Economic Consequences of the Conflict in Ukraine

Roel Beetsma, Matthias Busse, Matthias Busse, Massimo Giuliodori, Martin Larch, 25 May 2022

Macroeconomic projections are an essential building block of any budgetary plan. This column studies the one-year-ahead budgetary projections from the Stability and Convergence Programmes of EU member states and finds that the most important variable explaining budget balance errors is GDP growth. More optimism in GDP growth projections produces more optimistic budgetary projections. The findings call for delegating the construction of output projections to adequately equipped national independent fiscal institutions. Such institutions with high media impact producing or assessing the macroeconomic forecast appear to lead to actual budgetary improvement relative to projections.

Rainer Kotschy, David Bloom, 25 May 2022

Declining fertility rates and longer life expectancies are producing an ageing global population. This column investigates the challenges that rapidly ageing societies pose to systems of long-term care. To avoid shortages in the workforce, the long-term care industry should endeavour to improve working conditions while also recruiting workers from a larger pool. Investing in disability prevention and rehabilitation are also promising avenues to absorb pressure from growing long-term care needs.

Marina Feliciano, Ethan Ilzetzki, Borui Niklas Zhu, 24 May 2022

The April 2022 CfM survey asked members of its European panel to assess the effects of an embargo on Russian gas on the German and EU economies. The majority of panellists assesses that an embargo on Russian gas would cut one to three percentage points from German GDP growth in 2022-3, if the German government offsets the costs with well-targeted fiscal policy. Estimates increase if the German government were to take no offsetting action. Additionally, a large majority thinks that the EU could weather such a ban with costs in the one to three percentage point range, even absent offsetting fiscal or monetary measures.

Rüdiger Bachmann, Christian Bayer, Heiko Stüber, Felix Wellschmied, 24 May 2022

Differences in labour market outcomes between East and West Germany persist, 30 years after reunification. Using high-quality administrative data from Germany, this column documents that East German plants face a steeper size–wage curve than West German ones, invest less in marketing, remain smaller, and, on average, pay lower wages. A model with labour market monopsony, product market power, and customer acquisition matching these features of the data predicts 10% lower aggregate labour productivity in East Germany, partially explaining the persistent productivity gap between West and East Germany even 30 years after reunification.

Bruno Albuquerque, Alexandra Varadi, 23 May 2022

Mortgage payment holidays were introduced in the UK March 2020 to help households who might have struggled with mortgage payments during the Covid-19 pandemic. Using transaction-level data, this column finds that payment holidays supported consumption during the pandemic for more financially vulnerable households, while more financially stable households on a payment holiday increased their savings instead. These results suggests that payment holidays may have been instrumental in supporting household balance-sheets following the negative aggregate shock triggered by Covid-19. 

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