•The accuracy of methods to calculate the global distribution of income has not yet been tested.•Among four methods, the Lorenz-curve regression method is the most accurate. The two-parameter ...distribution method is also very precise.•On the basis of our new dataset, we find that income inequality among the citizens of 145 countries declined significantly between 1988 and 2015.•Our new method to deconstruct the change in the global Gini coefficient of income inequality reveals that income convergence was the main driver.•Without China and India, global interpersonal income inequality in 143 countries was higher in 2015 than in 1988.
While various methodologies have been used in the literature to estimate global interpersonal income inequality, the accuracy of these methods has not so far been tested. We compare the accuracy of four methods and find that the Lorenz curve regression method is the most accurate and robust, while the accuracy of the identical quantile income and the Kernel density methods depends on the level of detail about income shares. The simple two-parameter distribution method is also very accurate when either the Log-normal or the Weibull distribution is used. Using the two-parameter distribution method, we show that global income inequality among the citizens of 145 countries declined significantly between 1988 and 2015, largely because of the convergence of income per capita, which was offset to a small degree by the increase in within-country inequalities and the increased population share of poorer and more unequal countries. Regional income inequality declined in most parts of the world, with the notable exception of developing Asia where it has increased. Despite the large increases in within-China and within-India inequality, income convergence of the two countries drove down global income inequality. Without China and India, global interpersonal income inequality in 143 countries was higher in 2015 than in 1988, indicating that more than half of the world has not really become more equal.
•The unobserved expected future exchange rate is eliminated from a theoretical model.•The long-maturity forward exchange rate is a proxy for exchange rate disequilibrium.•A new error correction model ...leads to unprecedented forecasting results.•Both short-horizon and long-horizon out-of-sample predictability is achieved.•The model is simple, linear, easy to replicate, and uses real-time available data.
We show that in a popular model of exchange rate determination, the unobserved expected future exchange rate can be substituted with the observed forward exchange rate. This allows the derivation of a new error-correction forecasting model, which approximates the gap between the fundamental equilibrium exchange rate and the actual exchange rate with the long-maturity forward exchange rate. Our out-of-sample forecasting results for major currencies are unprecedented. The forecasting model is simple, easy to replicate, and the data we use are available in real time and not subject to revisions.
We create a euro-area Divisia-money dataset and estimate theoretically correct responses to money, user cost and interest rate shocks using structural vector-autoregressions. Our findings suggest ...that money matters for output, prices and interest rates, while the European Central Bank can influence monetary developments.
•We create and make available a dataset on euro-area Divisia-money aggregates.•VARs reveal significant euro-area output and prices responses to Divisia-money shocks.•After a short-term liquidity effect, Divisia-money shocks increase interest rates.•Divisia-money reacts to user costs and interest rates shocks.•Most of these results are not significant when we use simple-sum measures of money.
This article – written originally as a blog post for the think tank Bruegel – reviews the decisions made in June 2022 to allow Croatia into the euro zone but, in contrast, to make no change in the ...status of Bulgaria which, nominally, thus remains an EU Member State with a derogation from introducing the euro but one subject to complying with the requirements to allow it to do so. The author notes that, while the Bulgarian legislation on central bank independence remains an outstanding issue, there are other aspects of the decision to allow Croatia in but to refuse Bulgaria which cause disquiet. In reviewing price stability statistics on the basis of different measures, the author concludes that these indicate a level of decision-making discretion, creating a grey area in the criterion, as well as uncertainty over how comparative inflation performance is judged and a level of dubiety. He concludes that a rethink is necessary on how to interpret ‘best performers’ and that the time is right to fix the flaws in the existing criterion by switching to comparators which are closest to the average for the euro area as a whole.
Studying all possible pairs of 11 major currencies and 11 portfolios in 1976–2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and ...portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.
To ensure sufficiently rapid decarbonization to meet the Paris Agreement goals, investments in green infrastructure will have to increase by an estimated 2% of world GDP annually, according to the ...International Energy Agency. A significant part of that investment will need to be funded with public resources - raising major tensions between consolidation needs after the high deficits during the pandemic and the need to increase investments. We consider this trade-off in the European Union, which has set itself one of the most ambitious climate targets in the world. The additional public investment required to meet the European Union's climate goals is around 0.6% of GDP annually during this decade, which might increase if the green transition is accelerated due to Russia's invasion of Ukraine. Budget consolidation can be done at a moderate pace in line with EU fiscal rules if those rules are interpreted flexibly, but past consolidation episodes resulted in major public investment cuts. A 'green golden rule' -excluding net green investment from the fiscal indicators used to measure fiscal rule compliance- is proposed as the most promising option to address this tension and would provide a positive incentive to undertake such investments. However, the uncertain growth impact of green public spending and the risks to growth from climate change create difficult trade-offs in fiscally weaker countries. Better regulatory policy and a higher price on emissions should in parallel incentivise private green investment and reduce public costs. These ingredients should be combined to form a 'Green Fiscal Pact'.
Key policy insights
Public investments tend to be cut in fiscal consolidation episodes by vote-maximising politicians and thus need to be treated differently in fiscal rules. Increasing green public investments will be difficult in the upcoming consolidation period.
A 'green golden rule' -excluding net green public investment from the fiscal rule indicators- is proposed as the best option to incentivise public climate investment.
Policymakers need to underpin such a rule by clearly defining what constitutes emission-reducing climate investments and monitoring compliance.
Fossil fuel subsidies should also be eliminated, and private climate investment should be incentivised through appropriate taxation and regulation.
Climate change may tighten budget constraints in countries with already high debt levels because of its negative growth effects, so these countries should delay the introduction of the green golden rule.
The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the European Union underperforming economically relative to the United States and China during ...2019–2023. Southern European countries have been particularly strongly affected. Some sectors have been hit harder than others. Business insolvencies have, paradoxically, fallen. While total employment has almost recovered, the young and those with low-level qualifications have suffered employment losses. Inequality could rise. The pandemic may lead to lasting changes in the economy, with more teleworking, possibly higher productivity growth and changed consumer behaviour. Policymakers must act to prevent lasting divergence within the EU and scarring due to the fallout from the pandemic. The first priority is tackling the global health emergency. Second, the article warns against premature fiscal tightening but suggests additional short-term support to prevent scarring. Third, the article warns against protectionism and advocates for reforms that boost productivity growth further.
The European Union’s Lisbon strategy goal of tackling poverty was a notable failure, while the Europe 2020 strategy’s poverty target is out of reach. Both strategies were based on variants of the ‘at ...risk of poverty’ indicator, which has an inappropriate and misleading name. We demonstrate theoretically and empirically by cross-section, time series and panel cointegration evidence that the ‘at risk of poverty’ indicator essentially measures income inequality, not poverty. Our calculations show that even after taking into account the positive impact that expected economic growth should have on material deprivation and low work intensity, the Gini coefficient of income inequality would have to fall by 3.5 points in each EU country if the Europe 2020 poverty target is to be reached, which is implausible. The ‘at risk of poverty’ indicator does not satisfy standard axioms set in the literature, while the huge differences between national poverty thresholds make the EU-wide poverty aggregate pointless. The political agreement between EU member states expressed the goal of reducing poverty, not inequality. There are good reasons to aim for lower income inequality, but a political agreement would be needed to set an inequality goal and corresponding policies.
This article studies inflation persistence with time-varying coefficient autoregressions for 12 central European countries in comparison with the United States and the euro area. We find that ...inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the United States and the euro area. In most central and eastern European countries, for which our study covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable. Our findings have implications for the conduct of monetary policy and for a possible membership in the euro area. Among the two time-varying coefficient methods we use, our results favour the flexible least squares smoother over the Kalman smoother. We also conclude that the OLS estimate of an autoregression is likely upward biased relative to the time-average of time-varying parameters, when the parameters change.
We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with ...that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.
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