New Releases by Andrew Hodge

European countries face rising spending pressures and higher interest costs that could sharply increase debt and threaten growth if left unaddressed. The paper argues that maintaining fiscal sustainability requires a coordinated strategy combining structural reforms and fiscal consolidation, and in some cases deeper changes to the role of government, as incremental approaches are no longer sufficient

The EU has ambitious goals for climate and energy security. Its targets and policies may have large macroeconomic implications, but investment impacts are particularly uncertain. Detailed "bottom-up" approaches based on sectoral calculations point to investment increases of 2 to 3 percent of GDP annually, while “top down” general equilibrium models often yield negligible aggregate investment effects. Further, the investment and broader macroeconomic impacts of the EU’s energy transition will depend on how carbon pricing revenues are recycled. This paper addresses these issues using a modeling technique that bridges bottom-up and top-down approaches. A New Keynesian general equilibrium model (GMMET) is extended to feature a detailed representation of energy use in key emitting sectors, including buildings, transport and energy-intensive manufacturing. Simulations suggest that achieving the EU’s 2035 climate goals implies an increase in aggregate annual investment of just around 1 percent of GDP. More broadly, the EU’s energy transition only has modest macroeconomic impacts if it combines carbon pricing and green subsidies, partly because these are complementary—green subsidies lower energy prices and inflation and raise output, carbon pricing has opposite effects, and therefore combining both yields small effects on all accounts. The fiscal cost of the transition is modest provided decarbonization relies sufficiently on carbon pricing; while revenues from ETS1 and ETS2 could eventually reach about 1 percent of GDP, the public investment cost of the transition is less than 0.5 percent of GDP annually, leaving net fiscal space that could be used for other policy objectives.

A key challenge facing the UK is to increase growth, which has slowed down markedly since the Global Financial Crisis. As part of the government’s approach to this challenge, a new industrial strategy was published in June 2025. This paper discusses how to get the implementation of UK Industrial Policy (IP) right, to unlock its potential benefits while navigating the risks involved. IP has some potential to catalyze new investment and economic activity in key sectors, but the bar for getting it right is high. IP will only enhance productivity if well-targeted at overcoming market failures and the scale of IP is not too large, so as to mitigate potential distortions that it might introduce. Targeting IP is difficult because market failures are hard to identify, so an evidence-based approach is best, using quantitative metrics, as discussed in this paper. Monitoring the implementation of IP programs over time, using performance benchmarks to unlock continued funding, is important for ensuring IP’s effectiveness and to limit fiscal costs. While IP can be a useful tool, horizontal policies and structural reforms, particularly in planning, skills and infrastructure remain the primary vehicles to lift UK productivity and are prerequisites for vertical IP interventions to be successful. The extent of what can be achieved with IP is also likely to be curtailed by the limited space for additional public spending, given high debt and interest costs.

European countries are increasingly turning to industrial policy to address the challenge of geopolitical fragmentation, enhance productivity, and accelerate the green transition. Well-targeted industrial policy has the potential to correct market failures and support production efficiency by exploiting scale effects and internalizing knowledge externalities. But even the most carefully designed unilateral industrial policies risk generating negative production externalities in other countries, and, under certain conditions, may not even be welfare-enhancing for the implementing country. The reason is that negative externalities of unilateral industrial policy can drive European and international production patterns away from underlying comparative advantages, create regional or global over-supply, and result in changes in terms of trade that reduce domestic welfare. This suggests significant benefits from coordination. Structural modeling and case studies show that a coordinated approach within the European Union and with international trading partners on a narrowly defined and carefully designed set of industrial policies could unlock untapped benefits. Closer European integration would facilitate the adjustment of firms and workers to coordinated and well-targeted industrial policies and amplify their benefits.

This paper characterizes UK public spending pressures over a ten-year horizon and their implications for public deficits and debt levels. The analysis is based on a ‘bottom-up’ scenario for total public expenditure, that includes, inter alia, implementation of the NHS Long-Term Workforce Plan, public investment to support the Balanced Pathway to Net Zero, and state pension spending under the Triple Lock policy. This scenario is approximately consistent with IMF staff’s baseline projection for the medium term (to FY2029/30) shown in the 2024 Article IV consultation staff report, which assumes real growth in Departmental Expenditure Limits (DEL) of two percent per year after FY2024/25. Assuming revenue stabilizes in FY2028/29 at the level projected by IMF staff (40.8 percent of GDP), public debt does not stabilize over ten years, reaching 101.3 percent of GDP by FY2034/35. Stabilizing debt will require the primary balance to be 0.8–1.4 ppts of GDP higher per year (on average after FY2024/25), depending on the time horizon for stabilization (5 or 10 years) and the target probability of debt stabilization (50 or 75 percent).

This paper studies how and why inflation expectations have changed since the emergence of Covid-19. Using micro-level data from the University of Michigan Survey of Consumers, we show that the distribution of consumer expectations at one-year and five-ten year horizons has widened since the surge of inflation during 2021, along with the mean. Persistently high and heterogeneous expectations of consumers with less education and lower income are mainly responsible. A simple model of adaptive learning is able to mimic the change in inflation expectations over time for different demographic groups. The inflation expectations of low income and female consumers are consistent with using less complex forecasting models and are more backward-looking. A medium-scale DSGE model with adaptive learning, estimated during 1965-2022, has a time-varying solution that produces lower forecast errors for inflation than a variant with rational expectations. The estimated model interprets the surge of inflation in 2021 mainly as the result of a price markup shock, which is more persistent and requires a larger and more persistent monetary policy response than under rational expectations.

Using flow of funds and high frequency data from the Investment Company Institute, we study the effects of monetary policy shocks on the size of non-bank assets as well as on flows into long-term mutual funds and returns on their assets. Consolidating chains of non-bank intermediation to avoid double counting, we find that contractionary monetary policy shocks shrink the assets of non-banks reliant on long-term funding, while increasing those of nonbanks reliant on short-term funding. Contractionary shocks also cause sustained outflows from long-term mutual funds and reduce their returns. Using a Markov-Switching VAR, we find these effects to be more prevalent after the Global Financial Crisis, and show that monetary policy shocks had the opposite effects in some earlier periods. Policymakers will thus have to contend with a complex and heterogeneous transmission of monetary policy to financial and macroeconomic outcomes through the non-banks.

This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.

from the introduction..."This is a snug little hamlet, situated in the pleasant valley of Sandy Creek and fortified on all sides against the chilly blasts of winter and the rude storms of summer by mountainous hills. Thus sheltered by nature, and supplied with all the art of husbandry and the marts of the city can furnish, the denizens of this village pass their lives in quiet comfort and enjoyment, free from the excitements and frivolity of city life, and blessed with health and contentment." (Watertown Daily Times, October 15, 1873) This is a book of local history. It tells the story, through pictures, of a small community tucked within the hills of Rutland. In this book are images of people, of homes and houses, of businesses and organizations, of the way things used to be. Every picture tells a story. Some of the images are old, some are more recent. Some may be familiar to readers, some are not. The book''s purpose is to present a pictorial mosaic through photographs that help us gain an understanding and appreciation of what Tylerville looked like through the years. May we remember the people, places, and events that made the hamlet, as the above newspaper article suggests, a pleasant place to live.

Digitalization in Asia is pervasive, unique, and growing. It stands out by its sheer scale, with internet users far exceeding numbers in other regions. This facilitates e-commerce in markets that are large by international standards, supported by innovative payment systems and featuring major corporate players, including a number of large, home-grown, highly digitalized businesses (tech giants) that rival US multinational enterprises (MNEs) in size. Opportunity for future growth exists, as a significant population share remains unconnected.

This note discusses how to design subnational fiscal rules, including how to select them and calibrate them. It expands on the guidance provided at the national level on rule selection and calibration in IMF (2018a) and IMF (2018b). Thinking on subnational fiscal rules is still evolving, including their effectiveness (for example, Heinemann, Moessinger, and Yeter 2018; Kotia and Lledó 2016; Foremny 2014), and this note only provides a first analysis based on international experiences and the technical assistance provided by the IMF. Main findings are summarized in Box 1. The note is divided into five sections. The first section defines fiscal rules. The second section discusses the rationale for subnational rules. The third section provides some guidance on how to select the appropriate rule(s) and whether they should differ across individual jurisdictions. The fourth section explores the issue of flexibility by looking at how rules should adjust to shocks. Finally, the last section focuses on the “calibration” of the rules.

He was a builder, contractor, mason, stonecutter, and bricklayer. He was an employer and businessman, though not an industrialist or manufacturer. He was not a contemplative man, but rather a man of action. He was also a man of firm convictions -- some would call him strong-willed and obstinate. A newspaper article published a few years before his death called him the most talked about man in Watertown. His name was Henry Hodge. He came into the North Country from Herkimer County, New York in the mid-1800''s. He and his family settled on a farm near Tylerville in Jefferson County, but it was in Watertown where he left his mark. The book tells the story of Henry Hodge and the family from which he came. From humble origins to prominence as one of the greatest and best-known local builders of his generation in northern New York, Henry Hodge helped build Watertown into a manufacturing and commercial hub by the beginning of the 20th century. His life story is told here for the first time.

This paper identifies leading indicators of fiscal crises based on a large sample of countries at different stages of development over 1970-2015. Our results are robust to different methodologies and sample periods. Previous literature on early warning sistems (EWS) for fiscal crises is scarce and based on small samples of advanced and emerging markets, raising doubts about the robustness of the results. Using a larger sample, our analysis shows that both nonfiscal (external and internal imbalances) and fiscal variables help predict crises among advanced and emerging economies. Our models performed well in out-of-sample forecasting and in predicting the most recent crises, a weakness of EWS in general. We also build EWS for low income countries, which had been overlooked in the literature.

In the Hills of Rutland chronicles the story of the hamlet of Tylerville, New York, the author''s hometown in rural upstate New York. The book begins with the village''s prehistory, continues to its settlement in the early 1800''s, its growth and development to the present day. The story is told against the sweeping backdrop of American history. Along the way readers are told of the events that shaped the community, and readers meet a host of colorful and resourceful characters who have called Tylerville their home.

Fiscal rule frameworks have evolved significantly in response to the global financial crisis. Many countries have reformed their fiscal rules or introduced new ones with a view to enhancing the credibility of fiscal policy and providing a medium-term anchor. Enforcement and monitoring mechanisms have also been upgraded. However, these innovations have made the systems of rules more complicated to operate, while compliance has not improved. The SDN takes stock of past experiences, reviews recent reforms, and presents new research on the effectiveness of rules. It also proposes guiding principles for future reforms to strike a better balance between simplicity, flexibility, and enforceability. Read the blog

This note provides guidance on how to calibrate fiscal rules, that is, how to determine the thresholds (ceiling, floor, or target) for specific fiscal aggregates constrained by rules. The note focuses, more specifically, on the calibration of the debt, balance, and expenditure rules. The note is divided into four sections. The first section discusses general principles used to calibrate rules. The second section reports international evidence on the numerical ceilings used in existing rules. The third and fourth sections provide guidance on the calibration of the debt ceiling and the operational rules (fiscal balance and expenditure rules). This is one of two guidance notes on the design of fiscal rules; the other one focuses on rule selection. The two exercises are linked: if a fiscal framework had to be built from scratch, rules would need to be selected and calibrated at the same time.

According to U.N. estimates, low-income countries will have to increase their annual public spending by up to 30 percent of GDP to achieve the Sustainable Development Goals (SDGs), raising the question of whether they can do it all. This paper develops a new metric of fiscal space in low-income countries that accounts for macroeconomic uncertainty, allowing us to assess whether those spending needs can be accommodated. Illustrative simulations based on this methodology imply that, even under benign conditions, the fiscal space available in lowincome countries is likely insufficient to undertake the spending needed to achieve the SDGs. Improving public investment efficiency and domestic revenue mobilization can somewhat narrow the gap but it will require major efforts relative to recent trends.

This paper studies the impact on growth, welfare, and government debt of fiscal reform packages in a theoretical model drawing together three key features of the endogenous growth literature: (i) investment in technology (in the form of human capital) offsets diminishing marginal productivity of private capital, allowing for perpetual growth in output per capita; (ii) changes in investment behavior because of cuts to distortionary tax rates impact long-run growth; and (iii) public capital has a role influencing total factor productivity and growth. A quantitative simulation using reasonable parameter values suggests that modest capital and/or labor income tax cuts and public investment increases have significant positive effects on consumer welfare but small effects on per capita income growth, where fiscal costs are offset by reductions in unproductive government spending. Capital income tax cuts and public investment increases continue to boost welfare when offset by consumption tax rises (rather than spending cuts), although the welfare benefits of modest labor income tax cuts are outweighed by the costs of a compensating consumption tax increase.