Identifying fiscal inflation

Fiscal theorists warn about the risk of future inflation as a consequence of fiscal imbalances in the US. Because actual inflation remains historically low and data on inflation expectations do not corroborate such risks, warnings for fiscal inflation are often ignored in policy and academic circles. This paper shows that a canonical NK-DSGE model enables identifying an anticipated component of inflation expectations that is closely related to fiscal policy. Estimation results suggest that fiscal inflation concerns have induced a 1.6%-points increase in long-run inflation since 2001. The model also rationalizes why data on inflation expectations do not reveal such concerns outright.     

Monetary and Fiscal Policy Interactions in the Euro Area

The problem of monetary and fiscal policy interactions is an important issue for the euro area, since the individual member states of the EMU are responsible for their fiscal policies but monetary policy is pursued by a single monetary authority, the ECB. This paper is concerned with empirical evidence on monetary and fiscal policy interactions in the euro area. We first explore fiscal regimes with a VAR model and find empirical evidence that a non-Ricardian fiscal policy has been pursued in both France and Germany. As an example, we then study how one member state of the EMU, namely, Italy, is responding to the common monetary policy with its fiscal policy and find that Italian fiscal policy seemed to be counteractive to the common monetary policy between 1979 and 1998. In order to study monetary and fiscal policy interactions in a more general way, we explore time-varying interactions by estimating a State-Space model with Markov-switching for some Euro-area countries. There appear to be some regime changes in monetary and fiscal policy interactions in France and Germany, but the interactions between the two policies are not strong. Moreover, the two policies have not been accommodative but counteractive to each other. Finally we explore forward-looking behavior in policy interactions and find that expectations do not seem to have played an important role in the policy designs.     

The reaction of disagreements in inflation expectations to fiscal sentiment obtained from information in official communiqués

Using official communiqués about fiscal policy, we develop a fiscal sentiment indicator, and we verify the reaction of disagreements in inflation expectations to fiscal sentiment. This analysis is relevant to inflation targeting (IT) countries because transparency and communication can influence expectations. The results suggest that a more optimistic fiscal sentiment reduces disagreements in inflation expectations. Estimates show that, for higher disagreements in inflation expectations at 12-month maturity, an optimistic fiscal sentiment can reduce the disagreement more sharply. In turn, the fiscal sentiment effect on the disagreement for the 48-month maturity is stronger the smaller the disagreement is. The results allow us to outline the following policy recommendations. First, an optimistic fiscal environment is important in the task of guiding inflation expectations and reducing inflation uncertainty. Second, fiscal communication is an important tool for the expectations formation process, and therefore it must be carefully managed to help in the task of forward guidance of inflation expectations, being important for the IT regime. Third, both fiscal credibility and monetary policy credibility are important for the expectations formation process, particularly for the reduction of inflation uncertainty, representing aspects that must be preserved in countries that adopt the IT regime.     

Inflation and the fiscal limit

We use a rational expectations framework to assess the implications of rising debt in an environment with a “fiscal limit”. The fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes, so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt. We give households a joint probability distribution over the various policy adjustments that may occur, as well as over the timing of when the fiscal limit is hit. One policy option that stabilizes debt is a passive monetary policy, which generates a burst of inflation that devalues the existing nominal debt stock. The probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target. The distribution of outcomes for the path of future inflation has a fat right tail, revealing that only a small set of outcomes imply dire inflationary scenarios. Avoiding these scenarios, however, requires the fiscal authority to renege on some share of future promised transfers.     

统筹区域经济发展的财政政策选择

造成我国区域经济发展不平衡的原因是复杂多样的,其中,国家资金投入、税收优惠政策与政府间财政转移支付资金的安排在地区间的非均衡性对我国区域经济差异扩大有着十分突出的影响,而这又归结为国家在一定时期的财政政策选择.借鉴统筹区域经济发展的国际经验,促进我国区域经济的协调发展,应调整财政投资的区域布局和区域性税收政策,完善财政转移支付制度.     

Stepping on a rake: The role of fiscal policy in the inflation of the 1970s

The inflation of the 1970s in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.     

Dynamics of Macroeconomic Adjustment with Growth: Some Simulation Results *

This paper examines the impact of several macroeconomic policies, both demand and supply management policies, on economic activity within a small macroeconomic simulation model. The model is based on a standard analytical framework that underlies adjustment policies in developing economies (Des). The standard approach has been to use aggregate government expenditure as an instrument of fiscal policy to shock economic activity in a DE, with a negative dynamic response typically observed. In the context of such a small macroeconomic simulation model we decompose government expenditure into consumption and investment expenditure. Simulation exercises with and without model-consistent expectations throw up some contrasting results in the sense that fiscal policy can influence output positively through the effects of public sector investment on private investment in a DE such as India. [F43, E62]     

封闭条件下财政政策效应及其制约因素的一般分析

自经济危机发生以来,世界各国纷纷采取以扩大内需为主旨的积极的财政政策。从目前来看,尽管其对提升信心。抑制经济的继续下滑起到了作用,但离我们的预期政策目标还有较大的距离。究其主要原因,我们认为,财政政策主要受经济制度的制约而未能有效地发挥其应有的效应。以西方宏观经济理论中封闭条件下三部门IS—LM模型为主要分析工具,从理论上分析了制约财政政策效应发挥的各个变量,并实践上对制约中国财政政策效应的因素进行了详细分析。     

The global dimension to fiscal sustainability

This paper provides a new perspective of fiscal sustainability and financial globalization in emerging and industrial countries. We highlight the importance of global capital market shocks for fiscal sustainability, a relationship which has hitherto been ignored in the empirical literature. Using a factor model we demonstrate that the relationship between deficit and debt is conditional upon a global factor and we suggest that this global factor is related to world-wide liquidity. We also demonstrate that this acts as a constraint on emerging market economies’ fiscal policy.     

The case for fiscal rules

This paper estimates the effects of fiscal institutions on fiscal policy outcomes, addressing issues related to measurement and endogeneity in a novel way. Recently developed indices, based on partially ordered set theory, are used to quantify the stringency of fiscal rules. Identification of their effects is achieved by exploiting the exogeneity of institutional variables (checks and balances, government fragmentation, inflation targeting), which are found to be relevant determinants of fiscal rules. Our two-stage least squares estimates for (up to) 74 countries over the period 1985–2012 provide strong evidence that countries with more stringent fiscal rules have higher fiscal balances (lower deficits), lower interest rate spreads on government bonds, and lower output volatility.     

Fiscal policy under New Labour

This paper seeks to provide an evaluation of fiscal policy underNew Labour in the decade from its election in May 1997 to date.It begins with a brief review of macroeconomic performance overthat period. It outlines the main features of the approach ofthe Labour government to fiscal policy including the ‘goldenrule’ of public finance, and provides a critique of thatrule and the general approach to fiscal policy. It considershow far the policy rules have been observed in practice. Finally,it argues that the relative macroeconomic stability since 1997has not resulted from the fiscal policy pursued, but ratherthat changes in the fiscal stance have fortuitously offset variationsin private expenditure.     

To react or not? Technology shocks, fiscal policy and welfare in the EU-3

This paper develops a dynamic stochastic general equilibrium (DSGE) model to examine the quantitative macroeconomic implications of counter-cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity and consumption habits, as the particular market failures justifying policy intervention. We subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt-to-output ratio. A welfare analysis reveals that the most effective instrument-target combination is to use public consumption to stabilize the output gap. Moreover, welfare gains from counter-cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits. Finally, since active policy and automatic stabilizers are substitutes, it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers.     

Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers

The paper examines simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify bifurcations associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements.     

Monetary policy and fiscal limits with no-default

This paper discusses monetary and fiscal policy interactions that stabilize government debt. Two distortions prevail in the model economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include a ceiling on the equilibrium debt-to-GDP ratio, zero or negative elasticity of tax revenues, and a political intolerance of raising tax rates. At the fiscal limit two mechanisms restore solvency: fiscal inflation, which reduces the real value of nominal debt, and open market operations, which diminish the size of government debt held by the private sector. Three regimes achieve this goal. In all regimes monetary policy is passive. In all regimes a muted tax response to government debt is consistent with equilibrium. The propensity of a fiscal authority to smooth output is found to determine what is an acceptable response (in the form of tax rate changes) to the level of government debt, while monetary policy determines the timing and magnitude of fiscal inflation. Impulse responses show that the inflation and tax hikes needed to offset a permanent shock to transfers are lowest under nominal interest rate pegs. In this regime, most of the reduction in the real value of government debt comes from open market purchases.     

EMU fiscal indicators: a misleading compass?

The effectiveness of any device for fiscal discipline crucially depends on the indicators it refers to. This paper assesses the indicators adopted for fiscal rules in the European Economic and Monetary Union (EMU) with respect to their relevance for EMU’s objective of fiscal soundness and to the adequacy of the underlying statistical framework in providing conditions for enforcement. The paper argues that EMU’s deficit and debt indicators present several shortcomings with respect to both sustainability analysis and monitoring requirements. The debt indicator allows the achievement of targets via operations that do not improve fiscal sustainability and tends to underestimate overall outstanding liabilities. The deficit indicator cannot be monitored in a timely manner, allows too much room for discretion, and is subject to significant revisions. While acknowledging that any single indicator can be distorted when used as a policy target, the paper argues that the weaknesses of EMU’s indicators would be much reduced if consistency cross-checks played a larger role than they currently do.The authors wish to thank Claudia Braz, Carlo Cottarelli, Jorge Cunha, Mark De Broek, Albert␣Jaeger, Mohan Kumar, Joao Nogueira, Ethan Wiseman and the anonymous referees for helpful comments.     

Financial frictions and optimal stabilization policy in a monetary union

Financial frictions differ across countries and thus cause international differences in the transmission of shocks. This paper shows how the optimal mix of monetary and fiscal policy depends on these country-specific financial frictions. To this end, we build a two-country DSGE-model of a monetary union. Financial frictions are captured by the cost channel approach. We show that the traditional solution to the assignment problem – the common central bank stabilizes the inflation rate at the union level and the national fiscal authorities stabilize the national economies – does not hold in a world with financial frictions. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization even at the union level. Moreover, the more heterogeneous the union, the more important is fiscal policy in stabilizing shocks. Finally, we evaluate the scenarios in terms of welfare of the representative household.     

The cyclical behaviour of fiscal policy: evidence from the OECD

This paper addresses the topic of cyclicality in fiscal policy. In particular, we show that the level of cyclicality varies across spending categories and across OECD countries. In line with leading theories of fiscal cyclicality, we show that countries with volatile output and dispersed political power are the most likely to run procyclical fiscal policies. Wage government consumption is highlighted as the most important channel by which these variables affect fiscal cyclicality.     

货币政策与财政政策的区域产业结构调整效应比较

本文运用1978—2007年东、中、西部的面板数据分析。货币政策和财政政策是否具有区域产业结构调整效应结果显示:第一,财政政策具有产业结构调整效应,而货币政策的产业结构调整效应并不明显。第二,货币政策在对第一和第三产业的效应方面强于财政政策,而财政政策则在对第二产业的效应方面具有优势。第三,货币政策和财政政策对三次产业的效应都存在比较明显的区域效应。第四,在东部地区货币政策和财政政策对第一产业和第二产业的效应相差非常悬殊,而对第三产业的效应则集中在高位;在中部地区货币政策和财政政策对第二产业的效应集中在高位;在西部地区货币政策对第一产业的效应集中在高位,而财政政策对第一产业的效应则集中在低位。     

Fiscal financing and the efficacy of fiscal policy in Korea: An empirical assessment with comparison to the U.S. evidence

This paper aims to assess the empirical implications of fiscal financing in Korea and study how they differ from those of the U.S. We estimate two versions of the dynamic stochastic general equilibrium (DSGE) model—a small open economy (SOE) model for Korea and its closed economy counterpart for the U.S.—in which the former nests the latter as a special case. The fiscal policy specification posits that government spending, lump-sum transfers, and distortionary taxation on labor income, capital income and consumption expenditures respond to the level of government debt and the state of economic activity. Analysis of the data from 2000 to 2015 shows that distortionary capital taxes play a critical role in stabilizing government debt in the U.S., whereas non-distorting fiscal instruments are the primary means of fiscal adjustment in Korea. Regarding the magnitude of debt-financed fiscal stimuli, the substantial trade openness of Korea is significant in that it produces relatively smaller government spending and transfer multipliers compared to the U.S.