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This paper offers possible explanations for three generally observed facts about fiscal policy and development: (F1) The relative size of government increases as an economy develops, (F2) The rise in government and taxation are associated with rising or constant economic growth rates, and (F3) Today's developing countries have larger government sectors than did today's developed countries at similar stages of development. The explanations for these facts are based on the structural transformation from traditional (mostly agricultural) to modern (industrial and post-industrial) production, risi

Conventionally ; macroeconomic consequences of economic policy have been researched in structural vector autoregressions (SVAR). Fiscal policy SVAR models estimated for the U.S. are usually supportive for large fiscal policy effects on output. In one prominent example ; the tax multiplier is estimated as -1.33 ; and the spending multiplier as 1.29 (Blanchard and Perotti ; 2002). SVAR models require untestable identification assumptions ; thus ; prompting the search for natural experiments as an alternative source of identification. In a particularly influential study ; Romer and Romer (2010) construct a historical account of exogenous legislated U.S. tax changes and estimate a much larger tax multiplier of around -3. Applications of the SVAR methodology to Germany have generally found rather small effects of fiscal policy on output. In Hayo and Uhl (2014a) ; we use a natural experiment approach ; closely following Romer and Romer (2010) ; and find strong effects of tax changes on output. Based on our evidence ; one can conjecture that the tax multiplier in Germany might be as large as -2.4. The estimated tax multipliers are much larger than alternative estimates derived in fiscal policy VAR models for Germany. Implementing this study required intensive data collection processes ; Uhl (2013) contains the documentation of these efforts. Most studies on the macroeconomic consequences of fiscal policy use aggregate nationwide data. In Hayo and Uhl (2014b) ; we estimate the consequences of federal tax policy actions for regional economic activity in the U.S. We find considerable variation in how regional output reacts to federal tax changes and that estimated state multipliers range between –0.2 in Utah and –3.7 in Hawaii. An econometric analysis of determinants behind these differences reveals that the size and composition of a state tax base is related to the strength of the local income reaction. These results improve our understanding of the precise transmission mechanism of fiscal policy shocks. In Uhl (2014) ; I estimate the consequences of U.S. state-level fiscal policies for local economic activity and conclude that state-level spending multipliers are relatively small ; while tax multipliers are large. These results allow for assessing the consequences of subnational fiscal policies and provide stylized-facts on fiscal multipliers in a monetary union. It is interesting to note that estimated multipliers at the state level are comparable to estimates derived at the country level despite their different transmission mechanism. I also find that both increases in state spending and in state taxes improve out-of-state output which suggests that spillovers among states or countries are relevant. Inference on 'fiscal multipliers' in aggregate time series requires untestable identification assumptions. Asking economic agents directly about their responses to fiscal policy is an appealing non-standard alternative. Shapiro and Slemrod (1995) ; and follow-up papers ; ask U.S. residents about their consumption responses to various tax changes. We extend on this research by directly asking the German population about their consumption and labor supply responses to a recent 2013 payroll tax change using a representative population survey (Hayo et al. ; 2014 ; Hayo and Uhl ; 2014c ; and Hayo and Uhl ; 2014d). About 55 per cent of the respondents indicate that they have increased spending ; suggesting that tax changes in Germany have a relatively large impact on consumption and ; hence ; on economic activity. Based on the evidence from this representative survey ; the effects of tax changes on labor supply ; however ; are likely small. The relative dominance of consumption responses ; vis-à-vis labor supply responses ; is a conclusion that is also present in the aggregate time series evidence in Hayo and Uhl (2014a). One further noteworthy implication from our representative survey is that currently low interest rates reduce incentives to save as well as incentives for labor supply.

The objective of this article is to compare the outcomes of fiscal coordination under a narrow and a broad agenda in the European Monetary Union (EMU). The EMU (narrow) approach to fiscal coordination will lead to higher volatility of interest rates, output, inflation and average budget deficits than broad coordination. Further, fiscal authorities will prefer a broad type of coordination, although there will be incentives to deviate. Hence, to promote broad coordination in a monetary union like the EMU clear rules indicating how to operate and an effective forum to encourage dialogue should be put into place. [Copyright 2008 The Society for Policy Modeling; published by Elsevier Inc.]

AbstractThe power to raise taxes is asine qua nonfor the functioning of the modern state. Governments frequently defend the independence of their fiscal policy as a matter of sovereignty. This article challenges this defence by demonstrating that it relies on an antiquated conception of sovereignty. Instead of the Westphalian sovereignty centred on non-intervention that has long dominated relations between states, today's fiscal interdependence calls for a conception of sovereignty that assigns duties as well as rights to states. While such a circumscribed conception of sovereignty has emerged in other areas of international law in recent years, it has yet to be extended to fiscal questions. Here, these duties arguably include obligations of transparency, of respect for the fiscal choices of other countries, and of distributive justice. The resulting conception of sovereignty is one that emphasises its instrumental as well as its conditional character. Neither state sovereignty nor self-determination is an end in itself, but a means to promoting individual well-being. It is conditional in the sense that if states do not live up to their fiscal obligations towards other states, their claims to autonomy are void.

"With more than half of today's global GDP being produced by approximately four hundred metropolitan centers, learning about the economics of cities is vital to understanding economic prosperity. This textbook introduces graduate and upper-division undergraduate students to the field of urban economics and fiscal policy, relying on a modern approach that integrates theoretical and empirical analysis. Based on material that Holger Sieg has taught at the University of Pennsylvania, Urban Economics and Fiscal Policy brings the most recent insights from the field into the classroom. Divided into short chapters, the book explores fiscal policies that directly shape economic issues in cities, such as city taxes, the provision of quality education, access to affordable housing, and protection from crime and natural hazards. For each issue, Sieg offers questions, facts, and background; illuminates how economic theory helps students engage with topics; and presents empirical data that shows how economic ideas play out in daily life. Throughout, the book pushes readers to think critically and immediately put what they are learning to use by applying cutting-edge theory to data."

This paper discusses fiscal policy using a DSGE model with search and matching in the labour market. Fiscal policy is effective mainly via its impact through the labour market. Although public intervention tends to crowd out private consumption, public spending also improves the matching between unemployed workers and job vacancies. The mechanism modelled in this paper shares similarity with Baxter & King (1993) and Leeper et al. (2010). The model produces positive fiscal multipliers on impact and in the short term and consistently reproduces the reaction to a spending shock of the main labour market variables such as wages, employment or labour market tightness. These results are similar with that of Monacelli et al. (2010) except that the transmission channel does not depend on the downward adjustment of the reservation wage of workers. The size of the fiscal multiplier increases with the elasticity of matching to spending and is also negatively related with the steady state spending to GDP ratio in the presence of diminishing marginal returns on spending. For large value of the multiplier, there is a crowding in of consumption and investment. Lastly, this model produces output multipliers larger than 1 in the presence of nominal price rigidities.