Fiscal policy makers have faced an extraordinarily challenging environment over the last few years. At the outset of the global financial crisis, the International Monetary Fund (IMF) for the first time advocated a fiscal expansion across all countries able to afford it, a seeming departure from the long-held consensus among economists that monetary policy rather than fiscal policy was the appropriate response to fluctuations in economic activity. After establishing its analytical foundation, with chapters on such topics as fiscal risk and debt dynamics, this book analyzes the buildup of fiscal vulnerabilities before the crisis, presents the policy response during the crisis, discusses the fiscal outlook and policy challenges ahead, and offers lessons learned from the crisis and its aftermath.
This paper assesses the macroeconomic impact of fiscal policy shocks for four key emerging market economies - Brazil, Russia, India and China (BRICs) – using a Bayesian Structural Vector Auto-Regressive (BSVAR) approach, a Sign-Restrictions Vector Auto-Regressive framework and a Panel Vector Auto-Regressive (PVAR) model. To get a deeper understanding of the government's behaviour, we also estimate fiscal policy rules using a Fully Simultaneous System of Equations and analyze the mportance of nonlinearity using a smooth transition (STAR) model. Drawing on quarterly frequency data, we find that government spending shocks have strong Keynesian effects for this group of countries while, in the case of government revenue shocks, a tax hike is harmful for output. This suggests that there is no evidence in favour of 'expansionary fiscal contraction' in the context of emerging economies where spending policies are largely pro-cyclical. Our findings also show that considerations about growth (in the case of China), exchange rate and inflation (for Brazil and Russia) and commodity prices (in India) drive the nonlinear response of fiscal policy to the dynamics of the economy. All in all, our results are consistent with the idea that fiscal policy can be a powerful stabilization tool and can provide an important short-term economic boost for emerging markets, in particular, in the context of severe downturns as in most recent financial turmoil. ; Fundação para a Ciência e a Tecnologia ...
Doutoramento em Economia ; Throughout this work we empirically analyse three important dimensions of fiscal policy -cyclicality, fiscal forecasts and consolidation episodes. While central government expenditure is, on average, weakly countercyclical in the OECD countries and procyclical in Latin American countries, we find evidence of revenue procyclicality in both groups. Higher levels of income inequality lead to less procyclical policies on the revenue side but are associated with stronger expenditure procyclicality, and better institutions seem unable to mitigate this effect. We also study the track record of fiscal forecasts reported by the EU-15 countries in the context of the Excessive Deficit Procedure. For the budget balance, gross fixed capital formation (GFCF) and interest payments, we study the statistical properties of forecast errors and their politico-institutional determinants. While errors in interest and GFCF expenditure present few systematic patterns, budget balance errors are responsive to fiscal institutions and to opportunistic motivations, especially from 1999 onwards: upcoming elections induce over-optimism, whereas commitment or mixed forms of fiscal governance and numerical expenditure rules (but not deficit and debt rules) are associated with greater prudence. Finally, for the EU-27 countries between 1969 and 2006, we assess those factors that help in explaining successful fiscal consolidations. Gradual episodes (3-4 years) are more likely to be successful than cold-shower adjustments (during a single year). The probability of success also increases in the face of cuts in central government current transfers to lower tiers of government. Finally, while successful cold-shower consolidations are characterised, in the years they occur, by a very limited contribution from politically-sensitive expenditure items, such as government wages and social transfers, these items account for nearly half of the primary expenditure adjustment effort during successful gradual fiscal contractions. ; Neste trabalho procedemos à análise empírica de três dimensões da política orçamental -ciclicidade, previsões orçamentais e episódios de consolidação. Enquanto a despesa da Administração Central é, em média, ligeiramente contra-cíclica nos países da OCDE e pro-cíclica na América Latina, encontra-se evidência de prociclicidade das políticas do lado da receita em ambos os grupos de países. A elevada desigualdade de rendimentos conduz a políticas menos pro-cíclicas do lado da receita, mas está associada a uma maior prociclicidade da despesa, sendo que este efeito não parece ser mitigado por melhores instituições. Analisamos também o desempenho das previsões orçamentais reportadas pelos países da UE-15 no contexto do Procedimento dos Défices Excessivos. Para o saldo orçamental, formação bruta de capital fixo (FBCF) e juros pagos, estudamos as propriedades estatísticas dos erros de previsão e os seus determinantes político-institucionais. Enquanto os erros para a despesa com juros e FBCF apresentam poucos padrões sistemáticos, os erros de previsão do saldo orçamental dependem das instituições e de motivações oportunistas, especialmente a partir de 1999: a proximidade de eleições induz sobre-optimismo, enquanto que processos de decisão orçamental baseados em formas ditas de compromisso ou mistas e regras numéricas de despesa (mas não as de défice e dívida) estão associados a uma maior prudência. Finalmente, para os países da UE-27 entre 1969 e 2006, avaliamos os factores que ajudam a explicar o sucesso das consolidações orçamentais. Os episódios graduais (3-4 anos) têm maior probabilidade de sucesso do que os episódios do tipo "cold-shower" (que duram apenas 1 ano). A probabilidade de sucesso também aumenta na presença de reduções nas transferências correntes da Administração Central para outros sub-sectores. Enquanto as consolidações "cold-shower" bem sucedidas se caracterizam, no ano em que ocorrem, por um contributo muito limitado de rubricas de despesa politicamente sensíveis, como os salários da Administração Pública e as transferências sociais, estas rubricas contribuem com cerca de metade do esforço do ajustamento da despesa primária durante as consolidações graduais bem sucedidas.
This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.
Ziel dieses Lehrbuches ist die Befähigung zur makroökonomischen Analyse der Wirkungen des Budgets. Seit Erscheinen der ersten Auflage haben zu Änderungen im wirtschaftlichen Umfeld der "fiscal policy" insbesondere die Globalisierung der Finanzmärkte und die Internationalisierung von Wettbewerb und Produktion geführt. Darüber hinaus hat in zahlreichen Ländern ein starker Anstieg der Staatsschuld und der mit ihr verbundenen Zinslast die langfristige Tragfähigkeit ("sustainability") der aktuellen Budgetstrukturen in Frage gestellt. Diese Entwicklungen begründen die wesentlichen Änderungen der zweiten Auflage. Im Kapitel 5 "Fiscal Policy in offenen Volkswirtschaften" wird ein ZweiLänder-Modell entwickelt, das den Einfluss der "fiscal policy" auf das Ausland und die Rückwirkungen auf das Inland in die Analyse einbezieht. Im Kapitel 6 wird die Frage nach der Tragfähigkeit des Staatsbudgets erörtert; die damit verbundenen Überlegungen, welcher Handlungsspielraum für die "fiscal policy" verblieben ist, werden im Kapitel 7 vorgetragen. Auf eine Interpretation des Stabilitätsgesetzes wurde verzichtet (bisher Kapitel 9), da es seine frühere Bedeutung als Magna Charta der "fiscal policy" offensichtlich verloren hat. Dafür wird in einem neuen Abschnitt 6.5 der Europäische Stabilitätspakt kurz beschrieben.
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The numbers The Treasury will release in its PREFU next week will make it fairly easy to follow some bits of New Zealand fiscal policy over time, less so others, but do almost nothing to facilitate international comparisons, and discourage New Zealand users and analysts from looking at fiscal policy in the way most other … Continue reading Thinking about fiscal policy
Macroeconomics has paid profound attention to policy studies over the last decades. My PhD thesis discusses how to assess scal policy over the business cycle in unconventional but justifiable environments - either with nonstandard preferences or with less-studied idiosyncratic risks. Chapter 1 justifies policy interventions with exotic preferences. I study a production economy with preferences featuring loss aversion, a core concept commonly accepted in behavioral economics. The representative household obtains utility directly from fluctuations of asset returns, in addition to consumption. I ask whether loss aversion affects equilibrium conditions, whether equilibrium is efficient, and what Ramsey optimal fiscal policy is. I show analytically that the more loss aversion and the more concerns on the psychological utility, the less investment in risky assets in the risky steady state of equilibrium. Numerical results show that capital stock, consumption and output decrease as loss aversion parameters increase. I uncover that the competitive equilibrium is inefficient as long as the agent is loss averse due to pecuniary externality. The household does not internalize the price effect on her welfare so that she invests more in capital than the optimum requires. The Ramsey allocation rationalizes policy interventions: the government should tax capital accumulation to reduce capital stock and raise equity premium. Chapter 2 studies the effect of fiscal policy on investment and the welfare of heterogeneous agents over the business cycle considering independent and identically distributed idiosyncratic investment risks whose volatility is assumed to be countercyclical in line with data. All entrepreneurs make identical saving and portfolio choices each period, allowing for exact aggregation which facilitates computation. The model matches income inequality and dynamics of the income distribution over the cycle in the US data. The government sets rules of capital income tax rate and debt as functions of current output. I calibrate the cyclicality of scal policy to the US data as the baseline and adjust the parameters indicating cyclicality to study the effect of counterfactual policy. Both capital tax and debt policy create welfare conflicts between entrepreneurs and workers. The policy that optimizes utilitarian social utility specifies that the capital income tax rate should increase by 0.45 percentage point and the debt should increase by 0.37% facing a 1% decrease in output. It is possible that the government should reduce the capital tax in the recession if it increases the weight of workers on social welfare. The impulse response of aggregate variables to a negative productivity shock indicates that in general, the higher capital tax rate and the less debt when the adverse shock hits, the higher capital and output in the early stage after the shock. The result of the welfare conflict is robust to a constant labor tax and a varying consumption tax, but not to the removal of countercyclicality of idiosyncratic investment risks or to no idiosyncratic risks. ; Programa Oficial de Doctorado en Empresa y Finanzas ; Presidente: Anastasios Karantounias; Secretario: Javier Pérez; Vocal: Andrés Erosa Etchebehere
This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.
The incoming Labour Government of 1997 promised a new approach to the conduct of fiscal policy. Two lessons to be learnt from previous experience were: (1) adjust for the cycle and build in a margin for uncertainty; (2) set stable fiscal rules and explain clearly fiscal policy. Although the claims for novelty were exaggerated there was a serious attempt to expand the supporting explanatory material at the time of the Budget and the Pre-Budget Report (which was itself an innovation). It started well, with the most significant tightening of fiscal policy occurring in 1997–8; but it ended with a record postwar deficit, a debt/GDP ratio heading for more than 75 per cent of GDP and the suspension of the fiscal rules. While the Treasury was not alone in failing to forecast the financial crisis and its consequences, doubts about the policy were being raised before 2007. Although the fiscal rules were met over the preceding period and projected to be met in future, a succession of current budget deficits and a tendency, from 2001 onwards, for over-optimism in fiscal projections left the UK less well equipped than it might have been to meet the challenges of the crisis.
