South African fiscal relations

The democratic political system emerging in the new South Africa is not a sufficient condition to secure a stable society. The structure and composition of intergovernmental fiscal relations will become a very important dimension of public sector reform for the future South Africa. Historically, the South African government has been highly centralized. 1994 will record the beginning of the devolution and sharing of important responsibilities to subnational governments and the planning and implementation of new decentralized arrangements. Whether the new dispensation will adhere to the general economic principles of fiscal decentralization will in the first instance depend on the principles enshrined in the new constitution. The aim of this paper is to differentiate several key drivers which reflect upon the ability of the Government of National Unity to break away from the deeply ingrained institutions of apartheid. The paper starts with some constitutional issues relative to intergovernmental fiscal relations and economic performance. Second, I provide an overview of the theory of intergovernmental fiscal relations and examine the implications for the design of an intergovernmental financial system. Third, the current structure of intergovernmental fiscal relations in South Africa is sketched. Fourth, I review the current output of the constitutionally established Fiscal and Finance Commission which serves as an advisory body to parliament to ensure greater transparency, efficiency, consistency, and predictability of fiscal policy. Finally, the paper concludes with some challenges ahead.     

The macroeconomic effects of fiscal policy in a stochastically growing economy

This paper develops a stochastic model of endogenous growth with productive government expenditure. Herein, we specify the CES production function according to recent empirical evidence. The elasticity of substitution plays a key role in determining macroeconomic performance and the effectiveness of fiscal policy under uncertainty. Results demonstrate that a large elasticity of substitution provides a large expected growth rate and also large volatility of the growth rate. Regarding these effects, the growth-maximizing tax rate and welfare-maximizing tax rate under uncertainty are larger or smaller than those of deterministic economy according to the elasticity of substitution.     

The effects of fiscal spending shocks on the performance of simple monetary policy rules

We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flexible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes.     

Cyclicality of fiscal policy and the shadow economy

A survey of recent literature on cyclical properties of fiscal policy reveals that fiscal policy is procyclical in many developing countries whereas it is countercyclical in developed ones. However, there is no consensus on what drives the difference in this specific cyclical property of fiscal policy. Using cross-section and panel data sets for 78 countries we document that procyclicality of fiscal policy is more pronounced in countries with a larger size of the shadow economy. We also show that policies reducing the size of the shadow economy lead to a less (more) procyclical (countercyclical) fiscal response to shocks.     

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the long-run. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.     

Optimal climate and fiscal policy in an OLG economy

This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations (OLGs). I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive OLGs). In contrast to deterministic infinitely lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.     

Government debt,inflation dynamics and the transmission of fiscal policy shocks

We analyze the influence of the fiscal position on the transmission of government spending shocks in a New Keynesian model. We find that once we allow for positive levels of government debt in the steady state, the size of the fiscal multiplier depends strongly on the horizon at which the multiplier is evaluated. While the long-run effect of a fiscal policy innovation is typically of a similar order of magnitude as in Galí et al. (2007), short-run multipliers differ substantially. The reason for this non-monotonic behavior is the interaction between the dynamics of the inflation rate and the debt level in real terms for sufficiently high levels of government debt in the steady state.     

Macroeconomic effects of fiscal policy changes: A case of South Africa

This study develops comprehensive full-sector macro-econometric models for the South African economy with the aim of explaining and providing the macroeconomic effects of fiscal policy changes in the country. The models are applied to test the effectiveness of fiscal policy actions in an economic environment with existing structural supply constraints versus demand-side constraints and also to detect which components of the fiscal would be more effective in stabilising the economy. Based on the structure of the South African economy and the framework presented, the study concludes that the South African economy can be characterised as one which is embedded with structural supply constraints. Thus, a model which is suitable for policy analyses of the South African economy needs to capture the long-run supply-side characteristics of the economy. A price block is incorporated to specify the price adjustment between the supply-side sector and real aggregate demand sector. The models are estimated with time-series data from 1970 to 2011, capturing both the long-run and short-run dynamic properties of the economy. The results from the series of fiscal policy scenarios suggest that fiscal policy actions are more effective in an economic environment with limited or no supply constraints. Fiscal expansion or consolidation that comes more from government spending changes will be more effective in an economic environment where structural supply constraints are absent while tax revenue changes will be more effective in an economic environment where there exist major structural supply constraints.     

Optimal choice of monetary policy instruments under velocity and fiscal shocks

This paper, in the spirit of Poole [Poole, William, 1970. The Optimal Choice of Monetary Policy Instruments in a Simple Macro Model. Quarterly Journal of Economics, 84, 192–216.], studies how differently monetary and fiscal shocks influence the appropriate choice of the monetary policy regime. Velocity shocks are introduced by embedding a stochastic cash-in-advance constraint within the New Keynesian framework. In addition to optimal policy under discretion, three classic rules, interest rate targeting, monetary targeting, and the Taylor rule are ranked under both fiscal and velocity shocks. The non-stationarity of prices under the Taylor rule makes it inferior to the other rules under which prices are stationary. Monetary targeting, by stabilizing aggregate demand under fiscal shocks, outperforms interest rate targeting, while the latter provides a better insulation against velocity shocks. Monetary targeting (under fiscal shocks) and interest rate targeting (under velocity shocks) even outperform the optimal policy under discretion for sufficiently high intertemporal elasticities of consumption substitution.     

The macroeconomic effects of fiscal policy

We investigate the macroeconomic effects of fiscal policy using a Bayesian Structural Vector Autoregression (B-SVAR) approach. We identify fiscal policy shocks via a partial identification scheme, but also: (i) include the feedback from government debt; (ii) look at the impact on the composition of output; (iii) assess the effects on asset markets; (iv) use quarterly data; and (v) analyse empirical evidence from the US, the UK, Germany and Italy. The results show that government spending shocks, in general, have a small effect on Gross Domestic Product (GDP); lead to important ‘crowding-out’ effects; have a varied impact on housing prices and generate a quick fall in stock prices. Government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices. The empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model.     

Credit and the transmission of fiscal policy shocks: Recent evidence from Greece

Based on the SVAR approach we examine the importance of credit for the transmission of fiscal policy shocks in Greece. Fiscal shocks have more pronounced effects on the output when credit is constrained. Tax burden shocks have the most protracted effects.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

Commodity prices and fiscal policy in a commodity exporting economy

This paper analyzes the macroeconomic effects of commodity price shocks on a commodity exporting country. In doing so, we use a DSGE model developed to describe the business cycle in Chile, a copper exporting country. We compare the effects of commodity-price shocks under different fiscal rules. The results show that if the fiscal policy is conducted in a way such that the government saves most of the extra revenues from the higher commodity price, then the macroeconomic effects of a commodity price increase of 10% are an expansion of output below 0.2% and a real exchange appreciation of 0.5%. In contrast, when fiscal policy is highly expansive, the same commodity price increase implies an output expansion above 0.5% and a real exchange rate appreciation of 0.8%. With our model, we also analyze the effects of persistent reduction in the commodity price, the relevance of exchange rate flexibility and the role of imperfect credibility of the fiscal rule.     

On measuring the effects of fiscal policy in global financial crisis: Evidences from an export-oriented island economy

Following the 2008 financial crisis, Taiwan implemented various fiscal policies so that they could offset the shocks from the financial crisis. In the present study, we investigate whether these two fiscal policies alleviated the shock generated by the 2008 financial crisis on Taiwan's economy and unemployment. The findings provide that the economic and employment effects generated by the public work investment project were the most substantial in the public sector. By contrast, the economic and employment effects generated by the consumption vouchers policy were the largest in the service sector. These outcomes are closely related to Taiwan's industry structure. The fiscal multiplier of the public investment project and consumer vouchers distribution was 1.94 and 1.47. The evidence in the present study also seems to suggest that the two fiscal policies examined could not induce an effective long-term transformation of Taiwan's economic system.     

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

A Structural VAR model is employed to investigate the effects of monetary and fiscal policy shocks on stock market performance in Germany, UK and the US. A significant number of past studies have concentrated their attention on the relationship between monetary policy and stock market performance, yet only few on the effects of fiscal policy on stock markets. Even more we know little, if any, on the effects of fiscal and monetary policies on stock market performance when the two policies interact. This study aims to fill this void. Our results show that both fiscal and monetary policies influence the stock market, via either direct or indirect channels. More importantly, we find evidence that the interaction between the two policies is very important in explaining stock market developments. Thus, investors and analysts in their effort to understand the relationship between macroeconomic policies and stock market performance should consider fiscal and monetary policies in tandem rather than in isolation.     

The macroeconomic effects of fiscal policy in Spain

This paper focuses on the effects of fiscal policy in Spain analysed in a VAR context. Fiscal shocks are found to involve significant effects on GDP, private consumption, private investment, interest rates and prices. Non-Keynesian effects are observed. Moreover, evidence on the channels highlighted in the literature for such effects to arise is found, notably the effects of permanent income on consumption and investment on the demand side, coupled with the response of the equilibrium wage on the supply side affecting entrepreneurial profits and investment. The response of interest rates seems to reinforce both effects. Furthermore, the different readings of spending or taxes do not affect macroeconomic variables homogeneously.     

Oil shocks and fiscal policy procyclicality in Angola: Assessing the role of asymmetries and institutions

The aim of this article is to examine procyclicality in Angola, assess whether it behaves asymmetrically over the oil cycle, and test the hypothesis that institutions and fiscal rules can moderate procyclicality. Received wisdom suggests that in resource‐rich economies, fiscal policy tends to be procyclical albeit improvements in the past decades due to institutional reforms. Similar evidence is available for oil‐rich economies; however, we know little about how procyclicality behaves over the oil cycle; that is, whether spending (and revenue) grows faster during oil‐market booms, than during downturns. Further, evidence on institutions and fiscal rules in oil‐exporting economies is still ambiguous. We bridge both gaps by examining fiscal policy procyclicality in Angola, one of the largest oil‐producers in Africa, and a country that has experienced an intense process of institutional reforms since 2002. Therefore, it is an ideal candidate for our study. We use data for the 2004–2014 period to estimate a threshold vector error correction model that extends vector autoregressive and vector correction methods used up to date. Our results indicate that revenue and spending are generally procyclical to oil shocks, that revenue is more procyclical during booms, and that institutional quality, net inflows, financial openness, and fiscal rules affect procyclicality.     

Macroeconomic policy uncertainty shocks on the Chinese economy: a GVAR analysis

This article studies the spillovers of economic policy uncertainty (EPU) from developed economies to China in terms of the source, extent and persistence by estimating a global vector autoregressive (GVAR) model with both financial and trade variables acting as the transmission channels. Our findings confirm the existence of international transmissions of policy uncertainty, while the patterns differ markedly. The US EPU appears to be the most significant cause of the fall of export, industrial production, equity price and exchange rate, meanwhile, the EU EPU is also to be blamed for the depreciation of RMB. In contrast to industrial production, which shows the largest negative impact, Chinese inflation increases to a relatively smaller extent with the EPU shocks ranking as the US, Japanese and the EU. Regardless of the minor impact on a long-term interest rate, the short-term interest rate in China reacts positively to the European and US EPU shocks. Despite the independent national monetary policies, EPUs from the EU, Japan and the UK can decrease the Chinese monetary aggregate. In summary, the Chinese economy responds the most to the US EPU, especially to its inflation expectation disagreement component, whereas it responds the least to the UK EPU.     

US monetary policy shocks and the Chinese economy: a GVAR approach

Using a global vector auto regressive (GVAR) methodology, this article examines the impact of US monetary policy shocks on China’s major macroeconomic indicators. Our analysis reveals that a positive shock to the US money supply growth rate initially increases China’s inflation rate but after some time this effect completely disappears. This shock also raises China’s short-term interest rate and the Chinese currency appreciates against the US dollar. A positive shock to the US short-term interest rate increases China’s short-term interest rate but the real output growth and inflation rates decline and the Chinese currency appreciates.