Sunday, April 21, 2013
Monday, April 15, 2013
A new paper from Villaverde (U. Penn),
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” Santos
So, the Euro brought the idea that the whole
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
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."