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In uncertainty we trust: a median voter model with risk aversion
Full text linkThe principal-agent problem and uncertainty are some of the key factors affecting financial and political markets. Fear of the unknown plays an important role in human decision making, including voting. This article describes a theoretical model where voter risk aversion towards uncertainty gives political incumbents a significant advantage over their challengers, exacerbating the principal-agent problem between voters and legislators. The model presented predicts that a rise in voter uncertainty concerning the challenger allows the incumbent to deviate from the median voter’s policy preference without losing the election. This model reconciles the paradoxical coexistence of ideological shirking and high incumbent reelection rates without abandoning the elegant median voter framework.ideology, incumbency advantage, shirking, median voter, risk aversion, principal-agent problem
Review of the IMF's lending framework
Get PDFIn an effort to adapt to changes in its environment, the IMF has over the years adjusted its lending framework. Lending facilities have been created, abolished or modified, according to changing global circumstances. Nevertheless, these adaptations have often been made on an ad hoc basis. The article examines the current structure of IMF lending facilities and the policies governing them. It illustrates how some of the Fund’s lending facilities may have lost their relevance, that gaps could be perceived in the current lending framework and why the framework seems fragmented and overly complex. These issues can affect the credibility of the Fund’s lending framework and hence the perceived legitimacy of the institution. In order to address these issues, a comprehensive review of the IMF lending framework is direly needed. In fact, the Fund is currently reviewing its lending instruments and access policies in the context of its ongoing overall strategic review. This article seeks to provide an input into this process and, within this context, suggests three options for modernising the Fund’s lending framework. Under the first option, the spirit of the current multi-facility framework would be maintained, with a different facility for each type of financing need. In order to make this new multi-facility framework less complex and more internally consistent than the current set-up, a number of modifications are put forward to the policies governing it. A second option would involve the most far-reaching adjustment of the Fund’s lending framework, as it would replace the whole arsenal of IMF facilities with a single, flexible, SBA-type facility. Such a system is appealing for its simplicity, transparency and because it avoids the problem of having to analyse ex ante the type and expected duration of a member’s balance of payments needs. On the other hand, in order to be workable and to ensure uniformity of treatment, each lending decision would need to be based on clear rules and with due regard to precedents and the merits and requirements of each case. As an intermediary solution, the third option suggests replacing the current lending framework with a dual framework. Such a structure would comprise two facilities ; one facility for short- and one for medium- to longterm access or, alternatively, one facility for normal access and one for exceptional access to IMF resources.financial facilities, IMF, official lending, review
Economic projections for Belgium – Autumn 2009
Get PDFSince the previous forecasts, there have been increasing signs of recovery, in the wake of the most severe recession suffered by the global economy in the last sixty years. Indicators show that confidence has returned since the spring, against a backdrop of easing financial tension, while industrial production and trade have both increased slightly worldwide. Doubts still remain, however, as to the sustainability of the recovery. This recovery has, in fact, largely been driven by budgetary and monetary policy stimulus, along with movements in inventories, the effects of which are temporary. In contrast, unemployment is likely to increase further in most of the advanced economies, with investment remaining low, and this will restrict growth in 2010. In Belgium, the sheer scale of the GDP decline at the end of 2008 and the start of 2009 was historic. However, GDP did rise by 0.5 p.c. in the third quarter, and a revival in business cycle indicators suggests that the economy should continue to grow. The growth rate will remain low, however, given the absence of any vigorous recovery in foreign demand and the anticipated weakness of investment and private consumption, against the backdrop of a deteriorating labour market. GDP is thus set to contract by 3.1 p.c. on average in 2009, before growing by 1 p.c. in 2010. The labour market initially showed a certain degree of resilience in the face of the severe contraction in activity. Job losses and increasing unemployment were contained by the massive use of temporary lay-offs and other methods of reducing working hours. They were also cushioned by a significant drop in company productivity. Employment is likely to fall by 118,000 units between the end of 2008 and the end of 2010. As an annual average, net job losses are forecast at 27,000 and 64,000 persons respectively in 2009 and 2010. The unemployment rate is set to rise from 7 p.c. in 2008 to 9 p.c. in 2010. The deterioration in labour market conditions is expected to result in wage growth moderation. The combination of a severe financial crisis and a generalised decline in economic activity significantly affected both consumers and businesses in 2009. With the exception of public sector consumption and investment, all the main expenditure categories affected GDP negatively. Businesses had to face the synchronised collapse of most foreign markets, with exports contracting by more than 12 p.c. In addition, inventories were reduced significantly. Finally, businesses are likely to cut their investments, due to the unprecedented decline in their capacity utilisation rate in particular, along with modest demand prospects. Consumers are also likely to reign in their expenditure significantly in 2009, both in terms of consumption and investment in housing. This behaviour is largely an expression of great restraint in the face of uncertain prospects for jobs or future incomes. In 2010, the modest recovery in growth is likely to be based on a slight increase in private consumption and exports, and on a turnaround in inventory movements. Private investment adjustment is, however, likely to continue. As in the euro area, inflation in Belgium eased rapidly over the course of 2009, even turning negative from May to November, as a consequence of the significant fall in energy prices in comparison with the previous year. Due to the recent increase in international oil quotations, inflation is expected to return to positive figures at the end of 2009, though remaining low, owing to the rapid attenuation of pressure from import prices and wages. In all, as an annual average, inflation is expected to be 0 p.c. in 2009 and 1.6 p.c. in 2010. In the macroeconomic context depicted above, and in the light of the measures approved by the authorities, e.g. in the budgetary context, the public deficit is expected to reach 6.1 p.c. of GDP in 2009 and 5.4 p.c. in 2010, if there is no change in policy. In 2009 and 2010, the general government debt is expected to record a further sharp rise, though the increase should be slightly lower than the average for the euro area, rising from 89.8 p.c. of GDP in 2008 to 98.1 p.c. in 2009 and 102 p.c. in 2010.Belgium, macroeconomic projections, Eurosystem
Results of the Bank’s survey of wage-setting in Belgian firms
Get PDFThe analysis presented is the outcome of a survey conducted by the Bank and forming the Belgian component of an initiative launched by the Wage Dynamics Network (WDN), in order to accompany the empirical analysis based on individual employees’ wage data obtained, for instance, from administrative data banks. The survey contains questions on the wage-setting process, the existence of downward rigidity and the reasons for it, the reaction of firms to shocks, and the frequency and timing of wage and price adjustments. The survey reveals that almost all firms in Belgium are covered by a sector agreement, and just over a quarter apply an additional collective wage agreement at the firm level. Such firm-level collective agreements are more common in large firms. The results also show that just over half of firms apply a wage indexation mechanism with a threshold index, while just under half operate in an environment where indexation takes place at fixed intervals. The latter system is more common in large firms, so that the weighted results indicate that this mechanism applies to the majority of employees. The level of wages of new employees depends mainly on what is specified in collective agreements and on the wage level of comparable employees in the firm. However, the wages which the firm actually pays to its staff may deviate from the pay scales specified in the sectoral agreements. In a significant number of firms, especially for white-collar workers and skilled staff, actual wages paid exceed the sectoral pay scales. Such a wage cushion, forming a buffer between the actual wages and the collectively agreed lower limits, is more common in large firms. Overall, firms seldom respond to adverse shocks by cutting basic wages or using alternative ways of reducing labour costs per employee. Certainly in large firms, costs are reduced mainly via the employment channel, i.e. by reducing the number of primarily permanent staff, and to a lesser extent temporary workers. Reductions in non-wage costs are also important, while variable pay components are only cut in a small number of cases. Only a quarter of firms state that they adjust their prices more than once a year. Time-dependent price adjustments, in which the time of the adjustment does not depend on economic conditions (as opposed to state-dependent adjustments), occur in 22 p.c. of firms and are noticeably common in the business service sector. Combined with the low frequency of price adjustments, this indicates price rigidity in that sector. The frequency and timing of wage adjustments are closely linked to the indexation mechanism applied. Most firms adjust their wages no more than once a year. Time-dependent wage adjustments in a specific month apply to 61 p.c. of firms, and – like price adjustments – wage adjustments are concentrated in the month of January. Another peak occurs in July, and there is some concentration at the beginning of the second and fourth quarters, particularly in the case of wage adjustments.Survey, wages, prices, employment
Methodology or pricing: how can the greater volatility of consumer gas and electricity prices in Belgium be explained?
Get PDFOver the past three years, it has gradually become clear that consumer gas and electricity prices in Belgium are much more volatile than elsewhere in the euro area or in the three main neighbouring countries. The article first of all examines whether recent methodological changes to the registration method in the consumer price index are an explanatory factor for the differing movements in gas and electricity prices. The analysis shows that this is not the case, implying that the deviations in price movements from those in the reference zones may be attributed to the pricing itself. It also indicates an increase in volatility during the period 2007-2009 in response to a number of changes in pricesetting since the full-scale liberalisation of the gas and electricity market for residential consumption (changes that cannot necessarily be related directly to the liberalisation, however). Moreover, an international comparison of gas and electricity prices excluding taxation reveals that, contrary to what was previously the case, prices in Belgium began to move considerably ahead of those in the euro area in the course of 2008. As far as gas is concerned, this handicap was to disappear again in the third quarter of 2009, whereas the available indicators show that the gap remains substantial in the case of electricity, despite some narrowing. It may also be noted that gas and electricity prices may have then bottomed out and that the transmission (more substantial in Belgium) of the new upward momentum in prices for energy raw materials could lead to a deterioration in the relative position in the near future. It is then open to question which economic factor explains why price fluctuations for energy raw materials in Belgium are having a greater impact on consumer gas and electricity prices than elsewhere. In addition, the higher volatility of gas and electricity prices is also a factor that has to be taken into account when containing broader price and cost movements, especially in a situation where energy prices present a structural upward trend.consumer price index, Belgium, gas prices, electricity prices
Economic impact of the public debt
Get PDFFollowing the financial and economic crisis, there was a marked increase in the public debt of the euro area countries, the United States, the United Kingdom and Japan. In addition, without a change of policy, the public debt of those countries would maintain an upward trend, a key factor being the rising costs associated with population ageing. The article analyses the risks and implications of the expansion of the public debt currently evident in most of the advanced countries. The difficulties which certain euro area countries are experiencing in raising finance on the markets illustrate some of those risks. After outlining the movement in the public debt in the advanced countries in recent years, a simulation is produced in view of showing the future debt pattern in the absence of any change of policy. This exercise clearly highlights the potentially exponential growth of the public debt in most of the advanced countries. Next, the impact of the public debt on economic activity and inflation is examined. That impact appears to be very heavily dependent on the circumstances, which may vary greatly over time and between countries. When looking at the impact of the pattern and size of the public debt on economic activity, it is always important to distinguish between the short and the long term. Finally, the article sets out the need for fiscal consolidation and appropriate strategies for achieving that. The strategy focuses on three aspects: fiscal consolidation aimed at reducing the public debt, boosting the employment rate and productivity, and reform of the pension systems, health care and care of the elderly. For most of the advanced countries, large-scale reform programmes will be necessary in order to restore sustainable public finances. Some countries have already implemented consolidation measures, while others have yet to put most of the measures in place.public debt, deficit, economic growth, government expenditure and revenue, taxation, fiscal policies
Regulation and competition in the distribution sector in Belgium
Full text linkWhile being a key sector in all developed economies, retail trade does actually appear to be one of the reasons for Europe’s lagging behind in potential output growth. One of the reasons for this lag could be regulation. By determining conditions for market access and for carrying out a commercial activity, the regulatory framework may exert some influence on both economic performance and market structure and, ultimately, on the degree of competition. The article assesses the retail trade situation in Belgium along these lines. As far as possible, Belgium’s performance is compared with that of neighbouring countries and the findings are assessed by cross-matching the various sources of information available. First, evidence from international indicators (such as those regularly published by the OECD), as well as from a review of the main legislation governing retail trade in Belgium, tend to suggest that regulation in Belgium is relatively abundant and restrictive for this sector. Operating conditions in particular appear to be more regulated than in neighbouring countries. As regards the retail trade sector’s economic performance, it should be noted that, like most other economic sectors, the retailing business in Belgium still has a higher productivity rate than in the majority of other European countries and even the United States too. However, unlike trends noted in other branches of activity, this favourable position has been gradually eroded over the last ten years. It does actually seem that Belgium’s main problem lies in its inability to improve the efficiency of the production factors being used. However, looking more closely at the food retailing sub-sector, no striking anomalies are noted in the market structure and the degree of competition in Belgium. Even though the overall indicators point to some concentration at national level, local competition – assessed with an original approach applied to detailed data – appears to be quite strong; only a few sales outlets have a dominant position. Moreover, the non-specialised food retail sector has a growing number of big shops, as well as an increasing number of hard discounters and a larger share of generic brand products in traditional retail outlets. Using detailed consumption price data from CityData and Eurostat, this analysis throws up evidence that prices charged by the retail sector are higher in Belgium than in the three neighbouring countries and the euro area as a whole. There have also been signs of a recent deterioration in the differential between prices in Belgian supermarkets and prices charged by German and Dutch supermarkets in particular. Adverse developments in labour costs in Belgium and higher retail business margins can go some way to explaining the trend in price differentials compared to Germany, where hard discounters are more common. Then again, the sharp deterioration in the price differentials between Belgium and the Netherlands recorded in supermarkets can largely be explained by the price war that raged between the major Dutch retail groups from October 2003 to December 2006. Overall, it therefore appears that the actual influence of specific regulatory requirements for the retail trade on the efficiency of the sector, on the degree of competition and, ultimately, on consumer prices needs to be looked at very carefully. On the one hand, simplifying regulations in force in Belgium would no doubt break down the barriers to entry without necessarily impeding other policy objectives. On the other hand, the performance of the retail distribution sector must be examined taking account of the specific features of the economy, such as population density and cultural preferences.retail, regulation, market structure, pricing, productivity
The incomes and financing balance of individuals and companies
Get PDFThe article begins by establishing that the share of wages in GDP has declined quite sharply in Belgium over the past five years. The fall in the wage share in 2003-2005 was due partly to the deteriorating economic conditions at the beginning of this century. It can also be seen as a continuation of the decline which started in the early 1980s, attributable to structural developments such as globalisation, technological progress and the growing importance of the services sector. However, the downward trend in the total disposable income of individuals as a percentage of GDP is due mainly to the reduction in their net interest income, which is in turn attributable to falling interest rates. In absolute terms, however, the disposable income of individuals has risen, even if inflation is taken into account. The main effect of the reduction in the gross disposable income of individuals in relation to GDP has been to cut the savings ratio, as consumption expenditure has only fallen slightly as a percentage of GDP. Moreover, since 2004 individuals’ investment spending has surged, reducing their financing balance to less than 1 p.c. of GDP. The primary counterpart of the recent contraction of the wage share has been the strong rise in the gross operating surplus of companies. On the other hand, companies have also paid more taxes on income and wealth, made higher net dividend payments to other sectors, and invested more in fixed assets. Nonetheless, the financing balance of companies has risen steadily, reaching an average of 2.4 p.c. of GDP in the past three years, so that they have been able to move gradually towards financing more of their investment out of internal resources, thus further consolidating their balance sheets.wage share, operating surplus, disposable income, financing balance
How Do Industries and Firms Respond to Changes in Local Labor Supply?
Full text linkIn this paper, we investigate how changes in the skill mix of local labor supply are absorbed by the economy. We distinguish between three adjustment mechanisms: through factor prices, through an expansion in the size of those production units that use the more abundant skill group more intensively, and through more intensive use of the more abundant skill group within production units. We investigate which of these channels is dominant. We contribute to the existing literature by analyzing these adjustments on the level of firms, rather than industries, and by assessing the role of new firms in the absorption process of labor supply shocks. Our analysis is based on administrative data, comprising the entirety of firms in Germany over a 10 year period. We find that, while factor price adjustments are important in the non-tradable sector, labor supply shocks do not induce factor price changes in the tradable sector. In this sector, most of the adjustment to changes in relative factor supplies takes place within firms by changing relative factor intensities. Given the non-response of factor prices, this finding points towards changes in production technology. Our results further show, that firms that enter and exit the market are an important additional channel of adjustment. Finally, we demonstrate that an industry level analysis is likely to over-emphasize technology-based adjustments.Immigration, Endogenous Technological Change, Firm Structure
Confidence and financial crisis in a post-Keynesian stock flow consistent model
No full textThe paper aims at showing that one of the main channels by which the US 2007 financial crisis became a real and global economic crisis is the 'confidence channel', i.e. that the financial crisis affected firms, banks and households’ expectations and confidence, thus leading to what they were fearing. And I propose to model expectations and the state of confidence of private agents to use the indexes calculated by national statistical services from monthly polls.confidence, financial crisis, stock-flow-consistent modelling