Essays on macroeconomic policy

Abstract

This thesis looks at the interactions between fiscal, monetary and structural policies along three dimensions. The first paper looks at the dynamic effects of structural reforms when monetary policy is constrained. Structural reforms entail short run output costs that can be o set by a demand expansion. When monetary policy cannot carry out this short run expansion, there is a role for fiscal policy. In this case, reforms imply a fiscal cost in the short run, which can be justified by a long run improvement in public finances. This paper quantifies the short run costs and long run benefits of potential reforms in Europe. Results show that output losses from reforms can be fully o set with a modest fiscal stimulus. While for product market reforms this cost is justified by the long run fiscal gains, labour market reforms alone do not provide a sufficient boost to long run tax revenues. The second paper looks at the transmission of fisscal policy in an economy characterised by tax evasion and corruption. Cross-country evidence highlights the importance of these features in determining fiscal multipliers, and VAR evidence suggests that spending cuts reduce tax evasion, while tax hikes increase it. In a model with an underground sector, spending cuts reallocate production towards the formal sector, thus reducing tax evasion. Tax hikes increase incentives to produce in the less productive informal sector, implying higher output losses. Embezzlement of public revenues further amplifies these losses by requiring larger tax hikes to reduce debt. The model corroborates the evidence of increased levels of tax evasion during recent fiscal consolidations in southern Europe. The final paper compares price-based and quantity-based fiscal adjustments when in action is low. Focusing on the public wage bill, this translates to fiscal consolidation through cuts to public wages or public employment. In both cases, low inflation eliminates the expansionary e ects of the consolidation for the private sector. The drag in economic activity is substantially amplified, with increased debt-to-GDP levels during the consolidation.