Download Probably Too Little, Certainly Too Late. An Assessment of the

Probably Too Little, Certainly Too Late.
An Assessment of the Juncker Investment Plan
Mathilde Le Moigne1
Francesco Saraceno2,3
1 École
Sébastien Villemot2
Normale Supérieure
2 OFCE
– Sciences Po
3 LUISS-SEP
Dynare Conference – 30 September 2016
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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Investment at historically low levels
Total investment in 2015 still far below pre-crisis 2007 levels:
I
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in EU, by 9% (in volume)
in EMU, by 11.9%
Private investment low
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because uncertainty and lack of global demand
despite historically low interest rates
Public investment victim of consolidation policies
Infrastructure insufficient or in poor condition
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Public investment in selected OECD countries
% of GDP
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Public investment in France
% of GDP
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Infrastructure quality in selected OECD countries
Source: IMF (2014)
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Time for a public investment push?
Combines two positive effects:
I
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demand in the short run
supply in the longer run
Crowding-in of private investment (via complementarities)
Historically low interest rates
Multipliers likely high, hence may be a free lunch (IMF, 2014; OECD,
2016)
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The Juncker plan
Official name: European Fund for Strategic Investment (EFSI)
Public-private partnership financing scheme
Objective: trigger e315bn of new investment in Europe over 3 years
Fields:
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infrastructure
research & development
environmental projects
support to SMEs (through partnerships with intermediary banks)
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The Working of the Juncker Plan
Source: Claeys (2015)
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State of play as of September 2016
Source: EIB
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Paper objectives
Assess macro impact of Juncker plan through a DSGE model
Both in “normal” times and in a liquidity trap
Comparison with Obama 2009 plan
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Main results
Even under very favorable hypothesis, impact of Juncker plan
moderate
Had it been implemented earlier, could have been effective against
ZLB (“certainly too late”)
Had it been bigger (of the Obama plan size), would have been
effective against ZLB even today (“probably too little”)
Time-to-build and private leverage play critical roles
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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Structure
Closed-economy model of Euro area
Medium-scale DSGE with New Keynesian core
Two types of households (Ricardian/Keynesian or patient/impatient):
consume, supply labor
Productive sector with 3 factors: labor, private capital, public capital
Monetary authority: Taylor rule
Fiscal authority:
I
I
I
Several taxes, adjusted through fiscal rule
Discretionary public investment decision
Co-financing of projects by private sector: households contribute out of
their savings
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Households
Two categories:
patient/savers/Ricardian with discount factor β S
impatient/borrowers/Keynesian with discount factor β B < β S
Households maximize:
max E0
∞
X
t=0
I
I
I
"
β(i)t µt
(Ct (i) − h Ct−1 )1−σ
Lt (i)1+
−χ
1−σ
1+
#
external habit formation
preference for leisure
liquidity constraint on real debt:
Bt (i)
≤D>0
Pt
I
(1)
time rate preference shock µt : used to bring the economy at ZLB
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Patient Households (Savers) (1/2)
Have access to financial markets:
I
I
can hold bonds issued by the government
can lend to firms investing in private capital
Own the (intermediate good) firms, hence profits Πt are part of their
income
Budget constraint in real terms:
S
(1 − τtw )wt (i)Lt (i) + (1 − τtk )rtk Kt−1
(i) +
(1 + it−1 )
BtS (i)
+ Πt =
Pt
S (i)
Bt−1
+ (1 + τtc )CtS (i) + ItS (i)+
Pt
γw w 2
S
π (i) wt (i)
ItGS + ψ(ut (i)) K̄t−1
(i) +
2 t
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Patient Households (Savers) (2/2)
Non standard elements
Households are wage-setters, with Rotemberg-type adjustment cost:
γw w 2
π (i) wt
2 t
Households invest ItS (i) in private capital K̄tS (i), and decide the
utilization intensity ut (i) (with convex adjustment cost). Thus:
KtS (i) = ut (i)K̄tS (i)
Patient households can also invest in the public capital stock: ItGS
I
I
I
not the result of optimization
but follows an ad hoc behavioral rule (proportional to public
contribution)
investment in public capital does not yield any direct private return
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Impatient Households (Borrowers)
Impatient households have access to the financial markets in order to
contract a debt or save. . .
. . . but cannot invest in private or public capital
Because these agents are less patients than savers, they borrow up to
B
their credit constraint, so that BtP(i)
= D.
t
As a consequence, the budget constraint simplifies to:
1 + it−1
w
c
B
−1 D
(1 − τt )wt (i)Lt (i) = (1 + τt )Ct (i) +
1 + πt
Same wage demand schedule as savers
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Production
The perfectly competitive final good sector produces for consumption,
private investment and public investment.
Inputs come from a monopolistically competitive intermediate sector.
The intermediate sector drives the demand for labor, taking real wages
as given.
The characterization of Final Goods is standard
Z 1
max Pt Yt −
pt (j)yt (j) dj
yt (j)
0
Z
s.t. Yt =
1
yt (j)
p
θt −1
p
θt
!
p
θt
p
θt −1
dj
0
⇒ yt (j) =
pt (j)
Pt
−θtp
Yt
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Intermediate Goods
Technology (Leeper et al, 2010):
ν
G
yt (j) = zt Kt−1 (j)α Lt (j)1−α Kt−1
KtG is aggregate public capital, ν its productivity
p
Rotemberg nominal price rigidities. Price adjustment cost: γ2 πt (j)2 Yt
Cost minimization. Choice of Kt−1 (j) and Lt (j) (given ys (t)):
C (yt (j)) =
min
Kt−1 (j),Lt (j)
wt Lt (j) + rtk Kt−1 (j)
G
s.t. yt (j) ≤ F (Kt−1 (j), Lt (j), Kt−1
)
Profit maximization. Joint choice of ps (j) and ys (j):
∞ s−t λS p (j)
X
γp
s
s
S
2
max Et
β
ys (j) − C (ys (j)) − πs (j) Ys
Ps
2
ps (j)
λSt
s=t
p
ps (j) −θt
s.t. ys (j) =
Ys
Ps
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Government
Budget constraint:
G
BtG
1 + it−1 Bt−1
= Gt + ItG +
Pt
1 + πt Pt−1
S
Tt = τtc (1 − n)CtS + n CtB + τtw wt Lt + τtk rtk (1 − n)Kt−1
Tt +
Fiscal rule (mimics the Stability and Growth Pact)
!
G
G
Bt−1
Bt−1
∗
− εG
∆t − rt
=Φ
− bG
t
Pt−1
Pt−1
∗
∗
∆t = τtc (1 − n)C S + n C B + τtw w ∗ L∗
∗
∗
+τtk r k (1 − n)K S − Gt − I G
∗
The different tax rates are (exogenously) proportional to total tax
revenues
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Public Investment: Time to Build and Leverage
“Time-to-build”.
P Choice of At yields a flow of expenditures for N
periods: At N−1
s=0 φs
Public investment comes from the government (A) and from patient
households (AS )
At time t, total expenditure is the quota of all past decisions coming
due:
N−1
N−1
X
X
ItG =
φs At−s
ItGS =
φs ASt−s
s=0
s=0
The law of motion of capital:
G
KtG = (1 − δ G )Kt−1
+ At−(N−1) + (1 − n)ASt−(N−1)
with 1 − n fraction of patient households.
Hypothesis on leverage triggered by government investment:
(1 − n)ASt = (ξ − 1)(At − A∗ )
where ξ ≥ 1 is the private leverage factor.
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Monetary policy
The monetary authority follows a classical Taylor Rule, subject to a ZLB
constraint:
1 + π (1−ρi )φπ Y (1−ρi )φY
i
t
t
i
1 + it = max (1 + it−1 )ρ
(1
+
ε
);
1
t
1 + π∗
Yt−1
where ρi ∈ [0, 1) is the interest rate smoothing parameter, φπ > 0 (resp.
φY ≥ 0) captures the central bank reaction to inflation (resp. growth)
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Model Closure: Market Clearing
The equilibrium on the final good market is given by
Yt = (1 − n)CtS + nCtB + (1 − n)(ItS + ItGS ) + G + ItG
Z 1 p
Z 1−n w
γ
γ w 2
2
S
+
πt (j) Yt dj +
π (i) wt (i) + ψ(ut (i))K̄t−1 (i) di
2 t
0 2
0
Market clearing on markets for debt, private capital and labor, implies:
Z 1−n
G
Bt + n D +
BtS (i)di = 0
0
(1 −
Z
n)KtS
=
1
Kt (j)dj
0
Z
Lt =
1
Lt (j)dj
0
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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Doubts about plan effectiveness
EIB/EU contributions are not new money
Optimistic private leverage effect
Incitative impact not certain: some projects may have been launched
without EFSI support
Quality of projects in terms of productivity contribution?
We ignore these concerns and focus on the most favorable case.
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Output elasticity of public capital
ν
α
G
Yt = zt Kt−1
Lβt Kt−1
Aschauer (1989b): ν = 0.24 (core infrastructure in the US)
Eberts (1986): ν = 0.03 (at metropolitan level in the US)
IMF (2014): ν = 0.17 (core infrastructure of national govt.)
Our benchmark value: ν = 0.1
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Calibrated parameters (1/2)
Share of borrowers
Private leverage factor of public investment
Preferences
Discount rate of savers
Discount rate of borrowers
Disutility of labor
Persistence of time rate preference
Production
Private capital depreciation rate
Public capital depreciation rate
Private capital share in production
Public capital influence in production
Private capital utilization rate (steady state)
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n
ξ
0.34
5
βS
βB
χ
ρµ
0.995
0.99
1
0.75
δk
δG
α
ν
u∗
0.025
0.0125
0.36
0.1
0.85
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Calibrated parameters (2/2)
Price and wage stickiness
Market power (goods, at steady state)
Market power (labor, at steady state)
Monetary policy
Inflation (steady state)
Fiscal policy
Speed of fiscal consolidation
Debt target
Consumption tax (steady state)
Capital income tax (steady state)
Time to build of public investment
Time profile of public investment
Government consumption (steady state)
Public investment (steady state)
Debt constraint of borrowers
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θp ∗
θw ∗
6
6.2
π∗
0
Φ
∗
bG
τc∗
∗
τk
N
φs
G∗
A∗
D
1
80
2.4Y ∗
0.2
0.184
12
1
N
0.25Y ∗
0.02Y ∗
0.125Y ∗
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Estimated parameters
Parameter
Preferences
Frisch elasticity of labor
Relative risk aversion
Habit formation in consumption
Production
Adjustment cost on private investment
Elasticity of capacity utilization rate
Persistence of investment shock
Persistence of productivity shock
Price and wage stickiness
Adjustment cost on wages
Adjustment cost on prices
Persistence of price markup shock
Persistence of wage markup shock
Monetary policy
Persistence of interest rate
Sensitivity to inflation
Sensitivity to GDP
Symbol
Type
Prior
Mean
St. Dev
Posterior
mode
ε
σ
h
Γ
Γ
β
2
1.75
0.5
0.25
0.5
0.2
1.9200
1.8951
0.8715
γI
σu
ρκ
ρz
N
N
β
β
5
5
0.5
0.5
0.25
0.1
0.2
0.2
5.1858
4.9879
0.9042
0.8476
γw
γP
ρp
ρw
Γ
Γ
β
β
110
300
0.5
0.5
100
100
0.2
0.2
353.5216
83.5008
0.8972
0.1187
ρi
φπ
φY
β
Γ
N
0.8
1.7
0.125
0.1
0.1
0.05
0.8065
1.7292
0.1766
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The Juncker plan in the model
Positive temporary shock on public investment allowances
Magnitude: 0.5% of annual GDP (one-period shock during quarter of
plan launching)
Because of time-to-build, new investment spread over 3 years
Magnified by private leverage of 5
New public capital operational 3 years after plan launching
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Impact of Juncker plan on output
Baseline scenario, deviation from steady state
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Inflation and interest rates
Baseline scenario
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Public debt-to-GDP ratio
Baseline scenario, deviation from steady state
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Private investment
Baseline scenario, deviation from steady state
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Dynamic multipliers
Baseline calibration
Without leverage
With leverage of 5
1 year
1.0
5.2
3 years
0.8
4.2
10 years
2.2
13.0
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20 years
4.1
24.0
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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The dual effect of a public investment push
Short run: demand effect, hence inflationary
Long run: supply effect, hence deflationary
Time-to-build governs relative timing of the two
Bouakez et al. (2014): longer time-to-build beneficial in ZLB
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Simulating a liquidity trap
Shock to time preference rate (negative demand shock)
Solution method: extended path
Multiple equilibria problem: equilibrium selection based on Euro area
experience
Without government intervention
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ZLB lasts 14 quarters
GDP through at 12% below pre-crisis level, 5 quarters after shock
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Impact on GDP
ZLB case, deviation from steady state
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Nominal interest rate
ZLB case
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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The Obama plan
American Recovery and Reinvestment Act (ARRA)
$789bn = 5.5% GDP
4% GDP over 2 years in tax breaks, 1.5% GDP public investment
Quick implementation: voted Feb 2009, disbursements in summer
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Impact of Juncker and Obama plans (in T=2)
ZLB case, deviation from steady state
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Impact of Juncker and Obama plans (in T=10)
ZLB case, deviation from steady state
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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Sensitivity of dynamic multipliers
To elasticity of production to public capital
Elasticity (ν)
0
0.05
0.10
0.15
0.17
1 year
1.12
1.07
1.02
0.97
0.95
3 years
0.79
0.78
0.77
0.76
0.76
10 years
0.24
1.21
2.19
3.17
3.57
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20 years
−0.08
1.98
4.05
6.13
6.96
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Sensitivity to time-to-build
Reducing time-to-build has two effects:
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demand effect short-lived (crowding out disappears)
deflationary effect comes sooner (bad for ZLB exit)
Last property (Bouakez et al., 2014) verified:
I
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if TTB of 1 quarter, ZLB exit is postponed
if plan at T = 2, by 6 quarters (and recession worsened)
if plan at T = 10, by 1 quarter
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Sensitivity to private leverage
Fiscal multiplier = quasi-linear function of private leverage
However non-linear impact on debt-to-GDP: increase if no private
leverage
Important for pulling economy out of ZLB. If no private leverage,
multiple equilibria (for Juncker plan at T = 2):
I
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good equilibrium worse than with private leverage (2 more quarters in
ZLB)
bad equilibrium: slightly worse than no government intervention
(deflationary impact of public investment dominates)
Policy conclusion: if private support does not follow expectations,
need for bigger public involvment
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Outline
1
The Model
2
Simulating the Juncker Plan
3
The Zero Lower Bound and the Juncker Plan
4
A comparison with the Obama 2009 plan
5
Sensitivity analysis
6
Conclusion
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Conclusion
Initial intuition of “too little and too late” confirmed
Criticism could be rephrased as “probably too little, certainly too late”
Announcement on 14 September 2016 that plan could be doubled:
acknowledgment of size problem, but still too late (spread over
2018-2022)
Points to major flaw in European governance: rapidity of reaction
Institutional architecture needs to be adapted to the post-“Great
Moderation” world
Limitations of our exercise: replication of the ZLB and of the plan
complexity
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