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Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al

Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al. Discussion by Henrik Kucsera Magyar Nemzeti Bank. Outline. Disclaimer Summary Discussion ( theoretic ) Discussion (policy). Summary. DSGE modell with real and nominal frictions (EAGLE)

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Potential output and structural reforms after the crisis: the case of Italy A. Gerali et al

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  1. Potential output and structural reforms after thecrisis: the case of ItalyA. Gerali et al Discussionby Henrik Kucsera Magyar Nemzeti Bank Cím: Minta Cím - Előadó: Minta Előadó

  2. Outline • Disclaimer • Summary • Discussion (theoretic) • Discussion (policy) Cím: Minta Cím - Előadó: Minta Előadó

  3. Summary • DSGE modell withreal and nominalfrictions (EAGLE) • Inefficienciesbuiltintothemodel (monopolisticmarkets) • 3 regions (Italy, REA, RW) • Commoncurrency and monetary policy inEAcountries • Common (efficient) bond market forthewholeworld Cím: Minta Cím - Előadó: Minta Előadó

  4. Summary • 2 policy changes starting fromsteadystate • Fiscalconsolidation: 10% decreaseinpublicdebt/GDP from 119% • Implementedbyfiscalruleusingeitherlabourincometaxorcapitalincometaxasinstrument • Competitivenessimprovementinnontradables (servicessector): fallinmarkupby 10% • Optionallyaugmentedbydevelopementsininternationalbondmarkets(bondratespread) orcoordinated policy actioninthewholeEA Cím: Minta Cím - Előadó: Minta Előadó

  5. Summary Results • „the combination of the increase in competition and lower taxesgreatly favours the increase of Italian output and welfare in the long run” • „Spillovers of Italian reforms to therest of the EA are rather small” • Coordinated policy changeintheEAimprovesresults of competitiveness reform Cím: Minta Cím - Előadó: Minta Előadó

  6. Discussion • Carefullydoneexercise, framework has lots of potential • Incentivecompatibility (expectations, optimisation) vs. ‘semi-structural’ models ( SVAR,…) • Takesinto account regionalinterdependence • Wellsuitedtoaddresswelfarequestions • Papergives a goodexposition of theexercises, providing(some) robustnesschecksaswell • Topicnaturallyraisesmanyissues… Cím: Minta Cím - Előadó: Minta Előadó

  7. Discussion • Welfareanalysis of policy programsshould be quitestraightforward • E.g. incase of fiscalconsolidationviacapitalincometax, after 20 years: GDP 0.5%, Cons 0%, Lab 0.2% • nontradedcompetitiveness reform, after 20 years: GDP 3.2%, Cons1.5%, Lab1.5% • Joint program of previoustwo, after 20 years: GDP 9%, Cons9%, Lab 3% • It is notclearthattheseprogramsgreatlyincreasewelfare (exceptinthejointcase and thelongrun) Cím: Minta Cím - Előadó: Minta Előadó

  8. Discussion • Curiousnonlinearitiesinresultsincase of joint program (seeprev. slide) • Emphasisedasone of ‘main results’ of paperintheConclusion part • The feedbackloopcould be furtherexplored: • whatelements of themodelitdependson • Robustnesschecksconcerningtheseelements Cím: Minta Cím - Előadó: Minta Előadó

  9. Discussion • No supplysideeffects of governmentexpenditure • Notunusualinfiscalmodelstointroduceproductivityenhancinginfrastructureprovidedbygovernment (e.gGIMF) • Evenifgovernmentproduction is keptconstantduringtaxchanges, lump sum transferstohouseholdsarelikelytochangetoachieve market clearingontheintegratedworldbondmarket. • Changesintransferstohouseholdscanhavefirstordereffectontimespans 12-20 years (viae.g. labour market, demography). Cím: Minta Cím - Előadó: Minta Előadó

  10. Discussion • Fiscalconsolidationexercisesstartedfromsteadystate of model (?) • Carrying out fiscalconsolidationin an economyinslumpamountstoprocyclical policy • may be hardtojustify (connectstowelfareanalysisissuementionedearlier) • may be hardtoobtain/maintainpublicsupport • Fiscalconsolidationin a depressedeconomymay be self-defeatingthrough a positivefeedbackineconomicactivity and governmentbudget. Cím: Minta Cím - Előadó: Minta Előadó

  11. Discussion • Main traction of refomscomesfromnontradeablesectorcompetitivenessimprovement • The latter is almost alwaysgreatlybeneficialinthismodelsetup (atleastinterms of GDP) • Is italsothissimpleinpractice? Whythesemeasureshavenotbeenalreadycarried out? • Naturalmonopolies (economies of scale, oruniqueresources(tourism)…) • Measuresshouldaimoligopolisticmarkets – game theoreticdimension – improving market maynot be trivial • (Lobbyism) Cím: Minta Cím - Előadó: Minta Előadó

  12. Thankyouforyourattention! Cím: Minta Cím - Előadó: Minta Előadó

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