Using a novel regional database covering over 200 elections in several European countries, this paper provides new empirical evidence on the political consequences of fiscal consolidations. To identify exogenous reductions in regional public spending, we use a Bartik-type instrument that combines regional sensitivities to changes in national government expenditures with narrative national consolidation episodes. Fiscal consolidations lead to a significant increase in extreme parties’ vote share, lower voter turnout, and a rise in political fragmentation. We highlight the close relationship between detrimental economic developments and voters’ support for extreme parties by showing that austerity induces severe economic costs through lowering GDP, employment, private investment, and wages. Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment.
Using newly assembled data for 18 advanced economies between 1870 and 2019, I study how monetary policy affects wage inflation and unemployment and document two key findings regarding their tradeoff. First, the wage Phillips curve displays a time-varying slope. Second, the tradeoff becomes weaker in low price inflation environments due to a stronger unemployment rate and a muted wage inflation response to monetary policy. These findings lend support to the idea that monetary policy has state-dependent effects with the central banks’ ability in exploring the tradeoff being impaired by a low price inflation environment.
Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the fiscal transmission mechanism in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier around 2, an employment multiplier of 1.4, and a cost per job created of approximately €30,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, durable consumption, and the labor share together with a significant rise in total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrarily to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across industries, states of the economy, and member states.
Public procurement accounts for one third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase the amount of cash-flow based lending. I use Portuguese administrative data over 2009-2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning an additional €1 from a procurement contract increases firm credit by €0.05 at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash-flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity. Consequently, this enhanced access to credit promotes higher investment and employment with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, I empirically estimate that an additional €1 in public procurement increases regional output by €1.8 with the credit channel accounting for 10% of it
Does the exchange rate regime matter for inflation and economic activity? This paper argues that it does and that there are substantial benefits to a fixed exchange rate regime. At the heart of these benefits lies an increase in commitment for the central bank that reduces the inflationary bias of monetary policy. Using an open economy model we provide an estimate for the credibility of hundred different central banks between 1950 and 2016. Our empirical analysis demonstrates that after pegging the currency to a more credible anchor, the average economy benefits from persistently lower inflation of 3.5% per year, higher temporary economic growth and lower inflation volatility. Moreover, the less credible countries are the ones benefiting the most from committing to a fixed exchange rate regime.
We investigate whether joining the European Monetary Union and losing the ability to set monetary policy affected the economic growth of Eurozone countries. We use the synthetic control approach to create a counterfactual scenario for how each Eurozone country would have evolved without adopting the Euro. We let this matching algorithm determine which combination of other developed economies best resembles the pre-Euro path of twelve Eurozone economies. Our estimates suggest that there were some mild losers (France, Germany, Italy, and Portugal) and a clear winner (Ireland). Nevertheless, a gross domestic product decomposition suggests that the drivers of the economic gains and losses are heterogeneous. In particular, our results show that for the majority of Eurozone countries, Euro spurred government consumption and deterred investment and private consumption. The common currency also stimulated trade for most cases but only Germany and Ireland bear positive net trade benefits.
The economic literature considers voters quasi-rational agents that care about maximizing their individual welfare when deciding on who to vote for. Voters believe that, once a politician is elected, his or her characteristics will affect policy outcomes and consequently their private welfare. To assess whether mayors’ characteristics influence municipalities’ financial performance, I use a dataset composed of 278 Portuguese mainland municipalities from 2003 to 2016. I find that mayors’ age, education, occupation, and tenure influence the level of public investment, tax revenues, debt, and budget balances. Although most of the Portuguese voters only consider candidates’ political affiliation when deciding on who to vote for, my estimates do not show any significant impact of this characteristic on the financial indicators analyzed. Therefore, these results question the way Portuguese vote by arguing that, when voting for local government representatives, they should care about other characteristics among candidates besides their political affiliation.