discussion of the paper by susana parraga rodriguez: “the aggregate effects of government income...
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PREZENTĀCIJAS NOSAUKUMS DISCUSSION OF THE PAPER BY SUSANA PARRAGA RODRIGUEZ:
“THE AGGREGATE EFFECTS OF GOVERNMENT INCOME TRANSFERS SHOCKS – EU EVIDENCE”
Oļegs Krasnopjorovs, 21.06.2016
TOPIC AND CONTRIBUTION OF THE PAPER Original, well-focused paper.
Government transfers => Macroeconomic variables (GDP, GDP components, labour market variables)
Challenge: causality is two-sided, government transfers are endogenous.
Paper tries to solve endogeneity problem:
By employing a new dataset (compiled by public finance experts within ESCB) of discretionary changes in fiscal
policy;
Public expenditure measures (changes in legislation; measured as the difference relative to trend).
Data are harmonized across countries.
Differentiate between endogenous changes (due to cycle) and exogenous (structural reforms; raising purchasing
power); use only exogenous measures in regressions.
Main results: estimated (not precisely) fiscal multipliers seems too large: 2, 3, 4 .. Looks like strong rejection of
Ricardian equivalence view (not discussed in text). Some economic interpretations of these large values of
multipliers look amazing.
2
EVEN AGGREGATE RESULTS HAVE VERY LARGE STANDARD ERRORS => HARDLY SIGNIFICANT
3
not significantly different from 1 (1 is “rule-of-thumb” fiscal multiplier with no indirect effects)
176 = 22 countries X 8 years. But sample period includes 9 years.
Hardly significant at all: only 3 out of 8 estimates are significantly different from zero.
Text includes large passage regarding the discussion of “biases”, however, point estimates are very imprecise => cannot be sure whether “bias” is positive or negative
SOME RESULTS BECOME COUNTERINTUITIVE WHEN DISAGGREGATED… The biggest impact is on investments:
Government transfers ↑ => Investments ↑ :
counterintuitive. Theory would suggest that big
government is bad for investments (crowding-out
effect).
Text: “A rationale for this strong response could
be that discretionary changes in transfers change
expectations about future interest rates. Many
changes in transfers due to a reform have as
motivation to improve the long term
sustainability of public finances, which may affect
long term interest rates”
Comment: I would suggest not to write
interpretations on unreliably big coefficient
values (huge standard error; hardly significant).
4
The biggest impact from old-age pensions is on durables: pensioners are buying cars? Counterintuitive. Of course, differences are not statistically significant => we cannot say on which component impact of old-age pensions is bigger.
RESULTS ARE EVEN LESS CONVINCING WHEN IT COMES TO THE LABOUR MARKET… Out of 12 estimates, only 2 are statistically significant.
And there lacks economic interpretation why exactly
these estimates are significant.
Text: “the negative response of hours to shocks to old
age pensions indicates that this category distorts the
labor supply decision of labor market participants” (page
24-25)
Comment: Coefficient is -0.04 with standard error 0.25.
I would suggest the impact is near zero… Besides, it is
not clear why exactly this spending category distorts
labour supply.
Text: “The point estimate for unemployment benefits
indicate that higher unemployment benefits disincentive
labour supply”.
Comment: “-” hours worked; “+” employment; none is
significant.
5
BY HOW MUCH “EXOGENOUS” FISCAL MEASURES ARE REALLY EXOGENOUS?
• It is possible that “structural reforms” are more often
during (and immediately after) recessions. For instance, in
good times (more tax revenues), pension systems look
more sustainable as in bad times – no need for structural
reforms.
• It is possible that efforts to improve “purchasing power” are
also more often in bad times when purchasing power ↓.
• It is possible that fiscal measures due to court ruling
(counted as “Reform”) may be just abolition of previous
“cyclical” measures (like in Latvia during 2010-2011; at least
I would classify a prohibition for working pensioners to
receive an old-age pension as a cyclical measure; later it
was abolished by Constitutional Court).
6
Paper includes Granger tests between discretionary changes in transfers and: their own lag, lag of output growth, inflation, unemployment. Perhaps, additional Granger test specification may include output gap and change in output gap.
SOME ADDITIONAL ISSUES Page 1, abstract: “I demonstrate a positive and significant effect of exogenous transfer shocks to the
macroeconomy”.
Comment: What is “macroeconomy”? Should be clarified – GDP?, consumption?, employment? etc.
Page 14, footnote 8: “Private investment corresponds to gross fixed capital formation also from
Eurostat”
Comment: Gross fixed capital formation (if taken for the total economy, not for sector S13 only)
includes also public investments.
Page 24: “The results indicate that increases in transfers have a positive effect on employment and the
unemployment rate.” (page 24)
Comment: Transfers ↑ => Unemployment rate ↓ means that the impact on unemployment rate is
negative (but not statistically significant).
7
CONCLUSION + New data set on fiscal measures; + Trying to solve the fiscal policy endogeneity issue; - Small number of observations => large standard errors => majority of results not
statistically significant; point estimates are not precise. - Estimated (not precisely) fiscal multipliers seems too large: 2, 3, 4 .. Looks like strong
rejection of Ricardian equivalence view (not discussed in text). Main suggestions: We can say that government transfer shocks may have some positive impact on GDP and its components, but should be very cautionary when speak about numbers (estimate of the magnitude of multipliers); Don’t try to find economic interpretation for differences in coefficients – some interpretations look amazing, differences may reflect big standard errors (even huge coefficients, e.g., impact of unemployment benefits on investments are hardly significant).
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