Fiscal Activism Research Articles

Modern Tax Trends and Economic Growth in a Turbulent World: Insights from Developed and Developing Economies

The article examines recent trends in tax level and structure changes within developed and developing economies in relation to economic growth. The study’s significance stems from increasing geo-economic turbulence and emerging risks in the global economy, necessitating fiscal regulation. The analysis spans the period from 2009, post the Great Recession, to the present day. We tested the hypothesis that discernible patterns could be identified through statistical analysis regarding the relationship between tax indicators (level and structure) and economic growth indicators. However, no such clear patterns were found. In essence, it cannot be definitively concluded that reduced tax levels and/or increased indirect tax shares do explicitly foster national economic growth. Tax impact on economic growth varies significantly across developed and developing economies, presenting a complex and nuanced picture. The nature and strength of this influence are largely shaped by the specific circumstances of each location and period. In order to identify their unique impact, counterfactual analysis is required. In the course of further research, it is important to consider, firstly, the increased fiscal activism of the post-pandemic period: in this case, the research outcomes may be different from those obtained for the period already examined. Secondly, considering the ongoing processes of geo-economic fragmentation, it is recommended to re-examine the influence of taxes on economic processes. This investigation should adhere to the evolving framework of new macro-regions worldwide, rather than the conventional dichotomy of developed and developing economies. Participants within these macro-regions, interconnected through supply and value chains, will need to work together to align their tax rules and policies for mutual benefits.

Flexible Aid in an Uncertain World: The Coronavirus State and Local Fiscal Recovery Funds Program

Emergency fiscal transfers to state, local, tribal, and territorial governments have been at the core of the U.S. federal government's response to the COVID-19 pandemic. The most extensive of these transfer programs is the Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) program, contained in the American Rescue Plan Act of 2021. The CSLFRF is not only larger than prior rounds of emergency aid, it was also designed to address a broader series of crises, address pre-existing inequities, and provide greater discretion to public officials in deciding how to allocate funds. In this article, we consider the extent to which this program represents a departure from what some have called “fend for yourself” federalism. We conclude that while the coordinated effort of intergovernmental organizations resulted in a greater measure of federal fiscal activism and flexibility than might have been anticipated, lingering political conflicts and legacies of austerity will continue to inflect the CSLFRF's implementation.

Determinants of the profit rates in the OECD economies: A panel data analysis of the Kalecki's profit equation

The paper considers several determinants of profitability (investment rate, trade surplus, and budget deficit) in the OECD economies in the 1960–2014 period, using the Kalecki's profits equation framework. We estimate and utilise the aggregate profit rate measures for the total economy, employ a series of panel unit root and panel cointegration tests, and apply panel vector autoregressive (PVAR) model to examine the relationship between the profit rate and its determinants in the short- and long-run. The empirical evidence supports the hypothesis of positive effects of trade surplus on profitability, in line with Kaleckian views concerning the cyclical and secular dynamics of profits and profit restoration forces in the capitalist economies. The positive effects of investment rate on profitability are not confirmed, while the effects of fiscal activism on profitability are demonstrably negative; in contrast, a strong positive influence of profit rate on the pace of capital accumulation (investment) is indicated. The results are robust across sub-periods and panels with smaller cross-sectional dimension. Empirical results highlight the divergence between real investment and profitability, capital formation slowdown, and fiscal policy implementation problems in OECD economies over recent decades.

Fiscal Activism: Zakat and Debt Service?

Fiscal Activism: Zakat and Debt Service?

Shadow banks, banking policies and China’s macroeconomic fluctuations

This paper develops a model of the Chinese economy using a DSGE framework that accommodates a banking sector and money. The model is used to shed light on the period of the Global Financial Crisis. It differs from other applications in the use of Indirect Inference to estimate and test the model. Officially mandated bank lending and government spending were used to supplement monetary policy to aggressively offset shocks to demand. This paper examines the efficacy of monetary policy in terms of the reduction in the frequency of severe economic slowdowns. We find that monetary policy can be used more vigorously to stabilise the economy, making direct banking controls and fiscal activism unnecessary. A nominal GDP targeting monetary policy is the most efficient, compared with a conventional Taylor Rule, a Friedman rule or a price level targeting rule.

A NOTE ON INFLATION DYNAMICS, PRICE VOLATILITY, AND FISCAL ACTIVISM

Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility by about 6%. Moreover, results using alternative inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soft (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-à-vis advanced economies.

The End of the Consensus? The Economic Crisis and the Crisis of Macroeconomics

The New Consensus that has dominated macroeconomics since the 1980s was based on a fundamentally neoclassical structure: efficient markets that on their own converged on a natural equilibrium with a very limited role for macroeconomic (mostly monetary) policy to smooth fluctuations. The crisis shattered this consensus and saw the return of monetary and fiscal activism, at least in academic debate. The profession is reconsidering the pillars of the Consensus, from the size of the multipliers to the implementation of reform, including the links between business cycles and trends. It is still too soon to know what macroeconomics will look like tomorrow, but hopefully it will be more eclectic and open.

Fiscal Activism in the Euro Area and in Other Advanced Economies: New Evidence

We review the determinants of the discretionary fiscal policy action of governments in the euro area and in other advanced economies during the past 20 years. This is done by estimating fiscal reaction functions using dynamic panel techniques and country-by-country estimates. The results suggest that, on average, discretionary fiscal policy did not deliver economic stabilisation: during good economic times (positive output gaps) it has been on average pro-cyclical both in the euro area and in the other regions. However, the loosening bias during good times has been countered by the presence of efficient public institutions, higher long term interest rates and higher debt-to-GDP ratios. Overall, as a result of various counterbalancing forces, fiscal activism has not been a major feature of policy making in the euro area, nor in other advanced economies during the past 20 years. JEL Classification: E62, H6, C23

Can a comparative capitalism approach explain fiscal policy activism?

ABSTRACTThis study investigates the implications of models of capitalism for the responsiveness of countries’ fiscal policies during business cycles using new data for member countries of the Organization for Economic Cooperation and Development and China. We expand the literature by adding the category of East Asian nonliberal capitalism to the established distinction of liberal market economies and nonliberal coordinated market economies. These three differ substantially not just in their fiscal policies, but also in monetary policies, degree of financial market orientation, exchange rate regime, and labor market organization. As in previous studies, we find that governments of liberal economies adopt more countercyclical fiscal policies. Departing from existing studies, however, among the nonliberal models of capitalism, (East Asian) state-led models have more countercyclical fiscal policies than (European) coordinated market economies, perhaps as countercyclical as liberal economies, both historically and during the 2007–9 crisis. This is due to less independent central banks, managed float of exchange rates, and limited financial market orientation and financial openness in East Asia, which allow for more active fiscal policy. Among political factors, left-of-center governments, fractionalized party systems, and election years are associated weakly with countercyclical fiscal policy, as expected. Labor market coordination and welfare generosity have unclear roles in regard to fiscal policy, a topic for future research.

Fiscal Activism and the Zero Nominal Interest Rate Bound

In an economy where the zero lower bound on nominal interest rates is an occasionally binding constraint and the government lacks a commitment technology, it may be desirable for society to appoint a policymaker who cares less about government spending stabilization relative to inflation and output gap stabilization than the private sector does. A policymaker of this type uses government spending more elastically to stabilize the economy. At the zero lower bound, the anticipation of aggressive fiscal expansions in future liquidity trap situations increases inflation expectations and lowers real interest rates, thereby mitigating the decline in output and inflation.

Fiscal Activism and Price Volatility: Evidence from Advanced and Emerging Economies

Using a panel of 54 countries between 1980 and 2013, we find empirical support for the view that changes in the fiscal policy stance (year-on-year change in the cyclically adjusted primary balance) have a significant positive correlation with inflation volatility. An increase in the volatility of discretionary fiscal policies by one standard deviation raises inflation volatility between 5 and 6 percent. Moreover, results using alternatively different inflation volatility proxies confirm that an expansionary fiscal stance increases price volatility. Another relevant outcome is that in a context of economic expansions (recessions) the harmful impact of fiscal activism on price volatility is soften (heightened), while the negative impact of fiscal activism on price stability is higher when fiscal policy is expansionary. Finally, fiscal activism fuels inflation volatility much more pronouncedly in emerging market economies vis-a-vis advanced economies.

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

How to Deal With Economic Depression: Experimental and Theoretical Lessons from the Great Depression

The purpose of this paper is to explain not only why the Euro Area debt crisis does not subside, but also, why it deepens. We believe that the experience of the Great Depression can help economic theorists and officials to look at the problem from a different perspective since it is apparent that the economic orthodoxy and economic policies supported by its conventional wisdom do not provide desired results. Roosevelt's fiscal activism and Keynes' revolutionary theory deliver an answer to the question of why is, in crisis periods, vigorous reaction of economic authorities needed and why the free market is not able by itself to find way out of the fog, which, as time passes, becomes more and more dense.

La Taxation Directe Effective de l’Energie en Belgique. Pourquoi faire simple si on peut faire compliqué pour taxer peu ?

L’article calcule le taux effectif moyen d’imposition sur le revenu des entreprises du secteur de l’énergie en Belgique et le compare avec le taux équivalent dans les autres pays européens. L’article utilise les résultats comptables de 2010 d’un échantillon de 531 entreprises actives en Belgique. Les résultats montrent l’efficacité de l’activisme fiscal en Belgique puisque le taux effectif est parmi les plus bas alors que le taux statutaire est parmi les plus élevés. Ceci a un impact positif sur l’incitation à investir, mais a aussi un coût en termes de recettes fiscales. Par ailleurs, l’activisme fiscal est hautement réversible, comme le montrent les changements adoptés en Belgique depuis 2013.

Fiscal Policy and Regional Output Volatility: Evidence from Russia

Eller M., Fidrmuc J. and Fungácˇ ová Z. Fiscal policy and regional output volatility: evidence from Russia, Regional Studies. This paper investigates the relationship between fiscal policy and output volatility in Russian regions between 2000 and 2009. Accounting for endogeneity between output volatility and fiscal developments by using system-generalized method of moments (GMM) estimation techniques, the results indicate that discretionary fiscal policy contributes to output volatility and induces macroeconomic instability at the regional level in Russia. This corroborates previous studies using cross-country data. To reduce business cycle fluctuations, it would be necessary to curtail procyclical fiscal activism at the regional level, e.g. via fiscal rules and sound institutions of fiscal federalism.

Lessons in Fiscal Activism

This Article highlights an anomaly. It tells a story of two tax rules that were introduced at the same time to achieve a similar goal. Both were meant to be temporary and stimulate economic growth but received dramatically different outcomes. The Article reviews the reasons for this paradox. It demonstrates that the causes are structural, ideological, and political. It argues that the historical support the two mechanisms received diverged in accordance with their complexity, the perceptions they epitomized, and their instrumental role in society. The Article not only enriches an important and ongoing debate on the role of the tax system in our society that has received much attention in recent years, but also provides important historical insights to policymakers.

In Praise of Expansionary Fiscal Contraction

AbstractTextbook orthodoxy maintains that increases in the cyclically adjusted budget balance (i.e. reductions in the deficit) withdraw demand from an economy. Those Keynesian economists who believe that fiscal policy is the most powerful single influence on changes in demand expect ‘fiscal contraction’ to be accompanied by below‐trend growth or even declines in output. This article, a response to Martin Wolf's 2013 Wincott Memorial Lecture, considers this Keynesian view. Using a database prepared by the International Monetary Fund, it shows that since the 1980s ‘expansionary fiscal contractions’ have been the norm and not the exception in the USA and the UK. Keynesian support for fiscal activism is unsupported by a large body of recent evidence.

The Dog That Didn’t Bark: The Strange Case of Domestic Policy Cooperation in the “New Normal”

This paper examines domestic policy cooperation, a curiously neglected issue. Both international and domestic cooperation were live issues in the 1970s when the IS/LM model predicted very different external outcomes from monetary and fiscal policies. Interest in domestic policy cooperation has since fallen on hard intellectual times—with knock-ons to international cooperation—as macroeconomic policy roles became highly compartmentalized. I first discuss the intellectual and policy making undercurrents behind this neglect, and explain why they are less relevant after the global crisis. This is followed by a discussion of: macroeconomic policy cooperation in a world of more fiscal activism; coordination across financial agencies and with macroeconomic policies; and how structural policies fit into this. The paper concludes with a proposal for a “grand bargain” across principle players to create a “new domestic cooperation.”

The Paradoxes and Pitfalls of Revived Fiscal Activism

This paper critiques the revival of fiscal activism by the G20 in response to the global financial crisis of 2008–9. It first re-examines the international macroeconomic conditions leading up to that crisis, before highlighting the paradoxes and pitfalls of revived fiscal activism for advanced economies. It argues that the harmful legacy of budget deficits and escalated public debt levels spawned further financial crises, most notably in southern Europe, and generally damaged household and business confidence to the detriment of private consumption and investment spending, which has delayed economic recovery. To undertake the repair necessary to the fiscal accounts of most advanced economies, the paper proposes that government spending programmes need to be thoroughly reviewed against the key principles of public finance.

Fiscal Activism and the Zero Nominal Interest Rate Bound

Fiscal Activism and the Zero Nominal Interest Rate Bound