The rescue plan by the European central government to save Greek economy has been put into practice in return for the collateral agreement between the assisting side, Germany and Great Britain, and Greece. Greece has also already incurred Geek bonds to inject a fiscal stimulus into Greek economy to fill the current budget deficit. The IMF has offered loan to the EU in order to assist Germany rescuing Greece.
Many economists have already predicted that Greek economic depression will not be ended, and the deflation spiral goes on permanently. The part of reason is that Greece is no longer able to use the own monetarist policy, which increases the money supply to finance to fill the budget deficit and/or provoke the price inflation to reduce the net present value of the cost of borrowing. Pro-Europeanists have strongly suggested that the fiscal budget of the member states should be collectively controlled by one European federal government in order to avoid the instability such as a currently ongoing fiscal crisis in the Eurozone economy.
However, at the fist stage of establishing the Europeau Union, the fast full integration into the European Federation was denied. Many European states required for a slow pace of the integration process. Pro-Europeanist monetalists (distinguished from the Euro-Sceptic monetarist such as Prof. Milton Friedman) assumed that sharing a common currency encourages trade among these sharing economic regions, and therefore the system automatically harmonises the business cycle in these regions. Many Pro-Europeanists were convinced by this theory so that the current Eurozone system was adapted without a strong federalism. But, the currently ongoing crisis contradicted the assumption claimed by the Pro-Europeanist monetarists.
Although many people once expected for the appreciation of the Euro. These people imagined that the Euro would be the world leading currency instead of US dollar because of the weakening position of US economy. This is not based on a rational hypothesis; this is totally a mobs' irrational exuberance! Although US economy has lost an initiative which the USA used to hold, the situation will be neither the USA becomes collapsed nor the Eurozone economy becomes dominant to overwhelms the world economy. The USA still has her military power financed by the half of the world total millitary expenditure. This fact implies that the USA still has a capacity to gain her finance and resources split from those spent on military. Furthermore, the USA still has a huge human capital assets which are technology, higher education, and work ethics. These human capital assets will assist US economic recovery in spite of the pressimistic prediction of US economy which many anti-US modests have ranted on. In addition, even though the Eurozone economy may become a much stronger economic region than the current situation, the Eurozone will not become the super-power nation which the USA acted as during the cold war period. The globalisation after the end of the cold war has encouraged many emerging economies to catch up to become the advanced economy. The Eurozone may be still capable to exist as "one of" the centres of the international trade. Nonetheless, it is impossible to become one dominating economic super power. The post globalised world shall not have a super power state holding the economic dominance. The world will be more globalised, but it will not be based on the autocracy of one nation. The post-globalised world will be more pluralistic than the pre-financial crisis period.
Many people now started to expect the Euro will be depreciated and then fail so that the Eurozone system will be fragmented as same as the time when the all member states had their own currency. These mobs' irrational exuberance is often disappointing. Although once they expected that the Euro would be appreciated further, they now start saying that the Euro will cease. They seem to be unable to analyse the economic situation more rationally. My perspective is "Euro-sceptic", and contradicts the over-estimation of the Euro. However, I bet on that the Euro ( € ) will still exist.
There are still a lot of sceptical aspects about this European integration under the role of European federalism. Nonetheless, it will be the fact that European federalism will be reinforced due to the mistake learnt from this crisis. Pro-Europeanists are now confident with the further European integration. Almost all of us now have realised that the current Eurozone system does not work stably. The Eurozone can only decide to do either going back to the old system or going toward the European federation.
According to the political, rather than economic, situation, majority of Europeans tend to prefer being integrated further into one European community. Therefore, they seem to prefer keeping the Euro as one of the symbols of European integration.
In order to avoid the currently ongoing financial crisis inside the Eurozone, the collective responsibility on the fiscal policy among these member state is inevitably required. The European Union will share the common fiscal policy (tax, public expenditure, and national debt).
Greek national debts will keep depreciated further. Greece herself has not a capability to repay her debt back. Although Germany and Great Britain assist Greece, Greek economy does not have strong industries and human capital assets which stimulate a boost of economic recovery to overcome from this depression spiral. Therefore, it means that Germany and Great Britain make a loss from investing on expecting for Greek recovery. It seems to a fate for Greek economy to default. When a national economy default, there are many different cases happen by means of each different situation. In this case scenario, this national economy will be "purchased" by someone. It is less likely to be bought by one individual who turns Greece into the dictatorship. As Europeans tend to think of Greece as a birth place or the origin of European civilisation and her history the EU central government is very less likely to isolate Greece to hand her to a certain dictator. Thus, the agent purchasing Greece will be the EU central government.
The situation that Greece is purchased by the EU central government means that the European central government will be in charge of Greek fiscal policy and legal system. As it happens to Greece all the other member states will be eventually looked after by the European central government to be fair. All the Eurozone member states will be enforced to relinqush their right to incur their own national debt.
Under the currently going Eurozone system, Maastrich treaty technically prohibits incurring national debt more than 3% and owning national debt more than 60% of their GDP (But, realistically not many nations follow this agreement). The reason to put such a restriction is to avoid causing a disharmony of the price inflation among the member states and the budget deficit caused by fiscal inefficiency and corruption by government bureaucrats. Allowing these states to avoid this agreement and to set their own more flexible fiscal policy relatively works well unless they keep their own monetary policy (I have mentioned a lot in the other entries in this blog).
However, this current system is highly restricted to stimulate the Eurozone economy by fiscal stimulus when the economic crisis hits all over the Eurozone member states. Some relatively well-off EU countries have agreed to spilt their government finance to rescue Greece. But, these countries are also in the recession as well! Therefore, under the current Eurozone system, helping the most deprived member state induces all the member states to be collapsed!!
If the European central government plays a role as the European federal government which is the only institution holding a right to incur a national debt (i.e. the same system as the USA), it will provide a more efficient and effective fiscal stimulus without harming the Eurozone economy. The EU is planning to call this bond as "the Euro-bond", which is not still installed but will be inevitably introduced. This idea is far more effective than the current system because the EU is simply able to issue the Euro-bond to fund for the all member states simultaneously while the recession hits all over the Eurozone. As this bond is based on the value of the whole Eurozone the credibility of this bond will be stably high. Therefore, many other national governments and many individuals will buy the Euro-bond, and the golden role will work out. All in all, it is easier to provoke the recovery which enables the Eurozone to repay back the debt if the Euro-bond is introduced.
Under this new system recommended by European federalists is more flexible to control over the whole Eurozone economy. The reason is that the larger proportion of the fiscal stimulus will be fund by the European central government than the current system, the expenditure plan in the member state has to be monitored by where the funding source is coming from. In addition, the EU central government will make sure that all its fiscal stimulus is efficiently spent to stimulate the member states' economy so that the legal system in these states will be revised and amended by the EU central government.
The opposing opinion against this European federation and the Euro-bond is that roles of the fiscal policy in all the member states have to be enforced to follow and censored very strictly. This means that all the member states will be no longer sovereign countries. They will be the states of the European federation.
If this case scenario becomes true, although the countries which are already the Eurozone member states will be integrated into the EU federalism further, the advanced non-Eurozone nations, such as Great Britain and Scandinavian countries, except for Finland, will keep a distance further in terms of their economic policy. There will be a clear distinction between members in inside and outside the Eurozone in the EU. The EU members in outside the Eurozone may avoid the censorship on their fiscal policy by the EU central government as they still keep their own monetary and fiscal policy unless they decide to join the Eurozone in the future.
Great Britain has such an independent business cycle from the Eurozone member states and has a strong own initiative of her financial market in the global market. These factors of Great Britain detests the EU fiscal integration which disturbs British business cycle. Joining the Eurozone discourages the initiative of British financial market because the power of financial market will be more concentrated on Frankfurt because Great Britain will be enforced to harmonise her business cycle to the continental Europe. Great Britain is able to keep her own market initiative as she keeps her own role of acts in financial market. Liberal Democratic party is quite happy to abandon the traditional market initiative to be integrated into the European federalism. But, due to British voting system (First Past the Post) will always elect either the Conservatives or the Labour which prefer keeping a marginal distance (not the complete Independence from the EU though) from the EU.
Scandinavian countries have a quite rigid labour market and a strong trade union power, which strongly requires a tight monetary policy to keep the price inflation level to be low. As it has been seen in the last oil price shock in 2008 the central banks in Scandinavian countries frequently changed their interest rate in order to carefully set the rate not too high but not too low. If it is too low, it perpetuates the stagflation (stagnation + inflation) caused by both the oil price and the wage bargaining. If it is too high, it discourages the economy and then induces the recession. The economy with a rigid labour market is more likely to increase unemployment. As a matter of fact, the Eurozone economy supports the flexible labour market, which means less rigid labour market (less labour right, someone may say), in order to make the wage level to be adapted to the market clearing rate. If Scandinavian countries decided to adapt the Euro, the common currency, they have to discard the rigidity of their labour market. This is one of the reasons why Denmark and Sweden do not have the full EU membership and Norway is not a member of the EU at all.
If Scotland independent from the United Kingdom, Scotland will either join the Eurozone or keep a distance from the EU as same as Scandinavian countries. But, Scottish Nationalist Party (SNP), the party insisting on Scottish independence from the UK, has not made a clear consensus to decide which way Scotland should follow.
In conclusion, it might be worth-off to long the Euro( € ) in the long run although it seems to be better to short it in the short run. It is difficult to see the best time to decide whether long or short the "Euro" ( € ). The prediction is that the value of the Euro( € ) will not be zero because of the strong political support from the European people regardless of its economic aspect. Altough the Euro( € ) will be depreciated further for a while, it will appreciate again when the Euro-bond is introduced. Ummm, difficult to make a decision. If you are willing to actively but carefully trade often in the foreign currency market, you had better short the Euro( € ) in the short run and long it in the long run. If you are bothered to cautiously watch movements and European political situations all the time, then I may recommend you to long the Euro( € ).
Friday, April 16, 2010
Thursday, April 01, 2010
Health Care Issue is the most complicated and ethically controversial issue in public sector economics
I know the dispute concerning health care and the national insurance the most complicated issue in public sector economics. It is extremely controversial and concerns with the ethical issue when we declair to privatise them without a condition. But, on the other hand, the nationalisation (or any sort of public sector ownership) makes the system breaks the trust based relationship between doctors and patients (Prof. Milton Friedman mentioned in his "Freedom of Choice").
Everyone has almost the same risk to be sick or harmed regardless of any status. Generally speaking, nobody wants to be sick and harmed all the time and avoid being sick and harmed as much as possible i.e. everyone is risk averse.
Therefore, it is difficult to deal with the risk premium.
The incentive for inovators of new technilogy to make a profit is important. In the short run, and probably in the medium run as well, the price may rise dramatically. But in the long run the price will be calmed down and the technology invented will be shared among other agencies as well i.e. the supply increases.
Nonetheless, it must face the problem of monopoly in this market which has been seen in the USA. When we excessively rely on the saving of patients, economy won't be developed and progressed further as the economic multiplier will be shrunk. The private insurance scheme causes the "free riding" problem. One company with richer customers will monopolise the market and the other insurance companies faces bankruptcy or charges a huge cost on customers. Therefore, the collective responsiblity is eventually required.
In the past, the health care system was based on a very smaller schale so that we did not need a huge distribution system.
But, nowadays, there are so much stuff to administrate technology, information, and risks involved in dairy life (e.g. trafic, new diseases, longer life expectancy has brought more concerns about illnesses during the life as well).
All in all, it is very complicated, and all the economists are struggling with dealing with this issue...
Everyone has almost the same risk to be sick or harmed regardless of any status. Generally speaking, nobody wants to be sick and harmed all the time and avoid being sick and harmed as much as possible i.e. everyone is risk averse.
Therefore, it is difficult to deal with the risk premium.
The incentive for inovators of new technilogy to make a profit is important. In the short run, and probably in the medium run as well, the price may rise dramatically. But in the long run the price will be calmed down and the technology invented will be shared among other agencies as well i.e. the supply increases.
Nonetheless, it must face the problem of monopoly in this market which has been seen in the USA. When we excessively rely on the saving of patients, economy won't be developed and progressed further as the economic multiplier will be shrunk. The private insurance scheme causes the "free riding" problem. One company with richer customers will monopolise the market and the other insurance companies faces bankruptcy or charges a huge cost on customers. Therefore, the collective responsiblity is eventually required.
In the past, the health care system was based on a very smaller schale so that we did not need a huge distribution system.
But, nowadays, there are so much stuff to administrate technology, information, and risks involved in dairy life (e.g. trafic, new diseases, longer life expectancy has brought more concerns about illnesses during the life as well).
All in all, it is very complicated, and all the economists are struggling with dealing with this issue...
Wednesday, March 10, 2010
Free tade is the only fair trade
When the free trade caused an unfairness, either side of traders may have a problem. For example, some of the countries need to amend their own system by themselves to have a fair trade in free trade. The fairtrade supporters usually mourn that it is the nature of free market causing the unfairness, and ones who take an advantage of trade have to aid. But, this is ethically wrong. The fair trade these buggers support causes a major unfairness in the long-run. We had better let these weak economies to feel pain to allow them what kind of problems they have got rather than let them to be spoiled by the aid. This logic works for the colonial management of British empire. The reason why some colonies have been collapsed by trade and immoral is because these poor colonials deserved to be like that! The fact that there are many successful British colonies succeeded in prosperity via trade with British empire, their suzerein is the proof. Free trade without putting priority on fairness brings the best optimum outcome giving these economies either positive or negative sanctions owing to their paformance. All in all, the fair trade and the human right activists criticising about the free capitalist international trade are scum.
I just hate the idea and the brand-name of "fair trade" because this is very hypocritic. That's why I reject buying the product named fair trade. The margine for the labour cost is in fact not too different from the other products.
Speaking of monopoly, the floating exchange rate enables traders to adjust the rate to bring the fair outcome. When the monopoly of trade by Country A is concerned, Country B may put a higher exchange rate to restrict the monopoly power of Country A. The reason why some developing country depreciate the value of their currency rather than appreciate is to "dump" their product; it is not the case that advanced nations monopolise the market.
The free trade principles, floating exchange rate mechanism, liberated financial market, and freedom of choosing trading goods and their price, are the key figures to bring the stable equilibrium in the longer term.
* Small-scale producers in many poor countries are not necessary to be sustained to survive. As long as the products from the richer nations give better quality and quantity with a competitive price. As many commodities and services with inexpensive price become available from the import, then they can be more concentrated on investing the other sort of industries.
* The trade loss would be inevitable for these economies with a significantly lower productivity in the current globalised market. But, it is not the responsibility of richer economies and the "fair trade" is not a particular answer for decreasing the loss. The management of these poor countries have to become sophisticated. The method shall be either sending intellectuals from more advanced economy to teach then a lesson or let these poor economies to decide what they should do.
* Sometimes, these poor countries need to restrict the foreign trade when they are relying on the import too much. The reason why East-Asian economies could developed faster than the other LDCs is that their entrepreneurship and deligency to work were already capable to the global trade. However, I know some other poor economies are not capable enough. If they wish to join the global trade, they should temporary put priority on developing the entrepreneurship and civilising their own civilisation through welcoming the intellectuals from the advanced civilisations. I.e. Development dectatorship in these countries is necessary such as what Singapore did. Uncivilised economies such as all African economies and some South American economies should be isolated from the international society or become inducted by the more advanced and civilised economies.
* Extremely deprived economies with lack of natural resources still can be benefited from "free trade". They can still sell their cheap labour force! For instance, Bangladesh economy became far more developed and civilised after being involved into the global free trade. Therefore, "farmers in poor countries have few options for generating an income and many live in poverty" still can abandon their traditional income earning method and sell their cheap labour into the global economy. This industrial revolution and the dynamic change from traditional society to modern society (Westernised i.e. more civilised society) were also seen in Western nations inside their own economy in centuries ago. Now, the revolutionary movement having seen in Western economy in the past takes place in the "globe". Abandoning traditional life styles and abandoning traditional pre-industrial patterns makes the real income gain higher as the average commodity price index in the globe will go down owning to the productivity growht. Freer trade will accerelate this revolutionary movement further!
I just hate the idea and the brand-name of "fair trade" because this is very hypocritic. That's why I reject buying the product named fair trade. The margine for the labour cost is in fact not too different from the other products.
Speaking of monopoly, the floating exchange rate enables traders to adjust the rate to bring the fair outcome. When the monopoly of trade by Country A is concerned, Country B may put a higher exchange rate to restrict the monopoly power of Country A. The reason why some developing country depreciate the value of their currency rather than appreciate is to "dump" their product; it is not the case that advanced nations monopolise the market.
The free trade principles, floating exchange rate mechanism, liberated financial market, and freedom of choosing trading goods and their price, are the key figures to bring the stable equilibrium in the longer term.
* Small-scale producers in many poor countries are not necessary to be sustained to survive. As long as the products from the richer nations give better quality and quantity with a competitive price. As many commodities and services with inexpensive price become available from the import, then they can be more concentrated on investing the other sort of industries.
* The trade loss would be inevitable for these economies with a significantly lower productivity in the current globalised market. But, it is not the responsibility of richer economies and the "fair trade" is not a particular answer for decreasing the loss. The management of these poor countries have to become sophisticated. The method shall be either sending intellectuals from more advanced economy to teach then a lesson or let these poor economies to decide what they should do.
* Sometimes, these poor countries need to restrict the foreign trade when they are relying on the import too much. The reason why East-Asian economies could developed faster than the other LDCs is that their entrepreneurship and deligency to work were already capable to the global trade. However, I know some other poor economies are not capable enough. If they wish to join the global trade, they should temporary put priority on developing the entrepreneurship and civilising their own civilisation through welcoming the intellectuals from the advanced civilisations. I.e. Development dectatorship in these countries is necessary such as what Singapore did. Uncivilised economies such as all African economies and some South American economies should be isolated from the international society or become inducted by the more advanced and civilised economies.
* Extremely deprived economies with lack of natural resources still can be benefited from "free trade". They can still sell their cheap labour force! For instance, Bangladesh economy became far more developed and civilised after being involved into the global free trade. Therefore, "farmers in poor countries have few options for generating an income and many live in poverty" still can abandon their traditional income earning method and sell their cheap labour into the global economy. This industrial revolution and the dynamic change from traditional society to modern society (Westernised i.e. more civilised society) were also seen in Western nations inside their own economy in centuries ago. Now, the revolutionary movement having seen in Western economy in the past takes place in the "globe". Abandoning traditional life styles and abandoning traditional pre-industrial patterns makes the real income gain higher as the average commodity price index in the globe will go down owning to the productivity growht. Freer trade will accerelate this revolutionary movement further!
Monday, February 15, 2010
Arbroath, Scotland
Arbroath is a place in the East coast of Highland in Scotland. This is a wee small fishing village. However, this is a historically remarkable place. The declaration of independence was firstly written in 13th century. The declaration of independence in the USA is referred to this Scottish one when the US independence was declared. Furthermore, when Thomas Becket, the Archbishop of Canterbury from 1162 until his death in 1170, was assassinated, he was listed and praied as a Christian saint, and Arbroath Abbey nominates him as a saint of this Church institution.
Arbroath is famous for Smokies, the smoked fish, which is made of fish caught in local. This has a quite distinctive taste of fish, which offers us a natural taste of fresh fish with a unique taste of smokiness. This is the place where we can try a real taste of natural Scottish fish. Nonetheless, they no loger sell Fish&Chips made of the locally caught fish. This was a wee disappointing factor. But, Smokies are still made of the locally caught fish, and it is nice to eat such a traditional delicacy in a wee traditional Scottish village.
Wednesday, February 10, 2010
Proactive Macroeconomic Policy is important: The EMU fails (Econometric Analysis)
In order to prove that the European Monetary Union (EMU), which is also called the Eurozone, fails, the econometric analysis is used to see how the immediate, independent and proactive macroeconomic policy in smaller economic region is important to achieve in a stable long-run economic growth. This is the reason why Scandinavian nations keep their own monetary policy. The EMU is an ultimately unstable macroeconomic system without a doubt. Unlike the US federal government system, the EU does not have a common fiscal policy on the top of a common monetary policy. Furthermore, the population in the Eurozone is 329 million which far larger than the US population (approx. 250 million). Therefore, the Eurozone must require a federal government with a stronger fiscal enforcement and a huger scale of fiscal distribution system in order to stabilise the system.
Some pro-EU economists claimed that the trade frequency among the EU countries is so high that the business cycle among the Eurozone nations are more likely to be flexible and automatically stabilised. However, in the Eurozone legal systems are quite heterogeneous and the labour mobility is inflexible unlike the USA.
The centralised economic system eventually needs a big government in order to stabilise the system. The centralised big government in a huge size of econmic region suffers from notorious disadvantages. Labour right has to be abandoned in order to induce a frexible labour mobility to reallocate the labourers means of the change in the business cycle. The economy is more planned in order to redistribute the tax and the government expenditure. The reason why the economy has to be more planned in this system is that the monetary policy (interest rate, money supply, and capital investment plans) is no longer able to adjust to stabilise each business cycle in different areas. In addition, the transaction cost and the time consumed are high in this system to organise the fiscal policy.
On the other hand, the decentralised economic system enables the economic regions to stabilise the business cycle, react against the change in the business cycle by the fiscal policy with a smaller and more efficient transaction cost and a shorter time period, and the monetary is effective. Sweden could adjust its own interest rate immediately to react against the sudden shock in the business cycle as seen in 2009. Singapore remains a stable business cycle and long run economic growth with a smaller size government than the other nations. France is famous for a remarkably proactive macroeconomic policy. According to the econometric analysis offered by this short project proved that the proactive macroeconomic policy encourages a stable long run economic growth. This means that France seems to have a strong advantage in it. However, as France has joined the EMU, her proactive policy is more restricted because of the Maastricht treaty which is installed in order to avoid disharmony of the fiscal policy inside the EMU.
The following chapter explains how the regression analysis proved an effect of the proactive fiscal policy on the stable long run economic growth by using a macroeconomic data set based on 143 countries and 38 time periods (annual basis from 1970 to 2007). The data set is downloaded from Penn-World Table 6.3. GDP is created by multiplying the real GDP per capita (per worker) by the population. Government expenditure (denoted as "kg") is represented by Government Share of Real GDP per capita (RGDPL). Both GDP and Government Expenditure (kg) are natural-logged (denoted as l_GDP and l_kg accordingly).
Firstly, the variable representing the business cycle is created by subtracting "unit specific effects of countries (the different intercepts for countries)" and "time trend", which represent the long run trend from l_GDP as follows:
Then, the residuals are saved and named as "BizCycle" which represents the business cycle. This variable shows that the economy is in the boom when "BizCycle" is positive whilst the economy is in the recession when "BizCycle" is negative.
Secondly, the variable called "the level of fiscal stimulus", which indicates the level of government expenditure, is created by subtracting "unit specific effects of countries (the different intercepts for countries)" and "time trend", which represent the long run trend from l_kg as follows:
Then, the residuals are saved and named as "Fiscal_Stimulus" which represents the business cycle. This variable shows that "Fiscal_Stimulus" is possitve when the government expenditure is higher than the average across the time whilst "Fiscal_Stimulus" is negative when the government expenditure is lower than the average across the time.
At this stage, the variables representing the business cycle and the fiscal stimulus are created. The reason why the residuals are used instead of taking a difference of the GDP and the kg is to use the constant account of change rather than the current account. If we just use the first-difference of thees variables, it is only able to focus on the current account whici is not able to see the comparison with the average across the time period. The current account only compares the change between the current time period and the previous time period. Using the residuals instead of the first-difference does not exactly mean the constant account. However, it is able to see the dynamic impacts of these variables.
Now, in order to create the variable representing the level of proactivity, "Fiscal_Stimulus" is regressed on "the business cycle", and the kagged variables of "the business cycles" which are lagged for 1, 2, 3, 4, and 5 years, the unit specific effects, and the time trend by the fixed effect estimates (OLS) as follows:
The coefficients of the constant (the common intercept for all countries and time periods), time trend, the current business cycle, and the business cycle lagged for 5 years are significant.
The constant is significant because there is a fixed amount of the government expenditure in all countries. The time trend is significant but this variables is included in the estimates to prove effects of the main explanatory variables are strong enough across the time period. The fixed-effect is used to to prove effects of the main explanatory variables are strong enough across countries. Therefore, this OLS enables to prove the main explanatory variables, "BizCycle" and its lags, are strong enough to explain the dependent variable, "Fiscal_Stimulus".
The important figure is that "BizCycle" and "BizCycle_5" are significant. The coefficient of "BizCycle" is negative whereas "BizCycle_5" is possitive. This implies that "Fiscal_Stimulus" increases as the economy gets into the recession compared to the economy in the five years ago. By contrast, "Fiscal_Stimulus" decreases (lower expenditure and/or higher tax)as the economy recovers or gets into the bubble compared to the five years ago. All in all, this formula shows that it decides whether the economy is in recession or boom according to the comparision with the past situation. This is a quite rational explanation of proactivism, and this formula support the theory explaining how the level of fiscal stimulus is determined according to the business cycle.
The fitted values of "Model 3" is saved. The fitted values is named as "ProAct" which represents the estimated "Fiscal_Stimulus" based on the information of the constant, the time trend, "BizCycle" and "BizCycle_5".
Finally, the time trend, which represents a long run trend of the business cycle, is regressed on "ProAct" by the fixed-effect estimates. The time trend is used because this is only a variable showing its value increase by 1 a year.
The random-effect estimates (GLS) are also tried but offered a less significant level of the coefficient of "ProAct" than the fixed-effect estimates (OLS). But the random-effect estimates indicated that it is significant in the 10% siginicance level. On the other hand, the fixed-effect estimates indicated that it is significant in the 5% significance level which econometricians commonly refer to.
"ProAct" is considered as a relatively week variable because there are so many other potential explanatory variables explaining the long run economic growth. Nevertheless, despite this assymption, the coefficient of "ProAct" become significant and positive. This implies that the proactive fiscal stimulus is one of the important variables encouraging a stable long run economic growth.
Some pro-EU economists claimed that the trade frequency among the EU countries is so high that the business cycle among the Eurozone nations are more likely to be flexible and automatically stabilised. However, in the Eurozone legal systems are quite heterogeneous and the labour mobility is inflexible unlike the USA.
The centralised economic system eventually needs a big government in order to stabilise the system. The centralised big government in a huge size of econmic region suffers from notorious disadvantages. Labour right has to be abandoned in order to induce a frexible labour mobility to reallocate the labourers means of the change in the business cycle. The economy is more planned in order to redistribute the tax and the government expenditure. The reason why the economy has to be more planned in this system is that the monetary policy (interest rate, money supply, and capital investment plans) is no longer able to adjust to stabilise each business cycle in different areas. In addition, the transaction cost and the time consumed are high in this system to organise the fiscal policy.
On the other hand, the decentralised economic system enables the economic regions to stabilise the business cycle, react against the change in the business cycle by the fiscal policy with a smaller and more efficient transaction cost and a shorter time period, and the monetary is effective. Sweden could adjust its own interest rate immediately to react against the sudden shock in the business cycle as seen in 2009. Singapore remains a stable business cycle and long run economic growth with a smaller size government than the other nations. France is famous for a remarkably proactive macroeconomic policy. According to the econometric analysis offered by this short project proved that the proactive macroeconomic policy encourages a stable long run economic growth. This means that France seems to have a strong advantage in it. However, as France has joined the EMU, her proactive policy is more restricted because of the Maastricht treaty which is installed in order to avoid disharmony of the fiscal policy inside the EMU.
The following chapter explains how the regression analysis proved an effect of the proactive fiscal policy on the stable long run economic growth by using a macroeconomic data set based on 143 countries and 38 time periods (annual basis from 1970 to 2007). The data set is downloaded from Penn-World Table 6.3. GDP is created by multiplying the real GDP per capita (per worker) by the population. Government expenditure (denoted as "kg") is represented by Government Share of Real GDP per capita (RGDPL). Both GDP and Government Expenditure (kg) are natural-logged (denoted as l_GDP and l_kg accordingly).
Firstly, the variable representing the business cycle is created by subtracting "unit specific effects of countries (the different intercepts for countries)" and "time trend", which represent the long run trend from l_GDP as follows:
Then, the residuals are saved and named as "BizCycle" which represents the business cycle. This variable shows that the economy is in the boom when "BizCycle" is positive whilst the economy is in the recession when "BizCycle" is negative.
Secondly, the variable called "the level of fiscal stimulus", which indicates the level of government expenditure, is created by subtracting "unit specific effects of countries (the different intercepts for countries)" and "time trend", which represent the long run trend from l_kg as follows:
Then, the residuals are saved and named as "Fiscal_Stimulus" which represents the business cycle. This variable shows that "Fiscal_Stimulus" is possitve when the government expenditure is higher than the average across the time whilst "Fiscal_Stimulus" is negative when the government expenditure is lower than the average across the time.
At this stage, the variables representing the business cycle and the fiscal stimulus are created. The reason why the residuals are used instead of taking a difference of the GDP and the kg is to use the constant account of change rather than the current account. If we just use the first-difference of thees variables, it is only able to focus on the current account whici is not able to see the comparison with the average across the time period. The current account only compares the change between the current time period and the previous time period. Using the residuals instead of the first-difference does not exactly mean the constant account. However, it is able to see the dynamic impacts of these variables.
Now, in order to create the variable representing the level of proactivity, "Fiscal_Stimulus" is regressed on "the business cycle", and the kagged variables of "the business cycles" which are lagged for 1, 2, 3, 4, and 5 years, the unit specific effects, and the time trend by the fixed effect estimates (OLS) as follows:
The coefficients of the constant (the common intercept for all countries and time periods), time trend, the current business cycle, and the business cycle lagged for 5 years are significant.
The constant is significant because there is a fixed amount of the government expenditure in all countries. The time trend is significant but this variables is included in the estimates to prove effects of the main explanatory variables are strong enough across the time period. The fixed-effect is used to to prove effects of the main explanatory variables are strong enough across countries. Therefore, this OLS enables to prove the main explanatory variables, "BizCycle" and its lags, are strong enough to explain the dependent variable, "Fiscal_Stimulus".
The important figure is that "BizCycle" and "BizCycle_5" are significant. The coefficient of "BizCycle" is negative whereas "BizCycle_5" is possitive. This implies that "Fiscal_Stimulus" increases as the economy gets into the recession compared to the economy in the five years ago. By contrast, "Fiscal_Stimulus" decreases (lower expenditure and/or higher tax)as the economy recovers or gets into the bubble compared to the five years ago. All in all, this formula shows that it decides whether the economy is in recession or boom according to the comparision with the past situation. This is a quite rational explanation of proactivism, and this formula support the theory explaining how the level of fiscal stimulus is determined according to the business cycle.
The fitted values of "Model 3" is saved. The fitted values is named as "ProAct" which represents the estimated "Fiscal_Stimulus" based on the information of the constant, the time trend, "BizCycle" and "BizCycle_5".
Finally, the time trend, which represents a long run trend of the business cycle, is regressed on "ProAct" by the fixed-effect estimates. The time trend is used because this is only a variable showing its value increase by 1 a year.
The random-effect estimates (GLS) are also tried but offered a less significant level of the coefficient of "ProAct" than the fixed-effect estimates (OLS). But the random-effect estimates indicated that it is significant in the 10% siginicance level. On the other hand, the fixed-effect estimates indicated that it is significant in the 5% significance level which econometricians commonly refer to.
"ProAct" is considered as a relatively week variable because there are so many other potential explanatory variables explaining the long run economic growth. Nevertheless, despite this assymption, the coefficient of "ProAct" become significant and positive. This implies that the proactive fiscal stimulus is one of the important variables encouraging a stable long run economic growth.
Sunday, December 27, 2009
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