Ensaios em macroeconomia e finanças públicas

Abstract

The adoption of the Euro as the common currency in eleven countries of the European Union (EU) was an important benchmark in the process of economic integration in Europe. Much has been discussed in terms of the advantages and risks associated with this step. One of the major questions that has been raised is whether or not this group of countries qualifies as an optimum currency area. The definition of an optimum currency area, which was first developed in the seminal contribution of Mundell (1961), lies on different conditions. Primarily, there should be a low probability of occurrence of asymmetric shocks. However, according to Mundell, the existence of asymmetric shocks poses no problems if there is an appropriate set of fiscal instruments to offset their negative effects. In fact, the absence of an autonomous domestic monetary policy turns fiscal policy into the only available instrument to offset these shocks. The three chapters of this dissertation take this scenario as given and examine some of the existing risks and solutions. Namely, they focus on the topics of sustainability of public finances, optimal budget deficit rules and fiscal federalism. In the first chapter we examine the role of fiscal policy and the behaviour of the budget deficit in a non monetary continuous time stochastic economy. The model is developed in a general equilibrium framework, integrating the optimisation behaviour of representative consumer and the intertemporal resource constraint of the fiscal authority. The main features of the model are the endogenous determination of the budget deficit as a percentage of deterministic output, the endogenous determination of the public bonds interest rate and the analysis of how changes in the structural and stochastic parameters affect the stationary equilibrium. In this context, we obtain conditions for the stability of the budget deficit. Finally, this chapter simulates different scenarios and plots the stationary equilibrium path of the variables. We conclude that changes in the structural parameters of the model lead to unsustainable budget deficit behaviour. On the contrary, short -run shocks on technology and public expenditure are consistent with the stationary equilibrium. In addition, it is shown that the stationary equilibrium in economies having low tax rates and high public spending must be accompanied by a low public debt -wealth ratio and a low budget deficit. The same is true for economies that face high volatility in technology and public expenditure shocks. The awareness about the existence of risks for the sustainability of public finances is the reason why the EU has adopted the Stability and Growth Pact, limiting the budget deficits to 3% of GDP and setting penalties for non abiding countries. Therefore, the question of knowing what would be the proper mechanism to implement in the EU in order to avoid possible budget deficit crisis emerges as vital. The chapters two and three pursue different approaches. Firstly, there might be scope for improvements in the existing set of budget deficit rules. Secondly, the setting of a federal fiscal system might explore the opportunities for risk diversification between countries, leading to improvements in welfare. As we said, Chapter Two discusses the problem of the optimal determination of budget deficit ceilings in cases where there is a central fiscal authority that wishes to keep the budget deficit close to zero. It is assumed that the central fiscal authority takes the stochastic process for the budget deficit as given and minimizes the expected discounted value of the its squared deviations from zero. In addition, it faces lump -sum and proportional intervention terms of trade. The models are developed in a continuous time stochastic framework and simple closed form solutions are obtained. We conclude that risk sharing is a strong motive for taking part in a fiscal federation. Fiscal system participation increases when the country benefits from redistribution or when participation is a parameter of the utility function. Finally, it is shown that there are also incentives to participate in fiscal federations that respond to shocks on the terms of trade.