21,660 research outputs found
Fiscal Stabilisation Policy and Fiscal Institutions
No full textIn this paper we analyse countercyclical fiscal policy within the context of a microfounded analysis of business cycle stabilisation. We show that tax and spending instruments can have a useful counter cyclical role, even after allowing for the distortionary nature of the instruments and the need for debt sustainability. A critical barrier to the use of fiscal instruments may be political economy concerns, and we survey recent suggestions involving alternative fiscal policy institutions.
Should economics be democratised?
No full textWhen it comes to managing an economy should policymakers act on the basis of technical expertise or in accordance with the views of voters? Simon Wren-Lewis writes that economists need to act more as a collective, and do a much better job of articulating consensus viewpoints to the public when it comes to important questions of economic policy
The Eurozone crisis does not necessarily prove that a monetary union also requires fiscal/political union
No full textA common argument is that the Eurozone crisis necessitates greater fiscal and political integration among countries using the single currency. Simon Wren-Lewis disputes this idea, arguing that we should be cautious about forming concrete conclusions from a single observation. He states that the lesson of Eurozone failure is largely about bad design, rather than disproof of concept
What Should Fiscal Councils Do?
No full textN/AFiscal policy Council; Fiscal policy; Government policy;
What Carillion's collapse tells us about public sector outsourcing
No full textSimon Wren-Lewis reflects on the collapse of the construction firm Carillion and on the problems that have ensued for the government. Weighing the pros and cons, he suggests that it is likely that some of the current Private Finance Initiative (PFI) outsourcing was influenced by ideological considerations rather than being purely evidence-based, and warns that the next government should conduct a thorough review
The strange case of the disappearing productive capacity in the UK
No full textRecent data shows that the recession will have led to a 10 per cent permanent loss of UK output in a few years time. Simon Wren-Lewis investigates this puzzle and discusses some of the potential explanations; including, the possibility that hysteresis effects [i.e. the possibility that high unemployment increases the rate of unemployment below which inflation begins to accelerate] may have operated more quickly than anyone thought, the survey data is simply wrong, and that underlying labour productivity has fallen
A No vote in Ireland’s referendum on the Fiscal Treaty might contribute to the demise of the current mindset of austerity
No full textPolling in the lead up to Ireland’s vote on the Fiscal Stability Treaty has pointed to the endorsement of the Treaty. But will the Treaty be a positive force for Ireland, and for Europe? Simon Wren-Lewis argues that the Treaty is ultimately flawed as it treats the current crisis as stemming from massive public sector debts, whilst ignoring that these debts come from governments’ bailouts of banks that were under threat due to unsustainable borrowing from the private sector
Sovereign contingent liabilities: a perspective on default and debt crises
No full textChapters 2-3: A global games approach to sovereign debt crises The first chapters present a model that investigates the risks involved when a fiscal authority attempts to roll-over a stock of debt and there is the potential for coordination failure by investors. A continuum of investors, after receiving signals about the authority's willingness to repay, decides whether to roll-over the stock of debt. If an insufficient proportion of investors participates, the authority defaults. With one fiscal authority, private information results in a deterministic outcome. When a public signal is available, the model behaves in a similar manner to a sunspot model. In line with much of the global games literature, improving public information has an ambiguous effect on welfare. Finally, the model is extended to include a second fiscal authority, which captures a similar sunspot result and illustrates the potential for externalities in fiscal policy. Lower debt in the less indebted authority can push a more indebted authority into crisis. Lower debt makes the healthier authority relatively more attractive, which causes the investors to treat the heavily indebted authority more conservatively. In certain circumstances, this is sufficient to cause a coordination failure. Chapter 4: A debt game with correlated information This chapter models of debt roll-over where a continuum of investors receives correlated signals on whether a debtor is solvent or insolvent. The investors face a collective action problem: a sufficient proportion of investors must agree to participate in the debt roll-over for it to be a success. If an insufficient proportion of investors participates in the deal, the debtor will default. The game has a unique switching strategy, which results in global uncertainty being preserved. The ex ante distribution of play (conditional on the true solvency of the debtor) follows a Vasicek credit distribution. The ex ante probability of a debt crisis is affected by the exogenous model parameters. Of particular interest is the observation that increasing private noise unambiguously reduces the probability of a debt crisis. Unsurprisingly, increasing the fiscal space or return on debt also decreases the probability of a crisis. Chapter 5: Bailouts and politics The final chapter examines the political-economic equilibrium in a two-period model with overlapping generations and a financial sector, which is inspired by the model in Tabellini (1989). The public policy is chosen under majority rule by the agents currently alive. It demonstrates that the bailout policy adopted in the second period has important effects on the bank's financing decisions in the first period. By adopting a riskier financing regime (i.e. higher leverage) in the first period, the older generation can extract consumption from the younger generation in the second period. Sovereign backstops of the financial sector are state-contingent: they can appear costless for long periods of time but eventually result in a socialization of private-sector debt. It is this mechanism that makes implementing capital requirements costly to investors yet beneficial to the younger generation. The model also highlights two important issues: (i) bank capital is endogenous and (ii) proposed resolution mechanisms must be politically credible. It suggests that a major benefit of increasing and narrowing equity-capital requirements or increasing liquidity ratios is that they are implemented ex ante and therefore available either to absorb losses in the event of a crisis or to reduce the possibility of large drops in asset values. Finally, this chapter also provides a structure by which to interpret the stylized facts of Calomiris et al. (2014): that more populist political institutions are associated with more fragile financial systems
The Optimal Monetary Policy Response to Exchange Rate Misalignments
No full textA common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, which appears to pose a dilemma for policy makers. In this paper we develop a small open economy model which features traded and non-traded goods sectors with which to assess the extent to which monetary policy should respond to exchange rate misalignments. To do so we initially contrast the efficient outcome of the model with that under flexible prices and find that the flex price equilibrium exhibits an excessive exchange rate appreciation in the face of a positive UIP shock. By introducing sticky prices in both sectors we provide a role for policy in the face of UIP shocks. We then derive a quadratic approximation to welfare which comprises quadratic terms in the output gaps in both sectors as well as sectoral rates of inflation. These can be rewritten in terms of the usual aggregate variables, but only after including terms in relative sectoral prices and/or the terms of trade to capture the sectoral composition of aggregates. We derive optimal policy analytically before giving numerical examples of the optimal response to UIP shocks. Finally, we contrast the optimal policy with a number of alternative policy stances and assess the robustness of results to changes in model parameters.
Estimates of equilibrium exchange rates for sterling against the euro
No full text'This study has been prepared by Professor Simon Wren-Lewis of the University of Exeter to inform the assessment of the five economic tests'. Includes bibliographical references. Also available via the InternetAvailable from British Library Document Supply Centre- DSC:m03/30619 / BLDSC - British Library Document Supply CentreSIGLEGBUnited Kingdo
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