The Aggregate Effect of Government Income, Transfers Shocks - EU Evidence

The Aggregate Effect of Government IncomeTransfers Shocks - EU Evidence

Susana Parraga Rodrıguez

University College London

Public Finance Workshop, 21 June 2016

Introduction

Government income transfers are a key component of publicexpenditures.

Average Public Expenditures (% of GDP)

Total Public Social ExpendituresExpenditures In kind In cash Total

EU 43.5 12.9 15.9 28.8DE 41.3 12.0 16.1 28.0ES 38.6 11.1 14.5 25.5FR 50.4 15.1 18.9 34.1LV 32.9 8.3 10.2 18.5NL 41.5 16.8 10.8 27.6PL 38.3 9.9 14.3 24.2

Parraga-Rodrıguez (UCL) Transfers EU 1 / 15

Introduction

The question of what is the aggregate effect of government incometransfers shocks has received little attention in the literature.

However, to answer this question we need to control for endogeneity.

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31

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU Unemployment rate

EU Social expenditure (% GDP; right)


Introduction

This paper estimates the aggregate effect of government incometransfers shocks using a panel dataset of 22 EU Member Statesduring 2007-2015.

Construct a new measure of transfers shocks based on a dataset bypublic finance experts of the ESCB for

1. Old age pensions.2. Unemployment benefits.3. Other transfers.

Estimate the response of output, aggregate expenditure components,and labor market indicators to these transfers shocks.

I demonstrate a positive and significant effect of exogenous transfersshocks to the macroeconomy.


Related Literature

Aggregate effects government spendingPerotti (2007), Mountford and Uhlig (2009), Ramey (2011), Fisher andPetters (2010), Auerbach and Gorodnichenko (2011), Nakamura andSteinsson (2014), Wilson (2012), Suarez-Serrato and Wingender (2014),Chodorow-Reich et al (2012).

Aggregate effects transfersPoterba (1988), Wilcox (1989), Oh and Reis (2012), Romer and Romer(2015).

Household-level evidenceBodkin (1959), Hausman (2013), Parker et al. (2013, 2006), Stephens(2003), Browning and Collado (2001), Souleles (1999), Japelli andPistaferri (2010).


Government Income Transfers Shocks

Constructed from the new dataset by public finance experts withinthe ESCB.

Harmonized data with annual frequency.

The data reports discretionary changes in transfers.

The dataset defines a policy action as any change to legislation whichdetermines benefit entitlements.

Policy actions are measured as the difference relative to trend.

For academic purposes we should be able to reproduce the data.


Histogram of All Changes in TransfersPercentage of GDP

0 5

10 15 20 25 30 35 40 45 50

≤-0.2 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 ≥0.2

Frac

tion

Old Age Pensions

0 10 20 30 40 50 60 70 80 90

≤-0.2 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 ≥0.2

Frac

tion

Unemployment Bene@its

0 5

10 15 20 25 30 35 40

≤-0.2 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 ≥0.2

Frac

tion

Other Transfers


Narrative Analysis

The ESCB dataset contains a description for all measures.

Complement this information with the narrative record.

Reclassification discretionary changes:

1. Cyclical: Changes in transfers to promote short-run economic growth.2. Reform: Structural reforms for the long-run sustainability of public

finances, efficiency gains. Court rulings.3. Purchasing Power: Changes in transfers to keep up with inflation and

to improve the insurance provided by the welfare system.

Reclassification Table Predictability tests


Baseline Specification

Dynamic linear panel regression model:

lnyit = αi + δt + ρlnyit−1 + β∆Tit + γXit + εit (1)

Transfers shocks measure discretionary changes in public expenditurerelative to previous year.

Variables at constant prices of 2015 and per capita.

Controls: price level, interest rate of reference, ALTR, governmentspending.

Imprecise estimates for unemployment benefits and other transfers,focus on old age pensions.


Old Age Pensions Output multiplier

0 1 2 3 40

0.1

0.2

0.3

0.4

0.5

0.6

0.7

years

percent

BaselineAll changesResiduals2 s.d.1 s.d.

Long-run effect

Baseline 0.9All changes 1.0Residuals 0.6

U.S. data

Impact 0.2One year 1.0Long-run 2.2

FP controls

Other Transfers


Aggregate Expenditure Components

Government income transfers affect the macroeconomy throughchanging the disposable income of households and their spendingdecisions.

Next outcome variables: aggregate private consumption of durables,non-durables and service, and aggregate private investment.


Aggregate Expenditure ComponentsShock to OAP equivalent to 1% of GDP

0 1 2 3 4−0.5

0

0.5

1

1.5

percent

years

Durables

0 1 2 3 40

0.1

0.2

0.3

0.4

0.5

percent

years

Non−durables

0 1 2 3 4−0.1

0

0.1

0.2

0.3

0.4

percent

years

Services

0 1 2 3 4−1

−0.5

0

0.5

1

1.5

2

percent

years

Investment


Labour Market Indicators

Evidence on the aggregate effect of public expenditures shocks to thelabour market is scarce.

Literature has focused on the effect of government spending shocks.

Next outcome variables: employment, hours per worker,unemployment rate, real wage.

Labour market indicators represent the extensive and intensivemargins of labour supply, and a measure of labour costs.


Labor Market IndicatorsShock to OAP equivalent to 1% of GDP

0 1 2 3 4−0.1

0

0.1

0.2

0.3

percent

years

Employment

0 1 2 3 4−0.06

−0.04

−0.02

0

0.02

0.04

0.06

percent

years

Hours

0 1 2 3 4−0.25

−0.2

−0.15

−0.1

−0.05

0

percentage points

years

Unemployment rate

0 1 2 3 40

0.1

0.2

0.3

0.4

percent

years

Wage


Output Response in Different RegionsShock to OAP equivalent to 1% of GDP

0 1 2 3 4−0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

years

percent

BaselineSouthNorthEast2 s.d.


Summary

This paper provides evidence on the aggregate effect of governmentincome transfers shocks using a panel dataset of 22 EU MemberStates during 2007-2015.

Construction of a new measure of transfers shocks.

Estimates indicate a positive macroeconomic effect of transfersshocks.

A promising way for stronger conclusions could be a larger paneleither in terms of time span and/or number of countries.


Appendix

Classification of Discretionary ChangesAll Countries, 2007-2015

Category Old Age Pensions Unemp. Benefits Other

Endogenous 55 38 86

Exogenous 126 32 115Reform 70 27 74Purchasing Power 56 5 41

TOTAL 181 70 201

Back to presentation


Predictability Testsp-value Granger causality tests

Output Inflation Unemployment ALTR Primaryrate surplus

Old Age PensionsAll changes 0.31 0.74 0.27 0.36 0.45Exogenous 0.42 0.87 0.26 0.32 0.51

Unemployment benefitsAll changes 0.67 0.64 0.34 0.46 0.00Exogenous 0.59 0.88 0.99 0.23 0.07

Other transfersAll changes 0.38 0.08 0.53 0.86 0.18Exogenous 0.21 0.69 0.39 0.20 0.62



Alternative Controls for Fiscal Policy

0 1 2 3 40

0.1

0.2

0.3

0.4

0.5

years

percent

BaselinePrimary surplusInterest PaymentsNo Controls1 s.d.

Long-run effect

Baseline 0.9Primary Surplus 0.9Interest Payments 0.6No controls 1.0



Government Income Transfers Impact Multiplier

Exogenous Exogenous All discretionary Residualschanges changes changes

Old Age Pensions 0.44*** 0.41*** 0.51*** 0.38***(0.11) (0.11) (0.13) (0.09)

Unemp. Benefits 0.04* 0.03** 0.03* -0.02(0.02) (0.01) (0.02) (0.02)

Other Transfers -0.06* -0.03 0.06 0.03(0.03) (0.03) (0.07) (0.06)

Observations 176 176 176 176

Monetary policy x x xFiscal Policy x x xYear FE x x x xCountry FE x x x x



The Aggregate Effect of Government Income, Transfers Shocks - EU Evidence

Economy & Finance

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