Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady‐state debt to follow a random walk. In this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady‐state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government's objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi‐commitment policy, which allows for different probabilities of reneging on past promises.     

Interaction of Government Tiers and Central Banks in a Federation: An Empirical Test

Fiscal rules are necessary to protect monetary policy from the consequences of unsustainable or active fiscal policy for inflation. Monetary unions, such as the Economic and Monetary Union (EMU), require even stronger fiscal rules to avoid free riding by regional fiscal authorities on the common monetary policy. By contrast, in a fiscal federation, the federal government internalises the effect of active regional policies on the overall price level. Federal fiscal policy contributes to price stability either by enforcing fiscal rules or by adjusting its own stance. Following Canzoneri, Cumby and Diba (2001), we test whether federal and regional governments in Germany behave in an active or passive way. We find evidence of a spillover effect of unsustainable policies on other regions. The German federal government offsets the effect on the price level by running passive policies. The Bundesbank's prime objective of price stability is therefore endorsed by fiscal policy. The results have implications for the regulation of fiscal policies in the EMU.     

Inflation Targeting,Fiscal Policy,and the Exchange Rate Regime

Until recently, Turkey’s economy was characterized by high inflation, undisciplined public finance management, and a fragile banking system and experienced multiple economic crises. After the economy was hit by another crisis in 2001, the central bank became independent, adopted inflation targeting as the monetary policy framework, and implemented reforms to adopt a more stringent fiscal policy. Inflation rates decreased to single-digit levels within 3 years after the independence of the central bank. This article analyzes the end of the high inflation period in the context of monetary and fiscal policy interactions within a Markov-Switching Dynamic Stochastic General Equilibrium model in which monetary and fiscal policies are allowed to switch between different regimes.     

Monetary versus fiscal policy in India: an SVAR analysis

Conventionally, the policymakers relied on three policy alternatives to manage business cycles – debt-financed government spending, debt-financed tax rebate and interest rate. While the first two are fiscal policy instruments, the latter is a monetary policy instrument. This paper aims to capture interactions among Indian monetary and fiscal policy actions, and the impact of such policy actions on select macroeconomic variables for the period 1990Q1–2011Q4. The policy actions are identified using the sign restrictions approach combined with magnitude restrictions in a Structural Vector Autoregression framework, and interpreted using impulse responses and variance decomposition. The results show that Indian monetary policy responds to tax rebate shocks and spending shocks differently. In the case of a tax rebate shock, Indian monetary policy responds by reducing interest rates thereby accommodating fiscal expansion. On the opposite, monetary policy seems not to accommodate expenditure shocks. Interestingly, the monetary policy shock is accompanied by a fiscal expansion that threatens the credibility of the central bank actions, thus indicating fiscal policy dominance. A comparison of the efficacy of the policies suggests that the interest rate is more effective in stimulating output. Out of the two fiscal policy instruments analysed, the tax rebate seems to be the better option for stimulating output considering the output-debt trade-off.     

财政货币政策和我国股市关联性:基于脉冲响应函数和方差分解的对比检验

财政货币政策和股市关联性模型表明,宏观经济政策和股市可能存在强相关性。基于我国时序数据的脉冲响应函数检验结果显示,财政货币政策对股市作用存在阶段性并有着非中性和非对称性特征,即无论个体对政策冲击是否存在有效预期,政策变化对股市都将存在冲击效应。但二者对股市冲击持续时间有较大差异,财政政策冲击往往只存在短期效应,而货币政策冲击对股市长期波动却有显著影响。其中方差检验得出,财政政策对我国股市影响力相对更小。     

Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov‐Switching Estimation Exploiting Monetary‐Fiscal Policy Interdependence

In this paper, I propose an econometric technique to estimate a Markov‐switching Taylor rule subject to the zero lower bound of interest rates. I show that linking the switching of the Taylor rule coefficients to the switching of the coefficients of an auxiliary uncensored Markov‐switching regression improves the identification of an otherwise unidentifiable prevalent monetary regime because of the presence of the zero lower bound. Using a Markov‐switching fiscal policy rule as the auxiliary regression, I apply the estimation technique to U.S. data. Results show evidence of monetary and fiscal policy comovements, with monetary policy reacting weakly to inflation when fiscal policy is focused on real activity as opposed to debt stabilization, and vice versa.     

Monetary and Fiscal Policy Switching

A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. A computational model illustrates that because agents' decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues.     

The Impact of Monetary and Fiscal Policy Shocks on Stock Markets: Evidence from China

We study the impact of Chinese monetary and fiscal policy shocks and the interaction of the two policies on stock markets. We find that, first, when we focus on the contemporaneous correlation, Chinese fiscal policy has significant, negative contemporaneous relationships with stock market performance, while monetary policy’s impact on stock market performance varies, depending on the fiscal policy. Second, with respect to the lagged variables, Chinese monetary and fiscal policy both have a significant and direct positive effect on stock market performance. Meanwhile, interaction between the two policies plays an extremely important role in explaining the development of stock markets.     

Distortionary Taxation, Debt, and the Price Level

This paper compares the determinacy of equilibria under exogenous interest rates in an economy with a cash constraint, in which taxation is lump-sum or distortionary. Under passive fiscal policies lump-sum taxes generate nominal indeterminacy, while with distortionary taxes indeterminacy can be real, but not purely nominal. In general, under distortionary taxation uniqueness of the equilibrium allocation depends on monetary and fiscal policy interactions through taxes, debt, and interest rates. To illustrate this principle, we consider balanced-budget policies under distortionary income taxation and show that a unique equilibrium allocation prevails if interest rates are set consistent with long-run deflation. A separate section extends the analysis to endogenous interest rates.     

On the need for fiscal constraints in a monetary union

The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to following its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsistency problem.     

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.     

India's fiscal and monetary framework: growth in an opening economy

Since a crisis is a shock impinging on a system, the response can be used to deduce aspects of the system's structure. Analysis of the crisis and recovery suggests aggregate supply in India is elastic but subject to upward shocks. This has implications for cyclical policy and for fiscal consolidation. Both monetary and fiscal policy should identify measures that would reduce costs, while avoiding too large a demand contraction. Specific policies are identified and Indian policies evaluated.     

The Cyclical Relationships Between South Africa's Net Capital Inflows and Fiscal and Monetary Policies

This paper investigates the cyclical relationships between South Africa's post-liberalization net capital inflows and fiscal and monetary policies. Correlation analysis shows that the bulk of South Africa's capital inflows do not have a significant cyclical relationship with fiscal policy but have a procyclical and reactive cyclical relationship with monetary policy. Furthermore, causality analysis finds that fiscal policy reacts to monetary policy and capital flows, whereas capital flows react to monetary policy. Hence, these results suggest that South Africa's policymakers are in a better position to control the country's capital inflows using monetary policy than using fiscal policy.     

UK policy coordination: the importance of institutional design

This paper considers the principles that underpin the design of the UK's macroeconomic framework, with particular emphasis on the importance of good institutional design in ensuring effective coordination of monetary and fiscal policy when an independent Bank of England Monetary Policy Committee has operational responsibility for setting interest rates. The theoretical literature on policy coordination finds that the cost of central bank independence is less monetary‐fiscal coordination. We argue that once account is taken of the institutional arrangements, this conclusion does not hold for the UK. In fact, the UK macroeconomic policy framework represents a significant improvement in policy coordination through mechanisms that allow for greater transparency and accountability in policy‐making. Among the measures discussed in the paper is the role of the Treasury Representative on the Bank of England Monetary Policy Committee.     

Level,slope, curvature of the sovereign yield curve,and fiscal behaviour

We study fiscal behaviour and the sovereign yield curve in the US and Germany. We obtain the latent factors, level, slope and curvature, with the Kalman filter, and use them in a VAR with macro, fiscal and financial stress variables. In the US, fiscal shocks generate an immediate response of the short-end of the yield curve, associated with monetary policy, lasting 6–8 quarters, followed by a response of the whole yield curve lasting 3 years, with an implied elasticity of long-term yields of 80% for the government debt shock and 48% for the budget balance shock. In Germany, fiscal shocks have entailed no significant reactions of the yield curve shape and no response of the monetary policy interest rate, notably after 1999; only in the case of debt shocks there is a short-lived decrease in the medium-end of the yield curve in the following 2nd and 3rd quarters.     

低利率环境下的政府债务成本与财政政策选择

在未来较长时间内,名义利率和实际利率可能保持低位,低利率压缩了货币政策操作空间,较低的财政成本和较高财政收入,意味着财政政策应该且能够更多发挥更大作用。在政府债务稳定与产出稳定的权衡中,应更多关注产出稳定。     

我国财政政策和货币政策相互作用的实证研究——基于政策在价格决定中的作用

本文选取1980～2009年度数据为样本,利用MS-VAR模型检验我国财政政策和货币政策在价格决定中的作用区制。实证结果表明,在1980～1997年间,价格为货币政策主导区制;之后为财政政策主导区制。为检验该结果的稳健性,本文分别对李嘉图等式和财富效应进行分样本区间的实证分析。最后,本文选取1996～2010年的月度数据,利用MS-OLS模型检验财政政策和货币政策与价格的关系,发现我国互补的宏观经济政策在稳定物价上是有效的。     

当前启动内需与宏观经济政策的着重点

要通过启动内需而保增长,就必须有效调整货币政策和财政政策,实行积极的财政政策和适度宽松的货币政策。本文通过多方面分析,指出当前在我国启动内需的宏观经济政策调控中应该更多地注重运用财政政策,慎用货币政策,并就如何更加有效地运用财税政策提出相关建议。     

货币、财政和宏观审慎政策的协调搭配研究

本文通过构建包含多部门和多元宏观政策的DSGE模型,对货币政策、财政政策和宏观审慎政策的最优反应规则及其协调组合问题进行了分析。分析结果显示:(1)从社会福利最大化的角度,货币政策可继续盯住通胀和产出的稳定,政府支出和税收政策可分别重点盯住产出稳定和债务稳定,而宏观审慎政策则可重点关注以信贷利差和信贷波动为代表的关键金融变量;(2)货币政策、财政政策和宏观审慎政策,通过合理的搭配和组合使用,能比任何单一政策工具都具有更好的经济金融稳定效应;反之,政策之间的不协调将显著削弱彼此的调控效应,加大经济和金融波动,从而导致显著的社会福利损失;(3)从多种政策协调搭配产生“合力”的内在机制来看,财政政策主要通过增加对产出、通胀、就业和债务等变量的稳定效应,对货币政策产生额外助力,而宏观审慎政策则主要通过稳定金融体系和降低金融风险对货币政策产生助力。上述结论表明,在多种经济金融政策并存的情况下,基于良好设定的政策规则,同时加强政策各部门之间的协调合作,是确保多元政策产生积极合力的重要基础。     

Fiscal Policy in a Currency Union at the Zero Lower Bound

This paper constructs a two‐country core–periphery New Keynesian model of a currency union to address the interaction between the objectives of regionally directed fiscal policy constrained by a single currency and the aggregate use of fiscal policy in face of the zero lower bound (ZLB) on policy interest rates. We identify an optimal path of aggregate and relative fiscal policy responses to a negative region‐specific demand shock. Our results show that (i) in a monetary union, the optimal policy response to an asymmetric reduction in demand concentrated in the periphery always entails a relative shift of fiscal expenditure toward the worse‐affected regions, (ii) though no aggregate fiscal response is required outside the ZLB, and (iii) optimal union‐wide fiscal policy is expansionary at the ZLB. Therefore, optimal policy always entails an expansion in the periphery at the ZLB, but the optimal fiscal response in the core regions can be either expansionary or contractionary depending on the parameters of the model. However, (iv) fiscal expansion in the core is warranted if the periphery cannot implement an expansion due to constraints on public spending.