Littérature scientifique sur le sujet « Fiscal policy – Europe, Central »

In the past twelve months the government budget situation in Germany has improved markedly, and the budget deficit has moved from 3.2 per cent of GDP in 2005 to 1.7 per cent in 2006, with further improvements in prospect. Over the same period in France, the budget deficit moved marginally from 3 per cent of GDP in 2005 to 2.5 per cent of GDP in 2006. The prospects for further improvement appear limited as the new government plans to cut taxes to stimulate the economy. Projections for budget deficits are very uncertain, as they are the difference between two large numbers (receipts and spending) that are difficult to predict accurately. Figures 1 and 2 plot the errors around our budget projections for France and Germany based on stochastic simulations on NiGEM. The 95 per cent confidence limit for our forecast one year ahead is around 1 per cent of GDP around our central forecast, and uncertainty increases into the future. As we can see from figures 3 and 4, our forecast errors for France and Germany have been well within the 95 per cent bands in the past three years, except for our one year ahead forecast for Germany for 2006. The budget improved by 1.5 per cent of GDP more than we had anticipated, and this appears to have been due to unexpectedly high tax receipts, rather than to changed policy.

This study aims to estimate the impact of three fiscal instruments (direct tax revenue, indirect tax revenue and government consumption expenditure) on the economic growth of ten new European Union member states from Central and Eastern Europe– Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. We examine the hypothesis about the effect of expansionary fiscal policy on economic growth. The study employs a vector autoregression and annual Eurostat data for the period 2007–2019. Four control variables (the shares of gross capital formation, household consumption, exports in GDP, and the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on economic growth. The empirical results indicate that the real output growth rate in the ten new member states of the European Union is negatively affected by direct tax revenue, while economic growth in the euro area, exports and gross capital formation are positively related to economic growth. The results also imply that government consumption and indirect tax revenue have no significant impact on the growth rate of real output of the ten studied countries from Central and Eastern Europe. It may be inferred that policymakers in the new European Union member states can raise economic growth by encouraging exports and investment and by lowering the share of direct tax revenue in GDP. From the three analyzed fiscal instruments (direct taxes, indirect taxes and government consumption expenditure), only one has proven to be effective in the case of the new member countries.

There are new monetary and fiscal frameworks in place for the countries in the Euro Area. The European Central Bank has a remit to maintain price level stability in the medium term, and it has developed a two pillar strategy, with interest rates being set in relation to a reference value of M3 and general (inflationary) conditions. We discuss an ideal type representation of this framework and examine the potential effects of a fall in the euro. Fiscal policy in Europe is now based on guidelines from the Stability and Growth Pact and we discuss the role of commitment in this framework as well

AbstractThis paper considers the effects of fiscal governance in Central and East European countries 1998–2008. The first part makes predictions about which form of fiscal governance fits which form of government. Under multi-party coalition governments, fiscal contracts where governments make political commitments to multi-annual fiscal plans work well. In countries where two political blocks face off against one another, delegation based around a strong finance ministry should be most effective. The second part examines electoral and party systems, which affect the form of government in place. The third part documents norms, rules, and institutions in place. The final section considers the joint effects of fiscal governance on fiscal outcomes. On balance, the underlying political climate is crucial for determining what types of fiscal norms, institutions, and rules function best. The more countries diverge from their expected form of fiscal governance, the greater the increase in a country's debt burden.

The literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics: Capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible. Similarly, examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether. We develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence. We test the model using data from OECD countries. We find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low; preelectoral fiscal expansions occur when the exchange rate is fixed. We then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in Europe.

We discuss the main fiscal policy issues in Europe, focusing on two that are at the core of the current debate. The first is that the government deficit and debt were, from the outset, the key objects of contention in the debate that led to the creation of the Eurozone, and they still are. The second issue is that a currency union implies the loss of a country-specific instrument, a national monetary policy. This puts a higher burden on fiscal policy as a tool to counteract shocks, a burden that might be even heavier now that the European Central Bank has arguably reached the Zero Lower Bound. Two obvious solutions are mutual insurance (or risk-sharing) amongst countries and a centralized stabilization policy. Yet both have been remarkably difficult to come by, especially due to political constraints. We review and discuss the relative merits of several proposals for increased insurance or centralization, or both. We conclude with an early discussion of the implications of the COVID-19 crisis for European fiscal policy reform and an assessment of the current fiscal measures.

The European Council's Maastricht Agreement maps out a precise route to monetary union and the eventual introduction of a common currency. My discussion begins with a look at the general arguments for and against monetary union. I shall then discuss the proposed constitution of the European Central Bank and whether it is likely to be conducive to monetary stability, together with some of the problems posed by the transition to the new regime. Finally, I will turn to the issue of rules for the conduct of fiscal policy and the question of “fiscal federalism.”

Abstract: In this paper we examine the impact of self-imposed governmental constraints (by tripartite arrangements) and the timing of reforms (window of opportunity) on the successful implementation of large-scale reforms (fiscal stabilisation policy) in seven Central and Eastern European Countries. By analysing different sources and conducting interviews with experts and members of the tripartite councils, we consider the impact of tripartite structures on the government decision-making process in Bulgaria, Estonia, the Czech and Slovak Republics, Hungary, Poland and Slovenia. Our findings indicate that the early and continuously stabilising countries secured their policy-making by factors other than tripartite bargaining. In those countries that took a second, later approach to fiscal stabilisation, with a more confrontational style and stronger trade unions, tripartite bargaining proved to be a successful instrument.

In this research, we evaluated the impact of fiscal decentralization on GDP per capita growth. Using the unbalanced panel data, the authors assessed the interconnections between fiscal decentralization – considering its expenditure and revenue aspects as well as tax autonomy – and economic growth for Central and Eastern European countries from 1995 to 2018. In the examined states, the expenditure decentralization exceeded the revenue one. We found out that revenue decentralization and tax autonomy adversely affected economic growth. But expenditure decentralization associated with a positive GDP growth rate. In this paper, we also explored the peculiarities of fiscal decentralization reform. Structural transformations radically reduced the size of the public sector in Central and Eastern Europe, which had a positive effect on the economy. The vital components of local budgets tax revenues are personal income tax and the property taxes. The most effective mechanism for the property tax base’s determination arises from the value of the real estate or land. Keywords: fiscal policy, fiscal decentralization, tax autonomy, property taxes, economic growth

Competition policy is an important tool for assurance of the efficient allocation of resources in functioning market economies. Applicability of modern competition policy to situations in former planned economies, however, raises doubts because of fundamentally different states of competition in such markets. This study analyses development of competition policy in Poland, Hungary and the Czech Republic. Particular attention is given to the influence of the EU competition policy in the framework of negotiations for final membership in the EU.
This study proposes reassessment of the competition policy of the three countries in order to better tackle the economic complexities of transition to fully functioning market economies. Harmonization of competition policy of the three candidate countries for EU membership with competition policy of the EU assumes appropriateness of EU competition policy for transition situations. Contrary to this assumption, the thesis argues that competition policy in transition should be tailored closely to the needs of transition. Since harmonization of competition law is only an instrument to evaluate whether a candidate country has a functioning market economy that can be integrated in the EU Internal Market, competition policy aimed at better promoting competition should be welcomed.

Mestrado em Economia Monetária e Financeira
This work provides empirical evidence for a sizeable, statistically significant neg¬ative impact of the quality of fiscal institutions on public spending volatility for a panel of 25 EU countries in the 1980-2007 period. Following Fatas and Mihov (2003), the dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions and which may only reflect exogenous political preferences. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility. This relationship is based mainly on the fact that countries with more checks and balances make it more difficult for governments to change fiscal policy for reasons un¬related to the current state of the economy. Our results also confirm the findings of Furceri and Poplawski (2008) that bigger countries have less public spending volatil¬ity, while the stabilising function that bigger governments exert also contributes to lower policy volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that high concentration of parliamentary seats in a few parties would increase public spending volatility. In addition, the run-up to EMU and the SGP dummies have the expected negative sign on policy volatility, while for the new EU members, the results also give some support to reduced levels of policy volatility, reflecting recent improvements in public finances.
Este trabalho documenta empiricamente a existência de um impacto negativo, de magnitude considerável e, estatisticamente significativo da qualidade das instituições orçamentais sobre a volatilidade da despesa pública para um painel de 25 países da UE no período 1980-2007. Seguindo Fatás e Mihov (2003), a variável dependente e a volatilidade da política orçamental discricionária, que não representa reacções a mudanças nas condições económicas e que pode apenas reflectir preferências políticas exógenas. Os resultados de base fornecem então, suporte para o fortalecimento das instituições de modo a lidar com níveis excessivos de volatilidade da política discricionária. Esta relação é baseada sobretudo no facto de que em países com melhores instituições é mais difícil aos governos alterarem a política orçamental por razoes não relacionadas com o estado actual da economia. Os nossos resulta¬dos também confirmam os alcançados por Furceri e Poplawski (2008) de que países maiores tem menor volatilidade da despesa publica, enquanto que a função de estabilização exercida por governos maiores também contribui para reduzir a volatilidade da política. Em contraste com estudos anteriores, os factores políticos não parecem ser importantes, com excepção do índice de Herfindahl, que sugere que elevada concentração de assentos parlamentares em poucos partidos iria aumentar a volatilidade da despesa pública. Adicionalmente, as dummies para a UEM e para o PEC tem o sinal negativo esperado, enquanto que para os novos membros da UE, os resultados também fornecem algum suporte para níveis reduzidos de volatilidade da política, reflectindo melhorias recentes nas finanças públicas.

The thesis has two overarching objectives. One is to understand monetary policy in the Czech Republic, Hungary, Poland and Slovakia during 1990s and early 2000s; the other to use these findings to shed light on monetary policy in less developed, but highly open and financially integrated market economies. In order to achieve its aims, it analyses specific factors with significant influence on the conduct or outcomes of monetary policy in these countries; it analyses the transmission mechanism of monetary policy in Central Europe, based on a technique called vector autoregression; and examines use of principal types of constraints on policy discretion, such as central bank independence, exchange rate commitments and domestic targets for monetary policy, in countries of the sample. The thesis finds that strong internal and external pressures, together with frequent bouts of fiscal irresponsibility and sizeable additive and parametric uncertainty regarding the working of the economy, led, in all four countries, to pronounced macroeconomic vulnerability and a need for periodic adjustment to dangerous fiscal and external imbalances. Reaction of policy-makers in countries of the sample to this environment can be characterized as discretion constrained by a strong nominal anchor and real exchange rate considerations. Experience of Central European countries shows that various elements of a commitment by monetary authorities are not duplicatory or contradictory, but interdependent in contributing to the goal of constraining discretion. During the period studied, the two key overall developments in policy were the gradual shift of emphasis from exchange rate targets to domestic targets and (within domestic targets) a shift from monetary targets to inflation targets. This approach has been largely successful.

Transition vers l’économie de marché et accession a l’Union Européenne ont profondément modifié la structure et le fonctionnement des économies d’Europe Centrale et de l’Est. Cette thèse propose une analyse des évolutions observées sur les marchés du travail régionaux et nationaux des nouveaux pays membres de l’Union Européenne ainsi qu’une évaluation des politiques publiques mises en œuvre dans ce contexte de transition économique. L’analyse du processus d’appariement entre travailleurs et employeurs révèle l’importance de la demande de travail dans la création de nouvelles embauches en Lettonie, Slovénie et Estonie et souligne la nécessité d’intégrer flux (chômeurs et emplois vacants) et effets spatiaux dans la modélisation. L’efficacité des politiques publiques est attestée au niveau macro et microéconomiques et démontre l’influence positive des programmes de formation sur les taux de sortie du chômage et l’employabilité des participants
During the transition to market economy and the accession to the EU Central and Eastern European countries have witnessed remarkable changes in the structure and functioning of national economies. This thesis aims to assess the development of aggregate and regional labour markets in new EU member states through this eventful period and to investigate the role of active labour market policy in moderating the consequences of transitional shock and improving the performance of the labour market. The analysis of the process of worker-firm matching in Latvia, Slovenia and Estonia reveals that in transition - EU accession context the hiring process is labour demand driven and displays the existence of stock-flow patterns and spatial spillovers. The effects of ALMP programs are confirmed to be positive at both macroeconomic and individual levels: involvement of unemployed in training increases aggregate outflows from unemployment to jobs and increases individual employability of participants

Since economic transition began in many Central East European Countries (CEECs) nine to ten years ago, a number of significant features of development have emerged in relation to changes within CEEC forest sectors. These include changes in ownership of both the forest resource and the forest industry, in forest policy and legislation, and in the production, consumption, trade and marketing of forest products. The objective of this thesis is to analyse recent and prospective forest sector developments in Central Europe, and to consider the implications of these developments on the economy, society, and environment of three Central European study countries (Poland, the Czech Republic and Hungary), and on Central and Eastern Europe as a whole. Policy analysis is carried out through a review of forest sector policies and way in which these policies developed during the second half of the twentieth century. Based on the content of new Forest Acts, a description of current policy and an analysis of the implications of new policies is undertaken. Institutional analysis evaluate the extent to which the state has retreated from its original roles and the private sector has emerged to take on an increased role within the sector. Product market analysis is undertaken through the construction of a forest sector scenario model which projects future levels of production, consumption, import and export of seven forest products, at 5-year intervals, to the year 2050. Projections are made under three scenarios, based on differing rates of future economic growth. In the three study countries, the forest sector has adapted rapidly to the market economy system. New forest policies have been quickly developed and implemented to address the different circumstances in which the sector is in. A well managed forest resource supplies quality raw timber to a modernised and growing processing sector, which in turn is producing an increasingly wide range of timber products to growing domestic and international markets.

AbstractEconomic and monetary union is incomplete, not least because there is no common fiscal policy and the European Central Bank is not the lender of last resort. The EU’s supervisory machinery introduced after the financial crash is due for an overhaul. A watershed was reached when eurobonds were launched to recover from the shock of the COVID-19 pandemic. But these eurobonds should be scaled up, made permanent and fully federal. The EU budget should be subdivided into federal and national parts, with the former part funded by direct EU taxation.

James Buchanan and Richard Wagner in their famous book “Democracy in Deficit” note that democracy has not enough fiscal discipline because the citizens’ representatives are chosen in the election and they take the budgetary decisions seeking the re-election. Their theory of public choice may suggest the existence of a positive relationship between the democracy’s quality and the public debt level reflecting the long-lasting consequences of the budgetary decisions of policy-makers. Thus, we formulate the following research question: Is democratic system harmful for public finance? To operationalize the democratic system, we use five democracy indices (i.e., electoral, liberal, participatory, deliberative, and egalitarian), and the public debt to operationalize the threat for public finance. Conclusions put in a new light the theory, as first the study confirmed that there are statistically significant relationships between democracy’s quality and public debt and, however not in case of every democracy index and every European country.

Using a newly created dataset of detailed and disaggregated military expenditures, this paper studies the impact of military expenditures on economic growth in nine Central and Eastern European countries in 1999-2021. The results of the estimation of a Barro-type endogenous growth model with military expenditures confirm a negative and significant influence of different kinds of military expenditures on economic growth in the long run, and identify personnel expenditures and labour market adjustments as one of the most important channels of influence. To measure the impact of the short-run effect, fiscal multipliers of military expenditures were estimated using SVAR model and significantly negative values were obtained for aggregated and disaggregated military expenditures. Military expenditures tend to crowd-out non-military government expenditures in some cases.

To induce a taxpayer to act in a manner consistent with the objectives of the tax policy of the state, it is necessary to apply appropriate tax instruments, which are measures for the implementation of the incentive function of agricultural tax. Th ese primarily include tax exemptions and reliefs. The subject of this study includes issues related to the use of tax instruments to stimulate the economic investments of agricultural taxpayers. The author’s research intention is to demonstrate the truthfulness of the thesis that the effectiveness of these incentives is not optimal and can be increased by eliminating legal measures not adapted to the needs of fiscal stimulation. To achieve this objective, it is necessary to determine in the first place what is characteristic of each preference aimed at increasing economic investment in the farm. On this basis, in the second place, further groups of stimuli may be distinguished following the analysis of their features, both common and separate. Thanks to this, the disadvantages of the legal provisions applicable to stimulation preferences in the strict and largo sense are presented in separate chapters of this study

Asset markets and the asset prices affect financial institutions, consumers, producers and policy makers while they are making decisions. There is an important relationship not only between the financial market and banking system but also between the housing market and the credit market. Therefore, the study analyzes the impact of fiscal policy on asset prices by using beyasian vector autoregressive models. The sample data has been gathered from the Central Bank of the Republic of Turkey. The aim is to demonstrate the effects of fiscal policy shocks on stock prices and housing prices. The data covers the period between 1988:Q1 and 2014:Q2. Overall, the results confirm that the spending shocks coming from fiscal policy have a greater influence on the stock prices. In addition, the government revenue shocks are more influential on the house prices compared to the stock prices in Turkey.

The pandemic recession was fundamentally different from ordinary recessions, and thus required a different policy response. We review the empirical literature on fiscal consolidation and fiscal multipliers. Then, we assess the impact of fiscal policies on the pace of recovery and public debt sustainability. A premature or a strong fiscal consolidation might result in lower rates of economic growth and elevated public debt as a share of GDP. We critically analyze different adjustment paths across Europe and offer policy-relevant recommendations. The issue is particularly relevant for countries with a strong fiscal stimulus and moderate to high levels of public debt.

In recent years there has been considerable interest in the development of electronic money schemes. Electronic money has the potential to take over from cash as the primary means of making small-value payments and could make such transactions easier and cheaper for both consumers and merchants. Electronic money is a record of the funds or "value" available to a consumer stored on an electronic device in his or her possession, either on a prepaid card or on a personal computer for use over a computer network such as the Internet. This paper argues that e-money, as a network good, could become an important form of currency in the future. Such a development would influence the effectiveness and implementation of monetary policy. If an increased use of e-money substantially limits demand for central bank reserves, it would require changes in the operational target of the central bank and a closer coordination of monetary and fiscal policies.

In the early 1990s, with the fall of communism and the dissolution of USSR, the so-called transition economies have emerged in Eastern Europe and the former USSR. Within this transition period from planned to market economies, fiscal and monetary discipline has not been adequately emphasized while the crucial aim of these economies is to realize price liberalization, privatization and economic stabilization. Hence, the problems of income distribution and growth have not been able to be solved. In this paper, we analyze the relations between economic growth and fiscal and monetary discipline in the economies of Central Asia and Caucasia since their independence. We use WDI-2010 data of the World Bank in order to develop a model including fiscal and monetary variables, which aims to represent the growth experiences of the aforementioned countries.

As a monthly basis, 6% of tax revenues collected within provincial borders is allocated by central government as fiscal transfers to 30 metropolitan municipalities of Turkey. These transfers are the most important external revenue of the metropolitan municipalities. The fact that metropolitan cities have a different level of wealth causes the difference between the amounts of taxes collected in the provinces. The lack of tax apportionment policy further increases the disparity of fiscal transfers, since a significant part of major taxes are collected in a few metropolitan cities. In this study, a simulation of tax apportionment is carried out. Taxes and fiscal transfers before and after tax apportionment are compared. Inequality measures (e.g. Gini coefficient) show that fiscal equalization is promoted after tax apportionment.

Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg’s critique of the ECB’s crisis response is misguided and that his proposal to deepen and reinforce the ECBs role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg’s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.

- To understand contemporary challenges to European democracy, it is crucial to look beyond the surface of politics and consider the deeper relationship between democracy and the economy. Instead of focusing exclusively on the rise of ‘populism’, it is necessary to acknowledge the multiplicity of threats to European democracy, in particular those arising from the structure of European economies and economic policymaking. - Understanding these weaknesses in the functioning of European democracies is crucial to an effective approach to future economic transformations, in particular the green transition, but also for dealing effectively and equitably with challenges such as higher inflation. It is important that the relevant policy changes and responses are democratically legitimate and do not foster the kind of political backlash that previous economic transformations did. - Over the past 40 years, economic inequality – ranging from income inequality to discrepancies in wealth and economic security – has widened throughout developed economies. In turn, these developments have generated increasing political inequality, as economic policymaking has served the interests of the well-off. - Democratic systems have also been made less responsive to electorates through the ‘depoliticization’ of policymaking, in particular economic policy, as a result of its insulation from national-level democratic scrutiny. The expansion of technocratic modes of governance – notably through independent central banks and EU-level institutions – has in many cases entrenched the policy preferences of specific groups in institutions removed from direct democratic control. - As this depoliticization has to a large extent made democratic contestation over economic policy redundant, politics has increasingly been polarized around ‘cultural’ questions. But such a focus on culture is unlikely to address the inequalities behind the dysfunction of democracies in Europe. - Strengthening European democracy requires a ‘repoliticization’ of economic policymaking, including both fiscal and monetary policymaking. In the specific context of the EU, this would mean opening up more policy space for national decision-makers and parliaments – in particular by giving them a more influential role in fiscal policy, and by making monetary policy more democratic.

This report is part of a larger cross-country comparative project and constitutes an account and analysis of the measures comprising the Norwegian national response to the COVID-19 pandemic during the year of 2020. This time period is interesting in that mitigation efforts were predominantly of a non-medical nature. Mass vaccinations were in Norway conducted in early 2021. With one of the lowest mortality rates in Europe and relatively lower economic repercussions compared to its Nordic neighbours, the Norwegian case stands unique (OECD, 2021: Eurostat 2021; Statista, 2022). This report presents a summary of Norwegian response to the COVID-19 pandemic by taking into account its governance, political administration and societal context. In doing so, it highlights the key features of the Nordic governance model and the mitigation measures that attributed to its success, as well as some facets of Norway’s under-preparedness. Norway’s relative isolation in Northern Europe coupled with low population density gave it a geographical advantage in ensuring a slower spread of the virus. However, the spread of infection was also uneven, which meant that infection rates were concentrated more in some areas than in others. On the fiscal front, the affluence of Norway is linked to its petroleum industry and the related Norwegian Sovereign Wealth Fund. Both were affected by the pandemic, reflected through a reduction in the country’s annual GDP (SSB, 2022). The Nordic model of extensive welfare services, economic measures, a strong healthcare system with goals of equity and a high trust society, indeed ensured a strong shield against the impact of the COVID-19 pandemic. Yet, the consequences of the pandemic were uneven with unemployment especially high among those with low education and/or in low-income professions, as well as among immigrants (NOU, 2022:5). The social and psychological effects were also uneven, with children and elderly being left particularly vulnerable (Christensen, 2021). Further, the pandemic also at times led to unprecedented pressure on some intensive care units (OECD, 2021). Central to handling the COVID-19 pandemic in Norway were the three national executive authorities: the Ministry of Health and Care services, the National directorate of health and the Norwegian Institute of Public Health. With regard to political-administrative functions, the principle of subsidiarity (decentralisation) and responsibility meant that local governments had a high degree of autonomy in implementing infection control measures. Risk communication was thus also relatively decentralised, depending on the local outbreak situations. While decentralisation likely gave flexibility, ability to improvise in a crisis and utilise the municipalities’ knowledge of local contexts, it also brought forward challenges of coordination between the national and municipal level. Lack of training, infection control and protection equipment thereby prevailed in several municipalities. Although in effect for limited periods of time, the Corona Act, which allowed for fairly severe restrictions, received mixed responses in the public sphere. Critical perceptions towards the Corona Act were not seen as a surprise, considering that Norwegian society has traditionally relied on its ‘dugnadskultur’ – a culture of voluntary contributions in the spirit of solidarity. Government representatives at the frontline of communication were also open about the degree of uncertainty coupled with considerable potential for great societal damage. Overall, the mitigation policy in Norway was successful in keeping the overall infection rates and mortality low, albeit with a few societal and political-administrative challenges. The case of Norway is thus indeed exemplary with regard to its effective mitigation measures and strong government support to mitigate the impact of those measures. However, it also goes to show how a country with good crisis preparedness systems, governance and a comprehensive welfare system was also left somewhat underprepared by the devastating consequences of the pandemic.

In order to enhance fiscal sustainability and regain “investment grade” credit rating, in 2011 Colombia implemented a fiscal rule (FR) on the Central Government's structural balance. Investment grade was rapidly attained, and FR targets were complied with, until 2019. Using the Synthetic Control Method, we provide evidence that the FR promoted fiscal discipline. Nevertheless, public debt has increased continuously and is now expected to exceed 60 percent of GDP, in large part driven by the pandemic. We argue that the FR should be reformed so as to incorporate a debt anchor. Using a regime change model and the IMFs buffer risk methodology, we show that the prudent debt level should not exceed 48 percent of GDP and that in order to achieve this in the medium term, a policy mix increasing revenues to 17.8 percent of GDP (from 15.5 percent during 2016-2019) and reducing primary expenditure to 15 percent (from 16 percent during 2016-2019) is required. FR's performance would also benefit from changes in its institutional design.

This paper aims to provide evidence on the relationship between fiscal and monetary policy in Colombia through an empirical exploration of the credit risk channel. Under this approach, fiscal policy plays an important explanatory role in the sovereign risk premium, which, in turn, could affect the exchange rate and inflation expectations. The Central Bank reacts to inflation expectations using the policy interest rate; consequently, such reaction could be indirectly influenced by fiscal behavior. Using monthly data from January 2003 to December 2019, we estimate both jointly and independently the reduced-form core equations of a system that describes the credit risk channel in a small open economy. Our findings are in line with the model predictions. Fiscal policy affected the country’s sovereign risk during this period, but only slightly. Hence, there is insufcient evidence to sustain the idea that monetary policy has been signifcantly influenced by government fiscal management.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.