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AbstractEU fiscal rules have been suspended until 2024. European policymakers are considering whether to reinstate the existing fiscal rules or to define a new framework. Member States must have enough fiscal space. But the sustainability of public debt must be safeguarded. We use a nonlinear dynamic model to test if a primary balance adjustment rule can preserve debt sustainability in the presence of interactions between fiscal policy, economic growth, and interest rates. We find that a dynamic adjustment rule to changes in debt service can reduce the equilibrium debt ratio, even stabilizing the associated risk premium.

PurposeIn this paper, the authors study the long-run determinants of total factor productivity (TFP) in three major European economies over the period 1983–2017, namely Germany, France and Italy.Design/methodology/approachThe authors focus on the capital misallocation effects, scale effects and labor misallocation effects. To this end, the authors study how real interest rate shocks, real exchange rate shocks, real wage shocks and changes in labor regulation affected TFP in major European countries over the last decades. The authors employ a theoretical and an empirical model to investigate the issue. The empirical results are obtained using a VAR model for estimation.FindingsA stripped-down model of labor market in open economy with technology progress allows to identify the relevant variables affecting TFP. On the empirical ground, the authors find a positive relationship between TFP and real interest rate in the long run. Importantly, the authors detect a positive relationship between TFP and real exchange rate. Further, the authors show that the TFP can respond positively to a stricter labor market regulation and to a higher real compensation per employee. The results provide support to the idea that TFP has a positive relation with prices in the long run, while it may be biased along the cycle because of price rigidity.Research limitations/implicationsThe present model is stylized and may not capture all of the details of reality. The analysis should be extended to a larger number of countries. Technology progress could be proxied using different variables, as the R&D expenditure or the number of patents. Micro data, for specific sectors and industries, can improve the quality of the empirical investigation.Practical implicationsMainly the authors find that TFP has a positive relationship with price changes in the long run, while it may be biased along the cycle because of price stickiness. Capital misallocation and labor misallocation can negatively affect TFP. Thus, the observed divergences in European TFP can be traced back to the misallocation effects attributable to the decrease of real interest rate and real wages, together with the raising labor flexibility. Mainly, the authors detect a positive long-run relationship between TFP and real exchange rate. This outcome strengthens the supply-side view of the relationship between productivity and real exchange rate.Social implicationsThe authors believe that the present setup can be helpful to reflect critically on the nodes at the core of the productivity slowdown and asymmetries in the eurozone. The aim is to implement renewed policies in order to favor economic growth, convergence and stability in the euro area.Originality/valueThis research addresses the issue of asymmetries among European economies by focusing on the role played by real prices in the long run. Traditionally, the dynamics of TFP have been attributed only to technological components, human capital and knowledge. This work shows that the dynamics of prices such as the real interest rate, the real exchange rate and the real wage can also influence the technological process by pushing the production system toward choices that are not always optimal for economic growth. An interesting result of this research concerns the positive relationship between real exchange rates and TFP in the long term, evidence of an important supply-side effect on the technological process.

AbstractThe aim of this paper is to study the long-run cointegrating relationship ofTFPin a panel of five large European economies, namely France, Germany, Italy, Spain, and UK. We test whetherTFPis determined by the so-called "capital misallocation effects, scale effects, and labor market effects". By considering aggregate data, over the period 1983–2017, we employ dynamic panel cointegration techniques to identify the long-run component ofTFP. We get two main results. First, the interest rate, the real compensation and the real exchange rate have a positive impact on TFP. Then, the incidence of temporary employment (a proxy of labor market flexibility) has a negative effect onTFP. Moreover, for robustness, we run a panel VECM to check for causalities among the variables. Notably, this further excercise confirms the existence of a strong and positive long-run relationship betweenTFPand prices. We conclude that coordinated policies on the issue of interest rate, exchange rate, labour cost and regulation, may allow to reassemble the productivity slowdown puzzle and strengthen the European economic structure.

AbstractIn this paper, we study the dynamic relationship between the public debt ratio and the inflation rate. Using a non-linear macroeconomic model of difference equations, we analyze the role of monetary and fiscal policy in influencing the stability of the debt ratio and inflation. We get three main results. First, we find that, in a low inflation scenario, money finance can be helpful in stabilizing the debt ratio. Second, we show that in a dynamic setting, standard Taylor rules may not be sufficient to control inflation. The Central Bank's credibility in driving inflation expectations is indeed crucial to control price developments and to achieve macroeconomic stability. Finally, an active budget adjustment rule has a stabilizing effect on the debt ratio, even if it may not be enough to avoid explosive patterns. Notably, the stability of the steady state depends on the fine-tuning of the policy mix. One of the novelties of our analysis is the presence of a threshold level for the debt ratio and inflation, beyond which the debt ratio becomes unsustainable following an explosive path. The distance between this threshold and the steady state can be considered a proxy of the robustness of the economy to exogenous shocks.