Pre- and Post-Global Financial Crisis Policy Multipliers

This paper estimates the change in policy multipliers in the U.S. relative to their pre-2008 financial crisis levels. It also estimates the likely impact of the 2020 stimulus packages implemented to address COVID-19. The analysis is based on an augmented Blanchard-Perotti model that allows for the dynamic effects of shocks to the central bank balance sheet, real interest rates and debt levels on economic activity. The results suggest that expenditure multipliers have fallen post-2008, mostly because of higher government debt, implying that the effectiveness of fiscal policy has declined. They also suggest that the impact of quantitative easing is beneficial, but requires sizable interventions to have noticeable effects on real GDP. Because of rising debt stocks, dealing with a crisis is becoming more and more costly despite the current low interest rate environment.     

Climate threshold,financial hoarding and economic growth

We use an iterative finite difference method to establish theoretical models that reflect the relationships among climate threshold, financial hoarding and economic growth. We build a simultaneous equations model to conduct an empirical analysis based on China’s statistical data from 1979 to 2012. Our study yields the following results: China’s climate threshold has shown a zigzag-shaped rising trend since 1979; the main reasons for the rapid expansion of financial hoarding were high savings rate, savings leakage, higher marginal efficiency of financial hoarding compared to capital efficiency or higher internal creativity of the financial sector; there were positive cumulative effects between financial hoarding and economic growth, which were significantly inhibited by climate threshold; the climate threshold had discrepant influences on different industries. To achieve a balanced economy, more money should be invested in the real sector to appropriately reduce the rate of savings leakage; the financial sector should move from scale expansion to service efficiency improvements to increase its marginal contribution to the economy and to enhance capital efficiency; the real sector should improve technological innovation and speed up the adaptive adjustment in climate-sensitive industries to move from economic growth to advanced development.     

State-dependent fiscal multipliers in NORA - A DSGE model for fiscal policy analysis in Norway

We develop a novel medium-scale DSGE model, called NORA, for fiscal policy analysis in Norway. NORA contains a sheltered and exposed sector allowing us to model wage bargaining between a labor union and the exposed sector, reflecting Scandinavian wage formation institutions. Wages are subject to a downward nominal wage rigidity (DNWR). Inspired by many countries' fiscal policy responses to the Great Recession and the coronavirus pandemic, we investigate the model's ability to generate state-dependent fiscal multipliers. We find, that both the zero lower bound on nominal interest rates and DNWR individually can account for higher fiscal multipliers during recessions. In joint presence, however, the existence of DNWR reduces the multiplier at the ZLB. Moreover, the DNWR significantly relaxes the paradox of toil at the ZLB. We show that the state-dependency is robust to alternative assumptions about the origin of the recession, the nature of the fiscal stimulus and its financing source.     

Fiscal expansion, monetary policy, interest rate risk premia, and wage reactions

We examine the macroeconomic implications of fiscal policy in a small open economy, with emphasis on the interactions between fiscal, monetary and labour market policies. The paper uses the NBNZ-DEMONZ macroeconometric model. Novel features of the model are that it includes an endogenous interest rate risk premium (IRRP), and forward-looking monetary and fiscal policy reaction functions which capture the essence of New Zealand's Reserve Bank and Fiscal Responsibility Acts. The most important empirical result is that the postulated IRRP, proxying financial market mechanisms, can contribute at least as much as the monetary policy reaction function to maintaining price stability. Also of significance are that an income tax cuts package shows more damped real GDP and underlying inflation paths than does an expenditure increases equivalent; and that the inflationary and real sector impacts of a personal income tax cut package depend heavily on how the cut is `shared' between firms and workers. The nature and interdependence of monetary and fiscal policies and labour market conditions are therefore crucial to the macroeconomic outcomes.     

Fiscal deficits,banking crises and policy reversal in a semi-open economy

We study the effect of domestic policies and external shocks in a semi-open economy characterized by incomplete liberalization of the financial sector. We argue that in such transition economies stabilization programs can have a negative impact on the fiscal imbalances, offsetting to some extent the very achievement of the stabilization program. We develop a simple general equilibrium model which allows propagation of shocks in the presence of government guarantees and imperfect capital mobility. We also empirically test the impact of positive foreign interest shock on the Indian economy using a reduced form VAR approach. The econometric evidence, though broadly consistent with the main predictions of the model, suggests no significant impact of foreign interest rate shock on output and credit. We conclude that incomplete liberalization of the financial sector in transition economies has two effects. It reduces i) exposure to external financial shocks (like the current credit crisis) and ii) ability to deal with real sector shocks (which may arise from global recession in the medium term) due to endogenous policy reversals and presence of government guarantees.     

FINANCE,DISTRIBUTION AND THE ECONOMIC OBJECTIVE OF FINANCIAL COOPERATIVE INSTITUTIONS

This paper proposes a model where the structure rather than the size of the financial sector explains its influence on income distribution. Because of information asymmetries, a financial sector dominated solely by profit‐maximizing financial intermediaries will increase income and wealth inequality as it gives preferential access to credit for high‐income agents, whereas a diversified inclusive financial sector with alternative models of finance, like cooperatives, will reduce the inequality gap. No full convergence in income distribution can be realized through finance only and there is still a need for redistribution policies. Accordingly, an objective function for cooperative financial institutions should define a desired pricing behaviour that can increase the income of members at a rate higher than the average growth rate of the economy.     

The Role of Fiscal and Monetary Policies in Sustaining Growth With Stability in India*

The performance of the Indian economy in recent years has attracted increasing international interest. This paper focuses on the role of fiscal and monetary policies in the evolution of the Indian economy over the years, with particular attention being given to the reforms undertaken in these policies since the early 1990s. The coordination of fiscal and monetary policies has been crucial in the sequencing of the economic reform process carried out since the early 1990s. Monetary policy aims to maintain a judicious balance between price stability and economic growth. With the opening up of the Indian economy and the spread of financial sector reforms aimed at functional autonomy, prudential strengthening, operational efficiency, and competitiveness of banks, considerations of financial stability have assumed greater importance in recent years alongside the increasing openness of the Indian economy. The biggest challenge facing the conduct of fiscal and monetary policy in India is to continue the accelerated growth process while maintaining price and financial stability. Therefore, the self‐imposed rule‐based fiscal correction at both the national and subnational levels has to be consolidated and carried forward. The existence of a high level of fiscal deficit also contributes to the persistence of an interest rate differential with the rest of the world, which then also constrains progress toward full capital account convertibility. The success achieved in revenue buoyancy through tax rationalization and compliance has to be strengthened further.     

Determinants of fiscal multipliers revisited

We generalize a simple New Keynesian model and show that a flattening of the Phillips curve reduces the size of fiscal multipliers at the zero lower bound (ZLB) on the nominal interest rate. The factors behind the flatting are consistent with micro- and macroeconomic empirical evidence: it is a result of, not a higher level of price rigidity, but an increase in the degree of strategic complementarity in price-setting – invoked by the assumption of a specific instead of an economy-wide labour market, and decreasing instead of constant-returns-to-scale. In normal times, the efficacy of fiscal policy and resulting multipliers tends to be small because negative wealth effects crowd out consumption, and because monetary policy endogenously reacts to fiscally-driven increases in inflation and output by raising rates, offsetting part of the stimulus. In times of a binding ZLB and a fixed nominal rate, an increase in (expected) inflation instead lowers the real rate, leading to larger fiscal multipliers. Conditional on being in a ZLB-environment, under a flatter Phillips curve, increases in expected inflation are lower, so that fiscal multipliers at the ZLB tend to be lower. Finally, we also discuss the role of solution methods in determining the size of fiscal multipliers.     

Some further results on Rosen and Quandt's labor market model

An economy with a non-vertical long-run Phillips-curve defined for employment and the growth rate of real disposable wage is assumed. Steady-state effects of long-run gradual changes in the tax rate and public expenditure are analyzed. The slower the tax rate increases (or the faster it is reduced) the higher the steady-state employment level, the higher the inflation rate, and the larger the trade deficit. An increase in the growth rate of public expenditure has the same effects. A combined reduction in tax increases and public expenditure may increase steady-state employment, reduce inflation and improve the trade balance.     

FISCAL SUSTAINABILITY OF JAPAN: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM APPROACH

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt‐to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.     

How Big Was the Effect of Budget Consolidation on the Australian Economy in the 1990s?

This article evaluates the effects of budget consolidation on the Australian economy in the 1990s. As the economy recovered from the 1991–92 recession, the need to improve the fiscal balance to lift national saving became the dominant influence on fiscal policy. The article argues that spending cuts by the Australian federal government announced in 1996 had immediate effects on financial markets, with reduced long‐term interest rates of about 50 basis points in 1996–97. Using a modified version of the Treasury macroeconometric model of the Australian economy (TRYM), the article simulates the net macroeconomic effects of the expenditure cuts, fiscal consolidation and lower long‐term interest rates. The article finds that the program of budget consolidation had a sizeable short‐ and medium‐term impact on the economy, raising Gross Domestic Product by up to three‐quarters of a percentage point and reducing unemployment by 0.3 percentage points over the next two to three years.     

Why has US monetary policy become ineffective lately?

Some recent studies show that US monetary policy has lost its stimulative traction, especially since the early 1980s. They argue that the Fed’s forward guidance has enabled economic agents to anticipate the changes in interest rates more accurately. As a result, it is harder to find truly exogenous monetary policy shocks, which has made monetary policy ineffective. In this article, we find that anomalous economic behaviours of financial institutions might be the true reason for the ineffective monetary policy. Our structural vector autoregressive model shows that increases in the US money supply mostly flowed into the financial sector to increase its profits instead of stimulating the real sector of the economy through business investment.     

The Fiscal Multiplier in a Liquidity‐Constrained New Keynesian Economy

We study the effects of fiscal policy on the macroeconomy using a liquidity‐constrained New Keynesian model in which government bonds are liquid, and private financial assets are only partially liquid. We find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective. In this model, a bond‐financed fiscal expansion can stimulate output because higher public borrowing improves liquidity by increasing the proportion of liquid assets in private‐sector wealth.     

Is the Sky the Limit? Can Japanese Government Bonds Continue to Defy Gravity?

This paper presents a simulation model based on the growth rate, the inflation rate, and the consumption tax rate in the future. Future tax revenues and fiscal expenditures are projected using regression models estimated from past data. The fiscal situation is called unsustainable if the outstanding amount of Japanese government bonds (JGBs) becomes higher than the level of private sector financial assets. We focus on the general account of the central government, which is the source of JGB issues. We find that the higher the economic growth, the more likely it is that the fiscal situation is sustainable. When a larger portion of interest income is reinvested in JGBs, the chance is higher that the fiscal situation is sustainable. Most importantly, raising the consumption tax to 20% guarantees fiscal sustainability in most cases. Our analysis shows that without a consumption tax hike beyond the 10% rate, a fiscal crisis will be almost a certainty, even with a real economic growth rate of 2% despite a shrinking labor force. A reasonably quick hike of the consumption tax, namely a hike by 1% a year, up to 20%, combined with high or moderate economic growth rates, seems to keep the economy out of a fiscal crisis, where a moderate growth rate is defined to be generated by a productivity increase per working‐age population of 1.9%, which was the average during the Koizumi years.     

Does the quality of institutions enhance savings? The case of Sub-Saharan Africa

Over the last three decades, there has been increasing disparity in savings across regions and income groupings globally. In this paper, we investigate whether the quality of institutions explains the saving disparities in Sub-Saharan Africa (SSA). Utilizing comprehensive panel data and spanning the period 1980–2015, we estimate a savings model using the two-step instrumental variable generalized method of moment (2SIV-GMM) estimator. Our results show that the impact of institutions on savings behaviour differs across regions and income groupings, and in SSA, in aggregate. We find that the level and growth of per capita income and terms of trade enhance savings whereas government consumption expenditure, financial sector development and the elderly dependency rate are savings impeding. The findings are robust to alternative model specification and highlight the importance of institutions in influencing savings behaviour in SSA.     

Currency Crises, Monetary Policy and Corporate Balance Sheets

Abstract. This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.     

On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy

Contrary to the predictions of the theory underlying international finance, inflows of capital triggered by financial liberalisation have neither equalised real interest rates nor increased income growth in many emerging economies. We explain this puzzle by developing a model that combines the balance‐of‐payments constraint approach to economic growth with a less stringent version of the real interest rate parity hypothesis. The model’s foundations are based on robust empirical findings or well‐established macroeconomic models. We show that a perverse combination of income elasticities of demand for imports and exports generates slow income growth and high real interest rates. As domestic income grows and imports rise faster than exports, the real exchange rate is expected to depreciate in order to clear the balance of payments (or the foreign exchange rate market). An incipient capital outflow arises and interest rates increase. Faster adjustment in capital rather than in the goods market therefore generates a higher real interest rate differential between the domestic small open‐economy and the rest of the world. The long run analysis shows that a constant degree of risk aversion implies a positive equilibrium real interest rate differential that affects economic growth. A permanent increase in default risk driven by persistent current account imbalances thus impacts on long run growth. The model’s results are illustrated with evidence from the three major Latin America economies: Argentina, Brazil and Mexico.     

金融危机期间地方财政支出对经济增长的影响——基于省际面板数据的比较分析

采用省际面板数据,比较分析东南亚金融危机和国际金融危机期间各省区财政支出对经济增长的影响。研究表明,两次金融危机期间各省区的财政支出对经济增长的影响作用有所不同：同前期相比,国际金融危机期间社会保障支出对经济增长的影响仍为正效应,并且正效应明显变大;社会文教支出对经济增长的影响仍为微弱的负效应;而经济建设支出和行政管理支出对经济增长的影响则与之前相反,分别表现为不显著和显著的正效应。因此,优化财政支出结构应控制经济建设支出规模,继续加大社会保障支出,改善文教支出结构,从而提高其使用效率。     

Macroeconomic Control in the Transforming Chinese Economy: An Analysis of the Long‐Run Effect

This paper analyzes the issue of macroeconomic control in the Chinese economy where there is a dual structure (consisting of a state sector and a non‐state sector) and the financial sector is still under tight control by the government. Given the dual structure and financial repression, when inflation is a severe problem, the authors investigate whether it is possible for the government to bring inflation under control without hampering long‐term economic growth performance. The investigation is conducted within the context of an endogenous growth model that incorporates the two major institutional features of the transforming Chinese economy. The paper evaluates the long‐run effects of changes in government monetary and fiscal policies on the major macroeconomic aggregates. The analysis suggests that increasing in the interest rate on government bonds will reduce inflation without affecting the growth rate of output; while increasing the nominal interest rate on bank deposits will exert a stagflationary effect on the economy: raising the inflation rate but reducing the growth rate of output.     

The effects of fiscal policy on economic activity in Finland

This study analyzes whether fiscal policy decisions have real effects on the economy of Finland, and if they do, what are the strength and durations of the effects. We utilise the Vector Stochastic Process with Dummy Variables (VSPD) method in our empirical work. This approach is a suitable tool to study event-based episodes. Fiscal policy shocks do have an effect on the economic activity of Finland when the time period 1990–2007 is investigated. A positive tax shock (or a policy that increases public sector revenues) seems to have a positive effect on Investment and GDP but the response of private consumption is mixed. Results clearly indicate that increase in Government spending crowds out private sector activity, and the effect takes place sooner than with the Revenue variable in question. This is a clear evidence for the crowding out effect.