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Maximilian Freier

8 April 2020
After the financial and economic crisis in Europe, a broad consensus has emerged that a stronger fiscal dimension may be needed to complete the architecture of Economic and Monetary Union (EMU). This paper analyses the performance of interregional transfers in existing fiscal-federal systems, notably in Austria, Belgium, Germany, Spain and the United States, and aims to draw lessons for the design of a euro area fiscal instrument. The empirical risk-sharing analysis in this paper suggests that effective cross-regional stabilisation of asymmetric shocks tends to work via direct cash transfers to households, such as unemployment benefits, which are financed out of cyclical central government taxes and social security contributions. This would suggest that a euro area budgetary instrument for stabilisation should be designed as a tool that enhances the automatic stabilisation capacity in the single currency area. At the same time, it seems important that a prospective central stabilisation instrument for the euro area would be integrated in an overall fiscal policy framework that ensures proper incentives for national policymakers.
JEL Code
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
H11 : Public Economics→Structure and Scope of Government→Structure, Scope, and Performance of Government
H77 : Public Economics→State and Local Government, Intergovernmental Relations→Intergovernmental Relations, Federalism, Secession
4 May 2020
We consider the effects of quantitative easing on liquidity and prices of bonds in a search-and matching model. The model explicitly distinguishes between demand and supply effects of central bank asset purchases. Both are shown to lead to a decline in yields, while they have opposite effects on market liquidity. This results in a price-liquidity trade-off. Initially, liquidity improves in reaction to central bank demand. As the central bank buys and holds bonds, supply becomes scarcer and other buyers are crowded out. As a result, liquidity can fall below initial levels. The magnitude of the effects depend on the presence of preferred habitat investors. In markets with a higher share of these investors, bonds are scarcer and central bank asset purchases lower yields more. With a lower share of preferred habitat investors and a relatively illiquid market, central bank demand has a stronger positive effect on liquidity. We are the first to construct an index from bond holding data to measure the prevalence of preferred habitat investors in each euro area country. Subsequently, we calibrate the model to the euro area and show how yields and liquidity are affected by the European Central Banks asset purchase programme.
JEL Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
Research Task Force (RTF)
23 September 2020
Economic Bulletin Issue 6, 2020
Fiscal policy is playing a key role in stemming the economic fallout from the coronavirus (COVID-19) pandemic. In addition to the discretionary fiscal policy measures employed by governments, automatic fiscal stabilisers play an important role in cushioning the economic downturn. This article shows that automatic fiscal stabilisers are generally sizeable in the euro area, but vary significantly across Member States. However, their effectiveness may be more limited at the current juncture, given the nature of the COVID-19 crisis and the high uncertainty surrounding its effects. This provides a rationale for a stronger role of discretionary fiscal policy at national and European level. Over the medium term, fiscal policies could increasingly make use of quasi-automatic fiscal instruments that provide additional timely, targeted and temporary macroeconomic stabilisation for the euro area. Careful consideration should be given to the design of such instruments over the business cycle, their economic efficiency, and to the need for building fiscal buffers in good times.
JEL Code
H12 : Public Economics→Structure and Scope of Government→Crisis Management
H20 : Public Economics→Taxation, Subsidies, and Revenue→General
E63 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Comparative or Joint Analysis of Fiscal and Monetary Policy, Stabilization, Treasury Policy