Active Fiscal Policy Research Articles

Regional per capita income inequality and fiscal policy in Mexico, 1989–2021

AbstractIn this paper, we use trends in GDP gaps per capita or relative GDP per capita indicator as an aggregate alternative measure to show regional per capita income inequality between the states of Mexico. The indicator compares each state's gross domestic product per capita (GDPpc) with the annual average of each year and 2019; this allows for evaluating growth performance before and after the COVID-19 pandemic. The econometric method is a spatial dynamic panel, and the convergence–divergence model is conditioned to the behavior of the fiscal policy followed in each state: The fiscal policy indicators are current expenditure and public investment. In general, it is concluded that the amounts of current spending and public investment, in an active fiscal policy context, tend to favor states with higher relative per capita income, which is why an increase in regional inequality is observed. However, it tends to affect low-income regions more, with higher ratios of current spending and investment to GDP, which reduces regional inequality. Therefore, the short-term effects of active fiscal policy to reduce regional disparities can be neutralized.

Generalizing Determinacy under Monetary and Fiscal Policy Switches: The Case of the Zero Lower Bound

AbstractIn a fixed‐regime context, it has been established since the work of Leeper (1991) that a determinate and unique equilibrium can be achieved under both monetary dominance (characterized by an active monetary policy and a passive fiscal policy) and fiscal dominance (characterized by an active fiscal policy and a passive monetary policy) regimes yield a determinate unique equilibrium. In this paper, we generalize this well‐established policy‐mix taxonomy to regime‐switching models, and show that switches from monetary dominance to fiscal dominance regimes (and vice versa) render the economy indeterminate for standard parameter values. We apply our results to the important case of the exit from the zero lower bound (ZLB), where monetary policy is inherently passive. Contrary to the fixed‐regime prediction, the economy switching between the ZLB in a fiscally led regime and a monetary dominance regime is robustly indeterminate, making the coordination of agents' beliefs hard for anchoring expected inflation. Finally, we propose a direction toward which the perspective of the fiscal theory of the price level can be made consistent with a unique stable equilibrium.

EFFICIENCY OF ENVIRONMENTAL PROTECTION EXPENDITURE OF THE GENERAL GOVERNMENTS IN EUROPEAN UNION MEMBER STATES IN THE CONTEXT OF SUSTAINABLE DEVELOPMENT IN WASTE MANAGEMENT

Aim: Pursuing sustainable development justifies incurring expenditure in the field of environmental protection because the state’s active fiscal policy is an essential determinant of achieving sustainable development goals. The distribution of public funds should depend on the efficiency of their use. The purpose of the research procedure is (1) to analyze the structure of environmental protection expenditure of the general government in the European Union and the individual member states; (2) to assess the efficiency of environmental protection expenditure of the general government in the implementation of sustainable development goals in waste management. Methods: The study uses linear regression with regression confidence bounds. The indicator chosen to assess the efficiency of expenditure was the Recycling rate of municipal waste (SDG_11_60). Results: The structure of environmental protection expenditure of the general government in most member states in 2012–2021 was stable, which may result from the adopted national environmental policies or internal conditions of a given country. Waste management expenditure dominates the structure of environmental protection expenditure of the general government in many countries. The analysis of the efficiency of environmental protection expenditure of the general government in waste management confirmed its efficiency in a significant number of states. Conclusions: The research procedure indicated that positive relations between general spending on the environment and achieving sustainable goals can be confirmed. Unfortunately, there is a problem with data consistency of various indicators measuring sustainable goals. Therefore, extending such research to a multiple factor case, for example, can be difficult.

How “baked in” ideas hinder ideational robustness: the International Monetary Fund and “fiscal space”

Abstract This paper brings insights into ideational robustness to bear on the International Monetary Fund (IMF) fiscal policy thinking. It advances understanding of both the IMF and the concept of ideational robustness by focusing on economic ideas as they are put into practice by expert economic institutions. The IMF has traditionally enjoyed a reputation as a hawkish enforcer of neoliberal doctrine and conservative fiscal discipline, foregrounding deficit bias and fiscal sustainability concerns. Capitalist crises, notably the 2008 crash and COVID, have seen public debt increase while rendering growth and stability increasingly elusive. This turbulence has spurred some rethinking of Fund fiscal ideas. The IMF has added the new concept of fiscal space to its policy commentary and advocacy. Fiscal space seeks to reconcile economic stabilization and supporting growth to the Fund’s overarching concern to maintain fiscal discipline and sustainability. A focus on how ideas are put into practice shows that long-standing Fund fiscal priorities are hardwired into operational frameworks, curtailing the new emphasis and adaptions. Thus, key to the institutional conditions of IMF fiscal policy actions are “baked in” economic ideas. These are operationalized through economic models, analytical tools, fiscal evaluation frameworks, and standard operating procedures. The “politics of economic method,” in the form of deliberation and contestation over different normative ideas that can underpin alternative constructions of such policy frameworks, plays an important role in shaping which economic ideas come to matter, and how, for the IMF. The Fund’s “fiscal space” episode can be interpreted as a quest for ideational robustness (through increased flexibility), which thus far remains unrealized due to the crucial role of these mechanisms, institutional conditions, and ideational path dependencies.

Emergency Management System Evaluation and Fiscal Policy Inspiration—Take Liaoning Province as an Example

Taking Liaoning province as an example, based on the evaluation of its emergency management system (EMS), this paper puts forward some suggestions on fiscal policy innovation in view of the main problems. Firstly, according to the hierarchical structure model, the evaluation system is established. The relative degree of the index is determined by the Delphi method, and the weight of the index at all levels is calculated. The evaluation factor set and evaluation grade set are constructed, and the EMS evaluation model of Liaoning province is established and evaluated by using fuzzy mathematics evaluation method. Secondly, according to the model evaluation results, four conclusions are obtained. The top three secondary indicators are Industrial Development, Policies Regulations and Fund Source, which are very important in EMS. The top three weights of the three-level indicators are the Development of Industry, Policy Formulation and Social Funds. Active fiscal policies should be formulated to use social funds to promote the development of emergency industries. Four of the second-level indicators have reached Good, and two have reached Average. Among them, the Basic Platform has the highest score, which is a positive result of EMS construction in Liaoning province. The final score of the comprehensive evaluation of the target is the low-end level in the Good grade, indicating that there is still much room for development in the construction of the system. Finally, according to the evaluation conclusion, this paper puts forward the fiscal policy innovation to support the development of EMS, including expanding the investment channels, updating the investment fund model, increasing the selection of policy tools and establishing the national emergency management fund.

Scarring effects of major economic downturns: The role of fiscal policy and government investment

Long shunned as slow and ill timed, the response to the Covid-19 pandemic initiated a reassessment of fiscal policy as stabilisation tool. At the same time, there is ample evidence that major economic downturns produce lasting effects on real GDP in spite of active fiscal policy interventions. This paper takes a fresh look at economic scarring in 26 OECD countries, including 14 EU member states, since 1970 and examines the role played by fiscal policy. We find that higher current expenditure – the favoured active response - does not mitigate the lasting impact of major economic downturns on real GDP. In contrast, more government investment can help but generally receives little attention. As a result, scarring effects are significant confronting governments with sustainability risks, which in turn weigh on the room for manoeuvre in subsequent downturns. In sum, fiscal policy makers face two difficulties in the event of a major economic downturn: (i) adopt the right type of fiscal expansion, and (ii) find the right time to pivot from short-term stabilisation to fiscal consolidation while protecting investment. Both challenges are fraught with political economy issues.

Analysis on the Influence of Tax Reduction and Fee Reduction Policies on Digital Development Level of Enterprises Based on AHP-DEMATEL

Since structural tax cuts were first incorporated into active fiscal policy in 2008, various tax breaks have been introduced. Based on the detailed enumeration of tax reduction policy measures, this study constructs an evaluation index system for the level of digital development of enterprises in terms of strategy implementation, operation status, technology level, and quality management. Then DEMATEL hierarchical analysis method and big data analysis method are used to analyse and determine the comprehensive influence degree of each index. Finally, this paper analyses the benefits and convenience brought by tax reduction and fee reduction to the digital development of enterprises and puts forward countermeasures and suggestions for the development of digital transformation of enterprises in the context of tax reduction and fee reduction. This study aims to put forward relevant countermeasures for enterprises to enhance their digital transformation and development capabilities.

Understanding the role of China's factors in international commodity price fluctuations: A perspective of monetary-fiscal policy interaction

This paper examines the role of China's factors in international commodity price fluctuations from a perspective of monetary-fiscal policy interaction. We employ a nonlinear Interacted-VAR model to investigate whether the impact of China's monetary policy shocks on international commodity prices is conditional on its fiscal policy stances. Using several measures of China's fiscal policy stance, we estimate their interaction with monetary policy identified through Interacted-VAR analysis. We find that the response of international commodity prices to China's monetary policy is much stronger and more persistent in the presence of its active fiscal policy stance. The empirical findings are very consistent when using several alternative model specifications. Moreover, our analysis suggests that failing to take into account the interaction of monetary-fiscal policies in the model might lead to incorrectly assessing the impact of monetary policy on commodity price fluctuations. In addition, our results reveal the substantial heterogeneity in the impact of China's factors on commodity prices across sectors. These empirical findings offer insights into the interaction of monetary-fiscal policies, as well as the role of China's factors in the international commodity markets.

Public investment as a growth driver for a commodity-exporting economy: Sizing up the fiscal-monetary involvement

<abstract> <p>The study presents a solution to maximize public investment as a growth driver for commodity-exporting economies. The solution is to compensate for the low efficiency of public investment by drawing on internal and external factors within an active fiscal and monetary policy framework. For this, the paper introduces a quantitative model that implements a golden rule of public finance in a resource boom backed by a sovereign wealth fund under an active monetary policy stance. The modeling results show that mobilizing windfall resource revenues to finance increased public investment can limit a crowding-out effect through proper resource allocation and change the sectoral structure in favor of the final goods sector. As confirmed by the sensitivity analysis, the low efficiency of public investment can be partially offset by a less restrictive monetary policy response to fiscal dominance, but this leads to excessive volatility in financial indicators. However, if the public debt burden is an issue due to a more robust fiscal dominance regime, a higher tax rate on exported raw materials can be used to maintain sustainability. By developing a policy goals domain, the paper initiates a discussion that can direct policy recommendations toward a promising growth path by maximizing the public investment driver in the complex policy environment of fiscal-monetary interaction.</p> </abstract>

The Impact and Issues of Portfolio Rebalancing Channel in Quantitative Easing During COVID-19

As the largest black swan event in recent years, the COVID-19 has affected the development of the global economy. As the world's largest economy and one of the countries with the most severe epidemic, the United States has suffered a heavy economic blow. To promote economic recovery, the Federal Reserve has adopted a series of loose policies. This includes the most typical quantitative easing policy. Through literature research, this paper mainly analyzes the impact of the portfolio rebalancing channel in quantitative easing on the US economy. Quantitative easing policies can promote economic recovery to a certain extent, and the channel of portfolio rebalancing is also feasible in theory, but there are uncertainties in the factors affecting the economic environment. When solving the problem of high inflation caused by QE and active fiscal policy, it will have a negative impact on the current economy and enterprises. The government also needs to further consider the balance of economic development.

Resource scarcity, circular economy and the energy rebound: A macro-evolutionary input-output model

We propose an Agent-Based Stock-Flow Consistent model combined with a simplified Input-Output (IO) structure of production. In the model, heterogeneous firms interact in the energy, material, capital and consumption markets. Materials for production of consumer goods can be manufactured using non-renewable or recycled material inputs. We examine the conditions under which the circular economy emerges through market mechanisms, as well as it can be a source of the rebound effect. An important novelty of our approach is that recycling and mining sectors employ different types of capital for production. Capital goods (machinery) are produced by capital firms, which constantly engage in innovations to improve their technological features. This way we endogenize changes in technological coefficients of the Input-Output tables. We show that sectoral interdependencies along the value chain can render the energy rebound effect due to the circular economy (CE) even if energy intensity of the recycling process is lower compared to mining. This effect depends on the impact of investment in the recycling sector on the aggregate demand and energy use along the entire value chain. We assess the role of macroeconomic policies, namely mission-oriented innovation policies (MOIPs), active fiscal policies (AFPs), and environmental taxes in fostering the CE transition, while mitigating the rebound effect. We find that the combination of MOIPs and active fiscal policy is the most effective in promoting the circular economy, preserving employment and ensuring a sustainable growth path.

Investigating Causal Spillovers among International Stock Markets

Recognizing how financial shocks are transmitted to national economies will enable policymakers to take appropriate fiscal and monetary policy action. Such actions will be able to prevent or reduce the intensity of shocks to critical macroeconomic variables. Observing the financial crises in countries of the European Union and Argentina, highlights the main similarities and differences they present in the context of their course in international economic conditions. This study investigates the relation among international stock indices of major importance and stock indices of less developed economies during normal periods and the Covid-19 pandemic by employing a Vector Autoregression (VAR) framework. Econometric outcomes indicate that the German DAX30 and the British FTSE100 indices are positively influential towards the Greek ATX and the Portuguese PSI20 indices. Notably, this impact is revealed to fade out as more lags are considered. Moreover, the French CAC40 index is found to exert negative effects on the Greek and Portuguese indices and its impacts also diminish as time passes. Notably, the Argentinian stock index is found to be both a transmitter of purely negative effects towards the Italian and the Spanish stock indices while impacts on the Greek and the Portuguese indices turn into positive with the evolution of time. Nevertheless, its influence on stock indices of more advanced economies (DAX30, FTSE100) is found to be weaker. This paper serves as a compass for interested investors in order to better allocate their resources during normal periods as well as during crises.

Keynesian Without the Policy: Why the Business Cycle is all about Business Confidence and Finance

<p>Many of Keynes´s ideas and concepts are proven correct in this paper. The demand side, mainly business investments, drives the economy. Business firms steer the business cycle via profit expectations and animal spirits. Injections to and withdrawals from the circular flow of income are multiplied throughout the economy in accordance with Keynes´s multiplier. A sudden and sharp rise in households´ saving rates has a detrimental effect on aggregate demand, in line with Keynes´s paradox of thrift. Finance, not saving in the S=I sense, is the necessary condition for business investments and economic growth to be realized. Keynes´s finance motive thus makes money endogenous, contradicting the textbook result that exogenous money steers aggregate demand, contradicting the mainstream loanable funds theory and putting into question the Keynesian theory of sticky prices as a condition for real growth. However, a crucial omission in Keynes´s productive writings is the lack of an accelerator tying income to investment. Some of his followers such as Paul Samuelson tried to remedy that by developing multiplier-accelerator models. The problem with them is that the accelerator lacks micro foundations, in specific disregarding business confidence. Linking macro accounting identities with empirical national accounts data for five major economies produces the finding that business firms explain more than all aggregate expenditure growth during a 25-year period. Thus, it is concluded that business confidence is the root of the business cycle. Making the accelerator account for business confidence casts new light on the perhaps most well-known Keynesian “truth”: active fiscal policy as a main force stabilizing the business cycle. With business confidence being the endogenous and ubiquitous variable driving the business cycle, it turns out that any exogenous factor has the possibility to affect it. Policy needs to be viewed as a competing factor to the factor(s) driving the cycle in the other, destabilizing direction. The more powerful those factors are (e.g., a deadly virus), the tougher it gets for policy to “win” the competition, turning business confidence around. This leads up to the paper´s main conclusion: the worse the economy, the stronger is the case for active fiscal policy, but the lesser is the chance for it to succeed.</p>

Does the current crisis mark the end of the EU’s austerity era? Competing political projects in European fiscal governance

Following the pandemic, the EU has responded to the threat of a euro crisis flare-up by deactivating its fiscal framework and establishing the Recovery and Resilience Facility, drawing on joint European bonds to finance national investments. This paper seeks to explain these modifications to fiscal governance and asks whether they are an indication of European austerity making way for an alternative fiscal paradigm. Based on a neo-Gramscian approach, it discusses the policies as parts of competing political projects that are promoted or hindered by certain framework conditions. The paper undertakes a structured comparison of these framework conditions during the euro crisis and the current crisis. It finds that geoeconomic competition increases the demand for a more active fiscal policy, while political preferences and structural relations remained remarkably stable. As the current crisis is marked by high inflation, economic conditions are adverse to a fiscally expansive agenda. The findings do not suggest a lasting reorientation of European fiscal governance. Instead, the measures taken during the pandemic are interpreted as expressions of ‘passive revolution’ in which the EMU adapts elements of a fiscal integrative agenda to provide necessary fixes to its economic order while keeping its underlying fiscally restrictive features intact.

Fiscal multipliers and structural economic characteristics: Evidence from countries in sub‐Saharan Africa

AbstractOutput response to discretionary fiscal policy is a key aspect of examining various theories, findings of empirical studies and delivering guidance to policymakers. This study analyses the output response to unanticipated fiscal spending shocks under several structural economic characteristic factors, including business cycle states, debt burden, openness of the economy, exchange rate regimes and political governance regime, using annual data from 40 countries in SSA spanning from 2000 to 2019 in a panel threshold vector auto‐regression model. The findings indicate that fiscal spending multipliers have much larger effects on output in times of recession, in economies operating under lower trade openness, a fixed exchange rate, low‐debt burden, restricted capital mobility, less financial development and a democratic governance regime. Based on the results, the discretionary countercyclical fiscal policy and optimal fiscal policy action are recommended. Moreover, in order to have effective fiscal policy must target hand‐to‐mouth consumers (non‐Ricardian consumers) and firms with limited liquidity, concentrating on social services and social protection to increase short‐term demand. Likewise, A proper fiscal monetary policy mix should be considered with other structural measures to maximising the positive effects of the fiscal expansion.

The financial market's ability to forecast economic growth: information from sectoral movements

PurposeFinancial market holds superior information that can give insights into the future trajectory of economic growth. Further, identifying sectors that hold the key to future economic growth is important for all economies, but particularly relevant to emerging markets. However, unlike existing studies, the paper provides new insights into the forward-oriented nexus between financial markets and economic growth.Design/methodology/approachThis paper takes a forward-looking approach of using financial market information to predict future economic growth. The authors use ARDL modeling approach to predict economic growth using the information from stock market sectoral returns.FindingsThe authors find that sectoral stock returns significantly improve economic growth forecasts. However, the forecasting superiority is not uniform across sectors and horizons. Auto, consumers' spending, materials and realty sectors provide the most forecasting gains. In contrast, banking, capital goods and industrial sectors provide superior forecasts, but only at horizons beyond one year. The authors also find that the forecast superiority of sectors at longer horizons is inversely related to volatility.Research limitations/implicationsResearch highlights the need for sector-focused policy actions in driving economic growth. Further, the findings of the paper identify sectors that drive short-, medium- and long-term economic growth.Practical implicationsThere is a significant heterogeneity among different sectors and across horizons in predicting economic growth. Results suggest that targeted policy actions in sectors like materials, metals, oil and gas, and realty are key in driving economic growth. Further, policies geared toward the grassroots industries are at least as beneficial as the large-scale industries. Evidence also suggests the need for an active fiscal policy to address infrastructural bottlenecks in primary industries like basic materials and energy. Evidence nevertheless does not undermine the role of monetary policy actions.Originality/valueUnlike any paper till date, the innovation of the paper is that it takes an ARDL modeling approach to measure stock market sectoral returns' ability to forecast economic growth several months ahead in the future. Though the paper considers the Indian case, the innovation and contribution extents to the entire field of economic studies.

Passive Monetary Policy and Active Fiscal Policy in a Monetary Union

Passive Monetary Policy and Active Fiscal Policy in a Monetary Union

TÜRK KAMU MALİYESİNDE PARASAL VE MALİ BASKINLIK

The interactive roles of monetary and fiscal policies are represented by two competing theories in the literature. The advocates of the first theory, the monetarist view, argue that the fiscal authorities tune the primary balance in an attempt to preserve the fiscal solvency for each price level. On the contrary, the proponents of the new approach assert that the fiscal authorities are able to set primary surplus without making a binding commitment to restore solvency. In this study, the purpose is to figure out which approach is valid for Turkish public finances. To accomplish this objective, we run a model based on Bohn (1998) using the Auto Regressive Distributed Lag (ARDL) method so as to determine the type of regime prevalent in the Turkish economy. Besides, we run a Toda-Yamamoto type causality analysis to detect the direction of causality among public debt and primary balances. The results from both analyses reveal that the Turkish public finances are characterised by monetary dominant regimes which indicate that the fiscal solvency is restored by primary balance alterations by a set of active fiscal policy actions.

The Impact of Automatic Stabilizers on the Economic Growth of Albania During the Period 1999-2021

Fiscal policy remains a crucial and powerful strategy to improve the welfare of citizens. During the last three decades, Albania has faced enormous social-economic challenges, raising the necessity for an adequate fiscal policy under the current economic situation. The correlation between fiscal policy and economic growth is a highly debated topic in literature reviews, as some of the fiscal tools do not influence in the same direction on economic growth. The purpose of the article is to see the influence of Automatic Stabilizers (AS) on the Economic Growth of Albania during the period 1999-2022. Most of the topics have been focused on the influence of active fiscal policy on economic growth despite this an unclear gap exists about the influence of the automatic fiscal policy, especially in Albania reality. The secondary data of the Ministry of Finance and INSTAT institutions about the variables and the factors that influence them like the tax system, tax revenues, and public expenditures are analyzed for this purpose. The conclusions reveal the necessity to improve especially the formula of the tax system according to the challenges of the economy. For almost three decades, the data of Automatic Stabilizers (AS) have been included in the multiple linear regression equation using the Ordinary Least Square (OLS) technique. The empirical result shows a narrow positive impact range of Automatic Stabilizers on Economic Growth. The change in the tax system and events such as the earthquake on November 9th, 2019, and the Covid-19 pandemic seem to have had a huge impact on this relationship. As Automatic Stabilizers have to do with vulnerable groups (social assistance is part of AS), some actions should be undertaken focusing on the improvement of the tax system, according to optimal management of expenditures. Applying the best practices to increase the revenues of vulnerable groups is necessary to cope better with the increasing actual rate of inflation.

Analyzing the Mechanism Between Local Government Debts and China’s Economic Development: Spatial Spillover Effects and Environmental Consequences

Under the new normal of economy, a series of active fiscal policies such as tax reduction and fee reduction and new infrastructure construction in China have reduced the source of local government revenue, while the expansion of fiscal expenditure and the widening gap between revenue and expenditure have further exacerbated the motivation of local governments to borrow. Using the spatial econometric model and based on the data of 30 provinces in China from 2006 to 2018, this article deeply studies the impact of local government debt on economic growth and its spatial spillover effect and discusses the regional location heterogeneity of this growth effect. The research shows that: (1) local government debt has significantly promoted regional economic growth; (2) the growth promoting effect of local government borrowing has significant spatial spillover; (3) borrowing debt has the greatest effect on promoting economic growth in the central region, followed by the east, and the west is almost unaffected. Therefore, the Chinese government needs to continue to implement an active fiscal policy, improve the promotion and assessment mechanism of local officials, and adhere to the goal of balanced regional development.