Working papers

We estimate the impact of tax shocks on output across the business cycle. We do so for a panel of advanced economies using a harmonized dataset of narrative-identified exogenous tax changes and a smooth transition local projection model. The output response to tax shock is significant only during economic expansions-in recessions, the tax multiplier is insignificant, both in the short-and medium term. A unique panel of disaggregated tax changes reveals that the state dependence of the tax multiplier is predominantly driven by income and indirect taxes. Our results exhibit no asymmetry in the direction of the tax change. A model with an occasionally binding borrowing constraint shows that our findings stem from a cyclical labor supply response of hours worked to tax changes and confirms that differences in tax multipliers across the business cycle depend on the type of tax.

DNB Working Paper (2020 version)

We investigate the relationship between fiscal policy and inflation dynamics in the euro area, with a focus on the post-pandemic inflation surge. Using a BVAR identified via sign restrictions, we disentangle the effects of various demand- and supply-side shocks, including fiscal policy, on inflation. First, while both positive demand and adverse supply shocks contributed to the inflation surge, demand shocks were relatively more important. Second, fiscal stimulus played a substantial and progressively increasing role, particularly in influencing domestic-based measures of inflation. Finally, the relative impact of fiscal shocks on inflation dynamics varies across (selected) euro area countries.

SUERF Policy Brief

DNB Working Paper (2024 version)

We estimate the contribution of discretionary fiscal policy measures to euro area inflation in the post-pandemic era using an extension of Bernanke and Blanchard's (2024) semi-structural model. Since the pandemic, aggregate discretionary fiscal measures had a modest yet progressively increasing positive contribution to inflation that partly worked through an indirect effect on wage growth and inflation expectations. However, net indirect taxes helped to contain inflationary pressures, both during the pandemic and energy crises. Fiscal policy, therefore, can be a powerful tool to smooth the inflationary effects of adverse supply shocks, yet may also increase inflation persistence if fiscal stimulus is not timely withdrawn.

SUERF Policy Brief

We show that a negative relative demand shock in a sector with downwardly rigid prices, like the service sector, can generate substantial inflation. Such a shock induces an equilibrium decline in the relative price of services. If price adjustment costs are non-existent or symmetric, then this takes place through a simultaneous decline in services prices and increase in goods prices, resulting in, on net, little inflation. If prices in the services sector are downwardly rigid, however, this takes place mostly through an increase in goods prices, resulting in inflation. To illustrate the relevance of this mechanism in practice we provide evidence on the downward rigidity of person-to-person service prices during the Covid pandemic of 2020-2021. We then introduce downward price rigidities in a multisector New-Keynesian model and show how they can result in inflationary relative demand shocks.

Some countries currently face historically low interest rates on government debt due to a positive 'convenience yield' arising from an excess demand for safe and liquid assets. This low interest rate environment has raised interest in the role of fiscal stabilization policy. We study the convenience yield and its implications for fiscal policy in a New Keynesian model where households derive utility from government bonds. We find that the convenience yield expands the set of sustainable fiscal policies and renders counter-cyclical fiscal policy successful in stabilizing business cycle fluctuations. Conveniently, fiscal policies that stabilize output rather than debt are feasible, welfare enhancing and can even reduce the risk of exploding debt dynamics if the convenience yield is positive.

Slides

INFER Brief

We study the macroeconomic stabilization properties and welfare implications of a centralized fiscal capacity in a New Keynesian model for a two-country monetary union. When fiscal capacity investments respond endogenously and counter-cyclically to the business cycle, they enhance welfare and promote business cycle synchronization across member states. Exogenous fiscal capacity investments also raise welfare, provided they boost productivity and avoid exacerbating macroeconomic imbalances. If they fail to sufficiently enhance productivity, such investments risk aggravating macroeconomic variability. Our findings underscore the importance of the quality of public investments financed by a fiscal capacity under monetary union.

We provide new evidence on the international spillover effects of US monetary policy through global commercial real estate (CRE) markets. Using a global VAR-X model that exploits both city- and country-level data, we account for spatial dependencies arising from cross-border investor ownership of CRE. A US quantitative easing shock leads to a persistent rise in CRE prices, both within and outside the US, and an expansion of credit, but mostly in the US. To interpret these findings, we develop an open economy New Keynesian model with CRE markets, which highlights the role of increased domestic demand for foreign CRE as a key transmission channel. Moreover, the model reveals that spillover effects can spill back to the US via trade linkages, amplifying the initial effects of US monetary policy.