On the size of government spending multipliers in Europe

This article compares the size of government spending multipliers in Europe by applying a panel structural vector autoregression analysis on 11 eurozone and 8 non-eurozone countries using quarterly data from 1991Q1 to 2012Q4. We find that (i) spending multipliers are smaller in eurozone compared to non-eurozone countries, (ii) across the euro area the impact of government spending on GDP has been higher before than after the introduction of the euro, (iii) spending multipliers are larger in the eurozone periphery than in the core countries and (iv) since the beginning of the recent financial crisis, spending multipliers have become larger both for eurozone and for non-eurozone countries. We relate these results to an emerging theoretical literature linking the size of fiscal multipliers to the monetary policy stance. We also discuss the implications of our findings for the effectiveness of fiscal policy in Europe.     

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.     

What drives the short-run costs of fiscal consolidation? Evidence from OECD countries

We investigate how the short-term effects of fiscal consolidation on output and employment vary with the state of the business cycle, monetary policy, public debt, the current account, and private credit. By examining the response of a large number of variables, we are also able to shed light on the transmission channels of fiscal policy. Our main finding is that short-term output multipliers are below unity, even in states in which multipliers are expected to be larger (eg when the output gap is negative or monetary policy tight). Key offsetting factors that reduce the size of multipliers and explain differences across states are the extent to which the external sector improves and monetary policy eases.     

THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES

Implementing fiscal programs during monetary policy expansions seems to improve significantly their economic stimulus. We find this result by estimating the effect of government consumption shocks on gross domestic product (GDP) using a panel of 23 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business‐cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal‐monetary policy coordination. Our results also show lower multipliers in developing economies with flexible regimes, especially during economic slowdowns. (JEL E62, E63, F32)     

The political economy of delayed reform

Abstract

The role of economic policy in Finland's depression of the 1990s is analyzed with a simple model of an open economy, and the conditions for a successful financial reform derived: Let the system adjust after the removal of interest rate ceilings, and the domestic interest rate then be aligned with foreign rates before liberalizing international capital flows. In Finland, the financial system was liberalized simultaneously with international capital movements, with the domestic shadow interest rate initially considerably higher than the international market rates. A capital inflow the size of the monetary base followed, leading to the ‘crazy years’ of 1987–89. With a large current account deficit, the Bank of Finland tightened money sharply, causing a banking crisis practically wiping out the savings bank sector. The GDP declined by 13%. Several lesser policy measures aggravated the crisis.     

ON FISCAL MULTIPLIERS: ESTIMATES FROM A MEDIUM SCALE DSGE MODEL

This article contributes to the debate on fiscal multipliers, in the context of an estimated dynamic stochastic general equilibrium model, featuring a rich fiscal policy block and a transmission mechanism for government spending shocks. I find the multiplier for government spending to be 1.07, which is largest on impact. The multipliers for labor and capital tax on impact are 0.13 and 0.34, respectively. The effects of tax cuts take time to build and exceed stimulative effects of spending by 12–20 quarters. I carry out counterfactual exercises to show how alternative financing methods and expected monetary policy have consequences for the size of fiscal multipliers.     

Capital control reconsidered: financialisation and economic policy

We consider capital controls and their impact on selected countries, providing a critique of IMF policy. We show how the warning signs of the 1970s were ignored and the consequences became apparent during the ensuing period of neoliberal hegemony. We contend that promoting increased capital mobility is counterproductive as it reduces macroeconomic ‘policy space’. We introduce a development of the international policy ‘trilemma’ in the form of a variant of the idea of the ‘quadrilemma’. We suggest that, in most cases, the key policy driving economic growth is fiscal policy but it may be that its unconstrained use (and that of monetary policy) is not possible either under fixed exchange rates or when free capital mobility exists; a nation may face a ‘demi-quadrilemma’. We contend that, in practice, a country can only adopt ‘two from four’; if it chooses to retain free use of monetary and fiscal policy, it must sacrifice both fixed exchange rates and capital mobility. We advocate the rejection of fixed exchange rates and free capital mobility allowing the retention of requisite monetary and fiscal policy space, and that a multinational approach to the capital control policy would effectively contribute to a growth and development strategy.     

Economic Polarization and US Policy Activism

Many economists view the increased inequality associated with globalization as the cause of the US ‘employment miracle’. This paper argues, to the contrary, that any such benefits are short-lived. Increased income inequality has heightened social—and especially racial and genderpolarization; and the reactions of globally mobile corporations to this polarization have reduced both access to capital and the size of the fiscal and monetary policy multipliers. Stimulative macroeconomic policy remains crucial in achieving a more prosperous, less unequal society, if it includes measures to enhance access to human and financial capital.     

Macroeconomic stabilization in developing economies: Are optimal policies procyclical?

Many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies. In particular Kaminsky et al. [2004. When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, MIT Press] demonstrate that a large group of middle-income countries run contractionary policies and experience capital flight during times of recession. This paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics. An optimal fiscal and monetary policy problem is formulated and solved for a small-open economy that faces a country-specific interest rate spread in international financial markets. It is found that, in the presence of the country spread, optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization. Optimal policies and capital flows turn countercyclical in the absence of the country spread. This pattern is robust to a range of alternative model specifications.     

Is fiscal expansion more effective in a financial crisis?

After the Great Recession, the Keynesian expansionary policy has been regarded as an effective measure, especially under imperfect financial market conditions. Among literature related to fiscal policy in financial crises, Fernández-Villaverde (2010) suggests that the fiscal policy multiplier increases in a financial crisis through the Fisher effect. However, we should note that the author simply compared the multiplier computed in the standard new Keynesian dynamic stochastic general equilibrium (DSGE) with that in the DSGE with financial accelerator settings. As the financial accelerator is considered effective during both financial crises and normal financial conditions, the author’s comparison should be considered insignificant for showing a greater multiplier in the financial crisis. In this study, to make the exact comparison, we first estimate parameters regarding the Fisher effect under each regime separately and then compute and compare the estimated fiscal multipliers using these 2 estimates in the same DSGE model. Using Japanese financial data that provide enough observations under the good and bad regimes of financial conditions, we find that fiscal multipliers are smaller in the bad regime than in the good regime.     

So alike,yet so different: Comparing fiscal multipliers across EU members and candidates

We estimate, using a Panel Vector Autoregressive approach and data from 2001Q1 to 2017Q1, the fiscal multipliers of the European Union (EU) members and candidates. These countries are grouped according to their stages of integration: original members, new Eurozone members, and candidates for the Eurozone and the EU itself. For each group, we assess the impact of a positive spending shock (expansionary) or a positive tax shock (contractionary) on GDP. Our findings suggest that: (i) rising government spending increases GDP in both the EU and Eurozone candidates (Keynesian multipliers), but slightly decreases it in the Eurozone members (non-Keynesian multipliers); (ii) higher taxes are associated with mixed results in terms of GDP dynamics - both increases and decreases in terms of GDP are found - in the four country groups (suggesting the presence of Keynesian and non-Keynesian multipliers). Overall, these outcomes indicate that spending multipliers are, compared to tax multipliers, more sensitive to European Union or Eurozone membership.     

Determinants of Capital Flight: An econometric case study of Bangladesh

While Bangladesh remains steeped in staggering external debt, it is also concurrently witnessing a substantial outflow of domestic capital. This situation raises serious policy concerns for its development prospects. This paper applies the Bounds testing and the Autoregressive Distributed Lag procedures to confirm the existence of a long-run equilibrium relationship between capital flight and its determinants, and to estimate the long-run and short-run behavior of capital flight from Bangladesh. The estimated results suggest that political instability is the single most significant cause of capital flight from Bangladesh, while increases in corporate income taxes, higher real interest rate differentials between the capital-haven countries and Bangladesh, and lower GDP growth rates also significantly contribute to capital flight.     

Footloose Capital and Comparative Advantage

We investigate the effect of country size differentials and Ricardian technology differences on firms’ location decisions using a two‐country, two‐good (homogeneous agricultural good and differentiated manufacturing products), two‐factor (labour and footloose capital) simple new economic geography model. We found that manufacturing firms may agglomerate in a country where the manufacturing sector has a comparative disadvantage. In addition, when country size differentials and Ricardian technology differences exist between two countries, the key factor influencing firms’ location decisions changes according to the level of trade liberalization, from being market size‐dependent to becoming technology‐dependent.     

Biases in fiscal multiplier estimates

The size of fiscal multipliers is intensively debated as large (small) multipliers provide arguments to expand (cut) public spending. We use data on multiplier estimates from over a hundred scholarly studies, and ask whether the national imprint and various incentives that the authors face can help explain the large observed variance in these estimates. We complement this meta-analytical data with information on economists’ personal characteristics collected from their biographies and through a self-conducted survey. Our evidence is consistent with the hypothesis that national background and policy orientation of researchers matter for the size of multiplier estimates. We only find weak support for the hypothesis that the interests of donors financing the research are relevant. Significant biases largely disappear for teams of international co-authors.     

Paradox of plenty: Norway’s macroeconomic policy dilemmas during the oil price crash, 2014-15

Norway, a country at the top of global rankings in terms of gross domestic product (GDP) per capita and human development was also in an enviable position with large current account and fiscal surpluses, as well as a massive stock of public assets. Then came a shock; between June 2014 and early 2016 oil prices tumbled by more than 70 percent. As a major oil exporter, Norway’s current account was severely impacted but could this actually draw Norway into a macroeconomic crisis? Couldn’t it just fund its way out of the contractionary pressures building up in the economy using its stock of foreign currency reserves being held in a sovereign wealth fund? This article explores the fiscal and monetary policy challenges that Norway faced in preempting falling GDP growth and rising unemployment while at the same time, warding off a housing bubble going bust.     

Fiscal stabilizations: When do they work and why

This paper studies the determinants and channels through which fiscal contractions influence the dynamics of the debt-to-GDP ratio and GDP growth. Using data from a panel of OECD countries, the paper shows that the success of fiscal adjustments in decreasing the debt-to-GDP ratio depends on the size of the fiscal contraction and less on its composition. The rate of growth of output matters too, but higher GDP growth does not drive the success of a fiscal stabilization. In contrast, whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuvre. In particular, stabilizations implemented by cutting public spending lead to higher GDP growth rates. The effects of the composition on growth work mostly through the labor market rather than through agents’ expectations of future fiscal policy. Finally, the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations.     

Correlates of economic growth in developing countries: a panel cointegration approach

The inflow of foreign direct investment (FDI) has been found to play a crucial role in the economic growth of receiving countries. Using panel cointegration techniques, this perception was found to be mitigated by an empirical approach that yields different results from previous studies. While the growth in real FDI has an influence on real GDP growth across developing countries in the short-run, year-to-year periods, it does not explain real GDP in the long-run. Rather, it appears to be the economic factors internal to a country that have the most influence on real GDP over time: human capital (measured by literacy rates), export trade, and monetary and fiscal policy.     

Fiscal sustainability and dollarization: the case of Ecuador

This article tries to disentangle the dynamic relationships between fiscal variables and economic activity in a small emerging economy characterized by full dollarization, namely, Ecuador. We find that fiscal policy in Ecuador seems to be sustainable, explained by its policy of debt payment through oil revenues, rather than by a fiscal discipline that dollarization is supposed to encourage. The non-oil tax revenues variable is a purely adjusting variable. This result suggests that in a dollarized country that cannot benefit from the ‘seignorage’ revenues, the reliance on volatile oil revenues and on smoothing tax revenues leaves the economy’s fiscal sustainability vulnerable.     

Re-examining the “twin deficits” hypothesis: evidence from Australia

This paper re-examines the relationship between fiscal imbalances and net foreign borrowing. A general analytical approach is first developed which suggests that, other things equal, a rise (fall) in any advanced economy’s fiscal deficit should be fully matched by a rise (fall) in its net foreign borrowing, in accordance with the so-called twin deficits hypothesis. In the case of Australia, one of the world’s largest foreign borrower economies for its size, empirical estimation yields the novel result that Australia’s consolidated budget imbalance and its foreign borrowing were approximately twinned on the basis of quarterly data for 1983–2009, when Australia’s exchange rate floated and international capital mobility was high. This result is consistent with the conceptual framework and suggests that fiscal policy is likely to be ineffective as an instrument for influencing the real economy.     

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.