Fiscal policies in a monetary union: the eurozone case

2020 ◽  
Vol 17 (2) ◽  
pp. 156-170
Author(s):  
Gennaro Zezza
Keyword(s):  
Great Recession ◽  
Public Expenditure ◽  
Fiscal Policies ◽  
Unemployment Benefits ◽  
Medium Term ◽  
The Great Recession ◽  
Financial Position ◽  
Fiscal Austerity ◽  
Severe Recession ◽  
The Cost

We argue that the institutional framework of the eurozone was designed to deny a role for fiscal policy. However, the Great Recession of 2008–2009 forced governments to intervene, mainly to avoid the collapse of their financial systems. At the same time, the severe recession implied a decrease in tax revenues, and an increase in some components of public expenditure – such as unemployment benefits, which implied an increase in public deficits. When the crisis seemed to be over, the Maastricht rules gave priority to restoring fiscal targets, even at the cost of prolonged unemployment and stagnation in countries like Greece and Italy. Using the three-balances approach pioneered by Godley, we argue that such policies require the achievement of an external surplus, or else fiscal austerity will worsen the financial position of the private sector. We show that this is indeed how most eurozone countries moved, and argue that such policies are fragile, and possibly not sustainable in the medium term. We suggest the introduction of fiscal currencies as one way of introducing a degree of freedom in the sustainability of the eurozone.

scholarly journals Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone

2017 ◽  
Vol 107 (7) ◽  
pp. 1904-1937 ◽  
Author(s):  
Philippe Martin ◽  
Thomas Philippon
Keyword(s):  
Market Segmentation ◽  
Great Recession ◽  
Fiscal Policies ◽  
Labor Costs ◽  
The Great Recession ◽  
Credit Cycles ◽  
Macroprudential Policies ◽  
Fiscal Austerity ◽  
The Impact ◽  
Identification Strategy

We provide a comprehensive account of the dynamics of eurozone countries from 2000 to 2012. We analyze private leverage, fiscal policy, labor costs, and spreads, and we propose a model and an identification strategy to separate the impact of credit cycles, excessive government spending, and sudden stops. We then ask how periphery countries would have fared with different policies. We find that countries could have stabilized their employment if they had followed more conservative fiscal policies during the boom. Macroprudential policies and an early intervention by the central bank to prevent market segmentation and reduce fiscal austerity would also have significantly reduced the recession. (JEL E24, E32, E58, E62, F33, F42, H61)

The Role of Policy in the Great Recession and the Weak Recovery

2014 ◽  
Vol 104 (5) ◽  
pp. 61-66 ◽  
Author(s):  
John B. Taylor
Keyword(s):  
Economic Performance ◽  
Great Recession ◽  
Regulatory Policy ◽  
Poor Performance ◽  
Economic Policies ◽  
Slow Recovery ◽  
The Great Recession ◽  
The Past ◽  
Severe Recession

This paper reports on recent research showing that the severe recession of 2007-2009 and the weak recovery have been due to poor economic policies and the failure to implement good policies during the past decade. Monetary policy, fiscal policy, and regulatory policy became more discretionary, more interventionist, and less predictable in comparison with the previous two decades of better economic performance. At best these policies led to growth spurts, but were followed by retrenchments, averaging to poor performance. The paper also considers alternative views-that the equilibrium interest rate declined during the decade and that the seriousness of financial crisis caused the slow recovery.

scholarly journals Did Smaller Firms Face Higher Costs of Credit During the Great Recession? A Vector Error Correction Analysis with Structural Breaks

2018 ◽  
Vol 10 (3) ◽  
pp. 1
Author(s):  
Louisa Kammerer ◽  
Miguel Ramirez
Keyword(s):  
Lower Bound ◽  
Error Correction ◽  
Great Recession ◽  
Structural Breaks ◽  
Zero Lower Bound ◽  
Large Firms ◽  
Vector Error Correction ◽  
The Great Recession ◽  
Vector Error ◽  
The Cost

This paper examines the challenges firms (and policymakers) encounter when confronted by a recession at the zero lower bound, when traditional monetary policy is ineffective in the face of deteriorated balance sheets and high costs of credit. Within the larger body of literature, this paper focuses on the cost of credit during a recession, which constrains smaller firms from borrowing and investing, thus magnifying the contraction. Extending and revising a model originally developed by Walker (2010) and estimated by Pandey and Ramirez (2012), this study uses a Vector Error Correction Model with structural breaks to analyze the effects of relevant economic and financial factors on the cost of credit intermediation for small and large firms. Specifically, it tests whether large firms have advantageous access to credit, especially during recessions. The findings suggest that during the Great Recession of 2007-09 the cost of credit rose for small firms while it decreased for large firms, ceteris paribus. From the results, the paper assesses alternative ways in which the central bank can respond to a recession facing the zero lower bound.

scholarly journals The inevitable deservingness gap: A study into the insurmountable immigrant penalty in perceived welfare deservingness

2018 ◽  
Vol 29 (2) ◽  
pp. 166-181 ◽  
Author(s):  
Tim Reeskens ◽  
Tom van der Meer
Keyword(s):  
Labour Market ◽  
Great Recession ◽  
Unemployment Benefits ◽  
Target Groups ◽  
Welfare Provision ◽  
The Great Recession ◽  
Political Debates ◽  
Foreign Origin ◽  
Vignette Experiment

As the asylum crisis hit Europe in tandem with the Great Recession, concerns about declining support for equal welfare provision to immigrants grow. Although studies on welfare deservingness show that immigrants are deemed least entitled to welfare compared to other target groups, they have fallen short of isolating welfare claimants’ identity (i.e. foreign origin) with competing deservingness criteria that might explain the immigrant deservingness gap. This article studies the importance of welfare claimants’ foreign origins relative to other theoretically relevant deservingness criteria via a unique vignette experiment among 23,000 Dutch respondents about their preferred levels of unemployment benefits. We show that foreign origin is among the three most important conditions for reduced solidarity, after labour market reintegration behaviour (reciprocity) and culpability for unemployment (control). Furthermore, favourable criteria do not close the gap between immigrants and natives in perceived deservingness, emphasizing the difficulty of overcoming the immigrant penalty in perceived welfare deservingness. We conclude our findings in the light of ongoing theoretical and political debates.

How to Combat Recession

2018 ◽  
Author(s):  
Laurence Seidman
Keyword(s):  
Great Recession ◽  
Aggregate Demand ◽  
Government Debt ◽  
The United States ◽  
United States Congress ◽  
Fiscal Stimulus ◽  
The Great Recession ◽  
Goods And Services ◽  
Severe Recession ◽  
Stimulus Package

This work analyzes all aspects of a new policy to combat recession: “stimulus without debt.” Fear of deficits and debt kept Congress from enacting a large enough fiscal stimulus to overcome the Great Recession that began in 2008, and this fear is likely to restrict fiscal stimulus in the next severe recession. “Stimulus without debt” is a new policy that would increase aggregate demand for goods and services in a recession without increasing government debt. Stimulus without debt consists of a transfer (not loan) from the central bank to the national Treasury (or to national treasuries in the case of the eurozone) so that the Treasury does not have to borrow to finance fiscal stimulus enacted by the legislature. In the United States, Congress would enact a fiscal stimulus package that consists mainly of cash tax rebates to households but also other temporary expenditures and temporary tax cuts; the fiscal stimulus would raise aggregate demand. The Federal Reserve would use new money to give a large transfer (not loan) to the Treasury equal to the fiscal stimulus package so that the Treasury does not have to borrow to pay for the package. Hence, there would be no increase in government debt.

scholarly journals Understanding the Great Recession

2015 ◽  
Vol 7 (1) ◽  
pp. 110-167 ◽  
Author(s):  
Lawrence J. Christiano ◽  
Martin S. Eichenbaum ◽  
Mathias Trabandt
Keyword(s):  
Great Recession ◽  
Economic Activity ◽  
New Keynesian ◽  
Factor Productivity ◽  
Working Capital ◽  
The Great Recession ◽  
Keynesian Model ◽  
Price Rigidities ◽  
The Cost ◽  
Joint Behavior

We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)

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