EconPol Working Paper Series

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.

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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.

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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.

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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.

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Cover of EconPol Working Paper 69

60%, -4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments

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

This paper investigates the relationship between the budget balance and the current account balance for European Union countries with a quarterly data set from 1995 to 2020, using various time series and panel data empirical methodologies. The analysis shows that the impact of the budget balance on the current account balance is greater for those Eurozone countries with an average current account balance-to-GDP ratio outside the range of -4 to 6%, and in Eurozone countries with debt-to-GDP ratios above 60%. Hence, from a policy perspective, to avoid such unwelcome effects on the current account balance, governments should try to contain both, budget deficits and big current account deficits. Economic policy measures to mitigate the resulting macroeconomic imbalances should be tailored to individual countries but - given the feedback effects between economies as a whole - they also require coordination at EU level.  

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