Research

We find that fiscal consolidations raise productivity significantly and persistently. In our data, a consolidation that lowers regional public spending by 1% on impact raises TFP by about 1% on impact and about 2% after two years, even as economic activity contracts. We document this using two innovations. First, we build a novel regional utilization-adjusted TFP series for Europe, covering 139 NUTS 2 regions in ten euro area countries over 1999–2019, which corrects the Solow residual for cyclical variation in capital utilization and labor effort. Second, we isolate plausibly exogenous spending cuts with a Bartik-style instrument that interacts pre-accession regional spending shares with narratively identified national consolidation episodes. Productivity gains are larger than those observed in comparable downturns without consolidation and arise almost entirely within sectors and coincide with net exit of establishments, rather than reflecting reallocation across sectors. 

Europe’s defense spending is undergoing a historic shift. With NATO members expected to reach 2% of GDP and discussions underway to increase targets to 5% by 2035, this paper examines the possible macroeconomic consequences of such rearmament using two complementary approaches. First, using an annual panel dataset covering 27 EU countries over the period 1989–2023, we show that past national defense spending has stimulated economic activity in the short term, and entailed sizable cross-border spillovers. Importantly, we find that spending multipliers varied considerably across countries and over time: they tended to be larger when import intensity is low, fiscal space (captured by sovereign yields spread) is ample, and public investment efficiency is high. Second, a novel high-frequency dataset of monthly defense procurement contracts from Opentender, covering EU-27 countries from 2009 to 2023, allows for improved causal identification using fiscal news and instrumental variables based on European aggregate defense procurement and each country’s geographic proximity to major adversaries. The estimates corroborate the positive effects of defense spending on output and show that equipment procurement has the strongest relative impact. Given the larger and more synchronized nature of the current European defense buildup relative to past national episodes in our sample, multipliers might fall below historical estimates, especially if monetary policy is not accommodative. 

This paper documents earnings dynamics over the life-cycle and income level using a large administrative database from German tax records. I find that labor earnings display important deviations from the typical assumptions of linearity and normality. For the bottom earners, large income changes are driven equally by hours and wages which is consistent with transitions between labor status or jobs, whereas for those at the top, earnings changes are mainly induced by wage rate growth. There are also asymmetries in mean reversion of earnings growth mainly driven by the asymmetric hours dynamics. Finally, there is no evidence of an added-worker effect but government insurance and income pooling can mitigate the pass-through of individual earnings changes to the household level and attenuate the deviations from normality of the male earnings growth distribution.