Active Fiscal Policy Research Articles

The Relevance of the Fiscal Theory of Price Level in Korea

This paper estimates a small-scale New Keynesian DSGE model using Bayesian methods to address the question of what monetary and fiscal policy regimes characterized the recent Korean data after 2000. We find that a passive monetary policy and an active fiscal policy prevailed. This finding implies that the Fiscal Theory of Price Level (FTPL) is relevant in understanding the dynamics of the key macroeconomic variables in Korea.

The Effect of Government Expenditures on Economic Growth. the Case of Albania

One of the main issues of economic policy and government is to ensure a sustainable economic growth of a country.Economic growth has been at the center of every government in place since at least year 2000.Though for this teen-year ,growth values were satisfactory in Albania, the macroeconomic situation changed in 2009,when appeared the elements of the global crisis. Economic global crisis has awakened interest in the case of fiscal policy.Fiscal policy and monetary policy as well, are two basci components of state economic policy which are used for macroeconomic purposes:influence of gross domestic product, the level of enmployment, income and price level. The two main instruments of fiscal policy are government expenditures and taxes. Government expenditures are considered as the most powerful weapon available to fiscal policy makers, especially in developing countries such as Albania. During the last century , governments have spent more and more in relation to their national income. This increase in government spending can be explained by the impact that this variable can have on the economic growth of a country? In fact ,about the connection between the government spending and the economic growth of a country various studies seem full of contradictions.This conflict is explained by changes in terms of definitions and from the differencies of the various countries included in these studies. The objective of this study is to give an appropriate answer to the question : Can government spending have the potential to impact and stimulate economic growth? How the changes of the size of the fiscal policy instruments have affected indicators of economic growth in Albania? This article will focus on the role that the fiscal policy has on economic growth , especially in our country, reviewing economic growth theories, debates about the effectiveness of fiscal policy , and active fiscal policy. Finally some suggestions for the future addressing the government expenditures towards priority sectors.

Comment on Fernando Cardim de Carvalho - Monetary policy, Monetary Theory and Financial Structure

Professor Cardim de Carvalho has provided a clear and concise survey of the twists and turns in monetary theory and policy since the Keynesian revolution changed the context for monetary policy by introducing a second policy tool, active fiscal policy. As he notes, we have nowcomefullcircleandmonetarypolicyhasonceagainbecomethesole policy, given that fiscal policy has become hostage to the fiscal surplus targets imposed by IMF conditionality. While these changes in the views of practitioners of monetary policy were also accompanied by changes in view of academics formulating monetary theory, as he notes, much of recent theory has had little if any impact on current monetary policy. Rather, it is the experience of policymakers that has dominated. Irrespective of how one classifies the policy adopted by the Volcker FED in the United States in the 1980s, it is clear that it was adopted out of frustration with existing policy, not because of any conversion to monetarism (indeed, Volcker has confirmed this himself, see VOLCKER; GYOHTEN, 1992). By the same token, the decisions of his successor Alan Greenspan to allow much higher growth rates and lower unemployment rates without active monetary tightening during the boom in the last half of the 1990s has less to do with Greenspan’s lack of belief in the Phillips curve (see his remarks on the eventual transmission of lower unemploymentandhigherwagesrequiringmonetarytighteningtoavoidinflation) or the theory of the NAIRU, as with practical experience.

Optimal fiscal and monetary policy action in a closed economy

We study optimized monetary and fiscal feedback policy rules. The setup is a New Keynesian DSGE model of a closed economy which is solved numerically using common parameter values and fiscal data from the Euro area. Our aim is to welfare rank alternative tax-spending policy instruments used for shock stabilization and debt consolidation when, at the same time, the monetary authorities can follow a Taylor rule for the nominal interest rate.

Welfare Reversals in a Monetary Union

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices, and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent. (JEL E31, E52, E62, F33, F41)

The Simple Analytics of Helicopter Money: Why It Works — Always

Abstract The paper offers a rigorous analysis of Milton Friedman’s parable of the ‘helicopter’ drop of money – a temporary fiscal stimulus funded through an increase in the stock of fiat base money that is never completely reversed in present discounted value (PDV) terms. A monetized fiscal stimulus is more expansionary than a debt-financed one because a monetized expansion of the Central Bank balance sheet is profitable: it relaxes the intertemporal budget constraint of the State – it creates fiscal space. It is up to the fiscal authority to make appropriate use of this fiscal space. Four conditions must be satisfied for a helicopter money drop to boost aggregate demand. First, it must not be reversed fully in PDV terms. Second, there must be benefits from holding fiat base money other than its pecuniary rate of return: that is, the interest rate on any additional base money issued is below the rate of return on the Central Bank’s assets. Third, fiat base money is irredeemable – an asset to the holder but not a liability to the issuer. Fourth, the price of money is positive. Given these conditions, there always exists – even in a permanent liquidity trap – a combination of monetary and fiscal policy actions that boosts private and/or public demand demand) – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore policy choices. Other conclusions are: (1) the increase in the monetary base need not be permanent for helicopter money to be effective; (2) Treasury debt cancellation by the Central Bank or the purchase by the Central Bank of perpetuities (with zero, negative or positive coupons) rather than finite maturity debt are fundamentally irrelevant policy actions. At most they have signaling value; (3) dropping perishable helicopter money will make it more effective if households are liquidity-constrained.

Evaluation of the Federal Reserve's financial-crisis timeline

The present paper evaluates the effect that the events and policy actions important for the Federal Reserve had in five US financial markets. Analysis concentrates on events starting from February 2007 up to August 2009, as dictated by the financial-crisis timeline of the Federal Reserve Bank of St. Louis. Evaluation is indicated via an economic and statistical significance criterion. The former is based on Sharpe-ratio and the latter on Welch's t-test. Robustness of the latter criterion as appropriate for event evaluation is provided via a Kolmogorov–Smirnov test. An overall comparative analysis across the board of categories of the financial events is provided as well. Are there categories of events more significant than others? Is it fiscal decisions or policy actions that more significantly affect US financial markets? Results suggest that academics, economists and financiers re-think the significance of some of the events and policy decisions. Analysis is implemented in the following US financial markets: stock spot indices, stock index futures, Exchange Traded Funds, US Treasury bond futures and spot exchange rates.

Inflation dynamics: The role of public debt and policy regimes

In a passive monetary and active fiscal policy regime, changes in the value of public debt generate wealth effects on households. Then, in contrast to the active monetary and passive fiscal policy regime, inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks. Moreover, a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks. In a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters affect inflation.

Is the Greek budget deficit sustainable after all? Empirical evidence accounting for regime shifts

This article re-examines the sustainability of the Greek budget deficit by using a formal framework based on the government’s intertemporal budget constraint. The empirical analysis uses annual data from 1960 to 2011 and employs traditional as well as more recent unit root and cointegration techniques that account for linear and nonlinear effects in fiscal policy actions. Unlike previous studies, the evidence suggests that, allowing for structural breaks, the Greek budget deficit is unsustainable. The parameter after the second detected break reflects the structural deficiencies of the Greek economy.

Welfare Reversals in a Monetary Union

We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent.

REASSESSING THE EFFECT OF FISCAL AND MONETARY POLICIES IN IRAN: THE ST. LOUIS EQUATION REVISITED

The purpose of this study is to observe effect of fiscal and monetary policy actions on Iranian economy. The famous St. Louis equation, an econometric model with lagged independent variables, is key model for this study. Interestingly, findings are converse to what scholars found when examining Western countries, especially United States. With regard to Iran's case, monetary policy is much less effective than fiscal policy in stimulating permanent economic growth. It is suggested that government interference is reason. Furthermore, these findings support equation's general validity and its application, due to its parsimonious construction.Keywords: Fiscal Policy, Iran, Monetary Policy, St. Louis Equation, TRAMO/SEATSJEL classification: E52, E62, E63(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONFor over thirty years, Iranian economy has been under great pressure, with sanctions and embargos applied by many western countries (Ilias, 2009; gives an interesting summary). As a result of such pressure, a progressively more intense belief, on part of most Iranian politicians and various sectors of public, is that because government is responsible for stabilizing and stimulating economic growth, it is also therefore obliged to explore all financial and political possibilities without exception or restriction. This attitude could potentially also foster an excessive and inefficient use of fiscal assets by Iranian government. Notably, some politicians could use such policies more to pursue their own political objectives, rather than for public and national benefit. Mazarei (1996) argues that populist economic policies have mainly influenced Iran's economic conditions since post-revolution period after 1979. This issue is amplified by fact that Central Bank's monetary policy is controlled by government. Naghshineh-Pour (2009) criticizes dependant central bank policy with regard to Iran's banking problems. He (on page 2) comments further: A government-dependent central bank often tenders short-sighted politicians to try to wrangle a temporary economic roar to promote themselves. These concerns imply an insignificant economic effect induced by monetary actions. Although such concerns are frequently voiced, they are rarely investigated. Nevertheless, this study aims to show that these concerns are justified as empirical results demonstrate.The St. Louis equation may no longer be revolutionary and provocative, but so far, its critics have still failed to present any clear evidence to refute it. One notable advantage of model is indeed its simplicity, especially when reliable data is scarce. For instance, due to information barriers and restrictions in many non-western countries, such a model can be an excellent tool, especially for a qualitative assessment of impact of fiscal and monetary actions on economic growth. Certainly, some scholars may criticize that model's simplicity is what makes it inadequate in analyzing policy effects on complex economics, especially for case of developing countries. Indeed, it's debatable whether complexity can solve this issue. Hence, Summers (1991) points out that the empirical facts of which we are most confident and which provide most secure basis for theory are those that require least sophisticated statistical analysis to perceive. The St. Louis equation is certainly an unsophisticated approach and hence a good analysis tool for those scholars who agree with Lawrence Summer's point of view. The results of study are presented in third section of this paper, which is followed by a discussion. In last section, we derive some conclusions.The paper is organized as follows. Section 2 introduces issue of Iran's subsidized economy. Section 3 presents a short literature review regarding St. Louis equation. The following Section 4 introduces model and data while Section 5 presents results and robustness checks. …

Macroeconomic effects of fiscal policy changes: A case of South Africa

This study develops comprehensive full-sector macro-econometric models for the South African economy with the aim of explaining and providing the macroeconomic effects of fiscal policy changes in the country. The models are applied to test the effectiveness of fiscal policy actions in an economic environment with existing structural supply constraints versus demand-side constraints and also to detect which components of the fiscal would be more effective in stabilising the economy. Based on the structure of the South African economy and the framework presented, the study concludes that the South African economy can be characterised as one which is embedded with structural supply constraints. Thus, a model which is suitable for policy analyses of the South African economy needs to capture the long-run supply-side characteristics of the economy. A price block is incorporated to specify the price adjustment between the supply-side sector and real aggregate demand sector. The models are estimated with time-series data from 1970 to 2011, capturing both the long-run and short-run dynamic properties of the economy. The results from the series of fiscal policy scenarios suggest that fiscal policy actions are more effective in an economic environment with limited or no supply constraints. Fiscal expansion or consolidation that comes more from government spending changes will be more effective in an economic environment where structural supply constraints are absent while tax revenue changes will be more effective in an economic environment where there exist major structural supply constraints.

Monetary Policy and Debt Deflation: Some Computational Experiments

The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms’ debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.

The impact of uncertainty shocks in emerging economies

A recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variables that drive the business cycle. Using an empirical model, we find substantial heterogeneity in reactions to these shocks across countries. In comparison to the U.S. and other developed countries, emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock, take significantly longer to recover, and do not experience a subsequent overshoot in activity. We provide evidence that the dynamics of investment and consumption are correlated with the depth of financial markets. We control for the potential role of a credit channel, and estimate that it can account for up to one-half of the increased fall in investment generated by uncertainty shocks among emerging economies with less-developed financial markets. In this context, monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms may reduce the impact of uncertainty shocks in these economies.

A Multivariable System Approach for the Assessment of the Influence of Fiscal Policy to Business Cycle Shocks

The authors consider a multivariable system comprising a set of macroeconomic variables as inputs, states and outputs. In this setting the authors assess the control potential of fiscal policy versus a large negative business cycle shock that affects the output of the system. The inputs considered for this matter are the cyclical components of government spending and taxes. The states are the cyclical components of consumption and investment. These variables convey information to the policy maker at each time period. The output of the system is the cyclical component of GDP. In order to assess the control potential of government fiscal policy we begin by solving an optimal control problem minimizing the deviations of log GDP from its trend subject to a multivariable system and a set of input - output inequality constraints. Based on the results obtained the authors propose a set of optimal control indicators used to evaluate the effectiveness of fiscal policy action against a large negative business cycle shock and the potential controllability of the system.

Fiscal deficits under financial pressure and insolvency: Evidence for Italy, Greece and Spain

This article attempts to re-evaluate the sustainability of the fiscal deficit as well as the long-run macroeconomic relationship between government spending and revenues for three South-European economies under financial market pressure and insolvency; Italy, Greece and Spain. The empirical analysis uses annual data from 1970 to 2010 and employs various cointegration techniques to account for possible linear and nonlinear effects in fiscal policy actions. The evidence for all three countries suggests that, allowing for structural break, (i) the fiscal deficits are weakly sustainable in the long-run, (ii) the spend-and-tax hypothesis is supported and (iii) the budgetary adjustment process is asymmetric in Italy and Spain.

Losses from Membership in EMU: an Estimated Two-Country DSGE Model

Abstract This paper analyzes how adoption of the euro would affect the volatility of output and inflation in the presence of asymmetric shocks. In addition, we investigate whether changes in the objective function of the ECB, or more or less active fiscal policy, can decrease losses entailed by EA membership. Overall, results indicate that a membership would decrease EA losses but increase the new member's losses significantly. However, output variability is shown largely to decrease, a fact which can be explained by the disappearance of the exchange rate. Furthermore, results indicate that automatic stabilizers and flexible inflation targeting can play an important role in reducing these losses. JEL Classification: F31, F41, G15

Impact of Macroeconomic Policies on the Ghana Stock Exchange: A Cointegration Analysis

The study examined the impact of fiscal and monetary policy actions on the stock market in Ghana. In pursuing this, the researchers probed the inter-temporal interaction between macroeconomic policies and stock market activities in Ghana and investigated the efficiency of the stock market with respect to fiscal and monetary policy information. It was found that, both from common correlation analysis to recent econometric modeling; indicate fiscal policy actions have significant effects on stock market activities and not the other way round. In addition, there is a unidirectional causal effect of fiscal policy actions on stock market activity. It was thus concluded that the fiscal policy actions do matter in the activities of the stock market. The study recommends that government must synchronize its fiscal policy actions with activities in the stock market among others.

Effects of monetary-exchange policy to development of agriculture competitiveness in the Republic of Serbia

The Republic of Serbia has one of the most important resources - agricultural resources, which are affected by the monetary - exchange policy, and that, as such, is the backbone of Serbia's economic development, which should be based on the exploitation of agricultural land since this resource puts our country in the region with expressed relative, comparative advantages in relation to a large number of countries. The rise in prices of agricultural products in the long period was much slower than the growth in the price level, which is the agricultural activity in the context of primary production was placed in a very disadvantageous position. The active fiscal policy, through excise taxes on petroleum products leads to higher costs in farming than in any other area. Consumption of petroleum products is the biggest expense that directly participate in the production process. Neither in terms of monetary-exchange policy situation is not favorable. The unreal exchange rate policy stimulated imports and discouraged real exports of agricultural product results in the 'unrealistic' low productivity in this sector. In this regard, it is important to establish an appropriate economic policy through monetary, fiscal and exchange mechanism, in order to create a competitive advantage of agricultural production in this area.

Inflation Dynamics: The Role of Public Debt and Policy Regimes

In a passive monetary and active fiscal policy regime, changes in the value of public debt generate wealth effects on households. Then, in contrast to the active monetary and passive fiscal policy regime, inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks. Moreover, a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks. In a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters affect inflation.