Balanced-Budget Rules: Welfare Loss and Optimal Policies

Most economic models do not suggest an optimal fiscal policy in which the government's budget is balanced each period. Conventional wisdom suggests that the government run surpluses and deficits to smooth taxes. In this paper, I use an approach which brings together real business cycle theory and the theory of public finance to evaluate the effects of a balanced-budget restriction. Four fiscal policies are investigated in a model with growth. All models are solved numerically using a multidimensional collocation parameterized expectations algorithm. The welfare consequences of each policy are measured, and the optimal Ramsey policies are characterized. Journal of Economic Literature Classification Number: E62.     

Balanced‐Budget Rules,Elasticity of Substitution,and Macroeconomic (In)Stability

This paper examines the relation between factor substitution and (local) stability of equilibria in a one‐sector real business cycle model under balanced‐budget rules. We show that under non‐unitary elasticity of factor substitution, the Schmitt‐Grohé‐Uribe indeterminacy result can be altered. Using the two‐step normalization procedure, we highlight two opposing effects of factor substitution, namely, the efficiency effect and the distribution effect, on aggregate stability. With endogenous distortionary taxes and gross substitutability between capital and labor, the existing literature overlooks the distribution effect and finds that balanced‐budget rules are likely to deliver indeterminacy. However, if capital stock is relatively more abundant, a higher elasticity of substitution generates a source of stability due to the distribution effect. Our calibration shows that the distribution effect is always the dominating force.     

Spending Growth With Vertical Fiscal Imbalance: Decentralized Government Spending In Norway, 1880–1990

Vertical fiscal imbalance, decentralized responsibility of spending with centralized financing, creates a common pool problem with spending pressure towards central funds. A model of decentralized government spending under vertical fiscal imbalance is developed, and the importance of national political characteristics for internalization of costs and spending level is investigated in an econometric analysis of Norway during 1880–1990. We argue that in a parliamentary democracy, the internalization of costs is influenced by the party fragmentation of parliament. This is confirmed by the econometric analysis using a Herfindahl index as a measure of fragmentation and political strength.     

Macroeconomic stability and economic justice

This article presents a proposal to broaden the right to acquire capital with the earnings of capital as a means of promoting sustainable economic recovery and growth. It would open the markets for real and financial capital acquisition more fully and competitively to poor and working people (1) to distribute more broadly the earnings of capital and (2) to profitably employ more capital and labor. Both the recession and the strategies advanced to promote economic recovery may be viewed as responses to the prospect of inadequate present and future earning capacity of both consumers and producers (1) to purchase what can physically be produced and (2) to repay existent and anticipated debt obligations. To increase the prospects of sufficient, sustainable earning capacity, the proposal advanced in this article would extend to all people the same protections and benefits presently provided by government that facilitate market transactions whereby capital is acquired with the earnings of capital primarily for well-capitalized people. Although in theory, all people in a market economy are able to acquire capital with the earnings of capital, reliable empirical data reveal that as a practical matter, the major determinant of the ability of individuals to acquire capital with the earnings of capital is the existing distribution of capital ownership. The theory of “binary” economic growth underlying this proposal holds that the market return on capital is positively related to the distribution of capital acquisition with the earnings of capital. The prospect of a broader distribution of capital acquisition with the earnings of capital carries with it the prospect of more broadly distributed earning capacity in future years, which in turn will provide the market incentives to profitably employ more capital and labor in earlier years. The idea that the broader distribution of capital acquisition with the earnings of capital will promote growth is not found in any of the widely accepted theories and models of economic growth such as those proposed by Schumpeter, Solow, Roemer, and Lucas. By opening to all people the institutions of corporate finance, banking, insurance, government loans and guaranties, and monetary policy (the very institutions presently relied upon by the Federal Government to stimulate the economy) the practical ability to acquire capital with the earnings of capital can be more broadly extended to all people with the result that greatly enhanced prospects for greater and more broadly distributed earning capacity and growth can be reasonably expected and realized by all.     

On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one‐sector AK model of endogenous growth with utility‐generating government purchases of goods and services. In sharp contrast to traditional Keynesian‐type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief‐driven fluctuations in our endogenously growing macroeconomy. Unlike the no‐sustained‐growth counterpart, this instability result is obtained regardless of (i) the degree of the public‐spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.     

Macroeconomic stability and economic justice

This paper has benefitted from discussions with Thomas Naylor, Edward Kane, John Westerhof, Walter Benjamin, Loren Eckroth, Forrest Smith and Jane Sheffield.     

Government Spending and Taxation in Democracies and Autocracies

The paper develops a theoretical rationale for a non-linear relationship between the level of democracy and government spending. A model is presented showing why and how political participation influences the spending behavior of opportunistic governments that can choose an optimal combination of rents and public goods to attract political support. If the level of democracy remains low, governments rationally prefer rents as an instrument to assure political support. With increasing democratic participation, however, rents become an increasingly expensive (per unit of political support) instrument while the provision of public goods becomes more and more efficient in ensuring the incumbent government's survival in power. As a consequence, an increase in democracy, which drives a country from a pure autocracy to a semi-participatory system, tends to reduce government spending, while an increase in political participation from a semi-participatory country to a full democracy tends to raise the size of the public sector.     

政府支出、产业结构与经济增长

基于2007～2016年的省级面板数据,构建对称和非对称倒"U"方程检验民生支出对经济增长的影响以及产业结构对其效果的影响,对最优民生支出和偏离最优规模的效率损失进行测度,然后研究消费和生产性支出对经济增长的影响以及产业结构对其效果的影响。研究结果表明:民生支出与经济增长之间存在非对称倒"U"关系,多数省份低于最优规模,但正向最优规模靠拢;产业结构会提高最优民生支出规模,东部和中部地区的民生支出规模低于最优规模,但西部地区已经达到甚至超过了最优规模,偏离最优民生支出的效率损失从东、中到西依次递减;消费和生产性支出对经济增长的影响为负,产业结构对消费性支出效果的影响不显著,但会减轻生产性支出的抑制效应;产业升级对经济增长的促进作用会随着民生和生产性支出的扩张而增大,但受消费性支出扩张的影响很小。     

Government Spending and Welfare with Returns to Specialization

We explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity, without directly affecting either utility or production possibilities. In the presence of monopolistic competition and increasing returns to specialization, it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition. This is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods. If the degree of increasing returns to variety is large enough, a rise in such wasteful government spending may increase consumption levels enough to increase welfare.
JEL classification : E 60     

Foreign Aid,Government Spending,and the Environment

Using an endogenous growth model, this paper examines the growth and welfare effects of the allocation of foreign aid in the recipient economy. As public inputs are a productive factor, a rise in the allocation of aid to the public inputs increases growth and hence the welfare of the economy. However, raising the ratio of aid to pollution abatement may not help an economy, because it crowds out public inputs. Since public inputs are also partly financed by income taxation, the welfare‐maximizing income tax rate is larger than the growth‐maximizing rate, because a portion of the aid constitutes a lump‐sum transfer and can increase household consumption and hence welfare.     

地方政府债务置换与宏观经济风险缓释研究

地方政府债务问题已经成为威胁中国金融稳定和经济增长的重要因素。通过构造一个包含影子银行、土地财政等因素的五部门一般均衡模型,本文探讨了地方政府存量债务置换对宏观经济风险的缓释效果。研究发现:经济增速放缓、地方政府资金使用成本过高、土地出让收入不确定性增加是导致我国地方政府债务不可持续的主要因素。通过债务置换延长债务期限结构虽然可以缓解债务累积,且对宏观经济风险具有一定缓释作用,但会降低财政政策的有效性,使得短期内波动增加,中长期内产出下降。实施债务置换期间,数量型货币政策有助于增加财政政策的有效性,但会带来经济通胀风险。     

内生增长、政府生产性支出与中国居民消费

中国财政支出的较大一部分用于生产建设,中国居民消费与政府生产性支出表现出稳健的正相关关系,这一事实与从标准的新古典和新凯恩斯模型得出的挤出效应截然不同。本文构建了包含存量和流量两部分政府生产性支出的内生增长模型,研究表明,政府支出增加在提高税负、挤出居民消费的同时,也通过其生产性增加收入、挤入居民消费;政府支出增加究竟挤入还是挤出居民消费取决于两种效应的比较以及政府的生产性支出比重和税负水平。政府生产性支出的最优结构等于其相对生产性之比,政府支出的最优规模等于政府支出的生产性。     

Consumption and Government Spending Substitutability Revisited: Evidence from Taiwan

Bailey (1971) first documented the idea that there may be a degree of substitutability of the relationship between government spending and private consumption. In this paper, this issue is embedded in a Markov–switching framework where the relationship is subject to shifting between two different regimes. To control small–sample bias, the bootstrap maximum likelihood estimator is used. Evidence from Taiwan indicates that the crowding–in effect dominated the pre–1980 period; the substitutability dominates the post–1980 period. It renders unconvincing the Keynesian plea for expansionary fiscal policy of Taiwan since the 1980s. A Mundell–Fleming approach is proposed to explain this dating.     

Government Spending, Taxation, and Oil Revenues in Mexico

The paper analyzes the intertemporal relationship between oil duties, taxes, government spending, and GDP in Mexico during the 1981–98 period. The results from estimating a VAR model, impulse response functions, and variance decompositions on the quarterly series of taxes, government spending, oil duties, and GDP suggest that there seems to be a substitution effect between oil duties and tax revenues, and that tax revenues are not able to absorb temporary decreases in oil duties. Also, increases in tax revenue might lead to increasing government spending, but short–run increases in government spending are not likely to lead to political pressure to reduce the expected budget deficit via increased taxation and/or oil revenues. Lastly, GDP is not stimulated in the short–run by temporary increases in government spending and, thus, stabilization measures adopted in recent years to reduce the size of the government are not likely to significantly undermine GDP growth.     

Government Spending and Real Interest Rate in an Open Economy

This paper investigates the dynamic effect of government spending in an optimizing monetary model of an open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real interest rates can be lower during temporary periods of high government spending. This result is compatible with the observation of low real interest rates during wars.     

Infrastructure Spending and Unemployment: Government Responsibility for Growth and Jobs

Australia has not had full employment for 20 years. Reliance on growth through microeconomic reform has failed. To restore full employment, the government must pursue a judicious program of infrastructure spending.     

Cointegration, Government Spending and Private Consumption: Evidence from Japan

Assuming a CRRA preference, this paper shows that there is a cointegration restriction implied by the intra-temporal first-order condition in the consumption function. This restriction predicts a cointegrated system of government consumption, private consumption, and their relative price. Our analysis indicates that, first, Johansen's VECM confirms the theoretical prediction that is supported by the data of Japan; moreover, Bierens' (1997) nonparametric estimator severely contradicts with the theoretical model and fits the data poorly; second, Japanese people have increasing willingness to rearrange their consumption over time. Besides, the intratemporal relationship between private and government consumption remains relatively stable over time.     

International Transmission of Government Spending,Monopolistic Competition and North-South Trade

This paper utilises a North–South general equilibrium model where South exports an intermediate good to North in exchange for differentiated goods. The model is used to examine international transmission of government spending and its welfare implications. It is shown that an increase in government spending in North (South) can increase (decrease) the number of differentiated goods produced, thereby decreasing (increasing) the degree of monopoly power in North. Furthermore an increase in government spending in South can decrease the welfare North, but the impact of an increase in government spending in North the welfare of South cannot be unambiguously determined. [F11, H41]     

Endogenous Growth,Taxes and Government Spending: Theory and Evidence*

This paper provides a theoretical and empirical investigation of the simultaneous effects of taxes and government spending on long‐run economic growth in an endogenous growth framework. A two‐sector model is considered: one sector produces physical output and the other produces human capital. Government expenditure is divided into several categories, and several types of taxes are included. The property tax is especially interesting because it is a major source of revenue for local government. The theoretical model is estimated using annual panel data from North Carolina counties. This study finds that state‐level fiscal policies affect economic growth but county‐level fiscal policies do not.