ECONOMIC FALLACIES II

'It is surely the current account deficit, rather than the budget deficit, which is the most important economic problem facing the new Administration - the budget deficit is by no means large when measured relative to the supply of savings from which it must financed.     

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.     

The causal relation between government revenue and spending: Evidence from Egypt and Jordan

In investigating the causal relation between government revenue and spending, our empirical results support the tax-and-spend hypothesis for Egypt and the fiscal synchronization hypothesis for Jordan. Breaking away from these historical trends is essential for both countries to eliminate the budget deficit and therefore ensure the availability of domestic saving for private investment. To cope with unemployment and poverty, continuing privatization is recommended for both countries to improve productivity and efficiency in the domestic economy. Privatization should lead to higher domestic saving and investment and at the same time eliminate the budget deficit by enhancing revenue and curbing spending. (JEL H62, H63)     

SURPLUSES AND DEFICITS

The US economy has twin deficits: internal (the budget deficit) and external (the current account). In sharp contrast, the UK combines a PSBR surplus with a rising current account deficit. Japan and West Germany both enjoy large current surpluses, though in Japan the public sector deficit is narrowing whereas in Germany it is rising. Remarkably, as Figure 1 shows, the present position on the public sector and overseas balances in each of the three major OECD economies and the UK is quite different. Japan is the mirror image of the US: the budget and overseas balances have been moving in the direction of surplus - private sector savings have been more stable. For the UK and West Germany (though again as images of one another) it is movements in private sector savings which have driven the current account. How has this come about?     

The Crash and Ricardo: Does the US Budget Deficit Matter?

How important was the American budget deficit as a cause of the crash? Geoffrey Wood and Mahmoud Pradham of the City University Business School argue that the deficit was not even a contributory cause. A modern version of the‘Ricardian Equivalence Theorem’suggests that the effect of government borrowing on the economy can be greatly exaggerated.     

我国经济转轨期软预算约束与通货膨胀分析

本文采用我国1989～2009年经济转轨时期的数据,对联立方程模型参数进行了重新估计,估计结果显示预算软约束依然是通货膨胀产生的原因之一,但是转轨时期软预算约束正逐步向硬约束转变,这个转变对社会消费尤其是居民消费产生很大影响。然后对2009年以来的通货膨胀问题与软预算约束以及结构扭曲之间的关系进行了研究,研究发现这一轮的物价上涨与经济结构严重失衡有密切的关系,并且预算软约束的存在使财政赤字和国债负担扩大,给经济运行带来了隐患和风险。     

CAM THE US DEFICIT BE TAMED?

There now appears to be a consensus in the US towards tackling the budget deficit. James Nixon looks at some of the arithmetic underlying proposals to balance the budget by the year 2002. In particular he challenges the view that this deficit-cutting exercise can take place without any loss to output even if the proposed reductions are seen to be fully credible. He also questions the underlying methodology of the calculations.     

Budget Prospects: The Problem of the Sterling Balances

Does the balance of payments deficit matter? Stephen Lewis, of Fifth Horseman Publications and UBS Phillips & Drew, suggests that the build-up in sterling balances provides an ominous background to the budget.     

ON THE INEFFECTIVENESS OF FISCAL POLICY AS AN INSTRUMENT OF MACROECONOMIC POLICY

Spending depends on the quantity of money. If an increase in the budget deficit is financed by sales of government debt to non-banks, the quantity of money is unchanged and public borrowing 'crowds out' private spending. But – if the government finances its deficit (or buybacks of existing debt) from the banks – the quantity of money, and hence spending and national income increase.     

Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence

This paper investigates the relevance of the Ricardian Equivalence theorem for the relationship between the budget deficit and real interest rate. In contrast to the existing literature, we focus on regime-change over a long study period and consider nonlinearities. Using a Markov regime-switching model applied to two centuries of annual data, we find evidence that the US economy switches between a Ricardian Equivalence regime, characterized by an insignificant relationship between the adjusted primary budget deficit and real long-term interest rate, and a regime characterized by the traditional view of a positive relationship. We also find evidence that the transition probabilities between regimes are time-varying insofar as a weaker level of economic activity, a lower real interest rate differential between the US and abroad, or higher national debts, is associated with a weaker relationship between budget deficits and interest rates.     

Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds

This study provides recent empirical evidence on the impact of the federal budget deficit on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds. The study is couched within an open loanable funds model that includes the ex ante real short term real interest rate, the M1 money supply, net international capital inflows, and the unemployment rate. Using quarterly data for the period 1973.1–2007.4, two-stage least squares estimation reveals that the federal budget deficit, expressed as a percent of GDP, exercised a positive and statistically significant impact on the ex ante real interest rate yield on these corporate issues.     

government and the PSBR

The government has changed its view of how to gauge the size of the budget deficit. Nick Parsons and David Coleman, of Union Discount, argue that this change is an ill-omen for the control of public spending.     

BRITAIN'S FISCAL POLICY NIGHTMARE

What should the Chancellor do about the burgeoning budget deficit or Public Sector Borrowing Requirement. Brian Durrant, of the futures brokers GNI Ltd, outlines the problems posed by a PSBR that could exceed £50bn.     

我国财政分权对垂直财政状况的影响——协调失灵将导致财政赤字的产生

在财政分权增加了协调失败可能性的理论假设下,本文利用GLS的随机效用模型对我国30个省级政府和中央政府1995-2006年的财政数据进行回归研究,推证出协调失灵将导致财政赤字的产生。研究结果表明:税收权力的转移和转移支付在不同程度上显著的增加了省级和中央的财政赤字,恶化了两级财政状况。     

for whom the road tolls

How strong is the case for road pricing? Giles Keating, of Credit Suisse First Boston, argues the case for a comprehensive system of road pricing. It would reduce both congestion and the budget deficit by £16·5bn.     

Financial Recovery and Structural Changes in the Economy

How significant is the Soviet Union's financial crisis? Sergei Vasil'ev, of the Institute of Finance and Economics in Leningrad, argues that the financial crisis is the key to future developments in the Soviet economy and that heavy industry can be expected to suffer as the budget deficit is brought into balance.     

US deficit sustainability: a new approach based on multiple endogenous breaks

Recent empirical work has questioned the consistency of US fiscal policy with an intertemporal budget constraint. Empirical results have tended to indicate that the deficit process has undergone at least one structural shift during recent decades, with the deficit becoming either unsustainable or sustainable in only a weak sense in the post‐shift period. In this paper, we re‐examine sustainability using a new approach, based on a cointegration model with multiple endogenous breaks. A Bayesian methodology is applied, incorporating Markov chain Monte Carlo simulators. In contrast to previous analyses, we find evidence of a sustainable deficit process over the 1947–1992 period, despite the occurrence of breaks during the 1970s and 1980s. Copyright © 2000 John Wiley & Sons, Ltd.     

A Keynesian Defense of the Reagan Deficit: The Real Issue Is How Big Should Federal Budgets Be and How Should They Be Met

Abstract . Agreement is general that the U.S. budget deficit of the Reagan administrations is a national disaster. The supply side and laffer curve economics of Mr. Reagan and his advisers have proved totally fallacious. Draconian monetary policy Curbed the inflation. But most of the negative charges against the deficit have also proved wrong. The U.S. is not a ‘debtor country.’ The purchasing power pumped into the economy may have mitigated the crisis in major U.S. industries. The real issue in the budget deficit debate is how big a share in the economy should the Federal Government have and should it be financed by taxation or borrowing.     

Net treasury borrowing and interest-rate changes

As noted by Arora and Dua (1993, 1995), studies investigating the relationship between budget deficits and short-term interest rates have generated inconsistent results. This study performs Granger causality tests on four short-term interest rates using changes instead of level measures. In lieu of deficit, the level of net treasury borrowing will serve as thex variable.     

UK Forecast in Detail

The Chancellor's post‐election ‘Summer Budget’ saw pragmatism trump ideology, with a relaxation of the squeeze on departmental spending and a slower path of deficit reduction. But the price for this was a sharp cut in the welfare budget and a hike in taxes. Overall, fiscal policy is set to remain a drag on the economy.…