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31. Taxation, Match Quality and Social Welfare

Author:
Brendan Epstein and Ryan Nunn
Publication Date:
04-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities.
Topic:
Governance, Tax Systems, Fiscal Policy, Welfare, and Social Services
Political Geography:
Global Focus

32. Portfolio Diversification and the Cross-Sectional Distribution of Foreign Investment

Author:
Alexandra Tabova
Publication Date:
11-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
In this paper I explore the role of portfolio diversification in explaining the distribution of foreign investment across countries. I capture the portfolio diversification motive by a measure of country-specific riskiness, "covariance risk", which I construct as how countries' growth rates covary with the stochastic discount factor of a representative international investor. My key new empirical finding is a strong and significant correlation between this new measure of country riskiness and foreign investment allocations. Less risky countries, i.e. countries whose growth rates are more highly correlated with the investor's stochastic discount factor, receive larger investment shares than more risky countries. I interpret this result as evidence that investors do take into account diversification opportunities, not only for portfolio investment decisions, but also for foreign direct investment decisions. My empirical results confirm the theoretical predictions of standard portfolio allocation models.
Topic:
Foreign Direct Investment, Investment, Risk, Fiscal Policy, Securities, and Stock Markets
Political Geography:
Global Focus

33. Fiscal Consolidation in an Open Economy

Author:
Christopher J. Erceg and Jesper Linde
Publication Date:
04-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a New Keynesian DSGE model of a small open economy to compare how the e¤ects of fiscal consolidation di¤er depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important di¤erences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
Topic:
Economics, Economic Theory, Fiscal Policy, and Consolidation
Political Geography:
Global Focus

34. The Timing of Sovereign Defaults Over Electoral Terms

Author:
Nathan Foley-Fisher
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
I construct a database that maps the timing of sovereign default decisions into elected politicians' terms of office, that provides an empirical means of investigating political economy theories of sovereign default. I find no robust patterns in the timing of default decisions over terms of office. I also find no evidence in support of the political reputation theory of sovereign debt repayment. Finally, there is some tentative evidence that elected leaders who default are also those more likely to be re-elected. Motivated by anecdotal evidence, I use a stylised model of political leaders with career concerns to demonstrate how this can occur when politicians care about re-election.
Topic:
Sovereignty, Elections, Leadership, Economic Theory, and Fiscal Policy
Political Geography:
Global Focus

35. How Do Laffer Curves Differ Across Countries?

Author:
Mathias Trabandt and Harald Uhlig
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt and Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
Topic:
Economics, Economic Theory, Human Capital, and Fiscal Policy
Political Geography:
Global Focus

36. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

Author:
Samir Jahjah, Bin Wei, and Vivian Zhanwei Yue
Publication Date:
06-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued.
Topic:
Development, Exchange Rate Policy, Fiscal Policy, and Bonds
Political Geography:
Global Focus

37. Evaluating a Global Vector Autoregression for Forecasting

Author:
Neil R. Ericsson and Erica L. Reisman
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Global vector autoregressions (GVARs) have several attractive features: multiple potential channels for the international transmission of macroeconomic and financial shocks, a standardized economically appealing choice of variables for each country or region examined, systematic treatment of long-run properties through cointegration analysis, and flexible dynamic specification through vector error correction modeling. Pesaran, Schuermann, and Smith (2009) generate and evaluate forecasts from a paradigm GVAR with 26 countries, based on Dées, di Mauro, Pesaran, and Smith (2007). The current paper empirically assesses the GVAR in Dées, di Mauro, Pesaran, and Smith (2007) with impulse indicator saturation (IIS)—a new generic procedure for evaluating parameter constancy, which is a central element in model-based forecasting. The empirical results indicate substantial room for an improved, more robust specification of that GVAR. Some tests are suggestive of how to achieve such improvements.
Topic:
Economics, Economic Theory, Macroeconomics, and Fiscal Policy
Political Geography:
Global Focus

38. Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes

Author:
Christopher J. Erceg and Jesper Linde
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
Topic:
Economics, Monetary Policy, Tax Systems, Macroeconomics, Fiscal Policy, Public Spending, and Liquidity
Political Geography:
Global Focus

39. Getting the Most out of International Capital Flows

Author:
The Organization for Economic Co-operation and Development
Publication Date:
03-2011
Content Type:
Policy Brief
Institution:
The Organisation for Economic Co-operation and Development
Abstract:
Increased international capital flows can support long-term income growth through a better international allocation of saving and investment.
Topic:
Economic Growth, Capital Flows, Investment, and Fiscal Policy
Political Geography:
Global Focus

40. International Capital Mobility: Which Structural Policies Reduce Financial Fragility?

Author:
Rüdiger Ahrend, Antoine Goujard, and Cyrill Schwellnus
Publication Date:
05-2011
Content Type:
Policy Brief
Institution:
The Organisation for Economic Co-operation and Development
Abstract:
International capital mobility: Which structural policies reduce financial fragility?
Topic:
Fragile States, Economic structure, Mobility, Fiscal Policy, and Capital
Political Geography:
Global Focus