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Fiscal policy after the crisis - Call for Papers ref 2015 ECFIN 013/C

Workshop organised by the Directorate-General for Economic and Financial Affairs of the European Commission.

I. Purpose and content of the workshop

The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop to discuss the challenges faced by fiscal policy after the crisis, on 19th January 2016 in Brussels.

The current economic scenario in the EU may be characterised by three different aspects that challenge the design and implementation of fiscal policy:

  • First, inflation uncertainty.

Inflation in the EU has been on a downward trend in the past few years, making it harder to reduce debt-to-GDP ratios, especially in a situation where nominal interest rates cannot decrease further as they have hit the zero lower bound. Contrary to that, if inflation surprises on the upside this increases the growth in nominal GDP and, all else equal, decreases the deficit- and debt-to-GDP ratios.

  • Second, GDP growth in the EU remains sluggish.

Investment continues to be weak in the EU, having so far prevented a broader and more robust acceleration of domestic demand. At the same time public investment has been particularly exposed to spending cuts across the EU, contributing further to the weakness of investment.

  • Third, social challenges have also exacerbated since the beginning of the crisis. The extent to which this is related to implemented fiscal consolidation measures remains elusive. At the same time, increased levels of poverty not only impact adversely the current living conditions of many EU citizens but may also negatively impact medium- and long-term economic growth and thus, the sustainability of public finances.

Overall, the workshop aims at discussing the role of fiscal policy in a context characterised by each of the three features outlined above. Against this background the Commission invites the submission of paper proposals addressing the following topics of which a more detailed explanation is given hereafter:

1. Fiscal policy in a low inflation context.

Since 2011 inflation rates across the euro area (and also the EU) have been trending downwards and still remain below the ESCB’s medium-term objective. At the same time, the conventional monetary policy instruments have reached the zero lower bound.

There is general acknowledgement that low inflation makes fiscal consolidation harder, while positive inflation surprises may have the opposite effect. However, the precise extent to which inflation impacts on fiscal variables remains uncertain and may change across countries and time. The workshop aims at shedding some light on two main topics in this area:

- The impact of inflation on fiscal variables, in particular government deficit and debt dynamics.

The workshop aims at understanding the specificities of how inflation developments are relevant to the achievement of fiscal policy targets.

From a theoretical point of view, low inflation reduces the growth in nominal GDP and all else equal, raises the deficit- and debt-to-GDP ratios. Debt dynamics would be left unchanged if nominal interest rates fall by the same magnitude as inflation. However, falling inflation leads to rising real interest rates when nominal rates have hit the zero lower bound, thus making it more difficult to reduce the high government debt-to-GDP ratios still prevailing in several EU Member States. Contrary to that, high inflation tends to increase nominal GDP and decrease the deficit- and debt-to-GDP ratios.

The empirical literature on the impact of inflation on debt dynamics is mostly recent. Reinhart and Sbrancia (2011) find that high inflation combined with financial repression can significantly contribute to debt reduction. Hall and Sargent (2010), on the contrary, find that inflation contributed only slightly to debt reduction in the United States between 1941 and 2009. Another strand of the literature (Missale and Blanchard, 1994 for example) tries to model the relationship between the government's incentive to inflate its debt away and the ownership and maturity structure of the debt.

Papers that empirically or theoretically explore the interaction of inflation shocks and fiscal variables in different EU countries or the EU/euro area as a whole will be welcomed.

- How should fiscal adjustment strategies be designed in a context of inflation shocks?

Inflation shocks can be expected to have a different impact (both in terms of size and timing) across government revenue and expenditure categories. Again, this can vary across countries and across time.

Aghevli and Khan (1978) find that government expenditure tends to adjust more rapidly than government revenue in response to anticipated inflation shocks, but adjust more slowly in response to unanticipated inflation shocks. They also find that inflation has a different impact on different categories of government revenues, with corporate income tax revenues adjusting more rapidly than income tax and domestic sales tax revenues. More recent literature focuses on the analysis of the fiscal drag through bracket creep in developed countries as OECD (2007) or Immervol (2005).

The differential impact of inflation across budgetary items may imply that the optimal consolidation strategy in a disinflationary context (in terms of the mix of measures on the revenue and expenditure side) may be different from the one in 'normal' times. In particular, the effectiveness of consolidation packages that focus on quantity-measures instead of price-measures may be different depending on the inflation environment. For instance, the budgetary yield provided by cutting social benefits via tightening the eligibility criteria (quantity-measure) or via reducing the actual amount of social transfers (price-measure) may vary depending on the inflation environment. Similarly, reducing the wage bill via cutting wages (price-measure) or shading public employees (quantity-measure) may have a different budgetary impact depending on the inflation environment.

Papers discussing or providing new data and institutional information on the different impact of inflation across budgetary items in different EU countries or the EU/euro area as a whole will be welcomed. Papers that discuss alternative consolidation strategies under different inflation environments are also welcomed.

2. Fiscal policy in a low growth / subdued investment context. 

The low level of investment is one of the main reasons why Europe’s economic recovery remains weak. In the longer run, low investment demand could also become structural, given Europe's demographic prospects and weak productivity performance. The EU Investment Plan aims to reverse downward investment trends in the near term.

Against this backdrop, the workshop aims at exploring whether there is also a role for public investment in helping to overcome the insufficient investment problem in the EU today, and more generally, the low growth (and low inflation) environment. As a result of the urgency, size and compositional choices of past consolidation efforts, public investment has been particularly exposed to spending cuts across the EU. In fact, the share of government gross fixed capital formation in GDP is expected to be one fifth lower in 2015 with respect to its 2010 levels, both in the EU and the euro area as a whole.

Public investment may have a substitution or a stimulating effect upon private investment depending on the economic environment and type of capital goods which government investment flows concentrate on. Recently, several papers looked into how to foster investment while pursuing fiscal consolidation, particularly in the Eurozone  (Buti and Mohl, 2014).  Other papers have explored the long-run relationship between public and private investment flows, sometimes finding that each country shows different characteristics as to the interaction between the two (Zou, 2006).  

The workshop aims at exploring further the relationship and possible complementarities between public and private investment flows and capital stocks in different EU countries or the EU/euro area as a whole.  Papers discussing the role of government investment in common public goods at the European level, such as energy or digital networks, will also be welcomed.

3. Fiscal policy in a context characterised by increasing poverty trends. 

Poverty is a multidimensional concept that relates not only to the lack of income and wealth but also to how resources are distributed. Since different indicators provide information along different dimensions it may happen that for a given country and year, these indicators show opposite trends. This implies that having an immediately clear and unambiguous picture of a particular situation may be a challenging task.

Severe material deprivation has generally increased in the EU since 2010, particularly in some countries. The workshop aims at disentangling the effect of the cycle from the specific effect of fiscal consolidation measures in explaining recent poverty trends.

The literature finds that absolute and relative poverty are determined by a set of micro and macro determinants, such as educational attainment, family structure, income per capita and long-term unemployment (Valleta, 2004; Matsaganis, 2013; Duiella and Turrini, 2014). The literature is however less conclusive when it comes to assess the impact on poverty of public finances and, in particular, fiscal consolidation measures.

Increased poverty poses not only short-term challenges with respect to the living conditions of citizens, but may also negatively impact medium- and long-term economic growth thus undermining the sustainability of public finances. The workshop also aims at analysing if and under what circumstances reducing poverty trends should become an overarching objective for fiscal policy. 

Papers exploring the extent to which the composition and speed of fiscal consolidation have an effect on poverty trends will be welcomed. Papers discussing the link between increased poverty and long-run sustainability of public finances are also welcomed.

II. General information and conditions

It is expected that six to eight papers are to be presented the day of the workshop, followed by the comments from discussants and a general exchange of views among the participants thereafter.

Selected authors will be required to send electronically a fully developed draft version of their paper to DG ECFIN by 30th November 2015 and to present it at the workshop on 19th January 2016. The final version of the paper must be submitted electronically by 29th February 2016. The final papers will have to be original work created in response to this call for papers and should be about 15,000 to 20,000 words in length.

In accordance with the conditions of the purchase orderpdf(190 kB) Choose translations of the previous link , the Commission intends to pay a maximum total fee of €4,092.00 consisting of maximum €4,000.00 per selected and presented paper and a daily allowance of maximum €92.00 for one speaker per paper to present it at the workshop in Brussels, irrespective of whether the paper is authored or co-authored. The Commission will arrange and pay for travel and accommodation. Such arrangements will be made via a travel agency, acting on behalf of the Commission.

III. Submission provisions

Candidates are invited to submit extended abstracts (up to 1,500 words) of research proposals related to the above mentioned topics. Papers can be co-authored.

 Extended abstracts must be submitted together with:

to the email ECFIN-PUBLIC-EXPENDITURE-2015@ec.europa.eu, clearly mentioning the topic of the paper proposal in the subject line of the email. This mailbox is reserved solely for submissions of proposals and the related compulsory documents. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication can be addressed to this mailbox.

New deadline for submission of your proposal (extended abstract and the above required documents): 12th July 2015  (23:59 CET) instead of 30th June 2015 (23:59 CET).

IV. Award criteria

The award criteria for evaluating the submitted research proposals are as follows:

  • clarity of the submission in: (i) outlining the topic, (ii) identifying its theoretical foundations and/or the empirical techniques to be used for analysis, as appropriate,  and (iii) specifying its policy implications (20 points)
  • scientific standard: quality of the submission in terms of its potential to provide robust economic analysis and value added vis-à-vis existing academic literature (25 points) 
  • value to policy making: relevance of fiscal policy implications of the proposed research in the European context (25 points)
  • excellence of the (co-)author(s): research excellence demonstrated by academic achievements (i.e. track record of their published research on related issues in leading journals) (15 points)
  • relevance of the subjects addressed: potential for a fruitful exchange of views among the workshop participants (15 points)

V. Award process

The submissions will be evaluated, receive points in accordance with the aforementioned criteria and then ranked with a view to select about 6 to 8 proposals. The assessment procedure is expected to be completed in August/September 2015. Candidates will be informed in due time of the outcome of the procedure.

VI. Publication and copyright issues

Copyright will be governed by the provisions specified in DG ECFIN’s Special Conditions attached to the purchase order (see model purchase order under Part II). Conditional on quality, papers contributed to the workshop might be published in a volume collecting the workshop proceedings. The Commission will retain the copyright.

VII. Further information

For any additional information please contact:

Julia Lendvai: julia.lendvai@ec.europa.eu

Lucía Rodríguez Muñoz: lucia.rodriguez-munoz@ec.europa.eu

Matteo Salto: matteo.salto@ec.europa.eu

Adrien Zakhartchouk: adrien.zakhartchouk@ec.europa.eu

This invitation to tender is in no way binding on the Commission. The Commission's contractual obligation commences only upon signature of the contract with the successful candidates.

The period of validity of the tender, during which candidates may not modify the terms of their tenders in any respect, is 6 months from the final date for submission. 

Up to the point of signature, the Commission may either abandon the procurement or cancel the award procedure, without the candidates being entitled to claim any compensation. This decision will be substantiated and the candidates notified.

Once the Commission has opened the tender, the document shall become the property of the Commission and it shall be treated confidentially.

You will be informed of the outcome of this procurement procedure by e-mail. It is your responsibility to provide a valid e-mail address together with your contact details in your tender and to check it regularly.

If processing your reply to the invitation to tender involves the recording and processing of personal data (such as your name, address and CV), such data will be processed pursuant to Regulation (EC) No 45/2001 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data. Unless indicated otherwise, your replies to the questions and any personal data requested are required to evaluate your tender in accordance with the specifications of the invitation to tender and will be processed solely for that purpose by Directorate General Economic and Financial Affairs. Details concerning the processing of your personal data are available on the privacy statementpdf Choose translations of the previous link .

Your personal data may be registered in the Early Warning System (EWS) only or both in the EWS and Central Exclusion Database (CED) by the Accounting Officer of the Commission, should you be in one of the situations mentioned in:

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