Understanding the Maltese Economy. A brief commentary

Transcription

1 Understanding the Maltese Economy A brief commentary Dr Ian Cassar University of Malta Friday, 17 June 2016

2 This publication together with the 2015 publication on the evolution of the Maltese Economy since independence, in my view, represent two very significant contributions to the area of economic research applied to the Maltese Economy. Timely and robust economic research is crucial for sound policy formation aimed at boosting a stable and noninflationary growth path, as well for coping with the various risks and challenges a small island economy, which forms part of a single monetary union, may be subjected to in the future. Effective applied economic research should aim to reach an optimal balance between the significance to policy formation, the quality of the research and timely availability of the results.

3 Part 1: An Overview of the Maltese Economy in recent decades The first two articles of the publication identify some very important structural changes which have enabled the Maltese economy to be resilient and foster growth, namely a greater diversification within the production and service activities of the economy and a sustained increase in female participation rate. This second aspect is of particular importance when one considers the simultaneous impact that this, together with the influx of foreign workers, has had on the labour market in terms of mitigating the possible increases in wage growth which could have negatively impacted Malta s overall competitiveness. A study which assesses the evolution of Malta s competitiveness over recent years indicates that an analysis of the traditional aggregate cost indicators, which over the recent years have suggested a deterioration of Malta s cost competitiveness, maybe to an extent misleading. Utilizing sector based indicators of cost competitiveness a different analysis emerges which provides further insight into the factors which have underpinned Malta s economic performance and resilience over the last decade.

4 Parts 3 and 4: Inflation Dynamics and Monetary Policy These two sections of the publication clearly aim to fulfil the key research objectives of a Central Bank, increasing the understanding of the process of inflation (and core inflation) as well as enhancing the current knowledge on the dynamics of the transmission mechanism of monetary policy in Malta In particular one article provides a deeper understanding of the effect of changes to the interest rate pass-through on the Maltese economy. This study assessed the impact of changes in the official interest rates, the retail lending and deposit rates. The results from this study illustrate and explain why there has been a drop in the interest rate pass through within the Maltese economy. Such studies exemplify the key role that applied research can potentially play within the process of monetary policy decision making especially in the context of the numerous challenges that the euro area is likely to face over the coming years.

5 Parts 2 and 5: The relationship between Output, Prices and Employment, and, Fiscal Multipliers These articles above all else represent key contributions to the body of applied macroeconomic literature to the Maltese economy. They will surely provide a foundation upon which numerous other studies will be built upon, given the core topics they cover: Okun s Law, The Nairu, Philips Curve, Potential Output (Growth accounting) and Fiscal Multipliers. As an academic, a challenge which is often encountered is how to effectively engage students by means of relevant case studies or discussions on studies which will further spark their interest in economics. This, given the relatively limited high quality research on the core topics of macroeconomics, applied to the Maltese economy, is indeed a challenge I encounter frequently. These articles will thus play a key role in the years to come not only to help students better understand core Macroeconomic theories but hopefully also to engage and inspire what are to become the economists of tomorrow.

6 Scope for further Research A study on the determinants of TFP in Malta would be of great benefit to shed further light on the process of economic growth in Malta and understand the absence of its pro-cyclicality identified within the article itself. A quantitative study to better understand the nature of labour hoarding in Malta, given the importance and relevance it has to the stability of the Okun coefficient for Malta. Modelling of the Beveridge curve for Malta to gain better insights into the skills gap and matching efficiency process. A study to better understand the effect of the change in trade unionization patterns, experienced from 1995 to date, on the wage inflation dynamic in Malta.

7 Conclusion The Central Bank of Malta, together with the University and institutions in the public administration, have key roles to play in ensuring that the economists of today and those of tomorrow will be front and centre in establishing a culture of (economic) research in Malta. If such a culture does become pervasive across a multitude of institutions this will not only enhance the efficiency in carrying out research, but crucially also stimulate the professional critique which is key to attaining ever increasing standards of research.

8 The more important reason is that the research itself provides an important longrun perspective on the issues that we face on a day-to-day basis -- Prof Ben Bernanke