Mix of Fiscal and Monetary Policy Rules and Inflation Dynamics in China

The present paper examines the role of the mix of fiscal and monetary policy rules in determining inflation dynamics using fiscal and monetary policy reaction functions and Markov‐switching vector autoregression methods based on quarterly data in the period 1992–2007. Our results show that fiscal and monetary policies in China can be adequately described using some simple rules, and that significant regime shifts took place around 1998. Fiscal policy tended to be active and countercyclical in the pre‐1998 period, then switched to be passive and more countercyclical, whereas monetary policy was characterized as passive and procyclical in the pre‐1998 period, and switched to be active and countercyclical afterwards. The mix of fiscal and monetary policy rules can explain inflation dynamics better than the monetary policy rule alone. Therefore, price stability requires not only appropriate monetary policy but also appropriate fiscal policy.     

逆周期财政政策能够控制政府债务风险吗?——理论变迁与经验数据分析

文章基于经济理论变迁,梳理了近代以来西方预算平衡与政府债务理论变迁的主要趋势,探讨了古典经济学年度预算平衡理论与凯恩斯财政革命后的周期预算平衡理论,及其对政府债务风险管理的影响。在此基础上,文章使用跨国面板数据实证分析了发展中国家财政周期选择对政府债务风险的影响,研究发现采取逆周期财政政策的国家能够更好地约束债务风险,该实证结果在不同债务警戒标准下均保持稳健。当前,为了有效约束财政风险,我国应避免进入顺周期财政陷阱,建立可控债务风险的逆周期财政调控机制。     

Debt targets and fiscal sustainability in an era of monetary independence

This paper investigates how to achieve flexibility in fiscal policy without sacrificing credibility or independence in monetary policy. The idea is to create a framework that generates fewer conflicts between policies but greater discipline within them. We assume an independent central bank and restraints on national fiscal policies. Using a theoretical model, we examine the consequences of assigning leadership to fiscal policies in order to exploit the implicit (but rule based) coordination available under standard transmission mechanisms and to allow priorities and targets to differ between policy makers. This works best when leadership takes the form of a debt rule (with hard or soft targets) to precommit fiscal policies over the longer term; but monetary independence to guarantee the credibility and discipline in the short term policies. Compared to the uncoordinated policies operating in Europe, inflation biases and debt/deficit ratios are both lower for no loss in output volatility. That matches the experience of the UK, an economy whose empirical reaction functions show fiscal leadership. On a wider sample of Organization for Economic Cooperation and Development countries, the gains from debt targeting are estimated at 2–4% of gross domestic product.     

Rules,discretion, and international monetary and fiscal policy coordination

This paper considers the implications of international policy coordination when both monetary and fiscal policy choices are endogenous. We show that a movement from insular monetary commitment to international monetary policy coordination will, if fiscal policies are not coordinated, produce higher output and public expenditure levels at the expense of higher inflation rates. We also show that the concurrent coordination of monetary and fiscal policies raises output and inflation while lowering public expenditure relative to a regime of monetary coordination alone. We conclude that the arguments for concurrent monetary and fiscal policy coordination fail to have a clear-cut theoretical basis.     

ON THE CYCLICALITY OF SOUTH AFRICAN FISCAL POLICY

This paper examines the cyclicality of government revenue, spending and the key fiscal balances in South Africa during 1972‐2001. The results suggest that while government revenues were largely acyclical, government spending appears to have been predominantly counter‐cyclical, in line with the recommendations of neoclassical analysis. In addition, countercyclical government spending appears to have translated into a countercyclical policy stance overall. This finding contrasts markedly with the results from other empirical studies of South Africa and other emerging market and developing economies, which typically indicate procyclical fiscal policy.     

Policy Shocks and Macroeconomic Fluctuations in a Two‐country Dynamic Stochastic General Equilibrium Model: Evidence from China*

In this paper, we construct a two‐country dynamic stochastic general equilibrium model to investigate the sources of business cycles in China and the contributions of policy shocks in economic fluctuations. The empirical results from Bayesian estimation show that, apart from the traditional supply and demand shocks, monetary and fiscal policy shocks also play important roles in determining China's economic fluctuations. In addition, we find significant feedback effects between monetary and fiscal policies in China, indicating that policy coordination is an important feature of China's monetary and fiscal policies. Overall, these results not only shed new light on the policy factors behind China's economic fluctuations, but also provide new evidence that is helpful for understanding the policy transmission mechanisms in China.     

Monetary policy transmission and macroeconomic policy coordination in Pacific island countries

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass‐through and credit growth. Weak credit demand and under‐developed financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks' efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.     

Delegation and Fiscal Policy in the Open Economy: More Bad News for Rogoff's Delegation Game

This article studies the open-economy Rogoff delegation game, taking into account both intra-country and intercountry interactions between fiscal authorities and central banks. With representative bankers, the Nash equilibrium of fiscal and monetary authorities independently responding to supply-side shocks sees insufficient monetary adjustment and an imbalance towards fiscal stabilization if shocks are sufficiently symmetric; the opposite occurs if shocks are sufficiently asymmetric. Appointing conservative bankers shifts the fiscal–monetary balance away from monetary towards fiscal policy. Unilateral delegation benefits that country; but when all countries independently delegate, the outcome is only favorable if shocks are sufficiently asymmetric.     

Sub-Saharan Africa's rising public debt stock: Is there a cause for concern?

The study investigated public debt sustainability in sub-Saharan Africa (SSA) by testing the reaction of the primary balance to positive and negative shocks in public debts in a panel of 45 SSA countries. The study adopts the innovative nonlinear fiscal reaction function and the dynamic panel threshold model to account for the potential asymmetric phenomenon in the public debt series. In line with extant studies, the study found that public debts in SSA are weakly sustainable and there is a highly procyclical fiscal policy bias in SSA countries, particularly in resource-rich countries, indicating that governments' fiscal policy responses are expansionary during economic upturns and contractionary during recessions, which may aggravate recessions and worsen debt situations across SSA. For robustness, the study compares the results with emerging and developed economies. The results indicate that in advanced economies, public debt is sustainable and that fiscal policy response is countercyclical. The research and policy implications are discussed.     

The Relationship Between Price Stability and Financial Stability: Evidence From Major Emerging Economies

We examine the relationship between price stability and financial stability for major emerging economies using a Markov regime-switching model. Empirical results suggest that monetary policy is consistent with the Taylor rule in all countries except for India and all countries followed both low and high inflation targeting monetary policy regimes. Low inflation targeting regime seems to be more persistent and has higher duration than high inflation targeting regimes except for Indonesia and South Africa. All countries seem to have had financial stability concerns when they formulated their monetary policy as the coefficient of the financial stress index is statistically significant at least in one regime. Overall the results suggest that Taylor rule-based monetary policies have been implemented to various degrees in major emerging economies to achieve economic stability, price stability, and financial stability.     

Real time uncertainty in fiscal planning and debt accumulation in the euro area

Using real time data from the OECD this study explores euro area fiscal policies since the late 1990s. The results indicate that in the so-called periphery countries (Greece, Ireland, Italy, Portugal and Spain) ex ante fiscal plans have been more sensitive to economic cycles in the countercyclical direction than in the other euro area countries. Accumulated debt ratios in the periphery reflect high initial debt ratios, underlying deficit biases and cumulated errors in the data on macroeconomic imbalances. Overall, reliable statistics, balanced macroeconomic developments and longer-term policy orientation are crucial for sound and sustainable public finances.     

Policy Effectiveness in the Post-ERM Era: Evidence from Six Countries

The objective of this paper is to determine whether ERM-participating countries have experienced a change in the effectiveness of monetary and fiscal policies since the establishment of the ERM. Countries which have come to rely more heavily on fiscal policy instruments as the means of output, price and exchange rate stabilization since the establishment of the ERM (and currently exceed the fiscal criteria) are expected to find the Maastricht fiscal criteria restrictive and perhaps destabilizing. We find that Belgium, Italy and Ireland are the countries that are likely to face the most difficulties.     

The stability and growth pact, fiscal policy institutions and stabilization in Europe

Ever since its inception, the EMU has been subject to controversy. The fiscal policy rules embedded in the Maastricht Treaty, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP has constantly been accused of being too rigid and of forcing procyclicality in fiscal policy. However, in an influential paper Galí and Perotti (2003) concluded that discretionary fiscal policy has actually become more countercyclical in EMU countries since the Maastricht Treaty. This paper argues that this conclusion stands up to several robustness tests using ex-post data, including the use of institutional variables, but not to the use of real-time data. Using ex-post data, there is some evidence pointing to a more countercyclical use of discretionary fiscal policy (or at least to less use of procyclical discretionary fiscal policy). However, the use of real-time data for the period 1999–2006 reveals that discretionary fiscal policy has been designed to be procyclical. Hence, the actual acyclical behaviour of discretionary fiscal policy in the period after 1999 seems to be simply the result of errors in forecasting the output gap, and not the result of a change in the intentions of policy-makers. As a result, there is no evidence to support the view that Maastricht rules have forced euro-area policy-makers to change their behaviour and design countercyclical discretionary fiscal policies.     

The Performance of Simple Fiscal Policy Rules in Monetary Union

The paper analyses the stabilising potential of simple fiscal policy rules for a small open economy in monetary union in a 2-region DSGE model with nominal and real rigidities. We consider simple fiscal instrument rules for government purchases, transfers, and consumption, labour and capital taxes in analogy to interest rate rules in monetary policy. The paper finds a dichotomy in the welfare effects of fiscal policy for liquidity-constrained and intertemporal optimising households, i.e. policies enhancing the welfare of one group tend to reduce the welfare of the other one. The moderate average welfare gains from optimal policy contrast with potentially large welfare losses from non-optimal policy. Fiscal rules that respond to employment fluctuations may be preferred to fiscal rules responding to indicators of price competitiveness, because optimal policy corresponds more closely to the idea of countercyclical stabilisation in the former case. The simulations also emphasise the crucial impact of the budgetary closure rule on the welfare consequences of fiscal business-cycle stabilisation.     

货币与财政政策后续效应评估:40次银行危机样本

以20世纪80年代以来40次重要的系统性银行危机为基础,对金融危机后的货币政策和财政政策选择进行实证评价。实证结果表明,"适度扩张"的货币政策和财政政策能产生相对较优的经济效果,应成为金融危机后的主要政策选择,但由于两种政策刺激或稳定经济的效力都集中体现在短期,为避免持续和大规模货币扩张和财政赤字带来的负面影响,一旦危机消退、经济企稳回升,之前作为"反危机工具"出现的扩张性货币和财政政策就应该逐步淡出。     

财政政策与货币政策的动态搭配和组合模式

基于经济周期的不同阶段,从IS-LM曲线和供求理论的双重视角解析利用财政政策与货币政策对宏观经济进行调控的内在机理,揭示两类政策搭配组合的理论逻辑,分析制约财政政策与货币政策调控效应的现实因素。研究发现,财政政策与货币政策的搭配组合要根据经济发展的不同阶段进行动态供给,以满足经济周期不同阶段的需求,如此方能实现经济的稳定增长。现阶段,我国应采取“更加积极的财政政策与稳健适度的货币政策”这一政策组合。产品市场与货币市场对利率的弱敏感性使政策刺激经济的效果受到制约,因而两类政策不仅要在总量层面“对冲”经济增速减缓的压力,而且要在结构层面增强协调性。     

THE CYCLICALITY OF MONETARY AND FISCAL POLICY IN SOUTH AFRICA SINCE 1994

This paper uses a structural vector‐autoregression approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over “neutral” base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro‐cyclicality, especially in the more recent period, though the policy simulations suggest that the pro‐cyclicality of fiscal policy has had little destabilising impact on real output.     

Monetary Unions in Historical Perspective: What Future for the Euro in the International Financial System

This paper discusses the introduction of the euro in the present international monetary context. European Monetary Union is not only an economic concept but also primarily a political one. Based on past experience, two aspects of monetary union seem essential: the nature of the future European Central Bank and the necessity that monetary union is implemented with a fiscal union. The euro's success on world markets, as a dollar substitute, depends on monetary authorities' credibility in targeting low-inflation, and on fiscal authorities' reputation. A central bank that does not respond to a political authority can cause social difficulties, especially if social policies are left in the hands of single countries and fiscal transfers, to support these policies, are not allowed     

Co-ordinating fiscal authorities in the euro-zone: a key role for the ECB

This paper examines the conditions for fiscal restraint to emergeas Nash equilibrium in the game between fiscal authorities ina monetary union and discusses the implications for the ECB'smonetary strategy. We show that fiscal authorities fail to internalizethe adverse area-wide effects of their policies when the ECBtargets union-wide aggregates. To address this co-ordinationfailure, we propose that the ECB reacts to fiscal restraintby implementing a monetary reward. Applying the pareto- andrisk dominance criteria to the ensuing co-ordination game, weshow that the ECB can ensure convergence upon fiscal restraintby adopting a weakly countercyclical reaction function.     

Designing Fiscal Institutions in a Monetary Union

This article explores the policy and wealth consequences of alternative institutional arrangements through which fiscal policy interacts with monetary policy in a monetary union such as the EMU. The central issue of the article is the design of the appropriate monetary and fiscal institutions through a comparison of alternative arrangements to distribute power over monetary and fiscal authorities between the central authority of the union and the individual members of the union and evaluating their performance. The main results of this article reveal that delegation of the fiscal policy to a council of country representatives and the monetary policy to a council of governors is the appropriate institutional design to reduce inflation bias and better stabilize regional, idiosyncratic supply and demand shocks in a monetary union.