Journal of Banking and Financial Economics

JBFE No 2/2014

Deep Roots of Fiscal Behavior

Serhan Cevik, Katerina Teksoz



This paper investigates the determinants of fiscal policy behavior and its time-varying volatility, using panel data for a broad set of advanced and emerging market economies during the period 1990–2012. The empirical results show that discretionary fiscal policy is influenced by policy inertia, the level of public debt, and the output gap in both advanced and emerging-market economies. In addition, the paper finds that macro-financial factors (such as real exchange rate, financial development, interest rates, asset prices, and natural resource rents) and demographic and institutional factors (such as the old-age dependency ratio, the quality of institutions, and policy anchors such as fiscal rules and IMF-supported stabilization programs) tend to have a significant effect on fiscal policy behavior. The results also indicate that higher government debt leads to more volatile fiscal behavior, while fiscal rules and higher institutional quality reduce the volatility of fiscal policy over time.


 JEL classification: E60, E62, G01, H30, H62

Keywords: Fiscal policy, fiscal reaction functions, fiscal policy volatility

DOI: 10.7172/2353-6845.jbfe.2014.2.1

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Euro area labour markets: Different reaction to shocks?

Jan Bruha, Beatrice Pierluigi, Roberta Serafini



A small labour market model for the six largest euro-area countries (Germany, France, Italy, Spain, the Netherlands and Belgium) is estimated in a state space framework. The model entails, in the long run, four driving forces: trend labour force, trend labour productivity, long-run inflation rate and trend hours worked. The short run dynamics is governed by a VAR model including six shocks. The state-space framework is convenient for the decomposition of endogenous variables in trends and cycles, for shock decomposition, for incorporating external judgment, and for running conditional projections. The forecast performance of the model is rather satisfactory. The model is used to carry out a policy experiment with the objective of investigating whether euro-area labour markets react differently to a reduction in labour costs. Results suggest that, following the 2008-2009 recession, moderate wage growth would significantly help delivering a more job-intense recovery.


JEL classification: C51; C53; E17; J21

Keywords: Labour market, Forecasting, Kalman Filter

DOI: 10.7172/2353-6845.jbfe.2014.2.2

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Gravity chains: Estimating bilateral trade flows when parts and components trade is important

Richard Baldwin, Daria Taglioni



Trade is measured on a gross sales basis while GDP is measured on a net sales basis, i.e. value added. The rapid internationalisation of production in the last two decades has meant that gross trade flows are increasingly unrepresentative of the value-added flows. This fact has important implications for the estimation of the gravity equation. We present empirical evidence that the standard gravity equation performs poorly by some measures when it is applied to bilateral flows where the parts and components trade is important. We also provide a simple theoretical foundation for a modified gravity equation that is suited to explaining trade where international supply chains are important.


JEL classification: F01, F10

Keywords: Value chains, parts and components trade, gravity, bilateral flows

DOI: 10.7172/2353-6845.jbfe.2014.2.3

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Household Money Holdings in the Euro Area: An Explorative Investigation

Franz Seitz, Julian von Landesberger



In this paper we analyse household holdings of the broad monetary aggregate M3 in the euro area from 1991 until 2009. Households are the largest money-holding sector in the euro area. We develop four models, two in nominal, two in real terms, with satisfactory economic and statistical properties. The main determinants are a transactions variable, wealth considerations, opportunity costs and uncertainty. In particular housing wealth is found to play an important role. The models are robust to different estimation strategies, samples considered and a multitude of misspecification tests. According to our analysis, it is quite apparent that in equilibrium, households jointly determine consumption and broad money holdings which are both influenced by wealth as well as interest rates. The importance of household money holdings for consumption expenditures may cast doubt on a purely passive role for money.


Keywords: money demand, cointegrated VARs, households

JEL Classification: E41, C32, D12

DOI: 10.7172/2353-6845.jbfe.2014.2.4

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Feedback to the ECB’s Monetary Analysis: The Bank of Russia’s Experience with Some Key Tools

Alexey Ponomarenko, Elena Vasilieva, Franziska Schobert



The paper investigates to what extent some basic tools of the ECBs monetary analysis can be useful for other central banks given their specific institutional, economic and financial environment. We take the case of the Bank of Russia in order to show how to adjust methods and techniques of monetary analysis for an economy that differs from the euro area as regards, for instance, the role of the exchange rate, the impact of dollarization and the functioning of sovereign wealth funds. A special focus of the analysis is the estimation of money demand functions for different monetary aggregates. The results suggest that there are stable relationships with respect to income and wealth and to a lesser extent to uncertainty variables and opportunity costs. Furthermore, the analysis also delivers preliminary results of the information content of money for inflation and for real economic development. 


JEL classification: E41, E52, E58

Keywords: Money demand, transition countries, cointegration analysis, inflation, real economic activity

DOI: 10.7172/2353-6845.jbfe.2014.2.5

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