Fiscal Policy, Current Account Dynamics and External Adjustment

The central research question of this thesis is the potential of fiscal policy to stabilise asymmetric shocks and macroeconomic fluctuations at the level of EMU member states, with a special focus on external imbalances. After a short introduction, Chapter 2 analyses in a small open economy DSGE model the potential of fiscal policy to attenuate current account imbalances. The focus is on fiscal policy rules that adjust the overall level of government expenditure. This chapter finds that, in case of productivity and risk-premium shocks, a counter-cyclical fiscal response to the current account can help stabilising most of the macroeconomic variables, independently of the underlying exchange rate regime. However, stabilising the current account via fiscal policy intervention comes at the price of higher variability of output in the short-run. Chapter 3 examines in a two-sector DSGE model whether shifting government purchases between tradable and non-tradable goods can help to reduce external fluctuations without large swings in the overall fiscal stance. The policy rules considered are budgetary-neutral in the sense that the overall level of government expenditure is kept constant. This policy rule is compared to fiscal devaluation as a strategy to reduce external imbalances and find that state-dependent changes in the composition of government purchases between tradables and non-tradables (T/NT) can stabilise excessive fluctuations in the event of economy-wide supply and demand shocks. Contrary to fiscal devaluation, the expenditure-shifting rule faces a trade-off between stabilising domestic activity and enhancing household welfare, on the one hand, and reducing excessive fluctuations in external positions, on the other hand. Chapter 4 builds upon the model developed in Chapter 3 but focuses on budgetary-neutral fiscal rules that adjust the composition of government purchases in response to domestic business cycle indicators as a stabilisation tool when fiscal limits are tight. This chapter finds that state-dependent reallocation of government purchases between tradable and non-tradable goods stabilises domestic activity and reduces the welfare costs of economy-wide and sector-specific shocks. Potential welfare gains of such policy rules are higher than welfare gains from standard counter-cyclical fiscal policy rules. Contrary to standard deficit spending policies, the state-dependent expenditure composition rules avoid the trade-off between, first, counter-cyclical spending and, second, consolidation needs in economic downturns in the presence of explicit or implicit deficit and debt limits. Chapter 5 deals with TARGET2 imbalances in the euro area. This chapter evaluates the current economic costs and profits of German claims on the Eurosystem through TARGET2. While Germany’s nominal profits from holding TARGET2 claims depend on the development of the nominal interest rate, the real profits are determined by the real interest rate as well as the real exchange rate. This chapter finds that at the end of 2013 Germany faces current losses of around 13 billion euros in real terms. Calculating the profits and losses of every member country in the euro area reveals that the TARGET2 system works as an implicit distribution mechanism and underlines the aspect that, even without an euro area break-up or exit of one member-country, holding TARGET2 claims can cause high economic costs in real terms.

Level thesis:degree_level

thesis.doctoral

Grantor dc:publisher

Universität Bayreuth

Year

2014

Author dc:creator

• Hohberger, Stefan

Contributors dc:contributor

• Herz, Bernhard

Repository record source_url

https://epub.uni-bayreuth.de/id/eprint/1712/

OAI identifier oai:identifier

oai:epub.uni-bayreuth.de:1712