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Author/Coordinator
João Pereira dos Santos

Category:
Research Papers

ABSTRACT
We present a difference-in-differences analysis of the road safety effects of introducing tolls on SCUT highways in Portugal, a policy motivated purely by financial considerations, as congestion was never an issue. Using negative binomial count models and a comprehensive dataset on all mainland municipalities covering 2008 to 2014, we find that introducing tolls led to an increase in the total numbers of accidents and of road injuries in municipalities where SCUT highways are located. Additionally, we register a change in the composition thereof, with fewer occurrences on highways (including on SCUT highways) and an increase on national and other roads. Finally, we find that most effects pertain to light injuries. No statistically significant effects were identified for fatal or serious injuries. Furthermore, as a result of introducing tolls on SCUT highways, we estimate that around 20% of the toll revenue collected is lost on the costs linked to road accidents. This questions the rationale of introducing such tolls, even on a revenue-raising standpoint.

WITH:
Alfredo Marvão Pereira
Department of Economics, The College of William and Mary, Williamsburg

Rui Marvão Pereira
Department of Economics, The College of William and Mary, Williamsburg
 
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Author/Coordinator
João Pereira dos Santos

Category:
Research Papers

ABSTRACT
This paper provides evidence of the quality of private sector forecasts of the budget balance between 1993 and 2009 for a sample of 29 countries, grouped into advanced and emerging countries. We find large differences across the two groups: forecasts for advanced economies are much more accurate than for emerging economies and much less subject to a bias towards optimism (i.e. they are less likely to forecast a bigger budget balance than the realization). Forecasts for both groups, however, exhibit a tendency toward forecast smoothing: forecasts are revised slowly so that revisions to forecasts can be systematically predicted based on past revisions. This tendency proves costly around turning points in the economy when the budget balance moves sharply but the corresponding forecasts only adjust very slowly to the reality of the situation.

WITH:
David B. Audretsch
Institute for Development Studies, Indiana University

Dirk Christian Dohse
Kiel Institute for the World Economy
 
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Author/Coordinator
João Tovar Jalles

Category:
Research Papers

ABSTRACT
Using data for a large panel of countries, this paper investigates the role played by income inequality and fiscal stimuli episodes in shaping the likelihood of political stability. By means of Tobit estimations, we show that a rise in inequality increases the probability of government crises. However, such adverse distributional effect is reduced when expansionary or increasingly expansionary fiscal stimuli episodes or successful fiscal stimuli programs are put in place.

WITH:
Luca Agnello
Department of Economics, Business and Statistics (SEAS) and University of Palermo

Vitor Castro
Faculty of Economics, University of Coimbra and Economic Policies Research Unit (NIPE), University of Minho

Ricardo M. Sousa
Economic Policies Research Unit (NIPE), University of Minho and LSE Alumni Association, London School of Economics and Political Science
 
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Author/Coordinator
José Tavares

Category:
Research Papers

ABSTRACT
The debate over political gender quotas is unduly confined to a supposed trade-off between diversity and competence. We characterize the effects of a political gender quota in a citizen-candidate model, to find that quotas do increase the overall quality of those elected whenever the rewards from public office are high, or the skill premium or political gender discrimination are sufficiently low. In such cases, high-skill women candidates run for office in sufficiently high numbers, driving off low-skill male and female candidates. Our model compares quotas with other policies in terms of their impact on the number and quality of those elected.

WITH:
Paulo Júlio
Banco de Portugal and CEFAGE
 
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Author/Coordinator
Francesco Franco

Category:
Research Papers

INTRODUCTION
Factual evidence since the start of the global financial crisis in 2008 shows that the Euro area members face strong challenges to attain simultaneously internal (employment and output) and external (balance of payments) balance. The lack of policy or market mechanisms designed to attain both balances is a weakness in the architecture of the currency area that has been identified since the 1960’s but that are still waiting for a viable solution. The southern Euro-members, given their common internal and external positions, should push for comprehensive and rational mechanisms that can help the achievement of the dual rebalancing.
In this brief talk, my aim is to elaborate an argument for a stabilization fund financed by a flexible mix of VAT and payroll revenues that can perform the role of an adjustment mechanism.
The first part of my presentation presents a narrative of the necessary and sufficient conditions that have been identified for a functioning currency area. This first part highlights some of the conditions identified in the economic literature and how they depend on the hypotheses presented in each specific study. The key message of the first part is that the above hypotheses do not always reflect empirical regularities but that sometimes they reflect beliefs. The idea that the market-based mechanism of internal devaluation, basically a decrease in nominal wages due to an increase in unemployment, would be a sufficiently rapid adjusting mechanism within the Eurozone has been proven wrong, at least in its “rapid” qualification.
The second part of my presentation presents two episodes relating to currency realignment, i.e. the mechanism that existed in the smaller European Union during the European Exchange Rate Mechanism (ERM). These episodes show that imbalances were difficult to resolve even when EU members maintained their own currency. Finally, the third part presents a proposal to explore an adjustment mechanism for the euro area members.
The mechanism is not new as far as it builds on the several existing proposals for a Common European Unemployment Insurance and are also present in the case of the less ambitious European stabilization fund. The novelty of the proposals consists in the financing of the fund with a flexible mix of VAT and payroll taxes. This financing scheme builds on the results that neutral budget tax swaps between VAT and payroll taxes can mimic the effects of currency realignment. The mix should be adapted to the relative position of each euro member in order to allow him to perform a fiscal devaluation or a fiscal revaluation, i.e. a fiscal realignment, while letting the stabilization fund help to achieve the internal balance objective.
 
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Author/Coordinator
João Tovar Jalles

Category:
Research Papers

ABSTRACT
We investigate the impact of sovereign defaults on the ability of the corporate sector in emerging nations to finance itself abroad. We test the hypothesis that sovereign defaults have a negative spillover onto the private sector through credit rationing. We explore a novel data set covering the majority of corporates in emerging nations that received foreign capital between 1880 and 1913. Results confirm that credit rationing existed, was very large, and persisted long beyond the default settlement. The private sector paid a severe cost for their governments’ debt intolerance, with negative implications for their growth.

WITH:
Rui Esteves
Department of Economics, University of Oxford
 
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Author/Coordinator
João Tovar Jalles

Category:
Research Papers

ABSTRACT
We compare model forecast error statistics with forecast error statistics of professional forecasts. We look at a standard sticky-prices–wages model, concluding that it delivers too strong a theoretical forecastability of the variables under scrutiny, at odds with the data (professional forecasts). We argue that the lack of compatibility between the model and professional forecasts results from trying to fit inflation (which is probably nonstationary) to a model that assumes inflation is stationary. A modified version of the model, one with a varying inflation target, delivers a better fit in terms of forecastability.

WITH:
João Valle e Azevedo
Banco de Portugal and Nova School of Business and Economics
 
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Author/Coordinator
Miguel Lebre Freitas

Category:
Research Papers

ABSTRACT
Following Hidalgo et al. (SciMag 317: 482–487, 2007),we use the structure of international trade to estimate a measure of “revealed relatedness” for each pair of internationally traded products, which intends to capture similarities in terms of the endowments or capabilities they use in production. Our method departs from the original one, in that we run statistical tests of equality in probabilities, instead of computing conditional probabilities. We estimate a matrix of “Revealed Relatedness Indexes” using 2005 data and we then investigate which “upscale” products in which Portugal didn’t develop comparative advantage are more related to products in which the country is currently specialized. The analysis suggests that more than 60 % of Portugal’s “upscale opportunities” lie in non-traditional sectors, such as “machinery” and “chemicals”.

WITH:
Luis Catela Nunes
Nova School of Business and Economics, Universidade Nova de Lisboa

Rui Costa Neves
Nova School of Business and Economics, Universidade Nova de Lisboa

Susana Salvado
Banco de Portugal
 
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Author/Coordinator
Francesco Franco

Category:
Research Papers

ABSTRACT
The objective of this work is to develop an early warning system (EWS) model to estimate the probability of a devaluation in Angola. We discuss the exchange market pressure (EMP), a measure that is commonly used in the literature to identify a crisis event and used as the dependent variable in EWS models, and find that is not always a valid proxy for devaluation pressures. The intuition is that the EMP would always be a correct measure if all the exogenous shocks to the economy imply the same pattern of correlations between the variables used to construct the EMP measure. We specify a stylized model for the Angola economy to show that this is possibly not the case and opt to define a devaluation event with an actual devaluation. We use the same model to identify the fundamentals that are likely to predict the event of a devaluation in Angola and estimate a EWS model. We find that fluctuations in the oil price and in the degree of dollarization are the main drivers of the probability of a devaluation. The estimated model is statistically and economically significant and can be used as a complementary tool by the policy maker.

WITH:
Júlio António Rocha Delgado
Inove Research – Investigação & Desenvolvimento

Susana Camacho Monteiro
Banco Nacional de Angola

Pedro Castro e Silva
Banco Nacional de Angola

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Author/Coordinator
João Tovar Jalles

Category:
Research Papers

ABSTRACT
This paper provides evidence of the quality of private sector forecasts of the budget balance between 1993 and 2009 for a sample of 29 countries, grouped into advanced and emerging countries. We find large differences across the two groups: forecasts for advanced economies are much more accurate than for emerging economies and much less subject to a bias towards optimism (i.e. they are less likely to forecast a bigger budget balance than the realization). Forecasts for both groups, however, exhibit a tendency toward forecast smoothing: forecasts are revised slowly so that revisions to forecasts can be systematically predicted based on past revisions. This tendency proves costly around turning points in the economy when the budget balance moves sharply but the corresponding forecasts only adjust very slowly to the reality of the situation.

WITH:
Iskander Karibzhanov
Bank of Canada, International Economic Analysis Department

Prakash Loungani
International Monetary Fund, Fiscal Affairs Department
 
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Author/Coordinator
José Tavares

Category:
Research Papers

ABSTRACT
We use a growth model in which saving, fertility and labour market participation are endogenous, to quantify the cost that barriers to female labour force participation impose in terms of an economy’s output. The model is calibrated to mimic the US economy’s behaviour in the long-run. We find that a 50% increase in the gender wage gap leads to a 35% decrease in income per capita in the steady state. Using independent estimates of the female to male earnings ratio for a wide cross-section of countries, we construct an economy with parameters similar to those calibrated for the US economy, except for the degree of gender barriers. For several countries, a large fraction of the difference between the country’s output and the US output can be ascribed to differences in gender discrimination.

WITH:
Tiago Cavalcanti
Faculty of Economics, University of Cambridge
 
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Author/Coordinator
João Tovar Jalles

Category:
Research Papers

ABSTRACT
We use data for a panel of 60 countries over the period 1980–2005 to investigate the main drivers of the likelihood of structural reforms. We find that: (i) external debt crises are the main trigger of financial and banking reforms; (ii) inflation and banking crises are the key drivers of external capital account reforms; (iii) banking crises also hasten financial reforms; and (iv) economic recessions play an important role in promoting the necessary consensus for financial, capital, banking and trade reforms, especially in the group of OECD-countries. Additionally, we also observe that the degree of globalisation is relevant for financial reforms, in particular in the group of non-OECD countries. Moreover, an increase in the income gap accelerates the implementa- tion of structural reforms, but increased political fragmentation does not seem to have a significant impact.

WITH:
Luca Agnello
University of Palermo, Department of Economics, Business and Statistics (SEAS)

Vitor Castro
University of Coimbra, Faculty of Economics
University of Minho, Economic Policies Research Unit (NIPE)

Ricardo M. Sousa
University of Minho, Economic Policies Research Unit (NIPE)
University of Minho, Department of Economics
London School of Economics and Political Science, LSE Alumni Association
 
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Author/Coordinator
Susana Peralta

Category:
Research Papers

ABSTRACT
The globalization of world markets has prompted firms’ search for benefits of international tax differentials. In this paper we consider a simple world with two countries and two multinationals with a division in each country. Both countries, that differ in market size, use a source-based profit tax on multinationals, who compete à la Cournot in local markets and use profit shifting based on the tax differential. We assess policies aimed to mitigate inefficient tax choices and show that tax harmonization cannot benefit the small country. We then propose a simple revenue sharing mechanism in which countries share equal proportion of their own revenue with each other, and show that revenue sharing increases equilibrium tax rates in each country, reduces the tax differential, and benefits both countries. Lastly we show that contrary to revenue sharing, the tax base equalization formula raises a fundamental equity issue.

WITH:
Jean Hindricks
(CORE, Université Catholique de Louvain)

Shlomo Weber
(Southern Methodist University, Dallas, New Economic School, Moscow, and CEPR)
 
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Author/Coordinator
Francesco Franco

Category:
Research Papers

INTRODUCTION
This short introduction is centered on organizing thoughts at an abstract but simple level on the difficulties of reducing debt and on presenting data on debt in Portugal. Models where debt is contracted to leverage acquisition of assets have a long tradition in the history of economic thought1. J.S Mill, Alfred Marshall, Knut Wicskell, Irving Fischer, Hyman Minski, all have developed models where excessive leverage ultimately creates troubles to the real economy. Knowledge of this class of models should stimulate the adoption of ex-ante rules and policies aimed at taming the build-up of excessive leverage to avoid the subsequent possibility of troubles as for example in Farhi and Werning (2013). Historical and contemporaneous evidence however shows that measures aimed at reducing the level of debt need to be adopted after the troubles have spread to the real economy. A central point that makes an excessive level of debt a problem is the heterogeneity between creditors and debtors. In a closed system such as the World or a closed economy, the liabilities of the debtors equal the asset of the creditors. In such a simple system a mandatory reduction of the debt can occur only through an arrangement between the debtors and the creditors. The creditors must concede time to the debtors to produce the resources to repay them or must be willing to renounce at least partially to their credits. When a government who controls monetary and fiscal policy is also present in such a system, he can engineer the reduction of debt. Using monetary policy the government can reduce the value of debt and assets using inflation, namely changing the value of the unit of account. The government can also engineer a redistribution through taxation. Ultimately both measures shift resources from the creditors to the debtors. In practice governments also engage in the accumulation of assets and liabilities both for productive and intra and inter-temporal redistribution motives. A fourth class of agents, the financial sector, intermediates the debt and credit transactions between the private creditors, debtors and the government. As long as the system is closed and the authority of the government is not questioned the resolution of a de-leveraging (through a reduction of debt) is ultimately a credible outcome. When the system is open and starts to borrow and lend outside of its monetary and fiscal boundaries the redistribution solution, coercive or not, by his government ceases to be possible and the resolution of the de-leveraging becomes a more uncertain outcome.
 
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Author/Coordinator
Francesco Franco

Category:
Research Papers

ABSTRACT
This paper presents the argument for a fiscal devaluation as a policy to adjust to external imbalances within the eurozone applied to the case of Portugal. From 1995 to 2010 Portugal has accumulated a negative international asset position of 110 percent of GDP. In a developed and aging economy the num- ber is astonishing and any argument to consider it sustainable must have relied on extremely favorable growth forecasts. Portuguese policy options are reduced in number: no autonomous monetary policy, no currency to devaluate, and limited discretion in changing fiscal deficits and government debt. To start the necessary deleveraging, a remaining possible policy is a budget-neutral change of the tax structure that increases private saving and net exports. An increase in the value added tax (VAT) and a decrease in the employer’s social security contribution tax (ESSC) can achieve the desired outcome in the short run if they are complemented with wage moderation or if nominal wages are sticky. To obtain a substantial improvement in compet- itiveness and a large decrease in consumption, the changes in the tax rates have to be substantial: a swap of 1 percentage point of GDP from social security contributions to VAT revenues achieves a decrease in real imports of 13.6 percent within 8 quarters and an improvement of real exports of 8.4 percent within 5 quarters without significantly affecting the fiscal budget. The increase in the effective VAT rate could be obtained by raising part of the reduced VAT rates to the general VAT rate. Finally, in theory, coordi- nated fiscal devaluations could be the basis for competitiveness realignments within the monetary union.
 
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Author/Coordinator
Susana Peralta

Category:
Research Papers

ABSTRACT
Over the recent years, decentralization has been adopted in many health systems. The question however remains of whether local actors do better than the central government. We summarize the main insights from economic theory on the impact of decentralization and its empirical validation. Theory suggests that the decision to decentralize results from a trade-off between its advantages (like its capacity to cater to local tastes) and costs (like inter-regional spillovers). Empirical contributions point that decentralization results in better health outcomes and higher expenditures, resulting in ambiguous consequences on efficiency; equity consequences are controversial and address the relevance of redistribution mechanisms.

WITH:
Joana Alvesa
Escola Nacional de Saúde Pública, Universidade Nova de Lisboa

Julian Perelmana
Escola Nacional de Saúde Pública, Universidade Nova de Lisboa

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Author/Coordinator
Susana Peralta

Category:
Research Papers

ABSTRACT
We study the impact of transfer pricing rules on prices, firms’ organizational structure, and consumers’ utility in a two-country monopolistic competition model with source-based profit taxes. Firms can either be multinationals and serve the foreign market through a fully controlled affiliate, or be exporters and serve the foreign market by contracting with an independent distributor. The use of the OECD’s comparable uncontrolled transfer price (CUP) rule distorts firms’ output and pricing decisions, because the comparable arm’s length transactions between exporters and distributors — which serve as the benchmark — are not efficient. We show that the CUP rule is detrimental to consumers in the low-tax country, yet benefits consumers in the high-tax country when compared to the benchmark of un- constrained profit shifting. Using the OECD rule increases tax revenue at the expense of consumer surplus. Those results also hold under the alternative cost-plus transfer pricing rule.

WITH:
Kristian Behrens
Université du Québec à Montréal (UQAM), CIRPÉECEPR

Pierre M. Picard
Université du Luxembourg, Université Catholique de Louvain
 
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Author/Coordinator
Susana Peralta

Category:
Research Papers

ABSTRACT
The paper considers a model of federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital. Regions’ choices determine allocation of capital across the regions and their revenues under a tax sharing scheme. This framework allows for the examination of different approaches to fiscal equalization schemes [Boadway, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613–633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. We show that tax competition distorts (downwards) public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes. However, the equalization schemes remain beneficial not only for the federation and, under a low degree of regional asymmetry, also for each region.

WITH:
Jean Hindriks
CORE, Université catholique de Louvain, Belgium

Shlomo Weber
CORE, Université catholique de Louvain, Belgium, Southern Methodist University, Dallas, USA and CEPR, London, UK
 
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Author/Coordinator
Miguel Lebre Freitas

Category:
Research Papers

ABSTRACT
This paper tests the stability of the demand for money in the euro-area in the context of an open economy. A sample consisting of quarterly data covering the 1982:2-1999:3 period is considered. The main finding is that the U.S. dollar long-term interest rate plays a significant role in the European money demand relationship. This result holds for different combinations of variables forming the vector auto-regressive system and suggests that international monetary interdependency may be an important factor influencing the ECB monetary policy.
 
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Author/Coordinator
Miguel Lebre Freitas

Category:
Research Papers

ABSTRACT
This paper uses the stochastic approach to convergence to investigate whether real per capita GDP in Portugal has been converging to the EU15 average. The estimation accounts for conditional convergence, transitional dynamics and up to two structural breaks. It is found that per capita GDP in Portugal has indeed converged to the EU15 average, but the pace of convergence has not been uniform along time. In particular, a slow down in the convergence process is identified in 1974. This result depends, however, as to whether the choice of this break-date is viewed as uncorrelated with the data. No evidence of acceleration in the speed of convergence is found after EC accession, in 1986.

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Author/Coordinator
Miguel Lebre Freitas

Category:
Research Papers

ABSTRACT
We extend the Thomas (1985) dynamic optimizing model of money demand currency substitution to the case in which the individual has restricted or no access foreign currency denominated bonds. In this case currency substitution decisions and a substitution decisions are not separable. The results obtained suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of currency substitution. Applying this approach to six Latin American countries, we find evidence of currency substitution in Colombia, Dominican Republic, and Venezuela, but not in Brazil and Chile.

WITH:
Francisco José Veiga
Escola de Economia e Gestão, Universidade do Minho and NIPE
 
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Author/Coordinator
Susana Peralta

Category:
Research Papers

ABSTRACT
We present a spatial model of a city with two unequally productive jurisdictions. City residents bear a commuting cost to work in either of the two jurisdictions. Each jurisdiction must finance a public budget with a wage and a head tax. We compare the first best optimum to tax decentralization. From the total welfare viewpoint, tax competition is always inefficient. However, majoritarian local governments may prefer the inefficient tax decentralization to the first best.
 
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Author/Coordinator
José Tavares

Category:
Research Papers

ABSTRACT
This paper conducts a systematic investigation of the incidence and economic costs of terrorist attacks at the country level. We use newly assembled data sets on terrorist attacks, natural disasters and currency crises to answer three different questions: what are the determinants of terrorism; is there an output cost following a terrorist attack; and is that cost larger or smaller in the case of democracies. We find that rich countries are the most prone to suffer attacks while democracies are, if anything, less vulnerable than other countries. The cost to output of a terrorist attack is quantitatively small and closely associated with the occurrence of an event rather than the number of casualties. Finally, we find robust evidence that a terrorist attack imposes a lower output cost the more democratic a country is.
 
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Author/Coordinator
Miguel Lebre Freitas

Category:
Research Papers

ABSTRACT
This paper analyzes the relationship between money and inflation in a small open economy, where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adjusts to equal the foreign inflation rate. The model captures the stylized fact that temporary increases in the inflation rate may have permanent effects in the use of foreign currency, even without the introduction of dollarization costs.
 
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Author/Coordinator
José Tavares

Category:
Research Papers

ABSTRACT
This paper introduces a new methodology to examine the empirical relationship between democracy and economic growth. Democratic institutions are assumed to a!ect growth through a series of channels. We specify and estimate a full system of equations determining growth and the channel variables. Results suggest that democracy fosters growth by improving the accumulation of human capital and, less robustly, by lowering income inequality. On the other hand, democracy hinders growth by reducing the rate of physical capital accumulation and, less robustly, by raising the ratio of government consumption to GDP. Once all of these indirect e!ects are accounted for, the overall e!ect of democracy on economic growth is moderately negative. Our results indicate that democratic institutions are responsive to the demands of the poor by expanding access to education and lowering income inequality, but do so at the expense of physical capital accumulation.

WITH:
Romain Wacziarg University of California, Los Angeles, USA

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Author/Coordinator
José Tavares

Category:
Research Papers

ABSTRACT
This paper tests the widely held assumption that left-wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments. In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments. The effect is significant for cuts in public spending, public consumption (wage or nonwage), increases in total revenues, direct taxes on businesses and other taxes. We test for the role of several other determinants of persistence, confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence. The estimates of the impact of ideology and other variables on GDP and its components show that it is the size of the spending cut rather than cabinet ideology that is most important.

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