Download QUEST model Cohesion 2000 06 Warsaw

EUROPEAN COMMISSION
DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS
Modelling Cohesion Policy
in a DSGE Model with
Semi-Endogenous Growth:
simulations with the QUEST III model
Janos Varga and Jan in ’t Veld
Research Directorate
DG ECFIN - Economic and Financial Affairs
European Commission
Evaluation Conference, Warsaw, 30 November 2009
The views expressed here are those of the authors and should not be attributed to the European Commission.
Structure of the presentation
1. Dynamic Stochastic General Equilibrium
(DSGE) models
2. QUEST III model with endogenous
growth
3. Simulations of Cohesion spending
programme period 2000-06
4. Sensitivity analysis
5. Conclusions
3
Why model-based evaluations of
Cohesion policy?
•
•
•
•
Take into account cross economy spillovers of policies General equilibrium effects
Models can provide coherent and internally consistent
framework to analyse channels through which policies
have effect
Account for international spillovers
Dynamic profile – adjustment costs
But:
•
Dependent on “efficient use” of funds: assuming no
waste, no sub-optimal use
•
Model simulations can only indicate the potential effects
•
Reality may be different (absorption problems)
5
Absorption Problems (Herve and Holzmann, 1998)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
=>
•
•
Waste of transfers (projects with zero or negative economic return)
Administrative costs- extra resources for programming and monitoring, cannot
be used for increasing the productive capacity of the economy.
Rent-seeking activities: incentive to invest resources in unproductive activities
to catch a rent in the form of share of the transfers. Competition for resources
absorbs resources that can no longer be used productively.
Diversion of funds to consumption: increase in future consumption possibilities
will lead to a higher consumption on impact (consumption-smoothing) to the
detriment of investment
Timing related problems (time lags before returns to investment materialise,
opportunity costs are high and private investment decisions may be delayed),
Information disadvantage of the disbursing authority (leading to support of suboptimal investment projects),
Public choice considerations (leading to intentional support of suboptimal
projects).
Changes in relative prices could lead to Dutch disease type phenomena (rising
factor demand non-tradable sector leading to decline in tradable sector),
Immiserising growth phenomena (industrial restructuring in favour of protected
subsectors, with harmful consequences for long run growth )
Worsening of negative effects of market failures ( polarisation effects of
transfers due to increasing returns to scale and labour market distortions).
Transfers may be detrimental to economic growth and real convergence (most likely
cause: rent seeking, protectionism and market rigidities)
6
Absorption problems are likely to increase with the amount of transfers.
Use of Models in DG ECFIN
• Research tools to support policy making
• Help to determine priorities and guide + support
policy making in the European Commission in
general;
• Quantitative analysis of macro economic issues:
What are effects of shocks and/or policies on
rest of economy (spillovers/interactions) ?
• Analysis must to be conducted in a fully coherent,
disciplined and internally consistent framework
=> microfounded DSGE model
7
Use of Models in DG ECFIN (2)
Some recent model applications:
1. Impact of fall of dollar on EU economy
2. Impact of oil price shocks
3. Financial crisis: boom and bust house prices, rise in
spreads
4. Monetary and fiscal response to crisis, fiscal
stimulus measures
5. Structural reforms (Lisbon strategy/EU2020):
labour market reform, product market reform,
promoting R&D
6. Climate action: introduction carbon tax, directed
technical change
8
DSGE models used in other
policy-making institutions
• IMF: GEM (Laxton and Pesenti, 2003), GIMF (Kumhof and
Laxton, 2007)
• ECB: NAWM (Coenen, McAdam and Straub,2008)
• Fed: SIGMA (Erceg, Guerrieri and Gust, 2006)
• Bank of Canada: BoC-GEM (Lalonde and Muir,2007)
• OECD: OECD-Fiscal (Furceri and Mourougane, 2009)
• European Commission: QUEST III (Ratto, Roeger and in ’t
Veld, 2009)
9
Dynamic Stochastic General Equilibrium
(DSGE) models (1) :
• DSGE models are derived from micro principles in
a consistent manner - fully coherent, internally
consistent framework
• Decisions are based on intertemporal
optimisation, subject to technological, budget and
institutional constraints
• Consistent modelling of intertemporal budget
constraints for households and government plus
the current account
10
DSGE models (2)
• DSGE models include nominal rigidities that give rise to
imperfections in labour and product markets
• Explicit modelling of structural rigidities (mark ups, entry
barriers, financing restrictions (credit constrained households+firms))
• Role for active monetary + fiscal policy (New-Keynesian)
• Explicit modelling capital flows (channel of adjustment)
• DSGE models allow for an analysis of transition to new
steady state (short term adjustment costs, short term
distributional consequences)
• Adjustment costs in labour and capital determine dynamic
adjustment
• Anticipatory effects of (announced) future policies
11
Model-based evaluations of EU Cohesion
Policy using DSGE models:
•
Varga and in 't Veld (2009): QUEST III with
endogenous growth.
–
–
•
Impact of cohesion spending in NMS for programme period
2007-2013.
NMS treated as one region
Allard et al. (2008) : GIMF model (IMF)
–
–
–
Comparison EU transfers to households vs. public
infrastructure investment
Stronger impact of government investment on long term
growth
Similar DSGE model structure, but without endogenous
growth
12
QUEST III model
Dynamic Stochastic General Equilibrium (DSGE) model:
– Microfounded: decisions based on dynamic
optimisation subject to technological, budgetary and
institutional constraints
– Two types of households: non-constrained (“Ricardian”)
and liquidity-constrained (“backward-loooking”)
– Representative agent or overlapping generations
framework
– Nominal and real rigidities
– Adjustment costs
– Global model (flexible regional aggregation)
– Different versions: R&D, skill disaggregation, energy,
housing, multi-sector
– Estimated (Bayesian methodology)
13
QUEST III model variants
Country
disagregation
QUEST III
Sectoral
disagregation
Euro area
QUEST3NT - EA,RoEU,US,Asia,RoW
- 1 MS,RoEA,US,RoW
QUEST3RD - EU, US, RoW
- EA, NMS, RoW
Estimated
Tradables +
Nontradables
Final goods,
intermediate goods,
R&D sector
QUEST3EN EU, US, RoW
QUEST39
QUEST3H
Final goods +
energy sector
EU, US, Asia, RoW
9 sectors
EA,NMS,RoEU,US,Asia,RoW Tradables +
Nontradables +
Housing
QUEST3B
EU, US, RoW
Adds banking
sector
Structural
reforms
(Lisbon
Strategy)
Oil price shocks,
Energy taxes
Credit
constraints
Bubbles
Financial crisis
Financial crisis
14
QUEST III R&D model
Economy populated by:
• Households
• Final goods producing firms
• Intermediate goods producing firms
• R&D sector
• Monetary and fiscal authorities
Disaggregation of labour force: low-, medium, high skilled
(employment rate, skill efficiencies)
Technological change: increasing product variety
(Dixit&Stiglitz)
15
QUEST III R&D model
Knowledge investment is key to economic growth.
Disaggregation of investment into tangibles and intangibles
• Physical capital:
– rivalrous
– constant returns to scale
• Knowledge capital : design for production of new good
– non-rivalrous (Romer, 1990) ( and knowledge
spillovers)
– sunk cost for firm – increasing returns to scale
What polices can induce firms to increase intangible
investment ?
Romer (1990), Jones (1995), Aghion and Howitt (1998)
16
Households
• Ricardian (non-liquidity constrained) and
• Liquidity-constrained households
• Habit persistence
Non-liquidity constrained households
• buy new patents of designs produced by the R&D sector
• rent their total stock of design to intermediate goods
producers
• pay income tax on the period return of intangibles
• receive subsidies after their investment in R&D products.
17
Yj
Final good firms
• Final output is produced using a labour
aggregate, LY and At varieties of intermediate
inputs (xi,t) with an elasticity of substitution θ.
(1 ) 
Yt  At

1 1
K  L  K 
P 1
t

Y ,t
G G
t
At
 FCY , where  xi , t  KtP
i 1
18
Infrastructure investment
Productivity enhancing effect of public capital KG:
(1 ) 1 1
t
Yt  A
K  L  K 
P 1
t
K  (1   G ) K  I
G
t
G
t 1

Y ,t
G G
t
 FCY
G
t
I tG  ( IGSt   tIG )Yt
Investment in infrastructure IG raises total factor productivity
By how much depends on αG !!
(default : αG = 0.10)
19
Intermediate good firms
• The intermediate sector consists of monopolistically
competitive firms
• enter the market by licencing a design from domestic
households
• make an initial payment (FCA) to overcome
administrative entry barriers
• (tangible) capital inputs are also rented from the
household sector
• firms which have acquired a design can transform each
unit of capital into a single unit of an intermediate input
• entry occurs until the PDV of profits (where the discount
factor contains the risk premium for intangible capital) is
equal to the price of the patent (intangible) and a fixed
entry cost
20
R&D sector
Innovation corresponds to the discovery of new designs.
•
The R&D sector hires high-skilled labour LA,t and
generates new designs ΔAt according to a following
knowledge production function:
At  At1 At1LA,t
International R&D spillovers (Bottazzi and Peri, 2007):
ω and Φ measure the foreign and domestic spillover
effects from the aggregate international A* and domestic
At-1 stock of knowledge
21
R&D promoting policies
R&D sector sells new patents of designs to households
who rent them out to intermediate goods producers at
rental rate iA.
Households pay income tax at rate tK on the period return
of intangibles and they receive tax subsidies at rate τA
(1   A )it   tA1   A   t tK  A
i 
 rptA
K
(1  t t )
A
t
iA : households require a rate of return on intangible capital which is
equal to the nominal interest rate minus the rate of change of the
value of intangible assets and also covers the cost of economic
depreciation plus a risk premium.
Government policies to promote R&D:
–
–
tax incentives in the form of tax credits/depreciation allowances or
lowering the tax on the return from patents.
22
QUEST III RD Model
Final Goods
Mark up
Mark up
Household
Competition
Credit frictions
Tangibles
Intermediate Goods
Research
Credit frictions
Intangibles
Admin. Entry Barriers
Entrants
Subsidies
Subsidies
Government
Human capital accumulation
Labour-aggregate composed of three skill-types:
L Y,t 
1
L
sL
h Lt L Lt
L1
L
1
L
 sM
M
hM
t Lt
L1
L
1
L
HY
 s H,Y h H
t Lt
L1
L
L
L1
.
ss population share of group s
Ls employment rate of group s
hs accumulated human capital group s
Accumulated human capital hs is produced by participating in education:
st
h  hs e
s
t
,  0
where Λs is amount of time spent accumulating human capital
(years of schooling- ψ Mincerian return to schooling)
Additional training:
st  s  lts,TR , where lts,TR  1   s lts,1TR   ts,TR ,
24
#
Cohesion Policy programme 2000-6
• Objective 1 : to promote the development
and structural adjustment of regions
whose development is lagging behind;
• Objective 2 : to support the economic and
social conversion of areas experiencing
structural difficulties;
• Objective 3: to support the adaptation and
modernisation of education, training and
employment policies and systems in
regions not eligible under Objective 1.
25
Cohesion Policy programme 2000-6
European
Regional
Development
Fund (ERDF
European
Social Fund
(ESF)
European
Agricultural
Guidance and
Guarantee Fund
(EAGGF)
Financial
Instrument
for Fisheries
Guidance
(FIFG)
Total
Structural
Funds
Cohesion
Fund (CF)
Total Cohesion
Policy
expenditure
Czech Republic
0.98
0.40
0.17
0.00
1.55
0.81
2.37
Cyprus
0.03
0.02
0.00
0.00
0.05
0.03
0.08
Estonia
0.23
0.07
0.06
0.01
0.37
0.29
0.66
Hungary
1.23
0.45
0.31
0.00
2.00
0.82
2.82
Lithuania
0.58
0.19
0.12
0.01
0.90
0.59
1.49
Latvia
0.38
0.13
0.09
0.02
0.63
0.51
1.14
Malta
0.05
0.01
0.00
0.00
0.06
0.02
0.08
Poland
4.95
2.01
1.19
0.17
8.31
3.05
11.37
Slovenia
0.14
0.08
0.02
0.00
0.24
0.16
0.40
Slovakia
0.60
0.32
0.18
0.00
1.11
0.54
1.65
Germany
15.47
11.73
3.65
0.14
31.00
0.00
31.00
Italy
17.39
7.80
3.22
0.34
28.76
0.00
28.76
Ireland
1.93
1.04
0.20
0.06
3.23
0.53
3.76
Portugal
13.01
4.88
2.24
0.21
20.33
2.17
22.50
Greece
14.36
4.77
2.69
0.19
22.00
1.79
23.80
Spain
26.27
11.72
5.68
1.78
45.44
8.86
54.30
Total
97.60
45.63
19.83
2.95
166.00
20.18
186.18
Bln. euros
26
Table 3. Fields of interventions Structural Funds
(% of total spending 2000-2009)
Category
Agri.&Ind.&Serv.
Hum. Res.
RTDI
Infrastructure
Techn. Ass.
CZ
31.7
26.5
1.3
37.1
3.3
CY
40.0
41.7
0.0
14.7
3.5
EE
30.4
19.4
8.9
37.3
4.0
HU
30.5
21.7
4.9
38.5
4.5
LV
41.4
21.0
3.1
31.7
2.8
LT
35.0
15.8
5.2
40.8
3.2
MT
21.4
13.8
0.3
59.3
5.2
PL
27.9
23.4
2.7
44.0
2.0
SK
24.3
28.8
0.9
37.7
8.3
SI
42.5
27.9
6.2
19.0
4.4
DE
30.7
37.1
7.2
22.0
3.0
GR
22.3
20.4
1.8
52.0
3.6
IE
20.3
27.5
6.5
45.1
0.6
IT
35.5
27.1
3.6
29.5
4.4
PT
30.2
21.7
4.5
41.9
1.7
ES
25.1
25.5
6.2
42.4
0.8
30
Matching fields of interventions and model variables (p.1)
FOI Cd
1
11
111
112
113
114
1182
12
121
122
FOI
Productive Environment
Agriculture
Investments in agricultural holdings
Setting up young farmers
Agriculture-specific vocational training
Improving processing and marketing of agricultural products
Meeting standards: use of farm advisory services
Forestry
Investments in forest holdings
Improving harvesting, processing and marketing of forestry products
Category
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
HR, low-skilled
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Instrument
Fixed costs reduction
Fixed costs reduction
Government consumption
Fixed costs reduction
Training, low-skilled
Fixed costs reduction
Government consumption
Government consumption
Government consumption
Fixed costs reduction
123
124
Promoting new outlets for the use and marketing of forestry products
Establishment of associations of forest holders
Agriculture&Industries&Services
Agriculture&Industries&Services
Government consumption
Government consumption
Agriculture&Industries&Services
Agriculture&Industries&Services
Government consumption
Government consumption
Agriculture&Industries&Services
HR, low-skilled
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Fixed costs reduction
Training, low-skilled
Government consumption
Fixed costs reduction
Fixed costs reduction
Fixed costs reduction
Government consumption
Government consumption
Agriculture&Industries&Services
Government investment, (INFR)
Agriculture&Industries&Services
Agriculture&Industries&Services
Government consumption
Government investment, (INFR)
Agriculture&Industries&Services
Agriculture&Industries&Services
Agriculture&Industries&Services
Government investment, (INFR)
Government consumption
Government consumption
Agriculture&Industries&Services
Government consumption
Agriculture&Industries&Services
Fixed costs reduction
125
126
127
128
13
1301
1302
1303
1304
1305
1306
1307
1308
1309
1310
1311
1312
1313
Restoring forestry production potential damaged by natural disasters
and fire and introducing appropriate prevention instruments
Planting of non-farm land
Improving and maintaining the ecological stability of protected
woodlands
Forestry-specific vocational training
Promoting the adaptation and the development of rural areas
Land improvement
Reparcelling
Setting up of farm relief and farm management services
Marketing of quality agricultural products
Basic services for the rural economy and population
Renovation and development of villages and protection and
conservation of the rural heritage
Diversification of agricultural activities and activities close to agriculture,
to provide multiple activities or alternative incomes
Agricultural water resources management
Development and improvement of infrastructire connected with the
development of agriculture
Encouragement for tourist activities
Encouragement for craft activities
Preservation of the environment inconnection with land, forestry and
landscape conservation as well as with the improvement of animal
welfare
Restoring agricultural production potential damaged by natural disaters
and introducing appropriate prevention instruments
31
Table 4. Matching fields of interventions and model variables
Field
Variable to implement the shock
Infrastructure
Temporary increase in I G , government investment (via  tIG )
Agriculture,
Industry&Services
Temporary increase in other government expenditures ( Gt )
Reducing fixed costs of tangible capital costs faced by final goods
firms ( FCY and rpK, permanent or temporary reductions)
RTD
Reducing the fixed costs or risk-premia faced by the users of R&D
products, ( FC A and rpA, permanent or temporary reductions)
Human resources
Raising human capital and government transfers expenditures
- investment in high-skilled human capital ( htH via Ht )
- educational investments in all skills ( hts via st )
Technical assistance Temporary increase in government consumption ( Gt )
GBC: Bt  1  rt  Bt 1  Gt  IGt  TRt  BENt  St  TaxtC  TaxtL  TaxtP  COHt 
Cohesion Policy COH financed from EU budget
Contributions to EU budget (EU15 ):
• proportional to country’s GDP
• financed by labour taxes
32
Figure 5.1. Simulated GDP impacts EU27 Member States
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-0.50
20
21
A
20
22
A
20
23
A
20
24
A
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
0.00
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
The Netherlands
Portugal
Spain
Sweden
UK
Bulgaria
Cyprus
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Romania
Slovakia
Slovenia
-1.00
33
Example Table: Portugal
GDP
Employment
. Empl.low
. Empl.medium
. Empl.high
Consumption
. Cons.liq.constr.
. Cons.non-constr.
Investment
Exports
Imports
Real.wages
. Real.wages.l
. Real.wages.m
. Real.wages.h
Patents
Price.level.GDP
Consumer.price.level
Terms of trade
Dollar exch. rate
Euro exch.rate
Nom.int.rate (%p)
Real.int.rate (%p)
Infl (%p)
Gov.debt (% of GDP)
Gov.balance (% GDP)
Coh.funds (% GDP) net
Contr.to CF (% GDP)
Trade.bal.(% GDP)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2020
0.56
0.52
0.51
0.59
0.56
1.34
0.26
3.04
0.01
-0.37
2.38
0.02
-0.15
0.06
1.06
0.38
0.75
0.60
0.49
-0.13
0.00
0.03
-0.83
1.08
-0.73
0.50
1.05
0.05
-0.86
0.64
0.67
0.70
0.59
0.29
2.21
0.73
4.53
-0.22
-0.54
4.05
0.27
0.03
0.38
2.08
1.52
1.40
1.15
1.04
-0.08
0.00
0.10
-0.35
0.48
-1.53
0.44
1.13
0.16
-1.35
0.96
0.72
0.77
0.60
0.21
2.56
1.20
4.69
-0.50
-0.61
4.98
0.43
0.20
0.52
2.34
3.03
1.76
1.45
1.27
0.02
0.00
0.13
0.03
0.23
-2.21
0.43
1.87
0.20
-1.64
1.13
0.61
0.67
0.44
0.12
2.82
1.58
4.76
-0.69
-0.55
4.93
0.63
0.43
0.67
2.47
4.69
1.73
1.45
1.22
0.14
0.00
0.13
0.33
-0.13
-2.55
0.31
2.03
0.21
-1.62
1.41
0.48
0.55
0.26
0.10
3.08
1.85
5.01
-0.72
-0.38
4.36
0.85
0.68
0.83
2.62
6.40
1.46
1.25
0.95
0.26
0.00
0.12
0.52
-0.34
-2.71
0.22
1.98
0.24
-1.44
1.62
0.33
0.40
0.04
0.03
3.38
2.09
5.40
-0.60
-0.14
3.37
1.11
0.97
1.03
2.80
8.14
1.02
0.91
0.55
0.37
0.00
0.10
0.53
-0.44
-2.67
0.13
1.57
0.22
-1.12
1.89
0.28
0.36
-0.04
0.01
3.68
2.31
5.85
-0.40
0.09
2.50
1.34
1.22
1.21
3.00
9.84
0.60
0.58
0.14
0.46
0.00
0.08
0.47
-0.40
-2.62
0.12
1.31
0.21
-0.86
2.20
0.33
0.41
0.02
0.04
3.97
2.52
6.25
-0.15
0.32
1.85
1.52
1.42
1.35
3.23
11.45
0.24
0.29
-0.24
0.53
0.00
0.05
0.31
-0.32
-2.63
0.14
1.09
0.21
-0.67
2.75
0.47
0.53
0.23
0.23
4.28
2.82
6.58
0.13
0.51
1.61
1.60
1.50
1.38
3.28
12.92
-0.05
0.06
-0.60
0.58
0.00
0.02
0.62
-0.38
-2.88
0.28
1.56
0.21
-0.64
2.53
0.15
0.25
-0.28
-0.14
4.64
3.11
7.04
0.49
0.81
0.02
1.90
1.87
1.66
3.31
14.24
-0.69
-0.46
-1.02
0.59
0.00
-0.03
0.40
-0.61
-2.57
0.11
0.16
0.02
-0.09
2.74
0.18
0.27
-0.24
-0.04
4.88
3.27
7.40
0.81
0.96
-0.50
1.98
1.97
1.70
3.28
15.45
-0.99
-0.71
-1.30
0.57
0.00
-0.04
0.11
-0.20
-2.55
0.14
0.00
0.00
0.06
2.90
0.30
0.38
-0.06
0.05
5.05
3.46
7.56
1.05
1.02
-0.54
1.99
1.98
1.70
3.31
16.50
-1.10
-0.80
-1.44
0.55
0.00
-0.04
0.04
-0.09
-2.63
0.16
0.00
0.00
0.05
3.00
0.38
0.46
0.07
0.06
5.19
3.65
7.62
1.23
1.05
-0.51
2.01
2.00
1.71
3.30
17.37
-1.17
-0.86
-1.49
0.52
0.00
-0.04
0.01
-0.06
-2.70
0.15
0.00
0.00
0.03
3.08
0.44
0.52
0.15
0.06
5.30
3.82
7.64
1.37
1.07
-0.46
2.02
2.02
1.73
3.25
18.08
-1.21
-0.91
-1.51
0.50
0.00
-0.04
0.00
-0.04
-2.74
0.11
0.00
0.00
0.01
3.13
0.47
0.55
0.20
0.07
5.39
3.97
7.64
1.48
1.08
-0.40
2.03
2.04
1.74
3.18
18.64
-1.24
-0.94
-1.52
0.47
0.00
-0.04
-0.01
-0.03
-2.74
0.08
0.00
0.00
-0.02
3.16
0.50
0.57
0.24
0.07
5.46
4.08
7.63
1.57
1.09
-0.34
2.03
2.04
1.75
3.12
19.08
-1.27
-0.97
-1.52
0.45
0.00
-0.04
-0.02
-0.03
-2.69
0.04
0.00
0.00
-0.04
3.20
0.54
0.61
0.33
0.09
5.55
4.30
7.52
1.87
1.09
-0.11
1.99
2.00
1.73
2.94
20.08
-1.37
-1.08
-1.46
0.31
0.00
-0.05
-0.03
-0.01
-1.96
-0.12
0.00
0.00
-0.10
34
Effects Cohesion Spending
•
•
•
•
Consumption increases:
– Ricardian consumers anticipate higher permanent income and raise their
consumption
– Liquidity-constrained consumption also higher (employment and wage
developments)
Wages grow in long run in line with productivity
Donor countries: higher contributions to the EU budget - increase in labour taxes negative impact on employment growth.
Recipient countries: higher growth boosts tax revenues.
=> For the largest net recipients this second effect outweighs the first and there is room to lower
labour taxes, giving rise to positive employment effects.
•
Corporate investment is generally crowded out in the short run. In the medium run
productivity enhancing effects come to dominate and investment spending increases.
•
•
Upward pressure on inflation as the demand effects dominate in the short run,
But in the medium term, as potential output increases, inflationary pressures subside.
•
•
•
Imports are boosted by the increase in demand
Sizeable real appreciation in the largest recipient countries reduces exports growth.
Trade balances deteriorate and current account deficits become larger.
35
Effects Cohesion Spending (2)
Support Agriculture, Industry&Services plus Technical assistance:
•
•
•
Reductions in fixed costs (lowering startup costs and increasing entry of new firms)
Lower capital costs for tangible capital (increasing investment and capital
accumulation).
Government consumption (unproductive government spending), (only growth boosting
effect in the short run)
Infrastructure spending :
i.e. Transport, telecommunication, energy, environmental, social infrastructure
•
•
Government investment (productive)
Government consumption (unproductive) (“social infrastructure”)
Both lead to higher aggregate demand but are partly crowded out by lowering private
consumption and private investment and some of the demand impulse leaks abroad
through higher imports.
However, in the medium term government investment raises productivity
36
Effects Cohesion Spending (3)
Support to R&D
•
•
reductions in fixed costs
reductions in intangible capital costs for the intermediate sector
By reducing costs, new start-ups enter the market (new products). By supporting
innovation, high skilled workers are reallocated in the model from the production sector
to the R&D sector.
Initially, this reallocation reduces final goods production and has a negative impact on
growth, but over time the positive output effects dominate as productivity increases, and
this also stimulates physical investment (endogenous growth )
Investment Human Capital
•
•
•
non-productive government spending
direct transfers to households,
Improvement skill efficiencies.
The effects on average skill efficiencies take time to build up (cohort effects)
37
Figure 5.2. Simulated GDP impacts EU27 Member States
IT
DE
0.35
0.40
0.30
0.30
0.25
0.20
0.20
0.15
0.10
0.10
0.05
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
A
02
03
20
-0.05
20
01
20
20
00
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
20
02
A
01
00
20
20
A
0.00
0.00
-0.10
-0.10
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
PO
IR
0.70
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
3.50
0.60
3.00
0.50
2.50
0.40
2.00
0.30
1.50
0.20
1.00
0.10
0.00
A
25
24
A
20
23
A
20
22
A
20
21
A
20
A
20
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
A
07
20
A
06
20
A
05
20
A
04
20
A
03
20
A
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
03
A
20
01
02
20
20
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
20
00
A
0.00
-0.20
A
01
02
20
-0.10
20
20
00
A
0.50
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
38
Figure 5.2. Simulated GDP impacts EU27 Member States
ES
EL
3.50
2.50
3.00
2.00
2.50
1.50
2.00
1.50
1.00
1.00
0.50
0.50
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
0.60
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-R&D+INFR+OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-OT
A
A
20
25
A
24
20
A
23
20
22
A
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
20
A
21
20
A
20
20
A
19
20
A
18
20
A
17
20
A
16
20
A
15
20
A
14
20
A
13
20
A
12
20
A
11
20
A
20
10
A
09
20
A
08
20
A
07
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
CY
CZ
20
A
06
20
A
05
20
A
04
20
A
20
03
A
02
20
01
A
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
20
20
00
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
03
20
02
20
01
00
20
20
A
0.00
A
0.00
0.20
0.50
0.15
0.40
0.10
0.30
0.05
0.20
0.00
0.10
-0.05
-0.10
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
A
07
20
20
06
A
20
05
A
20
04
A
20
03
A
20
02
A
01
20
20
00
A
0.00
-0.10
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
39
Figure 5.2. Simulated GDP impacts EU27 Member States
HU
EE
1.40
1.00
0.90
1.20
0.80
1.00
0.70
0.60
0.80
0.50
0.60
0.40
0.40
0.30
0.20
0.20
0.10
A
A
0.00
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
LV
2.50
11
A
20
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
LT
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
02
01
20
20
-0.20
20
00
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
03
20
A
02
20
01
20
20
00
A
0.00
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
3.00
2.50
2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
20
02
A
01
A
00
20
20
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
02
20
00
01
20
20
A
0.00
A
0.00
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
40
Figure 5.2. Simulated GDP impacts EU27 Member States
PL
MT
0.70
1.80
0.60
1.60
1.40
0.50
1.20
0.40
1.00
0.30
0.80
0.20
0.60
0.10
0.40
0.00
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
02
20
01
20
20
00
A
0.20
-0.10
GDP-R&D+INFR+OT
SCF (% GDP), gross-R&D+INFR+OT
SCF (% GDP), gross-HR+R&D+INFR+OT
A
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
20
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
SK
0.35
11
A
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
SI
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
03
A
02
01
GDP-INFR+OT
SCF (% GDP), gross-OT
20
-0.20
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-INFR+OT
20
-0.20
20
20
00
A
0.00
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
0.80
0.30
0.60
0.25
0.20
0.40
0.15
0.20
0.10
0.05
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
02
01
A
20
20
A
20
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
20
19
A
20
18
A
20
17
A
20
16
A
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
20
05
A
20
04
A
20
03
A
20
02
A
A
00
01
20
20
-0.05
20
00
A
0.00
0.00
-0.20
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
GDP-HR+R&D+INFR+OT
GDP-OT
SCF (% GDP), gross-R&D+INFR+OT
GDP-R&D+INFR+OT
SCF (% GDP), gross-OT
SCF (% GDP), gross-HR+R&D+INFR+OT
GDP-INFR+OT
SCF (% GDP), gross-INFR+OT
41
Sensitivity analysis (1)
αG = output elasticity of public capital (infrastructure)
Large literature on infrastructure investment and economic
growth (since Aschauer 1989, 1990 )
Extremely wide range of estimates found in the literature
Econometric problems relating to common trends, missing
variables, simultaneity bias and reverse causation hamper
a proper identification of this elasticity from macroeconomic timeseries.
Gramlich (1994) makes a case for an identical rate of return
on private and public capital.
Assumption adopted in the model : output elasticity of public
capital is set such that the marginal product of public
capital is identical to that of private capital (αG =0.10)
=> Sensitivity analysis 1 : αG = 0.15
43
Sensitivity analysis (2)
slc = the share of liquidity constrained consumers
• The share of liquidity-constrained households is generally an
important parameter as it determines the degree of so-called nonRicardian behaviour in the model for non-productive government
spending shocks.
• The lower the share of liquidity-constrained households, the higher the
degree of crowding out of government spending shocks due to an
offsetting response of Ricardian households who raise their
precautionary savings in anticipation of higher future tax liabilities.
• The share of liquidity constrained households in the euro area is
typically estimated to lie in the range between 0.2 and 0.4 (e.g. Ratto
et al., 2009, Coenen et al., 2008).
• The assumption in the model version used here, that this share is
equal to the share of low skilled workers.
• This implies substantial differences across countries. Labour force
data on skill groups shows a large dispersion in the share of low
skilled workers across countries and our model assumption implies a
similar dispersion in the share of liquidity constrained households.
 sensitivity analysis 2 : slc=0.5
44
Sensitivity analysis (3)
Classification of interventions
Mapping of cohesion policy spending onto specific model variables
• lack of detailed information on some spending items
• alternative classifications are always possible.
=> Sensitivity analysis 3
We illustrate one variant in which we classify social infrastructure
spending as productive
45
Figure 6.1 Portugal: sensitivity analysis: GDP impact (% diff.)
and funds received (% of GDP)
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
A
25
A
20
24
A
20
23
A
20
22
A
20
21
A
20
20
A
GDP-social infr.
20
19
A
20
18
A
20
17
A
20
16
A
GDP-increased alphag
20
15
A
20
14
A
20
13
A
20
12
A
20
11
A
GDP-baseline scenario
20
10
A
20
09
A
20
08
A
20
07
A
20
06
A
SCF (% GDP), gross
20
05
A
20
04
A
20
03
A
20
02
A
20
01
20
20
00
A
0.00
GDP-SLC
46
Sensitivity analysis
Output elasticity public capital (αG = 0.15) :
As infrastructure spending amounts for a large share of
overall spending (between 30-40 per cent) this has a
significant impact on the results (eg. Portugal long term
GDP effect from 3.1 per cent to 3.7 per cent )
Share liquidity-constrained consumption (slc = 0.5 ):
The impact of this assumption is not particularly large.
1. Cohesion spending is financed by fiscal transfers from
the EU budget. This spending does not give rise to
proportionally higher tax liabilities in the future but is a
pure fiscal transfer from donor counties to recipient
countries.
2. Consumption by Ricardian households is also positively
affected as most spending is productive and leads to a
rise in permanent incomes
47
Conclusions
•
•
Microfounded DSGE model with semi-endogenous
growth
In the short run:
– spending could lead to crowding out of productive private
investment and could give rise to real appreciations which lower
export growth
– R&D promoting policies could drive up wages of researchers and
crowd out high skilled employment in other sectors.
– little benefit one can expect in the short run from training and
other human capital investments.
•
In the medium term:
– the productivity enhancing effects of infrastructure investment,
R&D promoting policies, and human capital investments become
gradually stronger
•
Long run:
– endogenous growth effects : positive benefits become stronger in
the medium and long run
48
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