Expenditure Reform in Industrialised Countries: A Case‐Study Approach*

This study examines reforms of public expenditure in industrialised countries over the past two decades. We distinguish ambitious and timid reformers and analyse in detail reform experiences in eight case studies of ambitious reform episodes. We find that ambitious reform countries reduce spending on transfers, subsidies and public consumption. Such expenditure retrenchment is also typically part of a comprehensive reform package that includes improvements in fiscal institutions as well as structural and other macroeconomic reforms. The study finds that ambitious expenditure retrenchment and reform coincides with large improvements in fiscal and economic growth indicators.     

Trade wedges,inventories, and international business cycles

The large, persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations.     

Policy risk and the business cycle

The argument that uncertainty about monetary and fiscal policy has been holding back the recovery in the U.S. during the Great Recession has a large popular appeal. This paper uses an estimated New Keynesian model to analyze the role of policy risk in explaining business cycles. We directly measure risk from aggregate data and find a moderate amount of time-varying policy risk. The “pure uncertainty” effect of this policy risk is unlikely to play a major role in business cycle fluctuations. In the estimated model, output effects are relatively small because policy risk shocks are (i) too small and (ii) not sufficiently amplified.     

A modern history of fiscal prudence and profligacy

Drawing on a newly collected historical dataset of fiscal stocks and flows, we analyze the determinants of variation, both across countries and over time, in how fiscal policy responds to increases in the government debt-to-GDP ratio. The fiscal data comprise revenues, primary expenditures, interest bill, and government debt for 55 countries for up to two hundred years. The policy response (increase in the primary fiscal balance in response to debt increases) is found to be significantly weaker when sovereign borrowing costs are low, inflation is high, and potential economic growth worsens unexpectedly. These results are robust to political factors.     

Measuring Regional Fiscal Transfers Induced by National Budgets

National budgets typically induce a substantial redistribution of resources across regions. In this paper I propose an economic definition of such implicit fiscal transfers, which, in the absence of gains or losses out of centralizing fiscal policy, is particularly suitable for territorial equity discussions. In my view the fiscal transfer of a region is equivalent to the region's willingness to pay for achieving fiscal independence. Such implicit transfers are also characterized in the context of a model where public debt is exclusively motivated by the tax-smoothing principle. It turns out that the fiscal transfer of a region can be computed by adding the region's primary balance and an allocation of the national primary deficit according to a linear combination of the region's share of receipts and expenditures. Thus, in general the computation of these implicit transfers requires detailed information about parameter values, which may not be available in practice. Some possible solutions are discussed.     

What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?

This paper analyzes the importance of monetary and fiscal policy shocks in explaining U.S. macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations, and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.     

The Effectiveness of Fiscal Policy Over the Business Cycle: A CEE Perspective

In this article we analyze the effectiveness of fiscal policy—for a group of four Central and Eastern European countries. The recent literature shows that fiscal multipliers in the developed economies are higher during recession than expansion. So far, similar empirical analyses have been lacking for CEE countries. The results presented in this article show that fiscal multipliers in CEE countries differ with respect to the phase of the business cycle. Based on the SVAR methodology in which we allow for deterministic regime switching, we show that the government spending multipliers are significantly higher when the output gap is negative.     

Fiscal incentives and political budget cycles in China

Political budget cycles in democracies have been extensively analyzed, but few studies of non-democracies exist. This paper explores political budget cycles in China’s provinces. Using data from Chinese provinces from 1980 to 2006, the analysis finds that the effects of a provincial leader’s tenure on political budget cycles are minimal, implying a weak causal relationship between spending composition and a politician’s time in office at the provincial level. However, there exists a national coordinated cycle associated with the timing of the National Congress of the Communist Party (NCCP). Two years prior to the NCCP, politicians are likely to shift public spending toward capital expenditures, such as innovation funds and capital construction, and away from current expenditures, such as agricultural subsidies. The opposite pattern occurs during the year of the NCCP, when politicians increase current expenditures, such as social expenditures and government administration, and decrease capital expenditures. The increased capital expenditures 2 years prior to the NCCP are accompanied by an increase in taxation and total aggregate spending. The empirical results indicate that provincial budget cycles are mainly driven by national policies rather than by provincial leaders’ personal career incentives. Chinese leaders’ fiscal behaviors are constrained by the dynamics of the national leadership transition, resulting in similar distortions to those found in the democratic countries.     

The Impact of Central Bank Independence on Political Monetary Cycles in Advanced and Developing Nations

This paper examines the extent to which monetary policy is manipulated for political purposes during elections. We do not detect political monetary cycles in advanced countries or developing nations with independent central banks. We do find evidence, however, in developing countries that lack central bank independence. Furthermore, we find some evidence that these cycles are not caused by monetization of election-related fiscal expansions. This suggests that pressure by politicians on the central bank to exploit the Phillips curve may be an important factor in generating political monetary cycles.     

The global financial crisis: Explaining cross-country differences in the output impact

What explains differences in the crisis impact across developing countries and emerging markets? Using cross-country regressions to assess the factors driving the growth performance in 2009 (compared to pre-crisis forecasts for that year), we find that a small set of variables explain a large share of the variation in the growth impact. Countries with more leveraged domestic financial systems, stronger credit growth, and more short-term debt tended to suffer a larger effect on economic activity, although the relative importance of these factors differs across country groups. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with more open countries affected more strongly and those exporting food commodities being less hard hit. Exchange-rate flexibility helped in buffering the impact of the shock, particularly for emerging markets. There is also some evidence that countries with a stronger fiscal position prior to the crisis were impacted less severely. We find little evidence for the importance of other policy variables.     

Economic integration,economic crises and economic cycles in Mexico

This article analyzes the peculiarity of the dynamics of economic fluctuations of the Mexican economy, within the framework of its integration with the US and Canada; the article demonstrates how the Mexican economy make endogenous the macroeconomic crises from the USA (2001 and 2007), and how the business cycles of both countries became more aligned to each other.Based on the heterodox economic theory of crises and cycles, we check the “empirical law of economic dynamics” of the Mexican capitalist system according to the logic of the multiplier–accelerator theory that allowed us to study the dynamics of business cycles for the period of the study (1993–2013). To do this, we construct and estimate a stationary VAR model and utilize the Granger causality tests and quarterly data.     

Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts

This article documents the main stylized features of macroeconomicfluctuations for 12 developing countries. It presents cross-correlationsbetween domestic industrial output and a large group of macroeconomicvariables, including fiscal variables, wages, inflation, money,credit, trade, and exchange rates. Also analyzed are the effectsof economic conditions in industrial countries on output fluctuationsin the sample developing countries. The results point to manysimilarities between macroeconomic fluctuations in developingand industrial countries (procyclical real wages, countercyclicalvariation in government expenditures) and some important differences(countercyclical variation in the velocity of monetary aggregates).Their robustness is examined using different detrending procedures.     

Is social capital associated with corporate innovation? Evidence from publicly listed firms in the U.S

We find that social capital in U.S. counties, as captured by strength of social norms and density of social networks, is positively associated with innovation of firms headquartered in the county, as captured by patents and citations. This relation is robust in fixed-effect regressions, instrumental variable regressions with a Bartik instrument, propensity score matching regressions, and a difference-in-differences design that isolates the effects of over time variations in social capital due to corporate headquarter relocations. Strength of social norms plays a more dominant role than density of social networks in producing these empirical regularities. Cross-sectional evidence indicates the prominence of the contracting channel through which social capital relates to innovation. Additionally, we find that social capital is also positively associated with trademarks and effectiveness of corporate R&D expenditures.     

Targeted transfers and the fiscal response to the great recession

Between 2007 and 2009, government expenditures increased rapidly across the OECD countries. While economic research on the impact of government purchases has flourished, in the data, most of the increase in expenditures was in government transfers. After documenting this fact, we argue that future research should focus on the positive impact of transfers. Towards this, we present a model in which there is no representative agent and Ricardian equivalence does not hold because of uncertainty, imperfect credit markets, and nominal rigidities. Targeted lump-sum transfers are expansionary both because of a neoclassical wealth effect and because of a Keynesian aggregate demand effect.     

Integración económica,crisis económicas y ciclos económicos en México

This article analyzes the peculiarity of the dynamics of economic fluctuations of the Mexican economy, within the framework of its integration with the US and Canada; the article demonstrates how the Mexican economy make endogenous the macroeconomic crises from the USA (2001 and 2007), and how the business cycles of both countries became more aligned to each other. Based on the heterodox economic theory of crises and cycles, we check the “empirical law of economic dynamics” of the Mexican capitalist system according to the logic of the Multiplier-Accelerator theory that allowed us to study the dynamics of business cycles for the period of the study (1993-2013). To do this, we construct and estimate a stationary VAR model and utilize the Granger causality tests and quarterly data.     

中美两国经济周期同步性研究

改革开放三十年以来,中芙两国经贸往来日益密切.从两国经济周期的同步程度来看,这三十年中,两国经济周期同步波动主要出现在2000年以后,我国进出口、投资等指标与美国消费之间的高度相关以及美国进出口与我国投资的高度相关是这种同步性得以实现的主要原因之一.中关两国经济周期的同步运动,主要源于美国经济周期对中国经济的影响.     

Government R&D spending,fiscal instruments and corporate technological innovation

Using panel data from 242 cities in China, we examine the impact of government research and development (R&D) spending on corporate technological innovation. We find that listed firms located in cities with higher government R&D expenditures are more innovative than firms in other cities. Further, the positive effect of government R&D spending depends on fiscal instruments and factor allocation. Through subsidies and tax incentives, government R&D spending enhances firm innovation by alleviating financing constraints, improving employee creativity and ensuring efficient operations. We demonstrate that subsidies are more effective than taxes in spurring corporate technological innovation. We also show that the impact of government R&D spending is stronger for state-owned and high-tech enterprises than for other enterprises. Overall, our findings suggest that government R&D spending can substantially improve corporate technological innovation through fiscal instruments.     

分税与地方财政支出结构

本文研究了税收分成对地方财政支出结构的影响。理论分析发现,在地方政府的财政支出结构竞争中,税收分成比例的提高将直接导致地方政府增加生产性公共支出,发挥生产性支出的产出外部性,提高产出水平和自身税收收入水平,实现福利最大化。一系列经验分析显著地验证了上述结论,即当地级市政府的税收分成率提高10%,该地区生产性支出占比将提高1.39%。本文的分析和结论有助于解释中国地方财政支出结构变动的原因,从而为政府间税收分配改革提供有效的政策建议。     

Revenue Sharing versus Expenditure Sharing in a Federal System

Problems of intergovernmental policy coordination can take many forms and are becoming increasingly important with continuing economic integration. In this paper we focus on the fiscal competition problem where the non-cooperative choice of taxes and transfers among governments typically leads to a suboptimal outcome. We look at the effect of two widely used corrective policies: revenue sharing and expenditure sharing (or intergovernmental matching grants). Our main result is that these two corrective policies have opposite effects depending on the form of competition between governments, namely whether governments compete in taxes or expenditures. More precisely, for any form of competition, revenue sharing is desirable exactly when expenditure sharing is not and vice versa. The implication is that the choice of the optimal corrective policy requires a complete understanding of the underlying non-cooperative behavior among governments. Our second main result is that neither revenue sharing or expenditure sharing can be sustained as a Nash equilibrium among governments, although all governments would benefit from one of these two corrective policies. Central intervention is therefore inevitable unless governments can pre-commit to the optimal corrective policy before setting their fiscal policies.     

Cyclically‐Neutral Generational Accounting

This paper introduces a key methodological innovation into generational accounting. By incorporating cyclically‐adjusted balances into the forward‐looking budget projections underlying the concept, we isolate pure policy effects, which render comparisons of the fiscal sustainability indicators obtained across time and countries truly meaningful. We also show that a demographic effect and a debt effect may drive fiscal sustainability measures over time, and establish a routine to control for these effects in the generational accounting framework. An empirical application for Spain illustrates that our proposed decomposition of indicators is empirically relevant. Standard generational accounting suggests that fiscal sustainability in Spain improved substantially in preparing for EMU. However, calculation of the pure policy effects reveals that this has not been the case.