A Note on the (Un)Pleasant Arithmetic of Fiscal Policy: The Case of Italian Public Debt

Using the simple arithmetic of government budget constraint, we perform an illustrative analysis on the Italian case, investigating the consequences on the main public finance aggregates of the adoption of a fiscal policy rule responding to past real debt/GDP ratio. Such a rule, firmly grounded in the economic analysis, would allow the reduction of Italy's outstanding stock of debt without requiring the strict adherence to the 3 per cent criterion for deficit/GDP ratio, as prescribed by SGP (Stability and Growth Pact). We perform a forecasting exercise under five alternative scenarios and analyse the details of a structural debt reduction strategy with alternative yearly step.     

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a non‐linear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.     

Algeria: A three-sector macrofiscal model for debt sustainability and growth policy analysis

In this paper, we present a dynamic general equilibrium (DGE) model to address the macrofiscal vulnerabilities and the effects of fiscal policy on growth and employment in Algeria. We first discuss the baseline scenario over the period 2021–2040. According to our baseline results, without fundamental changes in fiscal policies, even relatively high growth will not be sufficient to put public debt on a sustainable path. We then conduct four experiments and assess their impact on fiscal accounts, growth, and unemployment: an increase in the efficiency of public spending on infrastructure investment, a gradual reduction in the share of noninterest government spending in GDP, the same gradual reduction in spending combined with a permanent increase in the share of investment in infrastructure in total noninterest government expenditure, and a composite fiscal reform program that combines these individual policies, respectively. The results suggest that public debt sustainability can be achieved, and growth and employment can be promoted, as long as an ambitious fiscal reform program involving tax, spending, and governance reforms is implemented. Importantly, our quantitative analysis shows that, with a well-designed fiscal program, there may be no trade-off between fiscal consolidation and economic growth.     

Fiscal space on the eurozone periphery and the use of the (partially) balanced-budget multiplier: The case of Spain

This article adopts the “functional finance” approach to consider the utilization of expansive fiscal policies in the members of the European Monetary Union most affected by high unemployment. As they do not have their own monetary policy, fiscal deficits require the issuing of public debt without the support of the central bank. The authors consequently incorporate the notion of a (partially) balanced-budget expansion to achieve the desired stimulus in gross domestic product (GDP) with the least possible effect on public debt. Their proposal is only a sort of “imperfect” balanced-budget expansion: It is based on the idea that simultaneous increases in public revenue and expenditure can boost GDP, but without any pretension of keeping public deficit unchanged. Specifically, the authors use the case of Spain to show that a more expansive fiscal policy is desirable on economic grounds, and that only institutional constraints prevent it. They do it presenting two alternative scenarios for the coming years and analyzing their different impact on unemployment and fiscal sustainability. The first represents a firm commitment to budget consolidation, whereas the second is based on this “imperfect” application of the balanced budget multiplier. The main conclusion is that a more expansive fiscal policy is perfectly compatible with finance sustainability.     

PUBLIC DEBT AND PUBLIC INVESTMENT IN AN ENDOGENOUS GROWTH MODEL WITH REAL WAGE RIGIDITIES

We present an endogenous growth model with public capital, public debt and real wage rigidities due to labor market imperfections. Assuming that the primary surplus relative to gross domestic produce (GDP) is a positive function of the debt to GDP ratio, we study growth and employment effects of deficit‐financed public investment using simulations as well as how fiscal policy affects stability of the economy. Further, we contrast the growth rate and the unemployment rate in the deficit scenario with that of the balanced budget scenario. Finally, we compare our results with those obtained in case of flexible wages and full employment.     

Fiscal implications of AIDS in South Africa

The number of people living with HIV is alarmingly large. In addition to the incomprehensible human suffering of those directly affected, AIDS also has large, negative economic effects. In this paper, I study the fiscal implications of the HIV/AIDS epidemic in South Africa in a standard neo-classical growth model. I find that an antiretroviral program is to a large extent self financing. Improvement in dependency ratios and health care cost savings would pay for Rand 144 billion of a full epidemiological intervention. The indirect effect through the changing demographic structure will be more important than the direct health care cost saving effect. I also explore different taxation policies. The households would be willing to sacrifice an amount equal to 12% of GDP in the first period to be subject to an optimal (Ramsey) fiscal policy rather than an alternative fixed debt to GDP policy. The optimal policy implies an increase in government debt during the peak of the epidemic.     

Targeting Debt and Deficits in India: A Structural Macroeconometric Approach

This study attempts to construct a consistent macroeconomic framework for India to review the macro-fiscal linkages over the 14th Finance Commission period, 2015–2019. A macroeconomic policy simulation model comprising of real, external, monetary, fiscal and macroeconomic block is built for the purpose. The estimated model is used for policy simulations to address three scenarios: (a) shock due to 7th Pay Commission award, (b) targeting deficit and debt and (c) targeting higher growth. The results suggest that while Pay Commission award would result in slightly higher growth compared to the base case, this also results in higher inflation, fiscal-revenue deficits, current account deficit as well as higher government liability. Further simulation results suggest that expenditure switching policy, which is the core of expansionary fiscal consolidation mechanism, of increasing higher government capital expenditure and reducing the government transfers could result in higher growth with a manageable fiscal deficit of 5.3% that also brings down the government (centre plus states) liability to around 60% by 2019–2020.

     

Social polarization, fiscal instability and growth

We present a dynamic model of fiscal policy in a simple growth framework where social polarization (of preferences) plays a central role in the evolution of fiscal instability and growth collapse. In a highly polarized society, a deficit occurs endogenously, fiscal spending path becomes more volatile, output collapses, and economic growth rate is reduced along the transition path to a new lower level of output. One novel feature is that the size of fiscal deficit, the magnitude of fiscal volatility, and the size of reduction in output and growth rate are explicitly shown to be increasing functions of the degree of social polarization. This is because of the positive relationship between the polarization of preferences and the incentive for policymakers (or socio-economic groups) to overexploit the government resources in a common pool setting (polarization effect). Thereby, we offer a fiscal instability channel that negatively links social polarization and growth, which is an alternative yet distinct explanation for the empirical finding that social polarization is harmful to growth. Moreover, we fully distinguish the incentive to engage in such short-term policies under political uncertainty from that under polarization. Polarization and political uncertainty are shown to be distinct yet critical to the dynamic coordination failure in the common pool setting.     

FiMod — A DSGE model for fiscal policy simulations

This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates two important features. First, we consider a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. Second, we provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. In addition, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment.     

Fiscal Adjustment, The Real Exchange Rate and Australia's External Imbalance

This article examines issues of relevance to Australia's external imbalance. We investigate the sharp fiscal consolidation over the past five years and examine why it did not reduce the current account deficit. We show that a disproportionate part of the fiscal consolidation was achieved by cutting public investment spending, and we discuss some of the negative consequences of such cuts. We compare the macroeconomic behaviour of six OECD countries which have recently increased net government savings. It has been a common experience that an increase in net government saving has not been associated with a reduction in the current account deficit. For Australia, we establish that the link between fiscal consolidation and a smaller current account deficit was severed by a private sector investment surge. This leads us to examine the behaviour of the relative price critical to the allocation of this investment between the traded and non-traded sectors - the real exchange rate. Over the medium term, we argue that a substantial real depreciation is necessary as part of the adjustment required to stabilise the ratio of net external liabilities to GDP.     

我国财政货币政策作用关系实证研究--基于VAR模型的检验分析

文章通过构建一个真实GDP增长率、财政赤字占GDP比重、货币供给M2增长率、零售物价指数变化率等4个变量的VAR模型,对我国财政政策与货币政策相互作用的关系及其动态性进行了实证分析,通过模型设定、格兰杰因果关系检验、脉冲响应函数分析和预测方差分解,发现在我国不存在简单的财政货币政策的互补或替代关系,而是存在一种非对称性的关系,即扩张的货币政策伴随着收缩或稳健的财政政策,而扩张的财政政策导致被动扩张的货币政策,表现形式取决于具体宏观经济环境和经济冲击形式。同时,文章也得到其他一些结论,并认为,要增强政策的效率,必须强化央行的独立性,在现阶段需要严格控制赤字财政政策,以减少其对经济增长和经济波动的影响。     

A Theory of Growth and Threshold Inflation with Estimates

For an inflation targeting Central Bank, a precise estimate of the threshold inflation in the economy is important. Existing studies provide estimates without any coherent theory of growth and threshold inflation and hence suffer from several limitations about concept and measurement. The present paper attempts to develop such a theory to establish a stable steady state growth solution. It also operationalizes the theory through a model with support from the Indian data for specific components of the model to derive the required functional form. Final estimates in India with annual data from 1995–96 to 2017–18 show that the threshold inflation and associated optimal growth vary considerably as rates of fiscal deficit and current account deficit on the balance of payments vary. The current combinations of the long term four policy targets of 4% inflation; 8% growth; 6% fiscal deficit (to GDP); and 2% current account deficit (to GDP) are internally inconsistent and hence not achievable. Now that there is an opportunity to revise the inflation target for the period after March 2021, the present paper argues for choosing from the menu of internally consistent options for all these four policy targets to avoid unnecessary costs.

     

Options and strategies for fiscal consolidation in India

This paper uses a multi-region dynamic stochastic general equilibrium (DSGE) model to study options and strategies for fiscal consolidation in India. The challenge for India is how to put public finances on a more sustainable footing while preserving the potential for high growth and attenuating the adverse consequences on the needy. We analyze the macroeconomic implications of three fiscal consolidation scenarios. A “benchmark” case based on authorities' intentions that reduces government consumption, general transfers, and strengthens consumption tax collection; a “growth-friendly” that reallocates the savings to more public investment; and a “social-friendly” scenario that equally reallocates the savings between more public investment and more transfers to households excluded from the financial system. The simulations indicate that fiscal consolidation yields considerable long-term benefits and also entails output costs in the near term. Growth outcomes are better under the growth-friendly and social-friendly scenarios. These consolidation scenarios alone are not enough to maximize net gains for India. Other factors, such as the pace of consolidation, the combination with structural reforms and external economic conditions, play a critical role in the success of fiscal consolidation.     

区域发展战略能促进经济增长吗*——以振兴东北老工业基地战略为例

为了验证区域发展战略能否促进经济增长,笔者利用2003年实施的振兴东北老工业基地战略作为准自然实验,实证评估了该战略对促进东北地区经济增长的净效应。笔者引入项目评估计量经济学中的合成控制法控制了选择性偏差和由此导致的内生性问题。实证结果表明,振兴东北老工业基地战略的实施,使得东北三省2003年以来的年均经济增长率增加了11个百分点~16个百分点,但自2007年以来该战略的经济增长效应呈递减趋势。进一步分析发现,振兴东北老工业基地战略的经济增长效应,主要是通过增加投资和政府支出、改善基础设施实现的, 人力资本积累、科技进步和投资环境并未改善,产业结构和所有制结构虽有改善但作用有限。因此,这种增长效应容易受到经济周期的冲击而缺乏可持续性。进一步深化东北振兴战略,需要调整对东北地区政策扶持的方向、方式和对象。     

Fiscal Policy and Equitable Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general-equilibrium model with given exogenous fiscal policy, a nonmonotonic relation exists between the suboptimal long-run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two properties suggest that an alternative set of government policy instruments affects the response of private sector investment to fiscal policy. Moreover, the different properties of exogenous and endogenous fiscal policy theoretically account for the difference in the relation between economic growth and fiscal policy in empirical studies.     

Financial market imperfections and monetary policy strategy

In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank applying the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if interest rate pass-through is incomplete, the central bank can use a narrow monetary aggregate and the discount interest rate as independent and complementary policy instruments to reinforce the credibility of its announcements and the role of inflation target as a nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman's k-percent money growth rule, which can generate dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.     

Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets

Using a panel of 46 emerging market economies from 1997 to 2008, this paper investigates the key determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal consolidation narrow credit spreads, especially in countries with high initial public debt levels. The composition of fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.     

Fiscal stabilizations: When do they work and why

This paper studies the determinants and channels through which fiscal contractions influence the dynamics of the debt-to-GDP ratio and GDP growth. Using data from a panel of OECD countries, the paper shows that the success of fiscal adjustments in decreasing the debt-to-GDP ratio depends on the size of the fiscal contraction and less on its composition. The rate of growth of output matters too, but higher GDP growth does not drive the success of a fiscal stabilization. In contrast, whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuvre. In particular, stabilizations implemented by cutting public spending lead to higher GDP growth rates. The effects of the composition on growth work mostly through the labor market rather than through agents’ expectations of future fiscal policy. Finally, the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations.     

WHAT IT TAKES TO SOLVE THE U.S. GOVERNMENT DEFICIT PROBLEM

This paper uses a structural multi‐country macroeconometric model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/gross domestic product (GDP) ratio. It takes into account endogenous effects of changes in fiscal policy on the economy and in turn the effect of changes in the economy on the deficit. A base run is first obtained for the 2013:1–2022:4 period in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then transfer payments are decreased by an amount sufficient to stabilize the long‐run debt/GDP ratio. The results show that transfer payments need to be decreased by 2% of GDP from the base run, which over the 10 years is $3.2 trillion in 2005 dollars and $4.8 trillion in current dollars. The real output loss is 1.1% of baseline GDP. Monetary policy helps keep the loss down, but it is not powerful enough in the model to eliminate all of the loss. The estimates are robust to a base run with less inflation and to one with less expansion. (JEL E17)     

The growth impact of discretionary fiscal policy measures

This paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998–2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation generally has a negative impact on growth in the short run, although some specific budget categories are not found to be statistically significant. In general, expenditure-based measures are found to have a slightly lower detrimental effect on growth compared to revenue measures, although the difference is not statistically significant. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Non-linear specifications indicate that spreading out consolidation may reduce the negative impact on growth slightly, and there is weak evidence that this is especially the case for revenue-based adjustment.