How big should government be? António Afonso and Ludger Schuknecht link the recent findings of Data Envelope Analysis on public expenditure to the size of government. Their analysis of government performance indicators in relation to public expenditure finds the biggest expenditure categories have the highest savings potential.

In this EconPol working paper, the authors assess the impact of announcements corresponding to different fiscal and monetary policy measures on 10-year sovereign bond yield spreads. They find that the European Commission’s releases of excessive deficit procedure have a significant impact on the yield spreads. EC releases of higher debt and better budget balance forecasts contribute to the rise and decline of spreads, respectively.

Increasing the legal retirement age is politically feasible if policy contains the generosity of public pensions, conclude the authors of this EconPol working paper. After establishing three hypotheses within a politico-economic model and employing micro data for Germany, they demonstrate that a one percentage point increase in the share of the elderly increases the legal retirement age by 0.3 to 0.5 years, and that a 10 percentage point increase in the replacement rate reduces the legal retirement age by 0.5 to 3 years.

We assess, via system GMM, how Stock Flow Adjustments (SFA) affect the debt-to-GDP ratio in 65 countries (covering developed and emerging and low-income countries) between1985-2014. We find that SFAs positively contribute to the change in the debt-to-GDP ratio with a coefficient close to one. The existence of fiscal rules with monitor compliance contributes to lower the debt level. The fall in the debt ratio due to fiscal rules before the crisis was between 1.7%-4.2% of GDP while after the crisis, revenue and debt-based rules did not contribute to the reduction of debt, which was reinforced with large SFAs.

This paper investigates the impact of import competition on rent sharing between firms and employees using a large panel of French manufacturing firms. First, by applying recent advances in the estimation of price-costs margins, we are able to classify each firm into labour- and product-market regimes based on the presence/absence of market power and to estimate the degree of rent sharing among firms and workers. Second, we investigate the hypothesis that import penetration acts as a discipline device on the labour market, reducing workers’ bargaining power. We find that competition from OECD countries has a negative effect on bargaining power, whereas imports from low-wage countries have a more muted impact. By providing firm-level evidence for the relationship between international trade and rent sharing, the paper sheds new light on the effect of trade liberalisation on the labour market.

The European Commission’s Allowance for Growth and Investment (AGI) has proposed investment incentives in its two-step approach towards the Common Consolidated Corporate Tax Base (CCCTB). In this latest EconPol working paper, the authors demonstrate that the AGI strengthens investment incentives in high-tax countries and decreases the CCCTB-induced investment push towards low-tax countries. They also demonstrate that the AGI decreases tax competition and that a sufficiently generous AGI reduces tax competition between countries when introduced with the CCCTB.

The European Commission’s proposals for the post-2020 Common Agricultural Policy (CAP) are under discussion, and these cautious reform ideas have set the parameters for upcoming negotiations. CAP will continue to have a two-pillar structure of direct payments and rural development, with a seven-year budget of €365 billion. As before, almost three-quarters of the budget - €265 billion - is reserved for direct payments to farmers. However, ‘European added value’ must be urgently applied to CAP, say Friedrich Heinemann and Stefani Weiss, who have developed a series of recommendations to justify direct payments in their latest report for EconPol.

Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This paper unveils the logic of the quadrilogy by putting core services to “special depositors and borrowers” at the heart of the analysis, and makes room for bank and depositor implicit and explicit guarantees. It analyzes how prudential regulation must adjust to the emergence of shadow banking. The model also rationalizes ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms to counter syphoning and financial contagion.

Information technology, infrastructure enhancement, and arbitrage strategies all contributeto link trading venues in fragmented markets. Our paper highlights a new cross-market linking channel: the interdependence of liquidity providers' inventory costs. We use a two-venue duopoly model involving strategic risk-averse market-makers. Costs to provide immediacy depend on market-makers' inventory aggregated across venues, implying that absorbing a shock in one venue simultaneously changes marginal costs in all other venues. Moreover, market-makers strategically choose which shock(s) to absorb. These two forces may lead to competitive prices and enhanced liquidity. Using Euronext proprietary data, we uncover evidence for these crossmarket inventory cost linkages.

Macroeconomic imbalances (MI) play a prominent role in the "consensus narrative" of the crisis of the Euro Zone (EZ). Accordingly, the package of governance reforms undertaken by the EZ countries amid the crisis includes the Macroeconomic Imbalances Procedure (MIP) to be enacted by the Commission. The whole approach has raised various critical and alternative views. These are examined distinguishing between the "domestic" and "external" dimension of MI, and the controversial issues are identified with reference to the MI relevance, their causes and connections with the crisis, and their policy implications.