10.08.2015 • 30/2015
Germany Benefited Substantially from the Greek Crisis
The balanced budget in Germany is largely the result of lower interest payments due to the European debt crisis. Research from the Halle Institute for Economic Research (IWH) – Member of the Leibniz Association shows that the debt crisis resulted in a reduction in German bund rates of about 300 basis points (BP), yielding interest savings of more than EUR 100 billion (or more than 3% of gross domestic product, GDP) during the period 2010 to 2015. A significant part of this reduction is directly attributable to the Greek crisis. When discussing the costs to the German tax payer of saving Greece, these benefits should not be overlooked, as they tend to be larger than the expenses, even in a scenario where Greece does not repay any of its debts.
Reint E. Gropp
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Switching to Exchange Rate Flexibility? The Case of Central and Eastern European Inflation Targeters
Andrej Drygalla
FIW Working Paper, Nr. 139,
No. 139,
2015
Abstract
This paper analyzes changes in the monetary policy in the Czech Republic, Hungary, and Poland following the policy shift from exchange rate targeting to inflation targeting around the turn of the millennium. Applying a Markovswitching dynamic stochastic general equilibrium model, switches in the policy parameters and the volatilities of shocks hitting the economies are estimated and quantified. Results indicate the presence of regimes of weak and strong responses of the central banks to exchange rate movements as well as periods of high and low volatility. Whereas all three economies switched to a less volatile regime over time, findings on changes in the policy parameters reveal a lower reaction to exchange rate movements in the Czech Republic and Poland, but an increased attention to it in Hungary. Simulations for the Czech Republic and Poland also suggest their respective central banks, rather than a sound macroeconomic environment, being accountable for reducing volatility in variables like inflation and output. In Hungary, their favorable developments can be attributed to a larger extent to the reduction in the size of external disturbances.
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International Side-payments to Improve Global Public Good Provision when Transfers are Refinanced through a Tax on Local and Global Externalities
Martin Altemeyer-Bartscher, A. Markandya, Dirk T. G. Rübbelke
International Economic Journal,
No. 1,
2014
Abstract
This paper discusses a tax-transfer scheme that aims to address the under-provision problem associated with the private supply of international public goods and to bring about Pareto optimal allocations internationally. In particular, we consider the example of the global public good ‘climate stabilization’, both in an analytical and a numerical simulation model. The proposed scheme levies Pigouvian taxes globally, while international side-payments are employed in order to provide incentives to individual countries for not taking a free-ride from the international Pigouvian tax scheme. The side-payments, in turn, are financed via environmental taxes. As a distinctive feature, we take into account ancillary benefits that may be associated with local public characteristics of climate policy. We determine the positive impact that ancillary effects may exert on the scope for financing side-payments via environmental taxation. A particular attractive feature of ancillary benefits is that they arise shortly after the implementation of climate policies and therefore yield an almost immediate payback of investments in abatement efforts. Especially in times of high public debt levels, long periods of amortization would tend to reduce political support for investments in climate policy.
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Note on the Hidden Risk of Inflation
Makram El-Shagi, Sebastian Giesen
Journal of Economic Policy Reform,
No. 1,
2014
Abstract
The continued expansionary policy of the Federal Reserve gives rise to speculation whether the Fed will be able to maintain price stability in the coming decades. Most of the scientific work relating money to prices relies on broad monetary aggregates (i.e. M2 for the United States). In our paper, we argue that this view falls short. The historically unique monetary expansion has not yet fully reached M2. Using a cointegration approach, we aim to show the hidden risks for the future development of M2 and correspondingly prices. In a simulation analysis we show that even if the multiplier remains substantially below its pre-crisis level, M2 will exceed its current growth path with a probability of 95%.
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Money and Inflation: Consequences of the Recent Monetary Policy
Makram El-Shagi, Sebastian Giesen
Journal of Policy Modeling,
No. 4,
2013
Abstract
We use a multivariate state space framework to analyze the short run impact of money on prices in the United States. The key contribution of this approach is that it allows to identify the impact of money growth on inflation without having to model money demand explicitly.
Using our results, that provide evidence for a substantial impact of money on prices in the US, we analyze the consequences of the Fed's response to the financial crisis. Our results indicate a raise of US inflation above 5% for more than a decade. Alternative exit strategies that we simulate cannot fully compensate for the monetary pressure without risking serious repercussions on the real economy. Further simulations of a double dip in the United States indicate that a repetition of the unusually expansive monetary policy – in addition to increased inflation – might cause growth losses exceeding the contemporary easing of the crisis.
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Financial Factors in Macroeconometric Models
Sebastian Giesen
Volkswirtschaft, Ökonomie,
2013
Abstract
The important role of credit has long been identified as a key factor for economic development (see e.g. Wicksell (1898), Keynes (1931), Fisher (1933) and Minsky (1957, 1964)). Even before the financial crisis most researchers and policy makers agreed that financial frictions play an important role for business cycles and that financial turmoils can result in severe economic downturns (see e.g. Mishkin (1978), Bernanke (1981, 1983), Diamond (1984), Calomiris (1993) and Bernanke and Gertler (1995)). However, in practice researchers and policy makers mostly used simplified models for forecasting and simulation purposes. They often neglected the impact of financial frictions and emphasized other non financial market frictions when analyzing business cycle fluctuations (prominent exceptions include Kiyotaki and Moore (1997), Bernanke, Gertler, and Gilchrist (1999) and Christiano, Motto, and Rostagno (2010)). This has been due to the fact that most economic downturns did not seem to be closely related to financial market failures (see Eichenbaum (2011)). The outbreak of the subprime crises ― which caused panic in financial markets and led to the default of Lehman Brothers in September 2008 ― then led to a reconsideration of such macroeconomic frameworks (see Caballero (2010) and Trichet (2011)). To address the economic debate from a new perspective, it is therefore necessary to integrate the relevant frictions which help to explain what we have experienced during recent years.
In this thesis, I analyze different ways to incorporate relevant frictions and financial variables in macroeconometric models. I discuss the potential consequences for standard statistical inference and macroeconomic policy. I cover three different aspects in this work. Each aspect presents an idea in a self-contained unit. The following paragraphs present more detail on the main topics covered.
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Testing for Structural Breaks at Unknown Time: A Steeplechase
Makram El-Shagi, Sebastian Giesen
Computational Economics,
No. 1,
2013
Abstract
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown et al. (J R Stat Soc B 37:149–163, 1975) and Zeileis (Stat Pap 45(1):123–131, 2004), Nyblom (J Am Stat Assoc 84(405):223–230, 1989) and Hansen (J Policy Model 14(4):517–533, 1992), and Andrews et al. (J Econ 70(1):9–38, 1996). Power and size properties are derived using Monte Carlo simulations. We find that the Nyblom test is on par with the commonly used F type tests in a small sample in terms of power. While the Nyblom test’s power decreases if the structural break occurs close to the margin of the sample, it proves far more robust to nonnormal distributions of the error term that are found to matter strongly in small samples although being irrelevant asymptotically for all tests that are analyzed in this paper.
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Has the Euro Increased International Price Elasticities?
Oliver Holtemöller, Götz Zeddies
IWH Discussion Papers,
No. 18,
2010
published in: Empirica
Abstract
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown, Durbin, and Evans (1975) and Zeileis (2004), Nyblom (1989) and Hansen (1992), and Andrews, Lee, and Ploberger (1996). Power and size properties are derived using Monte Carlo simulations. Results emphasize that mostly the CUSUM type tests are affected by the presence of heteroscedasticity, whereas the individual parameter Nyblom test and AvgLM test are proved to be highly robust. However, each test is significantly affected by leptokurtosis. Contrarily to other tests, where skewness is far more problematic than kurtosis, it has no additional effect for any of the endogenous break tests we analyze. Concerning overall robustness the Nyblom test performs best, while being almost on par to more recently developed tests in terms of power.
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Money and Inflation: The Role of Persistent Velocity Movements
Makram El-Shagi, Sebastian Giesen
Abstract
While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In the present paper we use a multivariate state space framework, that substantially expands the traditional vector error correction approach, to analyze the short run impact of money on prices. We contribute to the literature in three ways: First, we distinguish changes in velocity of money that are due to institutional developments and thus do not induce inflationary pressure, and changes that reflect transitory movements in money demand. This is achieved with a newly developed multivariate unobserved components decomposition. Second, we analyze whether the high volatility of the transmission from monetary pressure to inflation follows some structure, i.e., if the parameter regime can assumed to be constant. Finally, we use our model to illustrate the consequences of the monetary policy of the Fed that has been employed to mitigate the impact of the financial crisis, simulating different exit strategy scenarios.
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