04 Sep

Second Annual Research Conference of Banco de España

Second Annual Research Conference of Banco de España (3 September 2018) Pablo Hernández de Cos, Governor, has said the following (remarkable facts) during his speech:

After several years of sustained recovery, the Great Recession has left a legacy of high public debt ratios, low potential output growth and rising inequality in some countries. For instance, the euro area aggregate public debt stands at close to 90% of GDP, almost 25 percentage points up on its pre-crisis level. Also, the IMF estimates that potential output growth in the major advanced economies has been declining since the early 2000s, this trend being further aggravated by the global financial crisis. Currently, potential output for this group of economies is thought to be

at around 1.5%, a significant drop from the 2% growth estimated in the pre-crisis period.2 At the same time, the percentage of wealth held by the richest 10% of the population of the United States, France or the United Kingdom has risen by between 5 pp and 9 pp in the last 25 years.

Moreover, far-reaching transformations such as globalisation, the digital revolution and demographic trends are all shaping the world economy today, and will continue to do so in the years to come.

Against this backdrop, tax and transfer systems can play a crucial role in providing sound public finances, increasing potential output and delivering sustainable and inclusive

growth. However, meeting these goals poses some significant challenges. And not only because of the intrinsic distortionary nature of taxation and the different existing trade-offs among these three dimensions, but also because some of these global phenomena, in particular globalisation and the digital revolution, can adversely affect the capacity of governments to collect taxes. As recently stressed in a newspaper article, the challenge is to define a system where taxes target rents, preserve incentives and are hard to avoid.

Avenues of research

The well-known equity-efficiency trade-off of taxation has given rise to a fruitful literature on the mechanisms driving the behavioural response of taxpayers and the size of such reactions.

While the initial focus of this literature relied on labour supply responses, some recent contributions have emphasised the importance of accounting for additional mechanisms, such as tax avoidance or rent-seeking activities by top earners.

For policymaking, it is crucial to know the direction and extent of these behavioural reactions. On one hand, because they inform the need for policy evaluation frameworks that go beyond the simple estimation of morning-after effects. On the other, because behavioural responses are at the root of the optimal design of the tax and transfer system. As a consequence, accounting for them is central to addressing a host of current policy debates, such as the optimal level of progressivity.

One influential avenue of research has documented a consistent trend of income concentration at the top of the distribution in some OECD countries in the last few decades.

From a macro perspective, a growing segment of the literature advocates a move from the standard new Keynesian framework, based on representative agents, to models that account for household and firm heterogeneity, in order to better understand the transmission channels of monetary and fiscal policy. This literature speaks directly to central bankers, since it challenges some of the basic tenets of our traditional understanding of monetary and fiscal policy.

In recent years Banco de España has aimed to further improve the standard of its research activity and to strengthen collaboration with other institutions. Overall, these endeavours reaffirm our commitment to research, as the fundamental basis for good policy decisions, and I hope they will enhance our research output in the future.

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