premia — and homoskedastic short-term shocks in the presence of limited marketparticipation — which produce sizeable risk premia to short-term cash flows. The slopedynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.
Productivity: More with Less by Better Available resources are scarce. To sustain our...