Current publications

Cover EconPol Working Paper 73

Effects of Policy Mix on European Regional Convergence

Ignacio Sacristán López-Bravo (Universidad Carlos III de Madrid), Carlos San Juan Mesonada (EconPol Europe, Universidad Carlos III de Madrid)

This paper analyses the impact of the fiscal-monetary policy mix on the convergence on per capita income of the least developed regions (Objective 1) of the European Union (EU 28) during the implementation of the three European Structural and Investment Funds (ESIF) programmes between 2000 and 2020. The Solow-Swan growth model with control variables allows us to assess the absorption capacity of regions in the different phases of the economic cycle. The empirical results show the effectiveness of EU Regional and Cohesion Policy. However, the combination of fiscal and monetary policy shows an impact that is asymmetric, depending on the region. Thus, a policy mix of fiscal restraint and monetary expansion would boost growth in all regions, but would slow down the convergence process in Objective 1 regions.

... Details
Cover of EconPol Policy Report 34

Investment Screening Mechanisms: The Trend to Control Inward Foreign Investment

Vera Z. Eichenauer (ETH Zurich), Michael Dorsch (Central European University), Feicheng Wang (University of Göttingen)

In an increasing number of sectors, concerns are rising that foreign firm participation may pose risks to public order. Many developed countries have adopted or extended their investment screening mechanisms to control inward foreign direct investment in strategically important sectors over the last years. This paper documents the development of investment screening in OECD and EU countries and provides the first discussion from an economic perspective. We review existing and propose new explanations for the adoption of investment screening. Our exploratory quantitative analysis suggests that countries with higher levels of technological development and with a stricter regulatory environment for foreign investment are more likely to introduce investment screening. Contrary to the popular wisdom, we do not find evidence that higher Chinese inward investments are associated with the implementation of investment screening.

... Details
Cover of EconPol Policy Report 33

A Model To Think About Crypto-Assets and Central Bank Digital Currency

Hernán D. Seoane (Universidad Carlos III de Madrid)

This paper introduces digital assets, crypto assets in general, and Central Bank Digital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis.

... Details
Cover of EconPol Policy Brief 40

The Recovery and Resilience Facility: A Springboard for a Renaissance of Public Investments in Europe?

Francesco Corti, Daniel Gros, Tomas Ruiz, Alessandro Liscai, Tamas Kiss-Galfalvi (EconPol Europe, CEPS) David Gstrein, Elena Herold, Mathias Dolls (EconPol Europe, ifo Institute)

The funds provided by the Recovery and Resilience Facility under the National Recovery Resilience Plans are supposed to finance new projects to supplement, not to supplant national efforts. This is also called additionality which has long been a key principle of the EU cohesion policy. According to this principle EU financial intervention should not substitute for national funding that would have been used in the absence of EU intervention. The purpose of this short contribution is to shed light on the additionality of public investments under the Recovery and Resilience Facility. To this end, the authors propose to look at additionality both from a macro and micro perspective. They apply the micro approach to four national recovery and resilience plans: Italy, Germany, Belgium and Austria.

... Details
Cover of EconPol Working Paper 72

Fiscal and Current Account Imbalances: The Cases of Germany and Portugal

António Afonso and José Carlos Coelho (EconPol Europe, ISEG - Lisbon School of Economics & Management, Universidade de Lisboa; REM/UECE)

This study’s aim is a comparative analysis between Portugal and Germany regarding the existence of a bidirectional relationship between the budget balance and the current account balance, starting with the introduction of the Euro (1999 and 2002, respectively) to the end of 2020. While the analysis finds a bilateral relationship, it shows that the budget balance and the current account balance for each country have similar and distinct developments, reflecting the distinct characteristics of each economy. One of the most striking findings is that the response of the budget balance to the current account balance is higher in Germany than in Portugal. In addition, public debt as a percentage of GDP positively affects the current account balance in Portugal, but not in Germany. This can be linked to the fact that the debt-to-GDP ratio is higher in Portugal, according to the authors.

... Details
Cover of EconPol Policy Brief 39

What Is the Substance‐Based Carve‐Out under Pillar 2? And How Will It Affect Tax Competition?

Michael P. Devereux, Martin Simmler, John Vella and Heydon Wardell‐Burrus

On 8 October 2021 Secretary of the Treasury Janet L. Yellen claimed that: “As of this morning, virtually the entire global economy has decided to end the race to the bot-tom on corporate taxation.” Tax competition threatens the long‐term viability of the existing international corporate tax system and bringing it to an end would thus be a veritable game‐changer. But is Secretary Yellen correct? Will the OECD/G20 Inclu-sive Framework’s “Two Pillar Solution” that has now been agreed by 137 jurisdic-tions, in particular the global minimum tax found in Pillar 2, bring competition in corporate taxation to an end? This note examines one of the factors that will deter-mine the impact of Pillar 2 on tax competition: the design of the substance‐based carve‐out.

... Details
Cover of EconPol Policy Report 32

Fiscal Policies during the Covid-19 Crisis in Austria - A Macroeconomic Assessment

Klaus Weyerstrass (EconPol Europe & IHS Vienna)

This EconPol Policy Report assesses the macroeconomic impact of fiscal policy measures introduced by the Austrian government during the Covid-19 crisis in 2020 and 2021. Large parts of the stimulus package aimed at stabilizing companies, employment and private households. According to the study short-term work schemes were particularly successful. Equally effective were measures supporting companies and the self-employed who were directly affected by the containment measures, e.g. liquidity support (fixed cost subsidies and loss compensations), tax reductions and tax deferrals. While support to private consumption generally is not the recommended fiscal policy reaction to a recession which is caused by government measures to restrict consumption possibilities, support to companies, employees and the self-employed who are affected by the closure of some businesses are appropriate, according to the study. At the same time, those companies that would have left the market anyway should not kept alive articifially, as this would hamper structural change. For the same reason, short-time work schemes should only be offered as long as the contaiment measures or other pandemic-related problems such as supply-chain disruptions prevail.

... Details
Cover of EconPol Working Paper 71

Read My Lips? Taxes and Elections

Clemens Fuest, Klaus Gründler, Niklas Potrafke, and Fabian Ruthardt

The paper introduces a new dataset that includes quantitative harmonized indices of tax reforms, which provides indicators on tax reforms for tax rates and tax bases, along with detailed subindices for six types of taxes in in 23 industrialized and emerging economies between 1960 and 2014. Relating tax reforms to the timing of elections, we examine electoral cycles in tax reforms. Our results show that politicians postpone tax rate increases to after elections. A key innovation of our dataset is the coverage of harmonized indices for six tax types. Examining heterogeneity across tax types, we find that electoral cycles are particularly pronounced for value added tax rates and personal income tax rates.

... Details
Cover of EconPol Opinion

Fiscal Rules Post-COVID: Using the Recovery Phase to Reduce Debt Ratios

Francesco Corti (CEPS) and Daniel Gros (CEPS)

The Commission has recently launched a review of the economic governance rules. One reason for this (re-)launch is that it is widely assumed that the debt reduction criterion cannot and should not be enforced when the suspension of the fiscal rules motivated by the Covid crisis ends. The main reason given is that debt levels have increased and that this makes it more difficult to reach the debt reduction target, which is one twentieth of the difference between the actual and the 60% reference value. However, this argument is wrong. The debt reduction criterion becomes easier to achieve during the post-Covid recovery phase because nominal GDP growth is higher than before the crisis, thus reducing the primary surplus required to achieve any given reduction in the debt to GDP ratio.

... Details
Cover of EconPol Working Paper 70

Labour Market Power and the Quest for an Optimal Minimum Wage: Evidence from Italy

Mauro Caselli, Jasmine Mondolo and Stefano Schiavo

This paper investigates the recent trends in labor market power in Italy and assesses the impact of a potential minimum wage using a large sample of manufacturing firms. The authors show that, despite a general shift of labor market power from the employer to the workers, monopsony power is still widespread, especially in certain sectors and regions. The introduction of a minimum wage would be beneficial to the economy as it reduces the monopsony power of highly productive firms that pay low wages. However, it may also have a negative impact, since firms with low labor productivity may react by reducing the number of their employees or even by exiting the market. The optimal minimum wage, which minimizes the negative effects and maximizes the positive effects on the economy, ranges between EUR 8.25 and 9.65 per hour.

... Details