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.

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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).

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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).

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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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