Volume 21, Issue 1

Economists have repeatedly developed various theories for the origin of inflation and claimed that these theories were always valid everywhere. But history has shown that the theories – although they are useful – were only valid during certain time periods and under special circumstances. What is therefore needed is a system that assigns the various explanations of inflation to the specific circumstances for which they are particularly suited. This paper sets out such a system. Borrowing from Charlie Munger's (2005. Poor Charlie’s Almanack . Stripe Press), I call it a “latticework of inflation models”. In the first section 1 map the various inflation theories and then discuss and relate them to each other in the following sections. I find that during and after the pandemic several drivers of inflation were at work, so that several theories of inflation instead of just one allow a more comprehensive explanation of the inflation experienced during this period. The “latticework of inflation models” is also better suited than just one model for investigating the outlook for inflation.

We provide a comparative evaluation of fiscal stabilization strategies during the Covid-19 pandemic. For this purpose, we use Germany’s temporary value-added tax (VAT) rate reduction as a reference point. We construct a credible counterfactual for Germany in a two-step procedure. First, we carry out a careful pre-selection of the donor pool countries to obtain a control group that is highly similar to Germany regarding important post-treatment characteristics. Second, we apply a reweighting scheme on the pre-selected donor countries. The synthetic control group only differs from Germany in the way that it did not implement the temporary VAT rate reduction. Our results indicate that the German VAT cut policy and partial VAT reductions in other countries were relatively ineffective in stimulating consumption with regards to their costs when compared to other measures such as (targeted) direct cash transfers (e.g. implemented in Canada, Denmark, Japan, and the United States). We attribute this to the fact that direct cash transfers are more comprehensible, salient, and actionable, in particular, in a dynamic environment with high uncertainty induced by unclear future economic prospects.

The paper examines the causality between the German current account and financial account. It contrasts with past research which assumes the current account and financial account to be jointly determined by a saving-investment imbalance. Our analysis decomposes the current account into exports and imports (real resource flows) and the financial account into domestic capital outflows and foreign capital inflows (gross capital flows). Evidence from the Toda-Yamamoto causality test shows that for Germany from Q1.1980 to Q2.2023, the causality runs from the financial account to the current account. It is not real resource flows but gross capital flows which exert significant impacts on the German real exchange rate. The finding implies that over the long run, strong German capital outflows and weak foreign capital inflows contributed to weak wage growth and stagnant investment in Germany, sustaining the persistent German current account surpluses. A reduction of the German current account surpluses requires a policy mix of fiscal expansion and monetary tightening which would expand the absorption of German and foreign capital in the German economy.

In this paper, we illustrate the tax attractiveness of EU countries as investment locations over time in terms of effective average tax rates and evaluate potential tax reform options. Our quantitative assessment of recent tax policies suggests that corporate tax rate cuts, notional interest deductions and R&D incentives significantly reduce the effective average tax rate. When government budgets are constrained, however, tax incentives with a direct link to investment activities, such as accelerated depreciation and R&D incentives, are most suitable to stimulate private investment. Even after the introduction of the global minimum tax, these measures remain a viable tool to stimulate investments.

Governments have responded to the 2022 Russian invasion by committing substantial aid to Ukraine. This paper investigates this aid on a cross-national basis utilizing differences in economic, political, and geographic characteristics of donor countries. It advances the comprehension of aid allocation to Ukraine and argues that donors’ interests heavily influence bilateral aid to Ukraine. Empirically, a two-stage approach serves to identify the main determinants of aid allocation, analyzing both the initial decision to donate and the level of aid generosity. The regression analyses show that wealthier, more populous, more democratic countries as well as those who trade with Russia are more likely to support Ukraine while the impact of these factors is more nuanced when determining aid generosity. Ceteris paribus, EU and NATO members are more likely to donate and more generous in their aid efforts. The results also shed light on the complex role of former Soviet republics.

Given high long-term interest rates, most industrial countries have to either cut spending or increase taxes to contain government debt. As an immediate fiscal consolidation would cause economic and political harm, adjustment must be steady and slow, based on a credible plan. This implies that government debt levels have to increase before falling. This is not good, but not catastrophic, as advanced economies can sustain a higher debt ratio, so long as it is not exploding.

This contribution, based on the proposals by Bakker, Beetsma, and Buti (2024a. “The Case for a European Public-Goods Fund.” Project Syndicate , 4 March. https://www.project-syndicate.org/commentary/public-goods-fund-could-finance-green-transition-and-ensure-fiscal-responsibility-by-age-bakker-et-al-2024-03, 2024b. “Two Birds with One Stone: Investing in European Public Goods while Maintaining Fiscal Discipline at Home.” Intereconomics 59 (2): 1–6), discusses an EU fund to finance investments with positive cross-border spill-overs, such as large infrastructures, that are too expensive for individual countries to finance, or of which the benefits are insufficiently internalised by individual investing countries. Each country receives a given part (“envelope”) of the fund. The envelope size and the contribution as well as the eventual debt repayment burden could be proportional to the size of the economy, thereby minimising cross-border redistribution. Access to the fund’s resources is conditional on adherence to the EU’s new fiscal rulebook. If a country fails to make full use of its envelope, the remaining resources are re-allocated over the other envelopes. Hence, the fund provides an incentive for countries to simultaneously undertake investments that benefit groups of countries or the EU at large, and to maintain fiscal discipline. We discuss the size of the fund, how it fits within the EU current instrument set, its governance, its financing and its potential political appeal.

In this article, I explore the need for reform of the German debt brake to incentivize public investment. I approach the issue from multiple angles: assessing elite support for debt brake reform among policymakers and economists, examining empirical evidence on the impact of fiscal rules on public investment, exploring the conceptual basis for prioritizing public investment within fiscal rules, and presenting a reform proposal put forth by the Scientific Advisory Board of the German Ministry of Economic Affairs and Climate Action.

We study the transparency of debts incurred for the EU Recovery Fund. In our opinion, the Recovery Fund lacks transparency at various levels. We find that the Fund implements a hidden transfer scheme that splits member states into net contributors and net recipients. As a result, the national budgets of the EU member states will have to face uncertain future obligations. Finally, we hold that the Fund weakens the European fiscal rules because the debts of the Recovery Fund do not add to the national debt levels. The national debt levels therefore do not show the whole burden.

In this contribution, I discuss the divergence of German and French public finances over the course of the last two decades. Major gaps in public deficit/debt levels and debt service costs have opened even under the presence of a common fiscal framework at the EU level. To explain these differences, I focus on three elements: the (non-)perception of budgetary and socio-economic crisis, differences in demographic conditions, and contrasting approaches towards the role of rules and expertise in fiscal policymaking. The contribution illustrates these points by providing two concise case studies on key developments in fiscal policymaking and institutions since the 1990s. I conclude with a brief reflection on German and French fiscal policymaking in the years to come.

After the pandemic peak, public debt over GDP in Italy has fallen sharply thanks to high real and nominal economic growth; a few institutional changes have further reduced concerns about its medium-term sustainability. Yet, the debt ratio is still too high and needs to be reduced. The gradual adjustment path forecasted by the new Eu fiscal rules seems broadly able to reach this objective without imposing too harsh policies that might turn out to be economically and politically counter-productive. Still, without a serious reform of the Eu and the Eu budget, there remains the problem of how Italy and the other European countries will finance the new spending priorities dictated by the green deal and the mutated geo-political situation. And in the longer run, the demographic shock remains the most serious concern for public debt sustainability.

The Swiss debt brake at the federal level was accepted in 2001 by a direct democratic referendum, where it received an overwhelming approval rate of almost 85 percent “yes” votes. The fiscal rule mandates that budgeted expenditures cannot exceed cyclically adjusted expected revenues, targeting gross debt while prohibiting new structural debt. Violations due to ordinary or extraordinary expenditures are transparently recorded in separate accounts, which must be balanced within three and six years, respectively. The federal rule is complemented by decentralized debt brakes at the cantonal level. Compared to a synthetic Switzerland without the federal debt brake, the fiscal rule did not decrease public investments, with the notable exception of military expenditure. Additionally, the accuracy of budget forecasts has improved, evidenced by reduced discrepancies between projected and actual revenues and expenditures.