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Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al Discussion by Henrik Kucsera Magyar Nemzeti Bank Cím: Minta.

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Presentation on theme: "Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al Discussion by Henrik Kucsera Magyar Nemzeti Bank Cím: Minta."— Presentation transcript:

1 Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al Discussion by Henrik Kucsera Magyar Nemzeti Bank Cím: Minta Cím - Előadó: Minta Előadó1

2 Outline Disclaimer Summary Discussion (theoretic) Discussion (policy) Cím: Minta Cím - Előadó: Minta Előadó2

3 Summary DSGE modell with real and nominal frictions (EAGLE) Inefficiencies built into the model (monopolistic markets) 3 regions (Italy, REA, RW) Common currency and monetary policy in EA countries Common (efficient) bond market for the whole world Cím: Minta Cím - Előadó: Minta Előadó3

4 Summary 2 policy changes starting from steady state Fiscal consolidation: 10% decrease in public debt/GDP from 119% Implemented by fiscal rule using either labour income tax or capital income tax as instrument Competitiveness improvement in nontradables (services sector): fall in markup by 10% Optionally augmented by developements in international bond markets (bond rate spread) or coordinated policy action in the whole EA Cím: Minta Cím - Előadó: Minta Előadó4

5 Summary Results „the combination of the increase in competition and lower taxes greatly favours the increase of Italian output and welfare in the long run” „Spillovers of Italian reforms to the rest of the EA are rather small” Coordinated policy change in the EA improves results of competitiveness reform Cím: Minta Cím - Előadó: Minta Előadó5

6 Discussion Carefully done exercise, framework has lots of potential Incentive compatibility (expectations, optimisation) vs. ‘semi- structural’ models ( SVAR,…) Takes into account regional interdependence Well suited to address welfare questions Paper gives a good exposition of the exercises, providing (some) robustness checks as well Topic naturally raises many issues… Cím: Minta Cím - Előadó: Minta Előadó6

7 Discussion Welfare analysis of policy programs should be quite straightforward E.g. in case of fiscal consolidation via capital income tax, after 20 years: GDP 0.5%, Cons 0%, Lab 0.2% nontraded competitiveness reform, after 20 years: GDP 3.2%, Cons 1.5%, Lab 1.5% Joint program of previous two, after 20 years: GDP 9%, Cons 9%, Lab 3% It is not clear that these programs greatly increase welfare (except in the joint case and the long run) Cím: Minta Cím - Előadó: Minta Előadó7

8 Discussion Curious nonlinearities in results in case of joint program (see prev. slide) Emphasised as one of ‘main results’ of paper in the Conclusion part The feedback loop could be further explored: what elements of the model it depends on Robustness checks concerning these elements Cím: Minta Cím - Előadó: Minta Előadó8

9 Discussion No supply side effects of government expenditure Not unusual in fiscal models to introduce productivity enhancing infrastructure provided by government (e.g GIMF) Even if government production is kept constant during tax changes, lump sum transfers to households are likely to change to achieve market clearing on the integrated world bond market. Changes in transfers to households can have first order effect on time spans years (via e.g. labour market, demography). Cím: Minta Cím - Előadó: Minta Előadó9

10 Discussion Fiscal consolidation exercises started from steady state of model (?) Carrying out fiscal consolidation in an economy in slump amounts to procyclical policy may be hard to justify (connects to welfare analysis issue mentioned earlier) may be hard to obtain/maintain public support Fiscal consolidation in a depressed economy may be self- defeating through a positive feedback in economic activity and government budget. Cím: Minta Cím - Előadó: Minta Előadó10

11 Discussion Main traction of refoms comes from nontradeable sector competitiveness improvement The latter is almost always greatly beneficial in this model setup (at least in terms of GDP) Is it also this simple in practice? Why these measures have not been already carried out? Natural monopolies (economies of scale, or unique resources (tourism)…) Measures should aim oligopolistic markets – game theoretic dimension – improving market may not be trivial (Lobbyism) Cím: Minta Cím - Előadó: Minta Előadó11

12 Thank you for your attention! Cím: Minta Cím - Előadó: Minta Előadó12


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