2022 Working papers
Patrick Grüning
ABSTRACT
This study develops a small open economy dynamic stochastic general equilibrium model with green and brown intermediate goods, banks subject to capital requirements, and public investment. The domestic economy might face domestic or foreign carbon taxes and an emissions cap. The model is used to analyze which environmental, fiscal, and bank regulation policies are effective facilitators of the domestic economy’s green transition and the costs involved. Among the policies that can generate an exogenously imposed and fixed emissions reduction, most costly is the exogenous world brown energy price increase, followed by the emissions cap reduction, while the introduction of domestic carbon taxes does not change GDP in the long run. The reason for this stark difference is that domestic carbon taxes and emissions cap violation penalties are used to stimulate public green investment. However, only domestic carbon tax revenues are substantial as brown entrepreneurs do not violate the emissions cap in equilibrium. Bank regulation policies and other fiscal policies are not capable of generating large emissions reductions. During the green transition induced by domestic carbon taxes, the first years of the transition are characterized by a run on brown energy in anticipation of higher prices in the future.
Keywords: small open economy, climate transition risk, energy, environmental policy, bank regulation, public investment
JEL code: E30, F41, G28, H23, H41, Q50
Andrejs Zlobins
ABSTRACT
This paper studies the interaction among non-standard monetary policy measures – the negative interest rate policy, forward guidance and quantitative easing – and their ability to substitute conventional policy rate setting when it is constrained by the effective lower bound. In this paper, the euro area serves as our laboratory since the European Central Bank has deployed all three unconventional measures in the past decade to bypass the binding effective lower bound constraint and stabilize the inflation trajectory towards the target. Our empirical setup makes use of a smooth-transition structural vector autoregression, while identification of monetary innovations is done via fusion of high frequency information with narrative sign restrictions, first introduced in Zlobins (2021b) and now further extended to isolate rate cuts in positive/negative territory, allowing to simultaneously identify the impact of both conventional and unconventional policy actions. Our findings show that unconventional measures can substitute the standard policy rate setting but their effectiveness is highly dependent on the overall policy mix and the state of the economy. However, the evidence also suggests that non-standard measures serve as complements to the conventional policy as they are particularly powerful in circumstances when standard policy rate setting loses its stabilization properties, for example, during market turbulence or when the risk of de-anchoring of inflation expectations is elevated.
Keywords: quantitative easing, negative interest rate policy, forward guidance, monetary policy, non-linearities
JEL code: C54, E50, E52, E58
Oļegs Matvejevs, Oļegs Tkačevs
ABSTRACT
This study explores the relationship between public and private investment using a sample of 33 industrialized economies of the OECD. The methodology relies on the fact that the relation between stocks of public and private capital can affect private investment also in the short term. We demonstrate that the immediate effect of public investment on private investment is either small or statistically insignificant, whereas in the medium to long term, extra public investment crowds in private investment as the latter adjusts in order to bring the stock of private capital closer to its long-term cointegrating relationship with public capital. The estimated median public investment multiplier over a horizon of seven years is around 2, which means that each additional dollar of public investment attracts approximately two dollars of private investment. Additionally, we examine whether the crowding-in effect depends on a country’s institutional quality and the area of public spending. We show that it gets stronger with improvements in the quality of institutions related to the rule of law, government effectiveness and control of corruption. Public investment in economic affairs, education and health infrastructure is the most effective in attracting private investment.
Keywords: public investment, private investment, crowding in, crowding out, public investment multiplier, local projections, forecast errors, governance quality indicators
JEL code: C23, E22, E62, H54
Erwan Gautier, Cristina Conflitti, Riemer P. Faber, Brian Fabo, Ludila Fadejeva, Valentin Jouvanceau, Jan-Oliver Menz, Teresa Messner, Pavlos Petroulas, Pau Roldan-Blanco, Fabio Rumler, Sergio Santoro, Elisabeth Wieland, Hélène Zimmer
ABSTRACT
Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
Keywords: price rigidity, inflation, consumer prices, micro data
JEL code: D40, E31
Konstantīns Beņkovskis, Peter Jarret, Ze'ev Krill, Oļegs Tkačevs, Naomitsu Yashiro
ABSTRACT
This paper investigates factors that contribute to the survival of export relationships at the firm and product levels using a large anonymised firm-level database for Latvia. It finds that some characteristics of exporting firms, such as a higher productivity level, larger size, lower indebtedness and higher profitability are associated with longer duration of export relationships. Firms that innovated prior to exporting are also likely to enjoy longer export spells, while participation in an EU-fund support programme did not alter duration. Younger staff and management of the firm are associated with a better survival of a new export product. Furthermore, this paper reveals novel roles of export product characteristics in survival, in particular an interesting tension between the complexity of new export products and their "distance" from the existing export bundle. While aiming high, that is, exporting products that are more complex, pays off as such products are associated with longer-lasting trade relationships, aiming too high, that is exporting new products that are far more complex than the exporter's existing product bundle, tends to lower their survival probability.
Keywords: Exports, economic complexity, trade, productivity, innovation
JEL code: F10, F14, P45, H81
Konstantīns Beņkovskis, Ludmila Fadejeva
ABSTRACT
We develop a novel way to evaluate the size of unreported wage payments at employee level. It is only the reported employer-employee income data combined with firm-level financial statements and survey information on various person-level indicators that are required for this purpose. We estimate the Mincer earning regression by the Stochastic Frontier Analysis approach, proxying the unreported wage payments by the non-negative inefficiency term. Our methodology is tested on the Latvian data: we find that small and young firms engage in illegal wage payments more than other firms. Unofficial payments to employees with small reported wages are more frequent and sizeable, revealing lower wage income inequality in Latvia when the unreported wage is taken into account.
Keywords: unreported wage, tax evasion, Mincer earning regression, income distribution
JEL code: E26, H26, J08, J31