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I would like to thank Kenneth Kang and Mahmood Pradhan for guidance and suggestions. I also thank Benjamin Hunt and Susanna Mursula for assistance in model simulations, Shekhar Aiyar, James John, seminar participants at the European Commission, colleagues from European Central Bank, and others for helpful comments and suggestions, and Jesse Siminitz for excellent research assistance. An earlier version of this paper was issued as a Selected Issues paper and served as background material for the Executive Board Meeting on the 2015 Article IV Consultation for the Euro Area.
In this paper, euro area excludes Lithuania, unless stated otherwise.
A decomposition along a Cobb-Douglas specification of the output per capita would be Y/N=A(K/N)α(L/N)1-α, where Y, N, A, K, L, α are output, population, TFP, capital stock, labor input (in hours), and capital share, respectively.
For comparison purpose, the labor statistics of the United States and Japan are also from European Commission annual macroeconomic database (AMECO), if available. There are some differences between AMECO and the labor statistics bureaus of the United States and Japan. For instance, Japanese labor force participation increased from 82.7 percent in 2007 to 86 percent in 2017 according to AMECO, while it increased from 78.2 percent to 80.2 percent according to Statistics Bureau, Ministry of Internal Affairs and Communications.
However, J. Mokyr argues that technology progresses tend to contribute little to measured output even if their impact on consumer welfare is very large. (http://www.wsj.com/articles/joel-mokyr-what-todays-economic-gloomsayers-are-missing-1407536487). See also Brynjolfsson and McAfee (2014).
European Commission (McMorrow and Roeger, 2014) also expects that EU growth rates are likely to be substantially weaker over 2014-2023 at an annual average rate of about 1.5%, a full percentage point lower than in the decade leading up to the crisis (1998-2007). Low future growth rates will essentially reflect the influence of weak pre-crisis trends, most notably for TFP, as well as the economic realities of aging populations and the fallout from the financial crisis.
These estimates are sensitive to the forecast growth rates and the relationship between output and unemployment (the Okun’s coefficient). For example, the Okun’s coefficient, while stable over time for most countries, was estimated to have been higher for Italy after 1995 (Ball and others, 2013). The WEO projections for the medium-term growth also may not fully incorporate the impact of recent structural reforms.
See Bornhorst and Ruiz-Arranz (2013) for detailed discussion of policy options for dealing with high debt in the euro area.
The deleveraging process of NFCs has been uneven within the economy. Debt reductions have been more intense in the construction/real estate sector than in other sectors, and by SMEs rather than by large firms. More generally, the decline in debt, investment, and employment has been appropriately more acute in those sectors that were more leveraged before the crisis (Mendez and Menendez, 2013).
For instance, if the accumulated debt were to be fall by two-thirds, it would imply a further reduction of nine percentage points of GDP for the euro area as a whole.
Simulations are provided by B. Hunt and S. Mursula (IMF).
If fiscal stance were allowed to respond beyond the role of automatic stabilizers in countries with low debt levels, the growth impact on these countries and the euro area aggregate would be smaller than presented in the text.
FSGM comprises three core models (G20MOD, EUROMOD, and EMERGMOD), each of which captures the global economy. FSGM is semi-structural with a single good, but private consumption and investment are structural (micro-founded); trade, labor supply and inflation are reduced form representations; supply is determined by an aggregate Cobb-Douglas production function; and monetary and fiscal policies are endogenously set with simple rules (Andrle and others, 2015).
The impact on real output per capita growth is the same because the simulations assume the same population growth as in the baseline.
See 2015 Article IV Euro Area Policies for detailed policy recommendations (IMF Country Report No. 15/204). https://www.imf.org/external/pubs/ft/scr/2015/cr15204.pdf.