Interpreting budget deficits and productivity fluctuations

Abstract: This thesis includes four self-contained essays on budget deficits and productivity fluctuations:ESSAY I evaluates the effects of budget deficits on several key macroeconomic variables of the Swedish economy by estimating a vector autoregression model. The main finding is that - apart from a positive transitory real interest rate effect associated with a shock in the deficit - neither actual nor unexpected movements in deficits have any significant explanatory power for the determination of real non-fiscal variables. The Ricardian equivalence theorem may explain the absence of real effects following budget deficits.ESSAY II investigates empirically the effects of aggregate demand and supply shocks on the level of multi-factor productivity in Swedish manufacturing. In theory, recessions may be beneficial to long-run growth by speeding up the allocation of resources in the economy. The results indicate that demand shocks have positive long-run effects on the level of productivity, i.e. demand-driven recessions improve productivity in the long run. ESSAY III attempts to discriminate between two different explanations of observed procyclical average labour productivity. The frequency of injuries in Swedish manufacturing is used as a proxy variable for unobserved labour-utilisation, and is shown to be positively correlated with output growth. Thus, unobserved labour-utilisation may explain some of the pro-cyclicality of labour productivity.ESSAY IV estimates the structural budget balance, as well as the cyclical component of output for Sweden using an unobserved components model. The results are compared with the OECD's calculations of the output gap and of the structural budget balance. One result is that the model's cyclically adjusted budget balance is uncorrelated with the actual budget balance, which is in sharp contrast to the OECD's findings. The unobserved components model is also estimated for 12 OECD countries in Europe, and tentative results for these economies are also presented.