Banque Nationale De Belgique Sa · EURONEXT:BNB
Banque Nationale De Belgique Sa — Technical Presentation (April 2024)
95 slides from Banque Nationale De Belgique Sa's technical presentation, April 2024
Slide 1: Who Is Afraid of Eurobonds?
Who Is Afraid of Eurobonds? Francesco Bianchi Leonardo Melosi Anna Rogantini Picco University of Warwick European Central Bank Johns Hopkins University FRB of Chicago & CEPR CEPR NBER & CEPR The views in this paper are solely those of the authors and should not be interpreted as reflecting the views
Slide 2: Where does the euro area stand?
Where does the euro area stand? More countries in euro area have now elevated government debt 80 100 120 140 160 France Germany Italy Portugal Spain EA Debt-to-GDP Ratio 60 40 1990 2000 2010 2020 Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 2
Slide 3: Where does the euro area stand?
Where does the euro area stand? Fiscal adjustments required at a time in which the euro area faces old and new challenges 80 100 120 140 160 France Germany Italy Portugal Spain EA Debt-to-GDP Ratio 60 40 1990 2000 2010 2020 Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024
Slide 4: Where does the euro area stand?
Where does the euro area stand? In the 90s fiscal rules introduced and there was convergence across euro area countries 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000
Slide 5: Where does the euro area stand?
Where does the euro area stand? The fiscal rules worked well in the 2000s... 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bianchi, Melosi, and Rogantini Pi
Slide 6: Where does the euro area stand?
Where does the euro area stand? ...but when Great Recession hit, debt accumulated quickly 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bianchi, Melosi, and
Slide 7: Where does the euro area stand?
Where does the euro area stand? Euro area entered a phase of low inflation and ZLB episodes 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bianchi, Melosi, a
Slide 8: Where does the euro area stand?
Where does the euro area stand? As a result, euro area had a sluggish recovery and debt remained elevated 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bian
Slide 9: Where does the euro area stand?
Where does the euro area stand? Pandemic further curtailed the ability of euro area policymakers to stabilize the economy 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 200
Slide 10: Where does the euro area stand?
Where does the euro area stand? Fiscal rules were temporarily suspended... 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bianchi, Melosi, and Rogantini Picc
Slide 11: Where does the euro area stand?
Where does the euro area stand? ...and inflation increased 80 100 120 140 160 15 France Germany France Germany Italy Portugal Italy Portugal Spain EA Spain EA Debt-to-GDP Ratio CPI Inflation Rate 5 10 60 0 40 1990 2000 2010 2020 1990 2000 2010 2020 Bianchi, Melosi, and Rogantini Picco Who Is Afraid
Slide 12: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 3
Slide 13: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 3
Slide 14: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024
Slide 15: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 16: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 17: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 18: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 19: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 20: The euro area at a crossroads
The euro area at a crossroads With the current framework policy coordination in the euro area is hard to achieve: + Hard to implement quick coordinated fiscal interventions + Hard to guarantee long-run fiscal sustainability Deterioration of fiscal positions and high inflation put euro area at crossr
Slide 21: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 4
Slide 22: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 23: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 24: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 25: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 26: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 27: A new policy framework
A new policy framework + We study a new monetary and fiscal framework that separates: the need of short-run macroeconomic stabilisation from issue of long-run fiscal sustainability of national debts + Strict fiscal rules do not apply to a centralized euro area Treasury that: issues Eurobonds impleme
Slide 28: Main findings
Main findings The new policy framework based on Eurobonds and a centralized euro area Treasury: + Removes the risk of deflation when debt is high and the ZLB is binding: 1. Smaller recessions → less accumulation of national debts → stronger recoveries 2. Controlled reflation of EA when necessary → e
Slide 29: Main findings
Main findings The new policy framework based on Eurobonds and a centralized euro area Treasury: + Removes the risk of deflation when debt is high and the ZLB is binding: 1. Smaller recessions → less accumulation of national debts → stronger recoveries 2. Controlled reflation of EA when necessary → e
Slide 30: Main findings
Main findings The new policy framework based on Eurobonds and a centralized euro area Treasury: + Removes the risk of deflation when debt is high and the ZLB is binding: 1. Smaller recessions → less accumulation of national debts → stronger recoveries 2. Controlled reflation of EA when necessary → e
Slide 31: Literature
Literature + Monetary and fiscal policy in currency unions Beetsma and Jensen (2005), Galı́ and Monacelli (2008), Ferrero (2009), Nakamura and Steinsson (2014), Farhi and Werning (2017) + Fiscal theory of the price level Sargent and Wallace (1981), Leeper (1991), Sims (1994), Woodford (1994, 1995, 2
Slide 32: A Model of a Two-country Monetary Union
A Model of a Two-country Monetary Union Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 7
Slide 33: A Model of a Two-country Monetary Union
A Model of a Two-country Monetary Union Households: + savers and hand-to-mouth preferences + value public consumption as a complement to private consumption + if savers, wage setters subject to a Calvo lottery + if savers, invest in physical capital and rent a share to domestic firms + if savers, bu
Slide 34: A Model of a Two-country Monetary Union
A Model of a Two-country Monetary Union Households: + savers and hand-to-mouth preferences + value public consumption as a complement to private consumption + if savers, wage setters subject to a Calvo lottery + if savers, invest in physical capital and rent a share to domestic firms + if savers, bu
Slide 35: A Model of a Two-country Monetary Union
A Model of a Two-country Monetary Union Households: + savers and hand-to-mouth preferences + value public consumption as a complement to private consumption + if savers, wage setters subject to a Calvo lottery + if savers, invest in physical capital and rent a share to domestic firms + if savers, bu
Slide 36: A Model of a Two-country Monetary Union
A Model of a Two-country Monetary Union Households: + savers and hand-to-mouth preferences + value public consumption as a complement to private consumption + if savers, wage setters subject to a Calvo lottery + if savers, invest in physical capital and rent a share to domestic firms + if savers, bu
Slide 37: Policy Authorities
Policy Authorities National governments EA fiscal authority EA monetary authority Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 8
Slide 38: Policy Authorities
Policy Authorities National governments + issue national debts with a maturity structure to domestic savers + levy distortionary taxes on domestic households + purchase goods and transfer resources to domestic households PtB Bt + τtK RtK Kt + τtL Wt Lt + τtC PtC Ct = (1 + ρPtB )Bt−1 + PtC Gt + PtC Z
Slide 39: Policy Authorities
Policy Authorities National governments + issue national debts with a maturity structure to domestic savers + levy distortionary taxes on domestic households + purchase goods and transfer resources to domestic households PtB Bt + τtK RtK Kt + τtL Wt Lt + τtC PtC Ct = (1 + ρPtB )Bt−1 + PtC Gt + PtC Z
Slide 40: Policy Authorities
Policy Authorities National governments + issue national debts with a maturity structure to domestic savers + levy distortionary taxes on domestic households + purchase goods and transfer resources to domestic households PtB Bt + τtK RtK Kt + τtL Wt Lt + τtC PtC Ct = (1 + ρPtB )Bt−1 + PtC Gt + PtC Z
Slide 41: Old policy framework: Fiscal Discipline
Old policy framework: Fiscal Discipline Fiscal authorities follow fiscal rules to stabilise their debts + National fiscal rules for i ∈ {IT , DE } J J τ̂i,t = ρJ τ̂i,t−1 + (1 − ρJ )γ Ji ŝbi ,t−1 , ĝi,t = ρG ĝi,t−1 − (1 − ρG )γ Gi ŝbi ,t−1 ẑi,t = ρZ ẑi,t−1 − (1 − ρZ )γ Zi ŝbi ,t−1 − (1 − ρZ )γ
Slide 42: Old policy framework: Fiscal Discipline
Old policy framework: Fiscal Discipline Fiscal authorities follow fiscal rules to stabilise their debts + National fiscal rules for i ∈ {IT , DE } J J τ̂i,t = ρJ τ̂i,t−1 + (1 − ρJ )γ Ji ŝbi ,t−1 , ĝi,t = ρG ĝi,t−1 − (1 − ρG )γ Gi ŝbi ,t−1 ẑi,t = ρZ ẑi,t−1 − (1 − ρZ )γ Zi ŝbi ,t−1 − (1 − ρZ )γ
Slide 43: Old policy framework: Fiscal Discipline
Old policy framework: Fiscal Discipline + The EA monetary authority follows a Taylor rule n o R̂t = max − ln R ∗ , ρr R̂t−1 + (1 − ρr ) [φπ π̂EA,t + φy ŷEA,t ] where π̂EA,t = 12 π̂1,t + 12 π̂2,t and ŷEA,t = 12 ŷ1,t + 12 ŷ2,t are at EA level + The Taylor principle is satisfied; i.e., φπ > 1 + ZLB
Slide 44: Old policy framework: Deviation from fiscal discipline
Old policy framework: Deviation from fiscal discipline Lack of stabilization tools in high-debt country can lead national government of this country to be unwilling or unable to comply with fiscal rules Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 11
Slide 45: Old policy framework: Deviation from fiscal discipline
Old policy framework: Deviation from fiscal discipline Lack of stabilization tools in high-debt country can lead national government of this country to be unwilling or unable to comply with fiscal rules + A conflict arises between high-debt country fiscal authority and monetary authority: Monetary a
Slide 46: Old policy framework: Deviation from fiscal discipline
Old policy framework: Deviation from fiscal discipline Lack of stabilization tools in high-debt country can lead national government of this country to be unwilling or unable to comply with fiscal rules + A conflict arises between high-debt country fiscal authority and monetary authority: Monetary a
Slide 47: Old policy framework: Deviation from fiscal discipline
Old policy framework: Deviation from fiscal discipline Lack of stabilization tools in high-debt country can lead national government of this country to be unwilling or unable to comply with fiscal rules + A conflict arises between high-debt country fiscal authority and monetary authority: Monetary a
Slide 48: New policy framework
New policy framework + EA Treasury is not subject to limits on primary deficits when facing a recession Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 12
Slide 49: New policy framework
New policy framework + EA Treasury is not subject to limits on primary deficits when facing a recession + EA policy authorities can coordinate on a response to an exceptionally large recession: 1. EA fiscal authority issues Eurobonds to finance the fiscal stimulus Bianchi, Melosi, and Rogantini Picc
Slide 50: New policy framework
New policy framework + EA Treasury is not subject to limits on primary deficits when facing a recession + EA policy authorities can coordinate on a response to an exceptionally large recession: 1. EA fiscal authority issues Eurobonds to finance the fiscal stimulus 2. ECB accommodates rise in inflati
Slide 51: New policy framework
New policy framework + EA Treasury is not subject to limits on primary deficits when facing a recession + EA policy authorities can coordinate on a response to an exceptionally large recession: 1. EA fiscal authority issues Eurobonds to finance the fiscal stimulus 2. ECB accommodates rise in inflati
Slide 52: New policy framework and a large shock
New policy framework and a large shock + EA fiscal rules (J ∈ {K , L, C }) J J P A P τ̂EA,t = ρJ τ̂EA,t−1 + (1 − ρJ ) γJ ŝEA,t−1 + γJ ŝEA,t−1 − ŝEA,t−1 | {z } unfunded budget P A P ẑEA,t = ρZ ẑEA,t−1 − (1 − ρZ ) γZ ŝEA,t−1 + γZ ŝEA,t−1 − ŝEA,t−1 + γZY
Slide 53: New policy framework and a large shock
New policy framework and a large shock + EA monetary authority tolerates increase in inflation to stabilise amount of Eurobonds due to EA large recession P P P R̂t = max − ln R∗ , ρR R̂t−1 + (1 − ρR ) φ π π̂ EA,t + φ π π̂ t − π̂EA,t +φy ŷEA,t | {z }
Slide 54: Emergency Budget
Emergency Budget We construct a counterfactual economy where: + Large symmetric recessionary shocks are shut down + Policymakers follow Fiscal Discipline Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 15
Slide 55: Calibration
Calibration National fiscal parameters: + Steady state and persistence of tax rates: EC, DG Taxation and Customs Union + Steady-state and persistence of G and Z: Eurostat + Steady-state national debt-to-GDP: 60% + Strength of fiscal response to debt-to-GDP: high-country debt-to-GDP back to steady-st
Slide 56: Calibration
Calibration National fiscal parameters: + Steady state and persistence of tax rates: EC, DG Taxation and Customs Union + Steady-state and persistence of G and Z: Eurostat + Steady-state national debt-to-GDP: 60% + Strength of fiscal response to debt-to-GDP: high-country debt-to-GDP back to steady-st
Slide 57: Three policy scenarios
Three policy scenarios We consider three policy scenarios 1. Old policy framework: Fiscal discipline always in place ⇒ risk of deflation Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 17
Slide 58: Three policy scenarios
Three policy scenarios We consider three policy scenarios 1. Old policy framework: Fiscal discipline always in place ⇒ risk of deflation 2. Old policy framework: Deviation from fiscal discipline ⇒ risk of inflation and fiscal stagflation Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobond
Slide 59: Three policy scenarios
Three policy scenarios We consider three policy scenarios 1. Old policy framework: Fiscal discipline always in place ⇒ risk of deflation 2. Old policy framework: Deviation from fiscal discipline ⇒ risk of inflation and fiscal stagflation 3. New policy framework ⇒ Stabilization policies separated fro
Slide 60: A large contractionary shock
A large contractionary shock + Recession induced through large risk-premium shock Persistence: Match average EABCN peak-to-trough Volatility: Match output volatility over 1999Q1-2019Q4 + Recessionary shock hits when debt-to-GDP away from steady state: Country 1 (Italy): annual debt-to-GDP 134.8% Cou
Slide 61: Old policy framework: From risk of deflation to risk of stagflation
Old policy framework: From risk of deflation to risk of stagflation Strict fiscal rules + zero lower bound ⇒ Risk of deflation and deep recession High-Debt Country Output High-Debt Country Debt-to-GDP EA Inflation 0.00 160.00 5.00 -5.00 140.00 4.00 120.00 3.00 -10.00 100.00 2.00 80.00 Risk of deflat
Slide 62: Old policy framework: From risk of deflation to risk of stagflation
Old policy framework: From risk of deflation to risk of stagflation Suspend fiscal rules ⇒ Risk of stagflation if one country unwilling to revert to them High-Debt Country Output High-Debt Country Debt-to-GDP EA Inflation 0.00 160.00 5.00 -5.00 140.00 4.00 120.00 3.00 -10.00 100.00 2.00 80.00 Risk o
Slide 63: Old policy framework: From risk of deflation to risk of stagflation
Old policy framework: From risk of deflation to risk of stagflation Monetary tightening further increases debt-to-GDP in high-debt country High-Debt Country Output High-Debt Country Debt-to-GDP EA Inflation 0.00 160.00 5.00 -5.00 140.00 4.00 120.00 3.00 -10.00 100.00 2.00 80.00 Risk of deflation 1.0
Slide 64: Old policy framework: From risk of deflation to risk of stagflation
Old policy framework: From risk of deflation to risk of stagflation Spiral of growing inflation, deeper recession, and debt accumulation High-Debt Country Output High-Debt Country Debt-to-GDP EA Inflation 0.00 160.00 5.00 -5.00 140.00 4.00 120.00 3.00 -10.00 100.00 2.00 80.00 Risk of deflation 1.00
Slide 65: Distortionary taxes generate a drag on the economy
Distortionary taxes generate a drag on the economy High-Debt Country C High-Debt Country L High-Debt Country K 21.00 32.00 23.00 31.50 22.80 20.50 31.00 22.60 30.50 22.40 30.00 22.20 20.00 Risk of deflation 29.50 Risk of stagflation 22.00 0 10 20 30 0 10 20 30 0 10 20 30 C L Low-Debt Country Low-Deb
Slide 66: New policy framework: Controlled reflation
New policy framework: Controlled reflation New policy framework based on Eurobonds and euro area Treasury eliminates both risks Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 21
Slide 67: New policy framework: Controlled reflation
New policy framework: Controlled reflation No need to suspend fiscal rules + ability to coordinate policies at ZLB Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 21
Slide 68: New policy framework: Controlled reflation
New policy framework: Controlled reflation No ZLB, milder recession, contained increase in inflation High-Debt Country Output High-Debt Country Debt-to-GDP EA Inflation 0.00 160.00 5.00 -5.00 140.00 4.00 120.00 3.00 -10.00 100.00 2.00 Risk of deflation 80.00 Risk of stagflation 1.00 -15.00 New fisca
Slide 69: Why the new policy framework is effective
Why the new policy framework is effective + New policy framework mitigates the recession relative to Fiscal Discipline because: Works as automatic stabilizer that boosts spending and inflation expectations and lowers real interest rates Eurobonds issued to finance fiscal stimulus not backed by expec
Slide 70: Why the new policy framework is effective
Why the new policy framework is effective + New policy framework mitigates the recession relative to Fiscal Discipline because: Works as automatic stabilizer that boosts spending and inflation expectations and lowers real interest rates Eurobonds issued to finance fiscal stimulus not backed by expec
Slide 71: Why the new policy framework is effective
Why the new policy framework is effective + New policy framework mitigates the recession relative to Fiscal Discipline because: Works as automatic stabilizer that boosts spending and inflation expectations and lowers real interest rates Eurobonds issued to finance fiscal stimulus not backed by expec
Slide 72: Why Both Countries Benefit from the Policy Reform?
Why Both Countries Benefit from the Policy Reform? When monetary policy unconstrained, it is an effective stabilisation tool High-Debt Country Output Low-Debt Country Output 0 0 -5 -5 -10 -10 -15 -15 Fiscal discipline, Symmetric debt, No ZLB 5 10 15 20 25 30 35 40 5 10 15 20 25 30 35 40 EA Output EA
Slide 73: Why both countries benefit from the policy reform?
Why both countries benefit from the policy reform? Large national debt matters somewhat for recovery under fiscal discipline High-Debt Country Output Low-Debt Country Output 0 0 -5 -5 -10 -10 Fiscal discipline, Symmetric debt, No ZLB -15 -15 Fiscal discipline, Asymmetric debt, No ZLB 5 10 15 20 25 3
Slide 74: Why both countries benefit from the policy reform?
Why both countries benefit from the policy reform? If ZLB binds, lack of stabilisation tools for high-debt countries under fiscal discipline High-Debt Country Output Low-Debt Country Output 0 0 -5 -5 -10 -10 Fiscal discipline, Symmetric debt, No ZLB Fiscal discipline, Asymmetric debt, No ZLB -15 -15
Slide 75: Why both countries benefit from the policy reform?
Why both countries benefit from the policy reform? Very costly, also for low-debt countries because euro area heavily integrated High-Debt Country Output Low-Debt Country Output 0 0 -5 -5 -10 -10 Fiscal discipline, Symmetric debt, No ZLB Fiscal discipline, Asymmetric debt, No ZLB -15 -15 Fiscal disc
Slide 76: Why both countries benefit from the policy reform?
Why both countries benefit from the policy reform? Scope for Eurobonds as stabilisation tool if ZLB binds and large national debt High-Debt Country Output Low-Debt Country Output 0 0 -5 -5 -10 -10 Fiscal discipline, Symmetric debt, No ZLB Fiscal discipline, Asymmetric debt, No ZLB Fiscal discipline,
Slide 77: Welfare implications
Welfare implications Variables Old framework New framework Euro Area Output 16.797 11.707 Euro Area Inflation 0.617 0.427 High-Debt Country Output 18.103 12.273 High-Debt Country Inflation 0.640 0.426 Low-Debt Country Output 15.516 11.147 Low-Debt Country Inflation 0.640 0.426 ZLB Frequency 0.210 0.
Slide 78: Conclusions
Conclusions + Coordination harder to achieve with current framework: 1. fiscal rules and ZLB limit stabilization policies in response to large contractionary shock 2. robust fiscal interventions require suspending fiscal rules Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 20
Slide 79: Conclusions
Conclusions + Coordination harder to achieve with current framework: 1. fiscal rules and ZLB limit stabilization policies in response to large contractionary shock 2. robust fiscal interventions require suspending fiscal rules + Swings between: 1. risk of deflation 2. risk of inflation and stagflati
Slide 80: Conclusions
Conclusions + Coordination harder to achieve with current framework: 1. fiscal rules and ZLB limit stabilization policies in response to large contractionary shock 2. robust fiscal interventions require suspending fiscal rules + Swings between: 1. risk of deflation 2. risk of inflation and stagflati
Slide 81: Conclusions
Conclusions + Coordination harder to achieve with current framework: 1. fiscal rules and ZLB limit stabilization policies in response to large contractionary shock 2. robust fiscal interventions require suspending fiscal rules + Swings between: 1. risk of deflation 2. risk of inflation and stagflati
Slide 82: Appendix
Appendix Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 29
Slide 83: Final Goods Firms
Final Goods Firms + Final good produced combining CtH and CtF with technology µc −1 1 µc µc −1 µc −1 1 QtC = (1 − νc ) µc CtH µc + νcµc CtF µc νc degree of openness & µc elasticity of sub. between H & F goods Demand for H and F intermediate goods i and i ∗ by final consumption good firm: Z 1 1 1+ηp
Slide 84: Intermediate Goods Firms
Intermediate Goods Firms + Intermediate goods firms Continuum of monopolistically competitive firms Use technology: Yt (i) = Kt (i)α (At Lt (i))1−α − At Ω Calvo-price setters Price indexation: ptH (i) = (πt−1 H )χp (π H )1−χp Pt−1 H (i) Face perfectly competitive factor markets for capital and labor
Slide 85: Wages
Wages Both savers and non-savers supply differentiated labor service hR 1 i1+ηw 1 Labor packer produces composite labor Lt = 0 Lt (l) 1+ηw dl − 1+η η w Wt (l) w Profit maximisation yields labor demand Lt (l) = Lt Wt Wage set optimally by savers with prob ωw Wage indexation Wt (l) = Wt−1 (l)(Πt−1 e γ
Slide 86: Households’ Preferences
Households’ Preferences + Savers + Hand-to-mouth Same preferences 1+ξ Lt (j) Ut = (ln Ct∗ (j) − C̃t−1 ∗ )− , 1+ξ where Ct∗ (j) ≡ Ct (j) + αG Gt back Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 33
Slide 87: Households’ Budget Constraints
Households’ Budget Constraints The nominal flow budget constraint for hand-to-mouth j ∈ [0, µ] PtC (1 + τtC + τtEA,C )CtN (j) = (1 − τtL − τtEA,L ) 01 Wt (l)LN C N R t (j, l)dl + Pt Zt (j) The nominal flow budget constraint for saver j ∈ (µ, 1] Qt,t+1 Bs,t+1 PtC (1 + τtC + τtEA,C )CtS (j) + PtI It (
Slide 88: Price Indices
Price Indices h 1−µc i 1 1−µc 1−µc PtC = (1 − νc )PtH + νc PtF ∗ h ∗ 1−µc i 1 ∗ 1−µc 1−µc PtC = νc PtH + (1 − νc )PtF Back Bianchi, Melosi, and Rogantini Picco Who Is Afraid of Eurobonds? April 2024 35
Slide 89: Calibration I
Calibration I Parameter Description Value Target/Source Preferences β Discount factor 0.999 Annual SS real rate of 1.35% ξ Inverse Frisch elasticity 2 Coenen et al. (2013) θ Habit in formation 0.59 Coenen et al. (2013) αG Substitutability of private vs. gov. consumption -0.24 Leeper et al. (2017) Fr
Slide 90: Calibration II
Calibration II Parameter Description Value Target/Source Monetary authority φπ Interest rate response to EA inflation 1.89 Coenen et al. (2013) φy Interest rate response to EA output 0.16 Coenen et al. (2013) ρr Interest rate smoothing 0.88 Coenen et al. (2013) Risk Premium Shock ρ Persistence of sh
Slide 91: Calibration III
Calibration III Parameter Description Value Target/Source Steady-state calibration targets sb,IT Quarterly debt-to-GDP in IT 2.4 Annualized 60%, Maastricht Treaty parameter sb,DE Quarterly debt-to-GDP in DE 2.4 Annualized 60%, Maastricht Treaty parameter sb,EA Quarterly debt-to-GDP in EA 0.28 Annual
Slide 92: Calibration IV
Calibration IV Parameter Description Value Target/Source Fiscal authorities ρL IT Persistence of τ L in IT 0.735 Estimated 2004-2020, EC, DG Taxation & Customs Union ρL DE Persistence of τ L in DE 0.735 Estimated 2004-2020, EC, DG Taxation & Customs Union ρL EA Persistence of τ L in EA 0.726 Estimat
Slide 93: Summary and parameterization
Summary and parameterization + Policy response to a large contractionary shock Parameter Description Fiscal Discipline Fiscally-led framework Conflict φπ Monetary response to πEA 1.89 0.9 1.89 γJ,IT Fiscal response for IT 0.11 0.11 0.001 γJ,DE Fiscal response for DE 0.11 0.11 0.11 γJ,EA Fiscal respo
Slide 94: Calibration V
Calibration V Transition matrix Q between the regimes is the following: p MM (1 − p FC − p FF ) 0 Q = (1 − p MM − p MC ) p FF 1 − p CC MC FC p p p CC Transition probabilities: p MM = 0.9995, p FF = 0.9995, p CC = 0.9 p MC = p FC = 0 The conflict is assumed to last 10 quarters Back calib Back
Slide 95: EU fiscal governance
EU fiscal governance Maastricht Treaty (1992): establishes fiscal rules 60% debt-to-GDP and 3% deficit limit No bail-out clause and no debt monetization Stability and Growth Pact (1997): adds more rigidity Budget position close to balance or in surplus over medium term Excessive deficit procedure if
Banque Nationale De Belgique — Technical Presentation (April 2024) on 6ix