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The purpose of this article is to demonstrate that a common fiscal policy, designed to support the euro currency, has some significant drawbacks. The greatest danger is the possibility of leveling the tax burden in all countries. This leveling of the tax is to the disadvantage of countries in Eastern Europe, in principle, countries poorly endowed with capital, that use a lax fiscal policy (Romania, Bulgaria, etc.) to attract foreign investment from rich countries of the European Union. In addition, common fiscal policy can lead to a higher degree of centralization of budgetary expenditures in the European Union.

This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reduced form model of the economy from a linear VAR with a non-linear welfare function and obtain analytic solutions for optimal policy. The variables in our reduced form model –growth, unemployment, primary surplus– have a natural rate that cannot be affected by policy. Policy can only reduce fluctuations around these natural rates. Our welfare function contains future GDP and unemployment, the relative weights of which determine the optimal response. The optimal policy rule demands an immediate and large policy response that is procyclical to growth shocks and countercyclical to unemployment shocks. This result holds true when the weight of unemployment in the welfare function is reduced to zero. The rule currently followed by policy makers responds procyclically to both growth and unemployment shocks, and does so much slower than the optimal rule, leading to significant welfare losses.

Sweden is a front-runner in defining intermediate targets for fiscal policy (fiscal rules) as well as in setting up an independent fiscal council to monitor and comment on developments. Swedish public finances are among the most sound in the OECD having been able to consolidate public finances and ensure fiscal sustainability, and they have maintained room for fiscal manoeuvre also during the financial crisis. This paper takes a closer look at the Swedish case as the stepping stone for a more general discussion of how to set intermediate targets for fiscal policy and the role fiscal councils may have in strengthening political accountability and thus ultimately credibility of fiscal policy. The Swedish fiscal framework is compared to the fiscal compact for EU countries, and it is argued that it has a number of desirable features.

This dissertation, comprising three academic papers, deals with the trade-off between fiscal sustainability and macroeconomic stabilization. The first paper examines the specification of fiscal reaction functions: We argue that the fiscal response to public debt is varying over time, finding formal empirical evidence in favor. We then link this non-linear fiscal response to changes in the interest rate-growth differential and the level of public debt. The second paper takes time-varying parameter fiscal reaction functions to an out-of-sample forecast performance evaluation, embedding it in ...

This dissertation, comprising three academic papers, deals with the trade-off between fiscal sustainability and macroeconomic stabilization. The first paper examines the specification of fiscal reaction functions: We argue that the fiscal response to public debt is varying over time, finding formal empirical evidence in favor. We then link this non-linear fiscal response to changes in the interest rate-growth differential and the level of public debt. The second paper takes time-varying parameter fiscal reaction functions to an out-of-sample forecast performance evaluation, embedding it in ...

This paper investigates the macroeconomic implications of alternative tax regimes. For this purpose, a one-sector general equilibrium model is constructed in which heterogeneous agents differ in productivity and holdings of capital in the sense of incurring transaction costs for participating in the capital market. A Cobb-Douglas production function is employed that can capture the capital-skill complementarity effect and the difference in productivities of the skilled and unskilled workers. With regards to fiscal policy experiments, this paper examines tax structures where a permanent reduction in each of the three main tax instruments namely, consumption, labour and capital income tax is compensated by a permanent increase in one of the remaining two policy instruments such that the government budget constraint is tax revenue neutral. The government levies taxes on consumption, labour income and capital income in order to finance its only activity, government consumption. Next, the model economy is calibrated to the Greek economy to reflect the great ratios over 1960:1-2005:4 and then, it studies the long-run, welfare and transitional effects of the undertaken analysis. The sensitivity analysis shows that the quantitative and qualitative findings are quite robust.

Macroeconomists often prefer monetary policy to fiscal policy as a tool to stabilize business cycles. Fiscal policy is typically only effective with a lag, and results in permanent deficits with higher nominal interest rates and distortionary taxes. In addition, a high marginal propensity to save out of temporary tax cuts might result in low fiscal multipliers with empirical estimates often below 1 (see Ramey (2011b) and Barro and Redlick (2011)). The zero lower bound on nominal interest rates, however, constrains the effectiveness of monetary policy during liquidity traps. Large stocks of sovereign debt limit the scope of fiscal stimulus, and inflated central bank balance sheets constrain asset-purchase programs as forms of unconventional monetary policy. The unclear effectiveness of several measures of monetary policy - both conventional and unconventional - after the 2008-2009 Financial Crisis calls for alternative mechanisms to increase aggregate demand and hence promote growth. This issue is especially relevant for several major developed economies that, years after the end of the Great Recession in the United States, are still experiencing sluggish growth. In particular, southern European countries are still facing the contractionary effects of the austerity measures they implemented to abate their debt-to-GDP ratios during the Euro sovereign-debt crisis. Many economists argue structural reforms are necessary to improve the competitiveness of these countries in the long run, but promoting a short-run increase in aggregate demand to jump start the economy is also a compelling objective for policy makers. The conundrum the Euro area has faced since the start of the Great Recession is to generate inflation and ultimately stimulate consumption and economic growth in a setting in which traditional monetary policy measures were not viable and governments could not generate growth with fiscal stimulus because of their large debt-to-GDP ratios. This challenge was so compelling that in his Marjolin lecture on February 4, 2016, the president of the European Central Bank, Mario Draghi, asserted that "there are forces in the global economy that are conspiring to hold inflation down." (Draghi, 2016).

Defence date: 26 March 2007 ; Examining board: Prof. Giancarlo Corsetti, EUI, Supervisor ; Prof. Morten Ravn, EUI ; Dr. Jeffrey Campbell, Federal Reserve Bank of Chicago ; Prof. Roel Beetsma, University of Amsterdam ; There is little doubt that fiscal policy plays an important role in business cycle fluctuations; however, the ability of fiscal policy measure to work as a countercyclical stimulus has recently been questioned (see Taylor, 2000), in light of the efficiency and transparency of monetary policy interventions. Far from postulating a definitive answer to the debate, the objective of this dissertation is to contribute to a better understanding of the transmission mechanism of fiscal policy shocks, through their interaction with the consumption behaviour of private agents. The fundamental contribution of this thesis is the introduction of different forms of households' heterogeneity in the analysis of the effects of government expenditure shocks and tax cuts.