Local fiscal multipliers and spillover effects: Evidence from Philippine regions

Fiscal policy in developed countries has been a rich topic since the Great Recession. However, research has remained limited for developing countries despite their similar use of fiscal policy and concerns about the efficiency of public spending. To help address this research gap, this paper provides a case study of multiplier effects of local government spending in regions in the Philippines as well as spillover effects of local government spending across regions. An instrumental variable based on the country’s intergovernmental transfer system is used to identify regional public spending in panel regressions. The local fiscal multiplier is estimated to be above one, where a 1-peso rise in spending by local government units in a region corresponds to a 1.2-peso rise in regional output. Multiplier effects are highest for capital expenditures and appear to be primarily driven by the services sector. Spillover effects are comparatively large, at around 1.8–2.0, highlighting the important role of domestic trade when stimulating regional economic activity.     

Evaluating monetary policy of the euro area with cross-country heterogeneity: Evidence from a New Keynesian model

This paper empirically investigates the optimal monetary policy conduct for the euro area in the presence of heterogeneous economic conditions across member states. Based on the New Keynesian monetary framework, we compare welfare losses under the assumption that the central bank conducts monetary policy using area-wide aggregate data against the alternative assumption that the central bank exploits country-specific as opposed to area-wide data. Empirical results reveal a sizable gain in stabilization performance if the European Central Bank formulates monetary policy by explicitly taking into account cross-country heterogeneity within the euro area. The estimated gain is more pronounced in a hybrid variant than in the purely forward-looking version of the New Keynesian model.     

Demographic forecasts and fiscal policy rules

All quantitative evaluations of fiscal sustainability that include the effects of population ageing must utilize demographic forecasts. It is well known that such forecasts are uncertain, and some studies have taken that into account by using stochastic population projections jointly with economic models. We develop this approach further by introducing regular demographic forecast revisions that are embedded in stochastic population projections. This allows us to separate, for each demographic outcome and under different policy rules, the expected and realized effects of population ageing on public finances. In our Finnish application, demographic uncertainty produces a considerable sustainability risk. We consider policies that reduce the likelihood of getting highly indebted and demonstrate that, although demographic forecasts are uncertain, they contain enough information to be useful in forward-looking policy rules.     

Energy intensity and directed fiscal policy

This paper assesses the effects of fiscal policy on economy-wide energy intensity within an endogenous growth framework. To this end, we first develop a two-sector (investment good and consumption good) augmented AK model by integrating the Uzawa model with Rebelo’s AK model, and assume that a non-renewable resource is one of the factors of production. Using this framework, we solve the model for the short and long run, identifying the sufficient parameter conditions that ensure higher energy intensity in the investment goods sector. We then introduce a balanced budget government, whose objective is to decrease the economy-wide energy intensity by levying tax on the energy-intensive investment goods sector and subsidizing the consumption goods sector. Contrary to our expectations, we find that this fiscal policy design increases economy-wide energy intensity as it leads to a decline in real GDP without changing total energy consumption. On the basis of this model, we propose the concept of a ‘directed fiscal policy’, which connotes a reduction of the economy-wide energy intensity by following a heterogeneous taxation policy across sectors.     

Behavioural heterogeneity and shift-contagion: Evidence from the Asian crisis

In this paper, we propose an empirical model based on the heterogeneous agents literature. Price changes are induced by fundamental, technical, and international factors. The model is estimated for Hong Kong and Thailand surrounding the Asian crisis. We find that the three sources are relevant and that their relative price impact fluctuates conditional on price impact in the previous period. Results imply that the crisis is triggered in Thailand due to an increased focus on the fundamental price, followed by an increase in chartism and finally aggravated by a focus on foreign developments. Furthermore, the crisis deepens in Hong Kong because of increased attention for foreign markets.     

Learning about fiscal policy and the effects of policy uncertainty

In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model are uncertain about the conduct of fiscal policy and act as econometricians by estimating fiscal policy rules that might change over time.We find that assuming that agents are not instantaneously aware of the new fiscal policy regime in place leads to substantially more volatility in the short run and persistent differences in average outcomes. We highlight issues that can arise when a policymaker wants to announce a policy change. From a methodological perspective, we introduce a novel way to model learning in the face of discrete policy changes.     

Monetary and fiscal policy under deep habits

Allowing habits to be formed at the level of individual goods – deep habits - can radically alter the fiscal policy transmission mechanism as the counter-cyclicality of mark-ups this implies can result in government spending crowding-in rather than crowding-out private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple policy rules to mimic fully optimal policy. We find that the presence of deep habits at empirically estimated levels can imply large externalities that significantly affect the conduct of monetary and tax policy. However, despite the rise in government spending multipliers implied by deep habits, government spending is barely used as a stabilisation tool under the optimal policy.     

On minimizing the welfare cost of fiscal policy: evidence from South Asia

This study evaluates whether India, Pakistan, and Sri Lanka minimized the welfare cost of their fiscal policies? For this purpose it tests tax smoothing hypothesis and finds that there is a weak tax smoothing in Pakistan and Sri Lanka whilst fiscal policy in India has not been conducted in an optimal fashion in accordance with the predictions of the hypothesis. The difference in results is due to difference in budget deficits as the deficits of Pakistan and Sri Lanka are higher as compare to India so they are careful to reduce volatility in budget deficits by trying to keep close correspondence between taxes and expenditures while India, with comparatively less deficit, was more careful regarding its debt. Therefore, to minimize the cost a close correspondence between permanent expenditure and taxes are required. In this context the best policy option would be an initiation of prompt action program of tax base expansions and expenditure rationalization.     

Fashions and continuity in British fiscal policy

Fiscal policy in the UK has reflected changing intellectual influences from Keynesianism in the 1960s to monetarism in the 1970s and early 1980s. New Labour's rules hark back to pre-war Treasury orthodoxies, despite their claims to modernity.     

Precautionary and Entrepreneurial Savings: New Evidence from German Households*

Various studies interpret the positive correlation between income risk and wealth as evidence of significant precautionary savings. However, these high estimates emerge from pooling non‐entrepreneurs and entrepreneurs, without controlling for heterogeneity. This article provides evidence for Germany based on representative panel data that includes private wealth balance sheets. Entrepreneurs, who face high income risk, hold more wealth than employees, but this tendency is not because of precautionary motives. Instead, they appear to save more for their old age, because they are usually not covered by statutory pension insurance. The analysis accounts for endogeneity in entrepreneurial choice and heterogeneous risk attitudes.     

Commodity prices and fiscal policy design: Procyclical despite a rule

Recent studies offer evidence of reduced fiscal procyclicality to commodity price changes in resource‐rich countries—a feature commonly attributed to the adoption of fiscal policy rules. We revisit this issue and find that, by controlling for global activity shocks while allowing for time‐varying changes in both fiscal policy and the volatility of shocks, this finding does not hold. To show this we develop a time‐varying dynamic factor model, allowing for a multiple of shocks, stochastic volatility and time‐varying parameters, and estimate it on data for Norway, whose handling of resource wealth is often cited as exemplary.     

Economic policy uncertainty and capital structure choice: Evidence from China

This paper studies how economic policy uncertainty affects corporate capital structure for Chinese listed firms from 2003 to 2013. We show that as the degree of economic policy uncertainty increases, firms tend to lower their leverage ratios. However, firms that are from regions with lower degrees of marketization, are state-owned or have prior bank-firm relationships mitigate the negative effect of policy uncertainty. Moreover, we provide consistent evidence that this negative effect is sourced from the deterioration of the external financing environment. We also find that firms adjust their financing structures by using more trade credit when economic policy uncertainty increases. Our results are robust to sample selection, data frequency, model specification and endogeneity.     

The role of fiscal policies for external imbalances: Evidence from the European Union

We revisit the relation between budget deficits and current account deficits for 28 European Union countries from 1996 to 2019. We find that an increase in budget deficit of 1 pp of GDP results in a deterioration of the current account deficit of 0.318 pp of GDP, which supports the Twin Deficits Hypothesis. On the other hand, dynamic panel estimates partially corroborate the Ricardian Equivalence Hypothesis in the presence of a fiscal rules index. In addition: i) the relation between the two deficits is asymmetric and the negative impact of the recent Eurozone banking and sovereign debt crisis on the current account balance is observed; ii) with right-wing governments, the impact of the budget balance on the current account balance is mitigated; if the government is on the left, the impact of the budget balance on the current account balance is amplified; iii) after 2010, the budget balance positively affects the current account balance; and iv) the positive impact of the budget balance on the current account balance is higher in the cases of non-Eurozone countries, high budget deficit countries, and low exports countries, whereas it is lower in the cases of Eurozone countries, low budget deficit countries, and high exports countries.     

Democratic transition and fiscal policy in the Arab world

This paper investigates the relationship between democracy and public debt in the Arab world over the period 2002–2013. The results show strong evidence of an inverted U-shaped relationship between democracy and public debt. This means that democratization is associated with lower debt only when a certain level of democracy is reached. In an attempt to explain these findings, we assume that the effect of democracy on public debt operates mainly through its impact on government spending and government revenue. Our results show that the inverted U-shaped relationship between democracy and public debt stems from the inverted U-shaped democracy-government spending path and the U-shaped democracy-government revenue pattern. This implies that, at the earlier stages of democratization, democracy is associated with an increase in government spending and a decrease in government revenue, which stimulates public debt. However, beyond a certain level of democracy, further democratization reduces government spending and enhances government revenue, leading to lower levels of public debt. Hence, achieving some level of democracy is a key prerequisite to improve the effectiveness of public spending, enhance tax compliance, and thereby control public debt.     

Religious Market Competition and Clergy Salary: Evidence from SBC Congregations in the South

A bstract .   We utilize a rich and unique data source covering 13,825 Southern Baptist Convention churches in seven Southern states to test the impact of religious market competition, or pluralism, on clergy salary. We link county-level religious market and socioeconomic data to the county in which each church is located. Two measures of religious output market are used. One is a narrow output market definition calculated using only SBC churches. The other is a more broadly defined measure calculated using 132 Judeo-Christian denominations. Using regression analysis, we conclude that greater concentration among Southern Baptist Churches' members within a given county area has a positive, and statistically significant, impact on Southern Baptist clergy salaries, while greater concentration among other denominations has no impact on Southern Baptist clergy salaries. Most importantly, we show that Southern Baptist Churches exhibit predictable economic behavior despite the ethereal nature of the product they provide.     

State and local fiscal policy and growth at the border

The paper studies the connection between state and local fiscal policy, as measured by the share of government spending and revenues in personal income, and the economic activity of counties that share a state border. I construct a panel of pairs of US counties that share a state border from the 1970s to 2012. Economic activity is measured by county employment, wages and business establishments. The state and local government spending and revenue shares are aggregates for the states on the respective sides of the border. I estimate distributed lag regressions of changes in economic activity on changes in state and local government budgets in two ways. The first (double difference) utilizes change in the difference between border counties. This suggests a quite modest relocation of economic activity away from states with fiscal expansion. I then look at activity on each side of the border separately and find more substantial and consistently negative effects of fiscal expansion on both sides of the border. A border county shares the negative consequences for its neighbor of growth in the size of that neighbor's state and local governments. This negative fiscal externality is roughly half the size of the direct negative effects from similar own-state spending increases, and the sum of the two is substantial economically.