A Study of Effective Financial Support for SMEs to Improve Economic and Employment Conditions: Evidence from OECD Countries

Using a panel logit regression model, this study analyzes whether or not five categorized financial supports for small and medium enterprises (SMEs) from the governments of 11 Organization for Economic Cooperation and Development (OECD) countries facilitate economic and employment growth: (1) direct government loans to SMEs; (2) government‐guaranteed loans to SMEs; (3) the reinforcement of relationship banking; (4) financial stability steps to ease pro‐cyclicality; and (5) equity‐linked financing. The academic contribution of this research is in identifying the optimal type of government financial support to SMEs given a country's level of financial crisis and market‐rate level. The main empirical test results are as follows. First, the type of financial support that contributes most to economic and employment growth is the set of steps that governments take to ease pro‐cyclicality. Second, the reinforcement of relationship banking can also contribute to improved economic and employment conditions. Third, in less capital‐intensive countries, the results confirm that economic and employment improvement occurs more often if equity‐linked financing is used. Fourth, the adoption of dynamic loan‐loss provisions to prepare for periods of economic recession is necessary to reduce the pro‐cyclicality of SME loans within the 11 OECD countries studied in this paper; it is also necessary to transition from a persistent monetary‐easing policy stance to a flexible monetary stance within a country's fiscal policy in order to make commercial banks benefit from an incentive‐like risk premium for SME loans despite the existence of economic recessions. Finally, the study finds that the need to apply equity‐linked financing methods through the stock market is especially urgent in developing countries. As the managerial perspectives, it is confirmed that easing pro‐cyclicality of SME loan and enhancing banking relationship can contribute to SMEs fund management. Copyright © 2017 John Wiley & Sons, Ltd.     

Monetary and fiscal policy under deep habits

Allowing habits to be formed at the level of individual goods – deep habits - can radically alter the fiscal policy transmission mechanism as the counter-cyclicality of mark-ups this implies can result in government spending crowding-in rather than crowding-out private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple policy rules to mimic fully optimal policy. We find that the presence of deep habits at empirically estimated levels can imply large externalities that significantly affect the conduct of monetary and tax policy. However, despite the rise in government spending multipliers implied by deep habits, government spending is barely used as a stabilisation tool under the optimal policy.     

Social expenditure cyclicality: New time-varying evidence in developing economies

This paper provides a novel dataset of time-varying measures of cyclicality in social spending for an unbalanced panel of forty-five developing economies from 1982 to 2012. We focus on four categories of government social expenditure: health, social protection, pensions, and education. We find that in developing countries social spending has been acyclical over time, with the exception of spending on pensions. However, sample averages hide marked heterogeneity across countries, with many individually showing procyclical behavior in different social spending categories. The use of time-varying measures of social spending cyclicality overcomes the major limitation of previous studies in assessing the drivers of fiscal cyclicality that rely solely on cross-country regressions and, therefore, cannot account for country-specific as well as global factors. Using weighted least squares regressions, we find that the degree of social spending (pro)cyclicality is negatively associated with financial deepening, the level of economic development, trade openness, government size, and political constraints on the executive.     

Fiscal and monetary policies in complex evolving economies

What is the most appropriate combination of fiscal and monetary policies in economies subject to banking crises and deep recessions? We study this issue using an agent-based model that is able to reproduce a wide array of macro- and micro-empirical regularities. Simulation results suggest that policy mixes associating unconstrained, counter-cyclical fiscal policy and monetary policy targeting employment is required to stabilise the economy. We also show that “discipline-guided” fiscal rules can be self-defeating, as they depress the economy without improving public finances. Finally, we find that the effects of monetary and fiscal policies become sharper as the level of income inequality increases.     

Connectedness of commodity,exchange rate and categorical economic policy uncertainties — Evidence from China

This paper provides a fresh perspective to explore the network correlations among commodity, exchange rate, and categorical economic policy uncertainties (EPU) in China. We try to contribute to the literature by examining the spillover mechanism with a relatively novel connectedness network using the monthly data over the period between June 2006 and January 2021. Our results suggest that prior to the recession, China’s commodity price is subject to greater spillovers from the exchange rate than recessions. The domestic commodity prices are more sensitive to monetary policy uncertainty and fiscal policy uncertainty. The occurrence of COVID-19 revises the dominance in the system from monetary policy uncertainty and fiscal policy uncertainty to trade policy uncertainty.     

The effect of episodes of large capital inflows on domestic credit

This paper analyses the effect of capital inflow surges on the evolution of domestic credit. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that in the two years following the beginning of a capital inflow surge the credit-to-GDP ratio increases by about 2 percentage points. The effect is reversed in the medium-term with the credit-to-GDP ratio decreased by almost 4 percentage points seven years after the initial surge. The paper also finds that the effect is different depending on the type of flows characterising the episode (debt vs. portfolio equity vs. FDI), with large capital inflows that are debt-driven having the largest effect. The results of the paper also suggest that the short-term effect of capital inflow surges on domestic credit depends on countries’ macroeconomic policy stances. In particular, it is found that this effect is lower in countries with higher real exchange rate flexibility and fiscal policy counter-cyclicality.     

Stabilizing expectations at the zero lower bound: Experimental evidence

Our study demonstrates how agents’ expectations can interact dynamically with monetary and fiscal policy at the zero lower bound. We study expectation formation near the zero lower bound using a learning-to-forecast laboratory experiment under alternative policy regimes. In our experimental economy, monetary policy targets inflation around a constant or state-dependent target. We find that subjects’ expectations significantly over-react to stochastic aggregate demand shocks and historical information, leading many economies to experience severe deflationary traps. Neither quantitatively nor qualitatively communicating the state-dependent inflation targets reduce the duration or severity of economic crises. Introducing anticipated and persistent fiscal stimulus at the zero lower bound reduces the severity of the recessions. When the recovery of fundamentals is sufficiently slow, participants’ expectations become highly pessimistic and neither monetary nor fiscal policy are effective at stabilizing the economy.     

Determinants of discretionary fiscal policy in Central and Eastern Europe

This paper explores economic, political and institutional determinants of discretionary fiscal policy in 11 Central and Eastern European (CEE) countries from 2000 to 2013 and compares discretionary fiscal reactions before and during the global economic crisis. We find that fiscal policy was procyclical to the output gap both before and during the crisis, while no fiscal reaction to the absorption gap was captured. Our results also indicate a negative relationship between the level of public debt and deficits over the entire period and the pre-crisis period, suggesting that rising public debt represented a brake on future deficits. We also find that election cycles affect the fiscal deficit, but only during the pre-crisis period, while no evidence of a relationship between fiscal policy and government fragmentation was captured. We find some evidence that in the pre-crisis period the CEE countries with a fixed exchange rate regime ran lower deficits than those with a floating regime, whereas during the crisis no impact of the exchange rate regime on the fiscal deficit was found. There is also some evidence that an arrangement with the IMF was associated with lower deficits for the entire sample period. However, no impact of EU accession on the fiscal stance was identified.     

Financial Depth and the Asymmetric Impact of Monetary Policy

This paper investigates the importance of financial depth in evaluating the asymmetric impact of monetary policy on real output over the course of the US business cycle. We show that monetary policy has a significant impact on output growth during recessions. We also show that financial deepening plays an important role by dampening the effects of monetary policy shocks in recessions. The results are robust to the use of alternative financial depth and monetary policy shock measures as well as to two different sample periods.     

Nonlinear effects of government spending shocks in the USA: Evidence from state‐level data

This paper uses state‐level data to estimate the effect of government spending shocks during expansions and recessions. By employing a mixed‐frequency framework, we are able to include a long span of annual state‐level government spending data in our nonlinear quarterly panel VAR model. We find evidence that for the average state the fiscal multiplier is larger during recessions. However, there is substantial heterogeneity across the cross‐section. The degree of nonlinearity in the effect of spending shocks is larger in states that are subject to a higher degree of financial frictions. In contrast, states with a prevalence of manufacturing, mining and agricultural industries tend to have multipliers that are more similar across business cycle phases.     

The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States

We estimate state‐dependent government spending multipliers for the United States. We use a factor‐augmented interacted vector autoregression (FAIVAR) model. This allows us to capture the time‐varying monetary policy characteristics including the recent zero interest rate lower bound (ZLB) state, to account for the state of the business cycle and to address the limited information problem typically inherent in VARs. We identify government spending shocks by sign restrictions and use a government spending growth forecast series to account for the effects of anticipated fiscal policy. In our baseline specification, we find that government spending multipliers in a recession range from 3.56 to 3.79 at the ZLB. Away from the ZLB, multipliers in recessions range from 2.31 to 3.05. Several robustness analyses confirm that multipliers are higher, when the interest rate is lower and that multipliers in recessions exceed multipliers in expansions. Our results are consistent with theories that predict larger multipliers at the ZLB.     

The impact of credit and fiscal policy under a liquidity trap

This study examines the interaction of non-conventional credit policy and fiscal policy when adverse financial conditions drive the economy to a deep contraction and conventional monetary policy becomes ineffective as the policy interest rate reaches its effective lower bound. Consistent with other studies, under counter-cyclical financial intermediation costs, credit easing policies aimed at reducing credit spread ameliorate the response of the economy and lead to a faster recovery. More importantly, I find that expansionary fiscal policy during an episode of liquidity trap is associated with a large multiplier effect that prevents an otherwise deeper and longer recession. Moreover, the large impact of expansionary fiscal policy is maintained even if credit policy is already in place.     

The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States

We estimate state-dependent government spending multipliers for the United States. We use a factor-augmented interacted vector autoregression (FAIVAR) model. This allows us to capture the time-varying monetary policy characteristics including the recent zero interest rate lower bound (ZLB) state, to account for the state of the business cycle and to address the limited information problem typically inherent in VARs. We identify government spending shocks by sign restrictions and use a government spending growth forecast series to account for the effects of anticipated fiscal policy. In our baseline specification, we find that government spending multipliers in a recession range from 3.56 to 3.79 at the ZLB. Away from the ZLB, multipliers in recessions range from 2.31 to 3.05. Several robustness analyses confirm that multipliers are higher, when the interest rate is lower and that multipliers in recessions exceed multipliers in expansions. Our results are consistent with theories that predict larger multipliers at the ZLB.     

积极财政政策宏观经济效益分析——基于宏观计量模型的研究

本文通过一个宏观计量模型来研究积极财政政策的宏观经济效益。与传统模型所不同的是，我们的模型不仅考虑了需求，同时也引入了社会的供给能力。研究表明，积极财政政策的实施为我国在2003年底彻底走出通货紧缩的阴影作出了不可磨灭的贡献。而到了2002年，积极财政政策的拉动效应开始递减，这为此后逐渐淡出的积极财政政策提供了一定的依据。     

Learning about fiscal policy and the effects of policy uncertainty

In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model are uncertain about the conduct of fiscal policy and act as econometricians by estimating fiscal policy rules that might change over time.We find that assuming that agents are not instantaneously aware of the new fiscal policy regime in place leads to substantially more volatility in the short run and persistent differences in average outcomes. We highlight issues that can arise when a policymaker wants to announce a policy change. From a methodological perspective, we introduce a novel way to model learning in the face of discrete policy changes.     

Decomposing the Ins and Outs of Cyclical Unemployment

This paper analyses the contribution of the composition of the pool of employed and unemployed individuals to labour market dynamics in different phases of the business cycle. Using individual‐level data from the Current Population Survey (CPS), we decompose differences in employment status transition rates between upswings and downturns into explained and unexplained parts. We find that the duration of unemployment contributes to explaining unemployment outflows to employment and observe that its initially positive contribution turns negative in deep recessions. Composition effects play an important role for unemployment outflows to non‐participation but dampen the cyclicality of unemployment inflows from employment.     

Fiscal policies and business cycles in an enlarged euro area

This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995–2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Both autonomous and counter-cyclical fiscal policies have little or no effect on cyclical variability in the eurozone countries, while such policies appear to be effective in Central and Eastern European countries.     

Commodity prices and fiscal policy design: Procyclical despite a rule

Recent studies offer evidence of reduced fiscal procyclicality to commodity price changes in resource‐rich countries—a feature commonly attributed to the adoption of fiscal policy rules. We revisit this issue and find that, by controlling for global activity shocks while allowing for time‐varying changes in both fiscal policy and the volatility of shocks, this finding does not hold. To show this we develop a time‐varying dynamic factor model, allowing for a multiple of shocks, stochastic volatility and time‐varying parameters, and estimate it on data for Norway, whose handling of resource wealth is often cited as exemplary.     

Some observations on forecasting and policy

This paper offers some thoughts on the use of macroeconomic and financial forecasts in monetary and fiscal policy. It stresses the role of nowcasting in constructing good forecasts: most of the value added in macreoeconomic forecasts comes from getting a good approximation to the jumping-off point. Some specific applications are discussed: long-range debt/GDP projections and forecasting recessions using asset prices. I also discuss the construction and use of density forecasts.     

Global recessions as a cascade phenomenon with interacting agents

This paper examines global recessions as a cascade phenomenon. In other words, how recessions arising within one or more countries might percolate across a network of connected economies. An agent based model is set up in which the agents are Western economies. A country has a probability of entering recession in any given year and one of emerging from it the next. In addition, the agents have a threshold propensity, which varies across time, to import a recession from the agents most closely connected to them. The agents are connected on a network, and an agent’s neighbours at any time are either in (state 1) or out (state 0) of recession. If the weighted sum exceeds the threshold, the agent also goes into recession. Annual real GDP growth for 17 Western countries 1871–2006 is used as the data set. The model is able to replicate three key features of the statistical distribution of recessions: the distribution of the number of countries in recession in any given year, the duration of recessions within the individual countries, and the distribution of ‘wait time’ between recessions i.e. the number of years between them. The network structure is important for the interacting agents to replicate the stylised facts. The country-specific probabilities of entering and emerging from recession by themselves give results which are by no means as well matched to the actual data. We are grateful to an anonymous referee for some extremely helpful comments.