Secular stagnation in Europe:
A view from investment
University of Groningen Faculty of Economics and Business
Msc Thesis International Economics and Business
Name student: Alexander Khoroshkov Student ID number: s2559641
Student e-mail: a.s.khoroshkov@student.rug.nl Date: January 5, 2016
2 ABSTRACT
The European economy hasbeen affected for seven years since the onset of the Great Recession of 2008-9 without even slightly recovering. There is a disturbance that Europe may meet the same lost decade as Japan, which last there for already 24 years. Behind the European economic recession there is a substantial historically unprecedented downfall in investment. This paper analyzes various factors that could have led to such an investment collapse by applying panel data model controlled for countries and time fixed effects with the robust standard errors over the 20 years period of 1995-2014. The empirical findings reveal thatthe rate of return on investment in Europe has increased due to the risks associated with future uncertainty of the economic policy. At the same time, Europe is suffering from a shrinking working-age population, rising policy uncertainty and unemployment. From the positive side, an increase in saving has a positive effect on the investment-to-GDP growth in Europe.
3 TABLE OF CONTENT
1. INTRODUCTION ... 5
2. LITERATURE REVIEW ... 8
2.1. Japan’s lost decade... 8
2.2. Secular stagnation ... 11
2.3. Demographics ... 13
2.4. Unemployment ... 14
2.5. Interest rates ... 15
2.6. Inflation ... 16
2.7. Financial fragmentation and debt overhang ... 17
2.8. Savings ... 19
2.9. Policy uncertainty... 20
3. CRISIS AND POST-CRISIS ERA IN EUROPE ... 22
3.1. An exceptionally slow recovery ... 22
3.2. The Crisis in investment in the European Union ... 27
3.3. Structural factors affecting investment in the European Union ... 31
3.4. Insufficient demand ... 35
4. THE RULES OF ECONOMIC CHANGE... 37
4.1. The paradox of thrift ... 37
4.2. The challenge of providing monetary stimulus ... 38
4.3. The challenge of providing fiscal stimulus ... 38
5. DATA AND METHODOLOGY ... 40
5.1. The baseline model ... 40
5.2. The sample ... 41
5.3. Dependent variable ... 41
5.4. Main independent variables ... 42
5.5. Control variables ... 45
5.6. Expected signs ... 48
5.7. Data description ... 49
5.8. Diagnostic checks ... 51
5.8.1. Outlier analysis... 51
5.8.2. Check for Multicollinearity ... 52
5.8.3. Check for Normality ... 53
5.8.4. Check for Endogeneity ... 54
6. EMPIRICAL RESULTS ... 55
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6.2. Robustness check ... 56
6.3. Discussion of the results... 62
7. CONCLUSION ... 63
7.1. Limitations and suggestions for further research... 63
REFERENCES ... 65
APPENDICES ... 75
Appendix 1. List of countries in the sample ... 75
Appendix 2. Description of variables in the dataset ... 76
5 1. INTRODUCTION
Since the onset of the financial shocks in the United States in 2007-08, economies of many countries fell into a global recession. Financial and economic crisesare not new; they have happened with some regularity throughout modern history: Mexico (1994), Asia (1997-98), Russia (1998), Brazil/Argentina (2000-01) and Turkey(2001). By these recent crises of the 1990s and 2000s, a sudden reversal of capital flows was followed by financial instabilities (Young, 2014). Moreover, these crises occurred in the periphery countries, as a result policymakersand economists could argue that these financial crises were not systemic, but occurred due toflaws in the affected countries. However, the situation has changed radically. Financial-economic crisis 2007-2008 is no longer a crisis of the periphery, it took place in the world center of finance and in the heartland of financial capital, namely, in the United States (Wade, 2008).A common feature between the current and the previous crises is that the economic development follows a boom-bust pattern, where macroeconomic and financial imbalances are created during the boom period. The economic growth then is stopped by the crucial event and a boom turns into a bust. As a result, the economy goes into recession and policymakers take measures to alleviate the effects of the crisis. In case of the crisis of 2007-2008, the pre-crisis boom period was characterized by the credit expansion, high leverage, real estate price increase, macro-economic imbalances and flexible exchange rates. The crucial event in the recent crisis was the falling housing prices and the failure of Lehman Brothers that sharply influenced not only the US but also other world's economies (Hodson, 2010).
6 Figure 1. Real GDP growth (annual % change)
Source: OECD
The Great Recession of 2008-9 led to an unsustainable public debt levels, very high budget deficits, increase in unemployment, limited access to capital as well as unprecedented challenges to the European integration itself (Young, 2014).European governments tried to alleviate the consequences of the crisis by introduction of low interest rates, costless financing, usage of capital injections and guaranties to ensure the survival of banks and other financial institutions (Norgren, 2010). However, after 7 years from the beginning of the crisis and the implementation of helpful measures by the government there is little sign that the European Economy will recover soon (Benczes and Szent-Ivanyi, 2015). Moreover, Eurozone is currently suffering from deep stagnation that some economists start even calling ―secular stagnation‖ (Summers, 2014; Hamilton et al., 2015).
Secular stagnation refers to "a condition of negligible or no economic growth in a market-based economy" (Financial Times). In spite of the fact that there is no sole definition of ―secular stagnation‖, most economists would agree that it is a set of combination of low inflation, low growth as well as low interest rates lasting more than a few years. Furthermore, secular stagnation is characterized
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7 by slow population growth, decrease of real interest rates (nominal interest rates minus inflation), excess of desired saving over desired investment, resulting in a persistent output gap and slow rate of economic growth (Eichengreen, 2015).
However, stagnation in the Eurozone is not the sole problem that hampers economic development in the Eurozone. ―Weak investment has been a primary reason for the weakness of the recovery‖ (European Commission, 2014). In 2014, the level of total investment in percent of GDP was almost 4% below its pre-crisis value (Figure 2).
Figure 2. Total investment in EU and EA(% of GDP)
Source: International Monetary Fund (IMF)
The absenceof investment recovery in Europe is a negative sign because it shows lack of confidence and deep uncertainty among firms. Continuously low investment rates may seriously damage the productive capacities of European economies (Baldi et al, 2014). Several factors have been at the root of the investment weakness: high cost of capital, limited access to finance because of high corporate leverage, financial fragmentation, and policy uncertainty. While the European Central Bank‘s policy rate is effectively at the lower bound, some European countries keep lending rates high as financial fragmentation persists
19 19.5 20 20.5 21 21.5 22 22.5 23 23.5 24 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perc e n t
8 (Barkbu et al, 2015). Policy uncertainty means uncertainty about the future economic policies of national governments, which is a crucial factor impeding business investment in the present European environment (ECB, 2014).
This paper contributes to the existing literature on euro zone‘s economic downturn by analyzing weak investment recovery in the European Union andfactors weighing on low investment demand that was causing an oversupply of savings. Moreover, this paper implies that the EU might be highly susceptible to risks of secular stagnation.
Hypothesis 1: EUcould fall victim to the same type of economic shock that has affected Japan for the last two decades, which is called “the lost decade”. Other research questions considered in this research paper are whether there is a serious threat in the EU from secular stagnation either due to decline in the rate of return on investment or due to a decline in working-age population growth, or from both of these factors.
This paper will have the following structure. In the next section, the existing literature on this topic will be reviewed. After that current economic situation in European Union will be observed, namely, slow recovery and crisis in investment. Further, the description of the methodology and the data used to test this hypothesis will be given, followed by a presentation of the results. After a more in-depth discussion of the results there will be a conclusion including the limitations of the research and suggestions for future research.
2. LITERATURE REVIEW
This section will give a literature overview of the various concepts, factors and definitions that have been used in this research paper.
2.1. Japan’s lost decade
9 expansion of monetary aggregates and credit. Moreover, at that period there was a stable CPI inflation together with the expansion of asset prices and long adjustment period after the peaking of asset prices (Shiratsuka, 2003). In order to keep inflation in check and deflate speculations, Japanese Central Bank raised inter-bank lending rate and thus caused bursting of the bubble and exerting stress on the real side of the economy and financial system owing to an unexpected correction of asset prices. As a result, the Japanese stock market crashed leading to sharp decrease in equity and assets prices. All this finally led to long-lasting economic recession. For example, from 1995 to 2014 the GDP of Japan fell from 5.33 to 4.6 trillion US dollars (IMF, 2015), while Japan experienced a stagnant price level (Worldwide Inflation Data, 2015).
Stagnation of investment, in particular private fixed investment, is the primary underlying factor of the Japanese economic downturn in the 1990s (Horioka, 2006). The research is based on the data over the period 1980-2003 revealed that the main reasons restraining GDP growth were the drop in government consumption, net exports and household consumption. The stagnation of household disposal income/wealth was owing toa great drop in land and equity prices and to a lesser extent due to the rise in uncertainty concerning the future social security payments. Another important factor affecting collapse in household consumption was the deterioration of future prospects, such as future income and future employment.
10 savings rate in Japan rose not because the future income of employees became more uncertain but because their possibility of unemployment strengthened.
Another important factor that should be taken into account by analyzing stagnation in Japan is changes in population size and age composition. Tsuya (2012) examined the Japan‘s population from 1960–2010 and found out that the population has increased from 93.4 million in 1960 to 128 million in 2010, however, the proportion of children (under age 15) in Japan‘s total population dropped from 30 percent in 1960 to 13 percent in 2010. As regards the proportion of the working-age population (age 15-64) in the total population, it remained the same around 64% in 1960 and 2010 respectively. In contrast, the proportion of the elderly (65 and above) increased almost in 4 times in 50 years, 6 percent in 1960 and 23 in 2010 respectively. There were two factors of population aging: a decreasing fertility and an increasing life expectancy (i.e. a declining in mortality). Since the middle of the 1970s, total fertility rate (TFR) has been decreasing to well below replacement reaching around 1.5 children per woman in the beginning of the 1990s. Afterwards, the TFR declined even further by reaching 1.4 children per woman in 2010.Declining in mortality in old age was another factor affecting country‘s population aging. According to the results, in 2010 the life expectancy at age 65 for males stood at 19 years and that for females was approximately 24 years. This means that after surpassing 64 years old, men live on the average 19 years and women 24 years respectively. This prolonging of the life expectancy affects the social security system and poses formidable challenges to Japanese social systems, pension system, as well as labor-market and employment policies.
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2.2. Secular stagnation
In November 2013 at the IMF Forum, the economist Larry Summersinvoked the notion ―secular stagnation‖ that was originally coined by Alvin Hansen in the late 1930s (Hansen, 1939). Hansen used this term to assume that the Great Depression may forebode the new economic era of a depressed economy. Moreover, Hansen emphasized demographic factors as a major cause of secular stagnation, namely, decreasing at that time birth rate implied low demand for investments as a result oversupply of savings. However, after the WW2 there was a period of baby boom that changed the population dynamics as well as the period of a huge increase in government spending, which closed the debates concerning insufficient demand (Williamson, 2001).
Summers (2013) stated that growth in today‘s advanced countries suffers from a secular deficiency inaggregate demand. Moreover, there are several reasons for that. Increasing and fast growing within-countries income inequalities, which diminish relative spending power for low-income households and thus fosterhigh propensity to consume (Dabla-Norris et. al, 2015). At the same time, there is an increasing inequality across the world as a wholedespiteeconomic growth of India and China, which are currently at the stage of transformation. This could also contribute to a downward shift in demand because fast-growing countries with underdeveloped capital markets spin off savings to diversify risk. Besides, the International Monetary Fund (2014, Chapter 3) summarized that fast growth in emerging markets was a major explanation of low interest rates before the crisisboth duetothe official sector‘s strong portfolio preference for safe assets as well as lower aggregate demand.
12 adequately stimulating demand and, hence, economic growth. The economy could then fall into a self-enforcing era of economic stagnation unless bold monetary and fiscal stimulus and far-reaching structural reforms are implemented‖ (Kleczka, 2015).
Debates on secular stagnation are focusing on the relations between the natural rates and the real interest rates. Undoubtedly, these rates are interrelated but they are based on various dimensions and drivers. The natural interest rate is a structural variable driven by real economic factors and can be approximated by the marginal product of capital or by long-term potential economic growth. The real interest rate is a cyclical variable and is measured by the nominal rate deflated by expected inflation (Amato, 2005). Over the last 30 years,a constant decline of real interest rate worldwide is observedand that incite the issue whether the natural interest rate is dropping in tandem. Van den End and Hoeberichts (2014) empirically tested the causal relationship between the real interest rate and the natural interest rate, which could be the first sign of secular stagnation if the real rate decreases. Their findings based on Vector Autoregression models (VAR) model for Japan, Germany and the US over the last 25 years showed that a downward shock in the real rate indeed lowers the natural rate. That was vividly determined for Japan and to a certain extent for Germany. However, for the US the outcomes were statistically insignificant. Robustness checks confirmed the results. What is more, their findings revealed that a long-term period of low real interest rates affects the real economy by undermining potential economic growth through real and financial channels. This was confirmed in case of Japan, where they found out a strong relationship between the real interest rate and the natural interest rate. Japanduringthe last 15 years experienced ultra-low real rates and persistent economic stagnation.
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2.3. Demographics
Falling birth rates are another factor that may have affected post–financial crisis recovery because low rates of fertility are associated with diminished economic growth (Bloom et. al., 2011).
Stock and Watson (2012) studied macroeconomic dynamics of the 2007-2009 recession in the US and the subsequent slow recovery. The database consisted of quarterly observations from 1959Q1 to 2011Q2 on 200 US macroeconomic time series. They used a high-dimensional dynamic factor model (DFM)and found out that ―most of the slowness of the recovery is attributable to a long-term slowdown in trend employment growth‖. According to their estimates annual employment growth declined from 2.4 % in 1965 to 0.9 % in 2005.The authors explained that by changes in underlying demographic factors, primarily the plateau in the female labor force participation rate and the aging of the workforce. Moreover, ―the net change in trend productivity growth over this period is small, this slower trend growth in employment translates into slower trend GDP growth‖.Such demographic changes suggestdiminishing trend growth rates in employment, which in turn impliesthat future recessionswill be deeper and longer, and therefore will have slower recoveries than has beenthe case historically. Demography trends and dynamics are important because demographic shifts may contribute to political shifts that strengthen the growth effects of ageing rather than improving them. For example, some economic studies (Shirakawa, 2012) consider the relatively rapid and severe demographic shift that Japan experienced to be a central turning point that predetermined Japan‘s lost decade.
14 of investment. Moreover, empirical results showed that age structure of a country has significant impact on investment: a high age dependency ratio has a negative effect on private investment, whereas for public investment, the effect is reversed. Nevertheless, taxes on profits, income and capital gains produce negative effect for the OECD countries. Subsidies and social security payment affect both types of investment.
Due to the fact that demographic changes are reflected in the growth of employment and therefore have a huge impact on economic growth, it is essential to scrutinize unemployment and its effect on investment in the next sub-section.
2.4. Unemployment
Several studies have explored the negative relationship between unemployment and investment using macroeconomic data. In order to test for the empirical significance the relationship between unemployment and investment, Sigurdsson 2013) performed a panel regression analysis using the sample of 15 OECD countries within 42 years period from 1970 to 2011. In his paper, investment is defined as gross domestic capital formation as a share of GDP, whereas unemployment as the rate of unemployed workers to the total labor force. Besides these two variables, the author also used labor productivity growth. According to the results, a one-percentage raise in labor productivity leads unemployment to drop by about a quarter of a percentage point. As for the investment and unemployment, the received results revealed a negative and statistically significant relation between these two variables implying an increase in investment by one percentage point will reduce unemployment by more than half a percentage point.
15 these institutional factors into consideration, investment comes through as one of the most significant determinants of movements in unemployment.
Besides shrinking working age population and increasing unemployment, investment may be affectedthrough monetary policy tools, namely, interest rates that will be in-depth considered in the next sub-section.
2.5. Interest rates
The relationship between investment expenditure and interest rates is at the heart of any analysis of stabilization policy. The higher and more sensitive is the response of investment due to changes in interest rates, the more efficient is monetary policy and the weaker is fiscal expenditure policy (Hall, 1977). Analyzing the U.S. lending standards as well as lending standards in the European Union, Maddaloni and Peydro (2011) found robust evidence that low short-term (monetary policy) rates soften lending standards for household and corporate loans, which resulted in stimulating household and business investments.
Furthermore, low interest rates were accompanied with higher risks in lending by banks, directly and together with weak banking supervision standards and high securitization. ―Securitization of loans results in assets yielding attractive returns for investors and also enhances bank lending capacity, especially when the capacity constraint is binding‖ (Maddaloni and Peydro, 2011). As a result, the effect of low interest rates on the softening of lending standards may be bigger with securitization. The sample for European Union covered the banking sector of 12 countries:Austria, Belgium, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. For the research, only large banks were taken into consideration. Due to the limitation in the dataset and the restrictions in the availability of the data, data for EU in the current paper only started with the fourth quarter of 2002 and is until the third quarter of 2008. With regards to the U.S., the same time period was used in the panel, despite the availability of the data since Q2 1991.
16 Bank Lending Survey (BLS) for the Euro-area countries and of the Senior Loan Officer (SLO) survey for the US. Variables included in the main analysis are short-term (monetary policy) rates, long-term (government bond) interest rates, GDP growth, inflation, securitization, and supervision standards for bank capital.For the empirics, the authors run two regressions: time-series for the U.S. only from Q2 1991 until Q3 2008 and panel over the period Q4 2002 – Q3 2008 for 13 countries (12 Euro-area and the U.S.). GLS (generalized least squares) panel regression with country fixed effects was used to allow the residuals to be heteroscedastic and correlated both cross-sectionally and over time. However, by estimating regressions with only data for the United States, the authors estimated a dynamic panel with least squares and robust standard errors.
Such monetary policy tool like interest rate management provides control over inflation level, which determines the advisability of investment, examined in the next sub-section in the more detailed way.
2.6. Inflation
Price stability always attracts meticulous attention of many central banks, especially in recent years. Monetary policy has been increasingly designed to achieve low and stable inflation. Central bankers and many other observers consider price stability as an objective that deserves worthy attention because they suppose that inflation is costly.These costs include the costs that are related to the variability and uncertainty of inflation as well as the average rate of inflation.Nevertheless, the general idea is that households and businesses perform less effectively when inflation is high and unpredictable.
17 0.4-0.6 percentage points. The negative correlation between investment and inflation was also found by Gillman and Kejak (2011). Based on postwar US annual data for 1954–2000, the authors indicated that the real interest rate decreases as inflation increases for levels of inflation up to a rate that is above that found in the US postwar era.
The relationship between investment and inflation was also studied on micro level. Fischer (2013) used a panel of loan-level data with fixed effects from small businesses. The findings revealed that during the periods of increased high inflation significant reductions in total investment were observed. The authors covered eight years period from 2001 to 2008 with 47,443 observations representing 27,771 unique firms. According to the results, periods of high inflation were associated with substantial reductions in total investment. For instance, a 1% increase in inflation led to a 10 percent drop in total business investment.
In the next sub-section, the fragmentation of European financial markets and firm deleveraging will be considered. The recent financial-economic crisis has forced the integration of Europe‘s financial markets to go into reverse with less cross-border borrowing and the re-emergence of substantial national differences in borrowing costs. Moreover, new capital and liquidity requirements compelled firms to cut back their lending needs and focus on the deleveraging process.
2.7. Financial fragmentation and debt overhang
18 fragmentation of the European-banking sector is likely to make financial constraints even more severe. In particular, in countries whose domestic banks reduced their balance sheets, financial fragmentation has exceptionally strong negative growth effects‖.
Since the onset of the crisis the debt ratios of corporations have slowly dwindled, which reflects both demand side and supply side factors influencing credit to the corporate sector. As for the demand side factors, there are low levels of economic activity, particularly, high propensity to retain earnings and weak capital formation have promoted to the decline of firms‘ need for external financing. As regards the supply side, banks restricted credit standards and that has diminished the growth of bank loans to the corporate sector. In the upshot, this has led to firms‘ deleveraging as well as to a change in the capital structure of firms (ECB, 2012). The paper by Goretti and Souto (2013) studied the impediments between investment and growth caused by corporate sector debt overhang in Europe. Based on aggregated firm-level data for 21 sector of activity in eight European countries (Austria, Belgium, France, Germany, Italy, Netherlands, Portugal and Spain) over the sample period 2000-11, the empirical results confirmed a negative relationship between firms‘ investment-to-capital ratio and their debt burden. In other words, higher debt overhang was found to substantially curtail investment in the sample countries.
19 Bureau van Dijk Electronic Publishing, BvD), which gave firm-level data on 130 million firms around 100 countries worldwide since the year 2005. However, for some countries, such as Europe, data was available since 1996. The focus of the authors in this paper was1999-2012.They ran difference-in difference regression of investment on debt. They found that substantial debt-overhang effects in Europe caused sluggish investment and that the overhang effect diminishes with falling macroeconomic conditions: sovereign risk and uncertainty. Moreover, according to the received finding, low investment was mostly due to debt-overhang effect and recapitalizing banks would not solve the problem.
The level of investment has always been determined by the savings niveau. The volume of savings at the country‘s disposal is vital for the providing of investment requirements with appropriate funds. The relationship between investment and savings will be demonstrated in the next sub-section.
2.8. Savings
20 degree of capital mobility. At the same time the US, the Netherlands and Norway indicated the highest degree of capital mobility.
The relationship between savings and investment before and during the financial economic crisis 2008-9 was studied by Johnson and Lamdin (2014) for a cross section of European countries. Their sample consisted of the 17 members of the Euro area and 10 European Union countries that do not apply euro for their reckonings. They also used members of the OECD countries in their model. Their time frame covered 1980–2012. However, not for all countries data was available for this whole period. In the empirical calculations they used fixed-effects panel model with annual data. They divided their entire sample into three groups: OECD countries, 17 Eurozone member, PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) and10 European Union countries that do not use the euro. Their findings showed that savings and investment became more linked for Eurozone countries and European Union countries during the early stages of the financial-economic crisis as capital mobility was apparently weakened. Moreover, it was not an incredible finding at all if international capital flows attenuated during this time. However, post-crisis result indicated that coefficient seem to have returned to its pre-crisis level.
The last but not least factor affecting investment is policy uncertainty that has significantly increased in the aftermath of the recent financial-economic crisis. In the next sub-section literature review about the correlation between policy uncertainty and investment will be discussed.
2.9. Policy uncertainty
Uncertainty is considered as a potential factor that shapes the depth and duration of the Great Recession. For example, Stock and Watson (2012) state that ―the main contributions to the decline in output and employment during the [2007-2009] recession are estimated to come from financial and uncertainty shocks.‖
21 dynamic stochastic general equilibrium (DSGE) model with heterogeneous firms, time-varying uncertainty and adjustment costs and found that uncertainty shocks can generate drops in GDP of around 2.5% and slow recovery. Besides, uncertainty makes firms cautious and thus it considerably reduces the response of the economy to stimulative policy.
There have been a number of empirical studies that hada look at the relationship between uncertainty and growth, and they have found that uncertainty is counter cyclical, rising steeply in recessions and falling in booms (Bloom, Bond and Van Reenen, 2007; Gilchrist, Sim and Zakrajsek, 2014). However, from this literature it is not clear whether uncertainty drives recessions or recessions induce uncertainty, or whether something else prompts both. In order to find the causal relationship between uncertainty and growth, Baker and Boom (2013) constructed cross-country panel data on stock market levels and volatility as proxies for the first and second moments of business conditions. The database covered 60 countries from 1970 to 2012. They used natural disasters, terrorist attacks, political coups and revolutions as instruments for their stock market proxies of first and second moment shocks, e.g. natural disasters led primarily to a change in stock-market levels, implying they were more of a first moment shocks. At the same time shocks like political coups led more to changes in stock-market volatility and were more a second moment shock. Their revealed results after conducting OLS analysis showed that both first and second moment shocks were highly significant in driving business cycles.
22 condition stimulated investment in most countries. However, in Europe uncertainty had only intensified, depressing investment.
There is now ample evidence that European Union faces not just an ongoing financial-economic crisis, which some economists start calling ―secular stagnation‖, but also a crisis of investment, namely, the slump in investment that has potentially serious consequences for the economic future of the whole euro area. Adverse demographics, debt overhang,high corporate leverage and financial fragmentation contribute to the weak investment dynamics in Europe.However, the most essential immediate cause of investment falloff during the crisis has been uncertainty about the world economy and the resolution of the financial-economic crisis.
In the next chapter, the researcher explains some potential reasonsof slow economic recovery after the financial-economic crisis and after that focuses on the potential factors causing the crisis in investment in the European Union.
3. CRISIS AND POST-CRISIS ERA IN EUROPE
In this chapter of the current research paper,the researcher focuses on the reasons why the economy of the European Union is so slowly responding to the consequences of the recent financial-economic crisis 2008-2009. Furthermore, the researcher analyses the fall of investment and structural factors affecting investment in the European Union. Besides, the researcher scrutinizes the insufficient demand prevailing in Europe as one of the causes of low investment.
3.1. An exceptionally slow recovery
24 Figure 3: Real GDP (annual % growth rate)
Source: OECD database
Nowadays, there is a predominant view in the academic circles that a decline in real rates (Figure 4) shows a drop in the equilibrium or natural interest rates, namely, the short-term real interest rate compatible with full employment,induced by underlying changes in savings and investment fundamentals (Duprat, 2015). According to adherents of the secular stagnation hypothesis, the natural interest rate dropped to around -2 percent to -3 percentin the middle of the 1990sbecause there was an excess of desired savings over desired investment (Laubach and Williams, 2003).
25 Figure 4. Real short-term interest rates (annual % change)
Source: OECD database, no data available for Japan before 2003.
It is worth mentioning that the natural interest rate cannot be observed directly because it is not determined by monetary factors in comparison with the observed interest rate in the market place (measured by interest rate on bonds). While natural interest rate is measured by population growth, household time preferences and productivity growth. Moreover, it varies over time in response to shifts in preferences and technology. For instance, ―a decline in the trend growth rate of potential GDP leads to a lower natural rate of interest, and so does a rise in risk aversion, which puts upward pressure on precautionary savings‖ (Duprat, 2015).
Some economists try to explain the fall in the natural interest rate owing to an increase in global savings by the so called ―global savings glut‖ hypothesis (Bernanke, 2005). It is the situation, where desired savings exceed desired investment and is mostly inherent to oil-producing economies and emerging economies, e.g. China. There is a growing preference for safe assets by investors in these countries, to some extentit could be explained by an overwhelming desire on the part of central banks to accumulate reserves.As a
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26 result, these extra savings have been directed to government bonds, which haveincreased the demand for treasuries and reduced debt rates (IMF, 2014). Another explanation for the post-crisis sharp drop in real interest rates could be the slower growth in productivity and labor force, as well as by demographic shifts. For example, unemployment rate (Figure 5). Unemployment in the European Union is constantly rising since the beginning of the crisis and has already exceeded more than 10 percent. Unemployment rate is very significant indicator with both economic and social dimensions. High unemployment implies loss of income for individuals, more government spending on social benefits and a reduction in government revenues from taxes. As regards economic perspective, unemployment may be considered as unused labor capacity (Marelli et. al., 2012)
Figure 5. Unemployment rate (% of total labor force)
Source: World Bank database
The decline in interest rates could also be attributable to the central bank‘s policy reaction to the crisis. Many central banks responded to the recession by slashing their policy rates to zero or close to zero (Figure 6). By reaching zero lower bound on nominal interest rates, major central banks began to adopt unconventional monetary policy (quantitative easing) in order to reduce long-term rates and long-term premia (Ashworth, 2013). This policy implies an increase in
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27 the money supply by injecting liquidity into the economy by purchasing government securities or other securities from the market.Moreover, it leads to an increase in the money supply and floods financial sector with capital in an effort to encourage lending by the banks to consumers and small businesses, which finally results in an increase in the economic growth (Magavi, 2012). Besides, by this form of monetary policy banks buy assets to replace the ones they have sold to the central bank. Therefore, these banks‘ assets buying lead to stock prices increase and interest rates lowering, which in turn boosts investment. However, there is a problem with zero lower bound on nominal interest rates. When nominal interest rates drop below zero, central banks are limited in their ability to move their policy rates lower in order to generate adequate demand, thus they jeopardize their economies to protracted economic depression (Gambacorta et al., 2014).
Figure 6. Central bank policy rate
Source: International Monetary Fund (IMF). Data on the EU is only available since 1999
3.2. The Crisis in investment in the European Union
Behind the euro zone‘s recession, there is a substantial historically unprecedented collapse in investment. Investment in the EU has declined appreciably since the onset of the crisis and has not yet recovered (Figure 7).
28 Total investment taken in real term is still below its pre-crisis level. Figure 7 shows that there was a sharp drop in total investment by 14% in 2009 in comparison with the base year 2007. After that, total investment started fluctuating and already in 2014 they reached almost 92%.
Figure 7. Investment Recovery in EU (in % to the base year 2007).
Source: Eurostat
Figure 8 shows an increase in the gross rate of return on investment and the decline in the investment to GDP ratio in EU. Investment to GDP ratio refers to the share of investment in total production and it reflects the infusion of requisite capital to support the development process. For the EU, it was around 0.2 percent during the last 20 years period, decreasing a little bit after the economic slump 2008-9. As for gross rate of return on investment, it is used to evaluate the efficiency of an investment and it is one way of considering profits in relation to capital invested. After the onset of the crisis, the rate of return on investment increased from 1.82 percent in 2007 to 2.13 percent in 2014, which applies that profit on investment capital has increased. This makes investments more attractive than before the crisis.
29 Figure 8. European Union’s Investment Coefficient and Return on Investment
Source: Eurostat database and author’s own calculations.
Notes: Investment-GDP ratio=Gross capital formation/Nominal GDP. Gross rate of return on investment=capital income/gross capital formation. Capital income=Value added-compensation of employees.
Notable that from the beginning of the crisis, gross national savings started considerablyexceed investment in the EU (Figure 9). The difference according to the available data from Eurostat amounted 3 percent of GDP in 2014. Savings imply postponing consumption today in order to consume more or better in the future. The major task of savings in the economy is that they provide resources to the modernization of equipment and factories, innovations and an increase in the stock of fixed assets. Thus, higher saving and investment in a nation‘s capital stock lead to productivity increase and stronger economic growth over the long term (Claus, 2015).
0 0.05 0.1 0.15 0.2 0.25 1.6 1.7 1.8 1.9 2 2.1 2.2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perc en t Perc en t
30 Figure 9. Gross National Savings and Investment in EU (% of GDP).
Source: International Monetary Fund (IMF)
The crisis has shown that a drop in savings did not lead to the increase in the use of investment by firms, for instance, non-financial sectors could have invested more without asking for external finance. On the contrary, drop in savings has shown that savings have been used for increase in public and private consumption rather than for investment. Moreover, many firms increased their savings to create a ―cash buffer‖ in expectation of limited access to external finance in the future. That is why the current situation with savings is problematic for the EU economy because it hampers economic growth and investment, which is the key to productivity growth (Acharya et. al., 2012).
Furthermore, such a huge gap exists not only between total investment and savings but also between other components of investment, for instance private. Figure 10 clearly illustrates that since the beginning of the 21st century, EU started to experience chronic private saving surplus, namely, private gross saving exceeded private gross investment. Just before the crisis, in years 2007-2008 the gap between private investment and savings reached less than 1 percent.In succeeding years, the gap widened again to more than 3 percent.
16 21 26 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perc en t
31 The generated private saving surplus will be used either in the form of borrowing by the government (general government deficit) or in the capacity of investment abroad (current account surplus). Pursuant to the Keynesian economics, if the private saving is bigger than the sum of current account surplus and general government deficit, then an excess supply of goods occurs. In order to restore balance in the goods market, a country could reduce its GDP through reduction in excess private savings (Fukao et. al, 2014).
Figure 10. EU’s Saving-Investment Balance: Relative to Nominal GDP
Source: International Monetary Fund and AMECO database.
General government deficit = total revenue minus total expenditure.
3.3. Structural factors affecting investment in the European Union
There are two structural factors of particular importance that shape investments in the European Union and explain the largest part of the decline in private investment: shrinking working age population and a multi-decade process of private sector deleveraging.
In Japan, the percentage of working age population began to decline since 1991 just as the consequence of the bursting of its asset price bubble in 1989-91 (Figure 11). In the EU, the working age population started to shrink since 2007, so just before the financial-economic crisis. According to the OECD data,
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 -5 0 5 10 15 20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Per ce n t Per ce n t
32 in 2014 only 66 percent of the total EU-28‘s population considered to be of the working age, namely, between 15 and 64. It could be assumed that EU is currently at the same stage as Japan was in the late 1990s. Declining workforce supposes a slower economic growth and thus drop in investment demand, since a shrinking workforce implies lower demand for residential and non-residential construction, new equipment, new materials etc. From business point of view, declining labor force implies excessive capital stock, consequently reduced return on capital and thus induces companies to diminish their capital investment.
Figure 11.Working age population in the EU, 15-64 (% of total)
Source: OECD database
After bursting of the capital-flow bubble in 2008, the Eurozone has been forced to perform a broad private sector deleveraging process, just like Japan after bursting of its assets price bubble in 1989-91 (Figure 12).
33 Figure 12. Private sector debt in Japan (% of GDP)
Source: OECD database
34 Figure 13. Private sector debt in EU countries (% of GDP)
Source: OECD database (data on Ireland is only available since 2001)
When high levels of private sector debt cause private sector (household, business and banks) to deleverage, namely, focus on savings instead of spending or investing, economic growth starts slowing down or descending. Thus, the economy falls into recession, which is called by economists as ―balance sheet recession‖ (Koo, 2008). It happens after the bursting of a credit bubble that leaves a debt overhang on the private sector balance sheets. Vivid examples are the Great Depression in the US in the 1930s and Japan‘s lost decade in the 1990s (Koo, 2011). By this type of economic downturn, even a zero interest rate does not stimulate borrowing and spending, therefore monetary policy is not effective at all (Figure 14).
0 50 100 150 200 250 300 350 400 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Per ce n t
France Germany Greece Ireland
35 Figure 14. Private investment in Japan an EU(% of GDP)
Source: Data on Japan is received from World Bank database; Data on EU is received from Eurostat and is available only since 2002.
3.4. Insufficient demand
Like most developed world economies, Euro area faced a sharp drop in the final demand in the aftermath of the economic slump that had occurred at the end of 2008. One of the reasons that has subtracted a major source of aggregate demand was an ongoing deleveraging process. Declining working age population together with tough tightening of the borrowing limits amended both investment and saving behavior that affected the level of real interest rates. According to the fact that there is an excess of desired savings over desired investment the euro area may fall in a situation of negative natural interest rates. However, it does not mean that secular stagnation hypothesis is correct in the Euro area because there could be other factors as well. In case the secular stagnation hypothesis comes true, the GDP under-performance in the Euro areawill continue for a long run (Figure 15).
36 Figure 15. Euro area’s Output gap (%) and Inflation Rate (%)
Source: Output gap is taken from IMF database and Inflation rate from Eurostat. Output gap = ((Actual Output-Potential Output)/Potential Output), Inflation rate is measured in terms of consumer price index.
Negative output gap after the recent crisis is not new for the Euro area because before the financial crisis 2008-9, Euro area has experienced negative output gap from 1995 until 2000 year and in the period 2002-2005, which means that actual output was less than full-capacity output. A negative output gap implies that there is spare or slack capacity in the economy due to the weak demand (Jahan and Mahmud, 2013). A positive output gap happens when actual output is more than potential output. This occurs when demand is high and in order to satisfy that high demand, factories and, consequently, workers operate far above their most efficient capacity. However, neither positive nor negative is ideal for the economy. The best option is zero because then the economy is running at full capacity providing full employment. In other words, both options are bad because an economy is running at an inefficient rate—either overworking or underworking its resources.
The problem of the excess of desired savings over desired investment cannot be solved through declining interest rates since the zero lower bound on interest rates impedes nominal interest rates from falling below zero (Duprat, 2015). As
-4 -2 0 2 4 6 8 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perc en t
37 aresult, forces that normally tend to recover the usual equilibrium do not work at the zero lower bound, thus the economy is stuck in a low-level equilibrium trap. The next chapter discusses the paradox of thrift as well as remedies to deal with an oversupply of savings in the economy.
4. THE RULES OF ECONOMIC CHANGE
This chapter examines the problem that occurs during the recession periodwhen the majority of people prefers to cut their spending on consumption or investment purposes. Moreover, this chapter provides two possible remedies from monetary and fiscal sides that can help to overcome the existing problem of secular stagnation in Europe.
4.1. The paradox of thrift
At the moment when nominal interest rates approach the zero lower bound, the economy faces a situation, which Paul Krugman calls ―virtue is vice and prudence is folly‖ (Krugman, 2013). This phenomenon is called ―the paradox of thrift‖ and is attributed to the economist John Maynard Keynes. The idea is that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Moreover, aggregate demand will fall and this will worsen the economy resulting in low total savings rate because of the lower output, which in turn makes it more difficult to curtail debt burdens. Therefore, when individuals save rather than spend or invest, they cause collective harm for the whole economy of their country because businesses do not earn as much and have to firelabor force (Corden, 2012).
38
4.2. The challenge of providing monetary stimulus
According to the secular stagnation analysis in order to reduce unemployment and restore full employment in the coming years, it is essential to ensure that real interest rates will decline further. However, it is impossible to accomplish in an environment where prices fall and interest rates are constrained by the zero lower bound. One of the possible solution in the prevalent situation is to generate an increase in the expected rate of inflation (Figure 16). This can be achieved by the central bank through increasing its inflation target and commit to future policy in a way that raises current inflation expectations (Krugman, 1988). Eggertsson and Mehrotra (2014) reveal in their research paper that monetary policy could lead to the economy boost during the secular stagnation period solely if the central bank raises its inflation target.
Figure 16. Inflation, end of period consumer prices (% change)
Source: IMF
4.3. The challenge of providing fiscal stimulus
Another possible solution to address secular stagnation is when the government uses abundant private saving for increasing public investment in infrastructure, research or education. Eggertsson (2010) finds that this could be an effective temporary measure in the era of secular stagnation and could be accomplished
-4 -2 0 2 4 6 8 10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Pe rcen t
Euro area European Union Greece
39 via a temporary raise in government spending and cuts in some forms of taxes, for instance in investment tax credits or sales taxes. However, this could be efficient only on the temporary basis because in the long-run permanent fiscal stimulus could have contractionary effects. Summers (2013) considers increase of public investment in infrastructure and education to be the best and the most effective strategy to react on secular stagnation.
Some economists (Nickel and Tudyka, 2013) consider that in case of the high public debt, the expansionary fiscal policy could have negative effect on real GDP because crowding-out of private investment raises substantially. However, currently Euro area is resource abundant, e.g. having very low long-term interest rates (Figure 17) and having excess supply of private savings, which expel the risks of crowding-out of private investment by the public sector borrowing.
Figure 17. Real long-term interest rates
Source: OECD database 0 5 10 15 20 25 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Perc e n t
40
5. DATA AND METHODOLOGY
5.1. The baseline model
To test for the hypothesis, we propose the following baseline model, which seeks to explain how and to what extent various factors influence the investment intensity for a panel of European countries covered over the 20-year period.
Ln INV it = β0 + β1Ln(DEPRAT)it + β2Ln(RROI)it + β3POLUNCit + β4Ln(SAV)it + β5Ln(INF)it + β6Ln(SHTIR)it + β7Ln(UNEMP)it + β8Ln(DEBT)it + 𝜀it
where Ln INV is the dependent variable investment as a percentage of GDP, in logarithmic form. Dependency ratio Ln(DEPRAT) is measured in logarithmic form because it shows the ratio of population aged 15-64 to total population. Ln(RROI) represents the ratio of capital income to investment and thus is measured in logarithmic form. Policy uncertainty (POLUNC) is expressed in absolute values indicating the higher policy uncertainty the higher is the value of this index. Ln(SAV) is saving to GDP ratio measured in percentage. Inflation Ln(INF) is annual percentages of the end of the period consumer prices change, expressed in logarithmic form. Short-term interest rate Ln(SHTIR)is expressed in logarithmic form. Unemployment rate Ln(UNEMP) refers to the share of the labor force that is without work but available for and seeking employment and is measured in percentage of total labor force, therefore is in logarithmic form. Ln(DEBT) is the amount of debt as a percentage of GDP, in logarithmic form.
Definitions of the abbreviations used in this model as well as the data sources, where it has been taken from, can be found in the Appendix 2 in the Appendices at the end of this research paper.
41 interest rates and investment, Gillman and Kejak (2011) discussed the interrelation between inflation and investment, etc.
More detailed information about each variable in the model, which includesdata sources, measurement and expected sign, can be seen in particular sections latter: ―Dependent variable‖, ―Main independent variables‖ and ―Control variables‖. To see the expected sign between independent and dependent/control variables based on the literature review we specially constructed ―expected signs‖ section.
5.2. The sample
A total number of 30 countries have been analyzed over the time period 1995-2014. The sample includes all the European Union 28 member countries, European Union (as a whole) and Euro area (as a whole). The list of all countries included in the sample can be found in the Appendix 1 in the Appendices.
5.3. Dependent variable
The dependent variable will be a ratio of total investment in current local currency and GDP in current local currency, expressed in percentage. The data has been obtained from the International Monetary Fund (henceforth IMF). The notion investment or gross capital formation is measured by ―the total value of the gross fixed capital formation and changes in inventories and acquisitions less disposals of valuables for a unit or sector‖ (UN, 2015).
The choice for investment-to-GDP ratio as an independent variable is based on the methodology from the research paper of Eggertsson and Mehrotra (2014) on model of secular stagnation, where they computed the investment to GDP ratio to examine the sensitivity of investment to shocks that cause the zero lower bound to bind. The ratio of investment to GDP was computed as follows:
𝐼 𝑌= 𝛿 𝐾 𝑌 = 𝛿 𝐴 𝛼𝐴 𝑟𝑘 1−𝛼 Where 𝐼 𝑌 denotes investment to GDP, 𝛿 𝐾
42 This model above could be explained that the investment to output ratio will fall if the rental rate on capital increases.
5.4. Main independent variables Dependency ratio
Dependency ratio is used as one of the main factors affecting investment in Europe.
Dependency ratio =𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑎𝑔𝑒𝑑 15−64
𝑡𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
The data has been received from the World Bank database (World Bank, 2015) Dependency ratio has a substantial influence on investment. For instance, when dependency ratio declines, it implies slower economic growth and owing to the accelerator effect a drop in investment demand. Therefore, less investment is needed to satisfy the demand because there will be lower demand for new dwellings, non-residential buildings, new materials etc. From the report of the European Commission (EC, 2014), European Union is now facing a shift towards drop of working age population. Many factor lies in the basis of it: fall in fertility rates, longer life expectancies and a shift of the post-war baby boom generations to the top of the age pyramid. Moreover, according to EC predictions, by 2020 more than a quarter of Europeans will be over 60 years of age. Pfister (2012) states that a combination of an ageing population and declining workforce will have a dampening effect on investment demand and economic growth due to ―relative scarcity of labor as the result dampening productivity rates and the return on capital, which also reduces asset values‖, thus less investment will be undertaken. Afonso and Jalles (2015) used a different measurement for dependency ratio:
Dependency ratio = 𝑃𝑒𝑜𝑝𝑙𝑒 𝑦𝑜𝑢𝑛𝑔𝑒𝑟 𝑡𝑎𝑛 15 𝑜𝑟 𝑜𝑙𝑑𝑒𝑟 𝑡𝑎𝑛 64
𝑤𝑜𝑟𝑘𝑖𝑛𝑔 −𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 (𝑎𝑔𝑒𝑠 15−64)
43 Due to the fact that investment is falling in Europe and working population is shrinking, which is supported by the literature evidence, the researcher expects the positive sign between investment and dependency ratio.
Rate of return on investment
The notion of secular stagnation is closely associated with a ―natural interest rate‖ where desired investment in new equipment, technology and structures opposes desired saving by households and firms in a ―general equilibrium‖ comes in Wicksellian-type theory from the neoclassical economist of the late 19th century Knut Wicksell. According to Wicksell, natural interest rate or the rate of return of capital could be determined by non-monetary factors, such as population growth, household time preferences and productivity growth. If for some reason, investment exceeds savings in an economy, then the natural rate would increase so that savings would then rise to match investment and vice versa. However, he argued that if the natural rate did not rise, then there would be ―overheating‖ in the economy, in the form of inflation. In case of recession, savings would be greater than investment and if the natural rate did not drop enough to diminish the desire to save, then there would be less than full employment.
The concept of ―natural interest rate‖ cannot be observed directly, in spite of the fact that there were some challenges in measuring and defining it. Laubach and Williams (2003) defined natural interest rate as ―real interest rate consistent with output equaling its natural rate and stable inflation‖. They determined the natural interest rate as the intersection of the IS (investment = savings) curve and the potential GDP line, real GDP equals potential, and the real interest rate equals the natural rate of interest.
44 below the natural rate, monetary policy is simulative, pushing GDP up‖ (Williams, 2003).
While the natural interest rate is difficult to measure especially for the whole sample used in the current research paper, rate of return on investment can play a role in identifying it. In theory, the natural rate of interest is closely linked to the economy‘s trend growth rate. The idea is that faster economic growth is associated with a higher rate of return on investment.
Salerno (2012) defines ―natural interest rate‖ as the ―rate of return on investment in the structure of production‖. In his article, he used this turn to show the behavior of entrepreneurs that are currently not confident to invest due to unpredictability of economic situation.
“Entrepreneurs have discovered that their spectacular successes during the boom [pre-crisis period] were merely a prelude to a sudden and profound
failure of their forecasts and calculations to be realized. Until they have regained confidence in their forecasting abilities and in the reliability of economic calculation they will be understandably averse to initiating risky ventures even if they appear profitable. But if the market is permitted to work, this entrepreneurial malaise cures itself as the restriction of demand for factors
of production drives down wages and other costs of production relative to anticipated product prices.The “natural interest rate,” i.e., the rate of return on
investment in the structure of production, thus increases to the point where entrepreneurs are enticed to renew their investment activities and initiate the adjustment process. Success feeds on itself, entrepreneurs’ spirits rise, and the
recovery gains momentum”.
45 Furthermore, for economic models, ―the rate of return on investment must be considered as exogenous, as well as the start of an investment boom‖. What is more, Keynes stresses that in a positive ―state of confidence‖ (Keynes, 1936), the rate of return on investment is high, while creditors issue loans at low interest rates, therefore facilitating stable and strong investment dynamic.
In this paper, the researched defined rate of return on investment as follows: Gross rate of return on investment
=
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒𝐺𝑟𝑜𝑠𝑠 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛
Capital income = value added – compensation of employees.
Data on capital income, value added, compensation of employees and gross capital formation is taken from Eurostat database (Eurostat, 2015).
Gross rate of return on investment is used to evaluate the efficiency of an investment and it is one of the way of considering profits in relation to capital invested.
Due to the fall of investment in Europe that was in detail discussed in the previous chapters of the current research paper, the researcher expects to have a rising rate of return on investment and a negative sign between these two variables.
5.5. Control variables Policy uncertainty
―Policy uncertainty is a class of economic risk where the future path of government policy is uncertain, raising risk premia and leading businesses and individuals to delay spending and investment until this uncertainty has been resolved‖ (Baker, Bloom and Davis, 2015). Uncertainty from the economic perspective may lead industries and firms to wait to invest, hire, or act.
Policy uncertainty includes uncertainty about the conducting fiscal or monetary policy, uncertainty over electoral outcomes that will influence political leadership as well as the tax or regulatory regime.
The data on uncertainty is taken from http://policyuncertainty.com/
