Fiscal Deficit and Economic Growth Nexus in India: A Simultaneous Error Correction Approach

This paper examines the impact of fiscal deficit on economic growth in India, during the period from 1970–71 to 2018–19. Using a combination of Autoregressive Distributed Lag and Simultaneous Error Correction Approach, this study shows that fiscal deficit and revenue deficit have an adverse effect on economic growth both in the long run and in the short run. The empirical analysis confirms that fiscal deficit influences economic growth both directly, and indirectly through the routes of investment, interest rate, current account deficit and composition of government expenditure. Further, gross investment has a positive and inflation rate has a negative impact on economic growth. For a policy perspective, the government should control fiscal deficit and revenue deficit as suggested by the FRBM Act. The composition of government expenditure should be altered to devote more resources for the formation of productive capital in India.

     

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.

     

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 Macroeconomic Outlook

A slow recovery is expected from the current recession. Since reaching a trough in the September quarter of 1990, real gross domestic product (GDP) has followed a flat path which is likely to continue through to the September quarter of 1991. A slow recovery may then commence in the December quarter of 1991. This is consistent with real GDP growth of -0.9 per cent in 1990-91 followed by 2.4 per cent in 1991-92 and around 3 per cent per annum to the mid- 1990s compared with 'normal' growth of 2.5 per cent per annum.
This recovery is likely to see the unemployment rate at over 10 per cent for most of 1991-92, before moving to around 8 per cent by the mid-1990s.
Inflation may fall sharply from a peak of 8.0 per cent in 1989-90 to a trough of 3 to 4 per cent in 199 1–92, due to the recession and movements in oil prices. With a slow recovery, inflation may increase to 4 to 5 per cent per annum in the medium term.
The current account deficit has fallen from 5.9 per cent of GDP in 1989-90 to a likely level of 4.1 per cent in 1990-91, but part of this gain is cyclical rather than structural. Thus the deficit is expected to increase to around 5 per cent during recovery and remain flat to the mid- 1990s, implying steady increases in the ratio of foreign debt to GDP.
Looser monetary policy would erode part of the forecast sustained reduction in inflation. Looser fiscal policy would lead to a higher current account deficit.     

Fiscal multipliers in a structural VEC model with mixed normal errors

This paper estimates the effects of fiscal policy shocks on GDP in the United States with a vector error correction (VEC) model in which shocks are identified by exploiting the non-normal distribution of the model residuals. Unlike previous research, the model used here takes into account cointegation between the variables, and applies a data driven method to identify fiscal policy shocks. The approach also allows statistical testing of previous identification strategies, which may help discriminate between them and hence also explain differences between various fiscal multiplier estimates. Our results show that a deficit financed government spending shock has a weak negative effect on output, whereas a tax increase to finance government spending has a positive impact on GDP.     

Is fiscal policy stationary in China? A regional study by local government

In this study, we apply a stationarity test with a flexible Fourier function proposed by Enders and Lee (2012) to test the stationarity of the deficit–GDP ratio in China. We find that our approximation has a higher power to detect U-shaped breaks and to smooth breaks than the linear method if the true data-generating process of the deficit–GDP ratio convergence is, in fact, a stationary non-linear process. The results show that the stationarity for fiscal policy varies across different regions and that the deficit–GDP ratio of half of the regions is stationary. The results related to the budget structural balance and the fiscal deficit indicate no expansion in the Eastern and Central regions. We find that China's provinces in these two regions meet the stability theory of fiscal policy in the current stage of development. The deficit–GDP ratio is not stationary in the Western and Northeastern regions. These results indicate that the fiscal deficits in these regions are expanding and cannot be controlled by automatic market adjustment, and the government should therefore avoid deficit expansion in favor of a balanced budget policy.     

The Macroeconomic Outlook

A slow recovery, commencing in the December quarter of 1997, is expected from the current recession. Overall, gross domestic product (GDP) may increase by 2.8 per cent in the year to the June quarter of 1992, and continue to increase at a similar rate thereafter.
This subdued recovery is likely to see the unemployment rate at over 70 per cent to the end of 1992, before moving down slowly to around 8.5 per cent by the mid-1990s.
Consumer price index (CPI) inflation may fall sharply from a peak of 8.0 per cent in 1989-90 to a trough of under 3 per cent in 1997-92, due to the recession and movements in oil prices. With a slow recovery, inflation may then increase to 5 per cent per annum in the medium term.
The current account deficit has fallen from 6.0 per cent of GDP in 1989-90 to 4.7 per cent in 1990-91, despite a fall in the terms of trade of 5 per cent. However, this has been due to the cyclical downturn. With a slow recovery in demand, and rising real labour costs hampering expansion in export and import-competing industries, the current account deficit may once again reach 6 per cent of GDP by the mid-1990s, implying steady increases in the foreign debt-to-GDP ratio.
This forecast assumes monetary policy targets an inflation rate of 5 per cent per annum. Any further easings in monetary policy may undermine the credibility of the inflation objective with the result that the trade weighted index (TWI) exchange rate may drop sharply from 59.     

Openness and the Effectiveness of Monetary Policy: A Cross-country Analysis

Abstract

This paper evaluates the relationship between a country's openness to trade and the effectiveness of monetary policy in changing output growth and inflation in 29 different countries. Using quarterly data from the 1957–2003 period, empirical estimates based on individual country specifications show that the direction, significance and nature of the relationship between openness and the effectiveness of monetary policy on output growth as well as inflation vary considerably across countries.     

The Bank of England and Parliament were monetarily adroit during the Napoleonic Wars

Abstract

With the connivance of Parliament, was the Bank of England's over issue of banknotes inflationary? The inflation stemmed from military subsidy and Peninsula campaign payments, as well as food imports, far in excess of Britain's export earnings to cover these capital transfers (particularly when crimped by the Continental Blockade), and not merely from domestic credit over issue. Neither domestic money creation nor the fiscal theory of the price level best explains the imbalance in Britain's international accounts during the Napoleonic Wars. This deficit stemmed from domestic production shortfalls in essentials (above all food production) and contractual obligations such as military spending/subsidies relative to the pound's international purchasing power which emanated from the ability of Britain to sell exports and replace imports with domestic output (raise food production internally). These types of highly inelastic transactions tended to operate independently of domestic money creation, fiscal policy (taxes) or price developments (inflation). This article tracks England's bullion debate, which concerned whether gold prices rose (and hence sterling's exchange rate fell) because military capital transfers overwhelmed the balance of payments, or because the Bank of England over issued paper money after the gold cover was removed in 1797. The issues herein are not antiquated because the primary issues in monetary debates for two centuries have concerned the cause of inflation and deflation, and whether the domestic money supply or the balance of payments is responsible. Determining actual causation is critical for the proper solution: monetary deflation, or domestic and international restructuring of trade and investment.     

Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.     

Fiscal consolidation with high growth: A policy simulation model for India

In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8% or so. The strategy is to gradually bring down the revenue deficit to zero by 2014–15, while allowing a combined fiscal deficit for centre plus states of about 6% of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case.     

中国宏观经济形势与政策:2008-2009年

2008年,中国经济景气进入到本次经济周期的收缩阶段,在将核心CPI指数通货膨胀率控制在2%以下的同时实现略低于10%的实际GDP增长速度。2009年,中国宏观经济管理应该在长期中性的需求管理原则指导下,建立以促进国内投资需求为核心的政策体系,采取扩张性财政政策和货币政策支持中国经济持续快速增长。     

Interpreting budget deficits in Latin America: the methods with application to Argentina

Fiscal policy in Latin American countries is too often evaluatedon the basis of raw deficit figures. This study demonstrateshow the effects of inflation on the deficit must be removedin order to derive the discretionary component of fiscal policy.Once this correction is made, fiscal policy can be evaluatedby testing the movement of the deficit with respect to alternativepolicy targets. As an illustration I employ Argentine data inorder to decompose the deficit and determine the degree to whichit is a reflection of budget endogeneity versus populism/socialconflict.     

“机会主义”策略及其在我国财政政策规则中的运用?

财政政策既要发挥内在的自动稳定器功能,又要体现政府的政策意图,具有与“机会主义”策略一致的内涵。文章将“机会主义”策略融入财政政策规则,对我国财政政策对通胀和产出的调节是否表现出“机会主义”策略进行了研究,得到的主要结论可以概括为：我国财政政策对通胀和经济增长目标值的关注表现出较强的时变性,且其对经济增长的调节依赖于对经济增速中间目标的偏离程度。当经济增速与中间目标的偏离位于区间[-0.95%,2.85%]内时,财政政策将发挥内生的自动稳定器功能,表现出较强的惰性;而当经济增速与其中间目标的偏离位于该区间外时,财政政策则表现出较强的活性,会对经济增长产生积极的调节作用。     

The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland

In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15 % (weakly significant) when GDP growth is below a threshold of 3 %. However, when the Finnish economy’s growth rate speeds up—above the threshold of 3 %—ERPT elasticity increases to 0.47 %. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.

     

我国货币政策对稳定物价有效性的实证分析

2009年以来,面对持续走高的物价,央行采取了连续上调准备金率的政策,以求减少货币供给量,稳定物价。通过建立CPI、广义货币供给量M2和GDP之间的回归模型,对1994～2010年的数据进行回归分析,得出了我国货币政策对稳定物价有效的结论。认为治理通货膨胀要采取多样化的宏观经济政策,注意货币政策、财政政策的搭配使用。同时要加快人民币汇率体制改革,促进产业结构调整和经济发展方式的转变。     

Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach

The main objective of central banks around the world is the achievement and maintenance of price stability, which actually creates an environment conducive for faster economic growth. Therefore, it is important for policy makers to understand the relationship between inflation and economic growth in order to make sound policies. If inflation is detrimental to economic growth, then policy makers should aim for low rates of inflation. This leads to a question; how low should the inflation rate be? Previous research in the non-linearities of the inflation–growth relationship has found that a positive relationship exists when the inflation rate is low and a negative relationship when the inflation rate is high. This implies the existence of a threshold level of inflation at which the sign switches. In this paper we use panel data for the period 1980–2008 to examine the inflation–growth nexus in the Southern African Development Community (SADC) region and to endogenously determine the threshold level of inflation. To deal with problems of endogeneity and heterogeneity, the paper uses the Panel Smooth Transition Regression (PSTR) method developed by González et al. (2005) to examine the non-linearities in the inflation–growth nexus. This technique further estimates the smoothness of the transition from a low inflation to a high inflation regime. The findings reveal a threshold level of 18.9%, above which inflation is detrimental to economic growth in the SADC region.     

中国宏观经济形势与政策:2007—2008年

2007年,中国经济保持高速增长与低通货膨胀的良好配合格局,在将核心CPI上涨率控制在2%以下的同时,实现11%以上的实际GDP增长速度。中国宏观经济管理应该在2008年继续实行稳健的财政政策,采取中性的需求管理政策取向,以在总体经济景气进入收缩阶段后延续其繁荣形态。     

Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary–fiscal narrative for Germany, the U.S., and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non-responsible fiscal policy and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary–fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.     

中国宏观经济形势与政策:2003—2004年

中国经济景气在2003年继续其2002年以来的扩张倾向,全年GDP增长率将接近9%,并且将在2004年完成从经济萧条到经济繁荣的经济周期形态转换。21世纪上半叶, 中国经济将继续保持高速增长的历史趋势,核心通货膨胀率将处于较低水平。在当前经济扩张的初级阶段,中国宏观经济管理应该采取适度扩张的财政政策与货币政策,建立以增加国内投资需求为轴心的需求管理政策体系,促进国民经济持续快速增长,并且在此基础上实现增加就业、保持结构平衡和维护人民币汇率稳定的多重政策目标。