Fiscal Model Research Articles

Global effects of fiscal stimulus during the crisis

The IMF's Global Integrated Monetary and Fiscal Model is used to compute short-run multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 10 percentage point increase in the US debt to GDP ratio raises the US tax burden and world real interest rates in the long run, thereby reducing US and rest of the world output by 0.3–0.6 percent and 0.2–0.3 percent, respectively.

On vector autoregressive modeling in space and time

Despite the fact that it provides a potentially useful analytical tool, allowing for the joint modeling of dynamic interdependencies within a group of connected areas, until lately the VAR approach had received little attention in regional science and spatial economic analysis. This paper aims to contribute in this field by dealing with the issues of parameter identification and estimation and of structural impulse response analysis. In particular, there is a discussion of the adaptation of the recursive identification scheme (which represents one of the more common approaches in the time series VAR literature) to a space-time environment. Parameter estimation is subsequently based on the Full Information Maximum Likelihood (FIML) method, a standard approach in structural VAR analysis. As a convenient tool to summarize the information conveyed by regional dynamic multipliers with a specific emphasis on the scope of spatial spillover effects, a synthetic space-time impulse response function (STIR) is introduced, portraying average effects as a function of displacement in time and space. Asymptotic confidence bands for the STIR estimates are also derived from bootstrap estimates of the standard errors. Finally, to provide a basic illustration of the methodology, the paper presents an application of a simple bivariate fiscal model fitted to data for Italian NUTS 2 regions.

Discussion of the paper “A rational expectations model for simulation and policy evaluation of the Spanish economy”

Rational expectations model for simulation (REMS) is a state-of-the-art DynamicStochastic General Equilibrium model (DSGE model) of the kind used in many pol-icy institutions throughout the world. It shares a number of common features withstandard models along this line of research, but also displays a number of specificfeatures that makes it appealing for fiscal policy simulations. Indeed, among otherparticular features REMS encompasses: (i) a wider coverage of fiscal variables thanin standard DSGE models, and (ii) a labour market specified along the lines of the“search”framework.WhileIthinkthatthemodelis,ingeneral,arelevantcontributionto the literature, in my discussion I will hinge upon some weaknesses and problemswith the modelling approach and the interpretation of the results that can be identified.For the sake of brevity I will focus on just a few points, grouped in two blocks. First, Iwill comment on non-standard features of REMS, as any critique to features standardin the relevant literature will make no justice to this particular model. Second, I willdiscuss some additional issues.

The Global Integrated Monetary and Fiscal Model (GIMF) � Theoretical Structure: Theoretical Structure

This working paper presents a comprehensive overview of the theoretical structure of the Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic general equilibrium model that is used by the IMF for a variety of tasks including policy analysis, risk analysis, and surveillance.

The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure

This working paper presents a comprehensive overview of the theoretical structure of the Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic general equilibrium model that is used by the IMF for a variety of tasks including policy analysis, risk analysis, and surveillance.

Macroeconomic Effects of Public Pension Reforms

The paper explores the macroeconomic effects of three public pension reforms, namely an increase in retirement age, a reduction in benefits and an increase in contribution rates. Using a five-region version of the IMF‘s Global Integrated Monetary and Fiscal model (GIMF), we find that public pension reforms can have a positive effect on growth in both the short run, propelled by rising consumption, and in the long run, due to lower government debt crowding in higher investment. We also find that a reform action undertaken cooperatively by all regions results in larger output effects, reflecting stronger capital accumulation due to higher world savings. An increase in the retirement age reform yields the strongest impact in the short run, due to the demand effects of higher labor income and in the long run because of supply effects.

Macroeconomic Effects of Public Pension Reforms

The paper explores the macroeconomic effects of three public pension reforms, namely an increase in retirement age, a reduction in benefits and an increase in contribution rates. Using a five-region version of the IMF‘s Global Integrated Monetary and Fiscal model (GIMF), we find that public pension reforms can have a positive effect on growth in both the short run, propelled by rising consumption, and in the long run, due to lower government debt crowding in higher investment. We also find that a reform action undertaken cooperatively by all regions results in larger output effects, reflecting stronger capital accumulation due to higher world savings. An increase in the retirement age reform yields the strongest impact in the short run, due to the demand effects of higher labor income and in the long run because of supply effects.

State Capacity, Local Fiscal Autonomy, and Urban—Rural Income Disparity in China

Continued urban—rural income disparity poses a serious policy challenge in China’s economic transition. As the Chinese economy booms and the state’s fiscal capacity grows, there should be a corresponding increase in the center’s capacity to redress urban—rural inequality. However, it seems that the stronger state extractive capacity since the mid-1990s has not translated into better urban—rural disparity outcomes. Based on a panel data set covering 270 prefectures in China between 1994 and 2003, the article evaluates the impact of local fiscal spending on urban—rural income disparity. Findings reveal a strong urban bias in China’s local fiscal system under an increasingly centralized fiscal system. The centralized fiscal model has in fact reinforced this tendency and ironically weakened the capacity of the central state in achieving the policy goal of reducing the urban—rural divide.

Structural reform, intra-regional trade, and medium-term growth prospects of East Asia and the Pacific—Perspectives from a new multi-region model

This paper analyses the potential benefits from reforms aimed at promoting domestic demand in the region, as well as the effects of slower growth in the US and the G3 (US, euro area, and Japan) on the members of the Executives’ Meeting of East Asian-Pacific Central Bank (EMEAP). The analysis is based on simulation scenarios using an expanded version of the IMF Global Integrated Monetary and Fiscal (GIMF) model which is particularly useful for conducting medium-term policy analysis, as it incorporates rich layers of intra-regional trade, production, and demand allowing the transmission mechanism of structural reforms and external shocks to be fully articulated. The simulation results show that reforms to rebalance the pattern of demand in regional economies (such as Mainland China) more towards domestic demand could entail non-negligible benefits for the EMEAP. These benefits could be even larger for those economies that more flexibly adjust to the shift in China's trade pattern. The simulation results also demonstrate that structural reforms in EMEAP economies will allow them to reduce vulnerabilities to economic downturns in major economies.

Predicting Presidential Elections with Equally Weighted Regressors in Fair's Equation and the Fiscal Model

Three-decade-old research suggests that although regression coefficients obtained with ordinary least squares (OLS) are optimal for fitting a model to a sample, unless the N over which the model was estimated is large, they are generally not very much superior and frequently inferior to equal weights or unit weights for making predictions in a validating sample. Yet, that research has yet to make an impact on presidential elections forecasting, where models are estimated with fewer than 25 elections, and often no more than 15. In this research note, we apply equal weights to generate out-of-sample and one-step-ahead predictions in two sets of related presidential elections models, Fair's presidential equation and the fiscal model. We find that most of the time, using equal weights coefficients does improve the forecasting performance of both.

Chile's Structural Fiscal Surplus Rule: A Model-Based Evaluation

The paper analyzes Chile's structural balance fiscal rule in the face of copper price shocks originating in foreign copper demand. It uses a version of the IMF's Global Integrated Monetary and Fiscal Model (GIMF) that includes a copper sector. Two results are obtained. First, Chile's current fiscal rule performs well if the policymaker puts a small weight on output volatility (relative to inflation volatility) in his/her objective function. A more aggressive countercyclical fiscal rule can attain lower output volatility, but there is a trade-off with (somewhat) higher inflation volatility and (much) higher volatility of fiscal variables. Second, given its current stock of government assets, Chile's adoption of a 0.5% surplus target starting in 2008 is desirable from a business cycle perspective. This is because the earlier 1% target would have required significant further asset accumulation that could only have been accomplished at the expense of greater volatility in fiscal instruments and therefore in GDP.

Fiscal Policy in American Presidential Elections: A Simulation

In this paper a simulation technique borrowed from civil engineering is applied to American presidential elections to explore the key relationship between federal spending and incumbent reelection, represented by the fiscal model. On the one hand, as Machiavelli would have understood, an expansionary fiscal policy militates against incumbent reelection but a cutback policy facilitates it. That is the `demand' side of the model. There is also a `supply' side: the longer the incumbents have occupied the White House, the more likely they are to implement fiscal expansion. We simulated 1,000 elections under conditions that replicated the values of the predictor variables of the fiscal model over the 1880—2004 and 1932—2004 periods of American history. The latter period deserves attention in its own right, because starting with the 1932 election, the federal share of gross domestic product broke out of the 2—3% range for the first time since World War One. This marked a qualitative change in the role of government in the United States of America. The simulated series allow patterns that are weakly detected in the historical data to emerge more clearly for observation and analysis. The results of the simulations not only confirm the empirical findings from the historical data, but suggest that the American political system is stable, maintaining alternation between political parties in the White House, a characteristic of democracies, and keeping fiscal policy within bounds of what the majority of the voters will support.

Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia

This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.

Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia

This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia's inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.

Macroeconomic Responses to Terms-of-Trade Shocks: A Framework for Policy Analysis for the Argentine Economy

This paper presents a version of the global integrated monetary fiscal (GIMF) model adapted and calibrated to the Argentine economy. The model replicates the effect of the strong improvement in Argentina's terms of trade stemming from higher world commodity prices as well as other key economic trends in Argentina during the period 2003-2007. The model can be used to assess the potential impact of different combinations of monetary and fiscal policies on output, inflation, and the external trade.

Macroeconomic Responses to Terms-Of-Trade Shocks: A Framework for Policy Analysis for the Argentine Economy

This paper presents a version of the global integrated monetary fiscal (GIMF) model adapted and calibrated to the Argentine economy. The model replicates the effect of the strong improvement in Argentina's terms of trade stemming from higher world commodity prices as well as other key economic trends in Argentina during the period 2003-2007. The model can be used to assess the potential impact of different combinations of monetary and fiscal policies on output, inflation, and the external trade.

Harmonisation of VAT Rates in the European Union Countries – the Actual State and Perspectives

Value Added Tax (VAT) plays a signifi cant role in contemporary fi scal systems. The tax is subject to harmonisation in the European Union1. VAT is also the only tax that was used to construct a universal fi scal model to be used in the whole European Union. Implementation of ‘the pattern’ was regulated by subsequently issued directives – altogether more than twenty. The harmonisation level of numerous VAT technical elements is considerable2 (particularly concerning the entity, the subject, the base, the moment a tax liability emerges, the place of taxable transactions, exemptions, special principles of taxation, etc.). With reference to creation of the common market, i.e. abolishment of customs related barriers for the fl ow of goods in the member countries of the Community, a system of the so-called intra-Community transactions was introduced. The system in question is responsible for functioning of the VAT in compliance with binding principles in the target country. However, much more attention should be still paid to the issue of equalising VAT rates that are applied in the member countries of the European Union. The harmonisation level of the rates in question is deemed to be low.

Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits

This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.

Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits

This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.

FORECASTING THE 2008 PRESIDENTIAL ELECTION WITH THE FISCAL MODEL: THE CHALLENGE MET

The October 2008 issue of PS published a symposium of presidential and congressional forecasts made in the summer leading up to the election. This article is an assessment of the accuracy of their models.The presidential election forecast made with the Fiscal Model three months before Election Day put the incumbents' share of the two-party vote (VOTE2) at 48% (Cuzán and Bundrick 2008). As of the time of this writing, it appears the incumbent-party ticket of John McCain and Sarah Palin took a little less than that (around 46.5%). At 1.5%, the error is less than 2.3%, which is Campbell's (2008, 680) “benchmark” for a “quite accurate” forecast. This is the second time in a row that the Fiscal Model ranks among the best performers (Campbell 2005, 23).