Sunday, April 21, 2013

Reinhart & Rogoff after peer review

Everyone talks about the "Reinhart and Rogoff affaire" and how some politicians used their paper to justify austerity measures. But the blunder wouldn´t have happened if the second part of the sign below had been applied.

Monday, April 15, 2013

The effect of the Euro on southern European countries

A new paper from Villaverde (U. Penn), Santos (Harvard) and Garicano (LSE) theorizes about the consequences of the introduction of the Euro on the Southern European economies. The introduction of the Euro together with a common monetary policy left Southern European economies with one unique economic policy available: structural economic reforms. That would, on the long term, bring economic growth and productivity to peripheral economies. However, such thing never happened. The reason, “the steep financial boom derived from the drop in exchange rate risk and from the Euro wide financial bubble meant that the budget constraints that these countries faced were loosened, rather than tightened. Countries that could cheaply borrow delayed painful reforms” “As a result, the financial bubble fueled the deterioration of governance and of the institutional arrangements on the Euro’s periphery”

So, the Euro brought the idea that the whole Europe was similar and high in efficiency and productivity. However, the truth was that countries were still very different. The easy credit was misused by most peripheral countries and when the crisis came those countries were the ones who suffered, and still suffering, the most.

This explanation raises two possible questions: First, why the markets misjudged the productivity and risks of Southern European economies? And secondly “Are all situations where financing is plentiful and cheap conducive to the lowering of standards, the deterioration of governance and the abandonment of economic reforms? If so, this situation is currently the one the United States, at the zero lower bound, is facing, in which case [the] analysis suggests that a similar deterioration public and private governance may occur.” That would mean that any fiscal expansion or QE affects negatively to quality of government and sound economic decisions.

Monday, April 1, 2013

The economic effects of Constitutions

Person and Tabellini came up with the following table to summarize many of the findings of their book "The economic effects of Constitutions" (2005).

A plus sign in a Theory column indicates that a constitutional reform, replacing the feature on the right  at the top of the column with the feature on the left will induce a greater degree or a higher level of the policy outcome for that row. And the opposite for a minus sign.

One of the central findings is the effect of electoral rules on fiscal policy. Interestingly enough, changing your country's political system from the proportional to a majoritarian one, improves fiscal policy. Specifically, and according to the data, it reduces Government spending by 5%, welfare spending by 2-3% of GDP and Budget deficit by 2% of GDP.

Another important conclusion that might be related to South European countries: "coalition governments are prone to a status quo bias,[...]. Hence, their reaction to adverse economic shocks is more likely to be inefficient than the response of single-party governments."