Fiscal Policy Interventions Research Articles

Policy Responses to Modern Economic Crises

In March 2020, Jay Powell, Federal Reserve (Fed) chairperson, faced a daunting prospect that only a few months prior seemed like a remote possibility: massive expansion of the Fed's balance sheet. Over the past five years, the economy had experienced steady economic growth, permitting the Fed to reduce its balance sheet. The Fed's economists expected the trend to continue. But the rapidly spreading global coronavirus pandemic (known as COVID-19) had rendered moot all prior forecasts. In addition to the health crisis, the United States—and the world—faced the prospect of another economic crisis—just over 10 years after emerging from the largest recession since the Great Depression. How should Powell and his counterparts who ran fiscal policy respond to the crisis? And to what extent could the policy experiments implemented in response to the Great Recession of 2008 guide the monetary and fiscal policy interventions in response to the pandemic crisis? Excerpt UVA-GEM-0182 Rev. Oct. 28, 2020 Policy Responses to Modern Economic Crises In March 2020, Jay Powell, Federal Reserve (Fed) chairperson, faced a daunting prospect that only a few months prior seemed like a remote possibility: massive expansion of the Fed's balance sheet. Over the past five years, the economy had experienced steady economic growth, permitting the Fed to reduce its balance sheet (see Exhibit1 for the monetary base). The Fed's economists expected the trend to continue. But the rapidly spreading global coronavirus pandemic (known as COVID-19) had rendered moot all prior forecasts. In addition to the health crisis, the United States—and the world—faced the prospect of another economic crisis—just over 10 years after emerging from the largest recession since the Great Depression. How should Powell and his counterparts who ran fiscal policy respond to the crisis? And to what extent could the policy experiments implemented in response to the Great Recession of 2008 guide the monetary and fiscal policy interventions in response to the pandemic crisis? Global Financial Crisis As is characteristic of economic crises, the global financial crisis of 2008 came as a surprise that forced policymakers to adapt to evolving events. Mortgage delinquencies accelerated, and indices of national home prices started to decline in early 2007 (Exhibit 2). Lenders such as HSBC experienced large losses, and some filed for bankruptcy. Despite the issues in the housing market, policymakers at first maintained an optimistic outlook. On March 17, Fed Chairman Ben Bernanke stated: “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” . . .

Mitigating the Socio-Economic Impacts of COVID-19; Role of Governments in Sub-Saharan Africa, Fiscal and Monetary Policy Perspectives

In this paper, we investigate the role of governments in mitigating the socio-economic impacts of COVID-19. We also try to evaluate the fiscal and monetary policy interventions by governments and assess how such policies could be sustained. Taking Ghana as a sample, this study reveals that, the coordinated applications of monetary and fiscal policies are lifesaving, preventing loss of incomes and jobs, protecting bankruptcies in businesses, and finally enhancing economic recovery. We propose a CCCRD Model which could serve as a global strategy for governments in the fight against COVID-19. Backing such policies with legislation could help in their sustenance.

Sticky prices versus sticky information: Does it matter for policy paradoxes?

This paper shows that under a strict inflation targeting regime, the government spending multiplier at the zero lower bound (ZLB) is larger under sticky information than under sticky prices. Similarly, well known paradoxes, e.g., the paradox of toil and the paradox of flexibility become more severe under sticky information. For the case of sticky information it is important to assume that the fiscal policy intervention coincides with the duration of zero interest rates, while such a distinction is less important for sticky prices. We unify and clarify results that may appear to contradict each other in the literature.

Estática comparativa e indeterminación de signos en un modelo macroeconómico neoclásico sencillo

En este trabajo se analiza un modelo macroeconómico neoclásico sencillo de dos periodos -corto y largo plazo- que considera exclusivamente el sector real de la economía (mercados de bienes y de trabajo). Se comprueba cómo, bajo una caracterización general, algunos signos importantes de la estática comparativa están indeterminados. Esta ambigüedad está causada por la presencia del tipo de interés real que liga intertemporalmente los cuatro mercados considerados. Añadiendo supuestos simplificadores se consigue determinar los signos al coste de una pérdida de generalidad y admisibilidad empírica. Este hecho limita considerablemente la relevancia empírica de buena parte de los modelos utilizados habitualmente para la enseñanza de la macroeconomía, donde se evitan resultados de este tipo, dado que se persigue fundamentalmente responder a preguntas sobre el sentido de las intervenciones de política fiscal y monetaria. Leído positivamente, este resultado obliga a prestar una mayor atención a todas las posibilidades teóricas que surgen al modelizar sistemas de interdependencia general, como son los propios de la macroeconomía.

Fiscal policy interventions at the zero lower bound

We build on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone. In this setting, we find that the big four eurozone economies (France, Germany, Italy, and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound, as suggested by Krugman (1998). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.

Media representations of sugar and sugar-sweetened beverage consumption in UK newspapers: implications for public health policy

BackgroundSugar-sweetened beverages (SSBs) have been identified as a key target for fiscal policy interventions designed to reduce sugar consumption and tackle obesity, particularly in young people. Research shows that the media have a powerful role in forming public perceptions, and thus likely acceptance, of such health policies. Our aim was to understand how newspapers play a part in shaping the acceptability of health policies in the case of SSB taxation. MethodsWe conducted quantitative content analysis of newsprint articles regarding sugar, SSBs, and taxation published in a diverse sample of 11 UK national newspapers from April 1, 2015, to Nov 30, 2016. Relevant articles were extracted by a systematic search of the Nexis database, and a structured coding frame was developed based on initial reading of a 10% subsample. A 10% subsample was double coded to ensure consistent application of codes. Frequency analysis and χ2 testing was done in SPSS (version 24). FindingsAfter exclusions, 684 relevant articles were identified. Articles were predominantly negative about sugar consumption (n=528, 77%) and SSB consumption (397, 58%), defining the problem in terms of impacts on health, primarily obesity (251, 37%). A high proportion of articles framed the problem as being driven by failures of industry (398, 58%). Discussion of potential solutions consistently focused on the need for government intervention (473, 69%) and the role that taxation could have. Peaks in reporting coincided with the publication of evidence, government policy documents, and campaigner activities. InterpretationThe problem of sugar and SSBs received substantial media attention in UK national newspapers during 2015 and 2016, particularly prompted by public health advocates and campaigners. The focus of the narrative changed over time from emphasis on the problem to discussion of potential solutions. The framing of the debate identifying failures of industry as an important driver of the problem may have contributed to a greater public acceptance of government intervention and thus helped to open a policy window for a soft drinks industry levy. FundingSupported by the UK Medical Research Council as part of the Understandings and Uses of Public Health Research programme (MC_U130085862, MC_UU_12017/6) and the Informing Healthy Public Policy programme (MC_UU_12017/15) and by the Chief Scientist Office of the Scottish Government Health Directorates (SPHSU15). The funders had no role in the commissioning of the study, writing of the abstract, or decision to submit it for publication.

Nudging for Prevention in Occupational Health and Safety in South Africa Using Fiscal Policies.

Currently, in some countries occupational health and safety policy and practice have a bias toward secondary prevention and workers' compensation rather than primary prevention. Particularly, in emerging economies, research has not adequately contributed to effective interventions and improvements in workers' health. This article, using South Africa as a case study, describes a methodology for identifying candidate fiscal policy interventions and describes the policy interventions selected for occupational health and safety. It is argued that fiscal policies are well placed to deal with complex intersectoral health problems and to focus efforts on primary prevention. A major challenge is the lack of empirical evidence to support the effectiveness of fiscal policies in improving workers' health. A second challenge is the underprioritization of occupational health and safety partly due to the relatively small burden of disease attributed to occupational exposures. Both challenges can and should be overcome by (i) conducting policy-relevant research to fill the empirical gaps and (ii) reconceptualizing, both for policy and research purposes, the role of work as a determinant of population health. Fiscal policies to prevent exposure to hazards at work have face validity and are thus appealing, not as a replacement for other efforts to improve health, but as part of a comprehensive effort toward prevention.

Optimal Fiscal Policy in a Liquidity Trap at the Zero Lower Bound

We build on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone. In this setting, we find that the big four eurozone economies (France, Germany, Italy, and Spain) can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases. We estimate the government spending multiplier to be above 1.8 when this policy is associated with a long-term commitment to keeping the nominal interest rate at the zero lower bound, as suggested by Krugman (1998). Notably, the short-term deficit effect on the budget balance can be offset five years after the implementation of a large spending program. We also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run. Moreover, we provide novel empirical evidence that a large government debt renders a government spending policy ineffective.

Stabilising Chaos and Optimising Impact: Policy Evaluation in a Structural Macroeconomic Model

The purpose of this paper is to construct a structural macroeconomic model to design monetary and fiscal policies aimed at attaining macroeconomic objectives. The study further attempts to simulate a baseline and policy scenario to evaluate the impact of such monetary and fiscal policy interventions on economy. To achieve the above objectives, the study benefits from both the concept of financial programming approach and vector error correction econometric techniques to build up an interconnected network among the four main areas of economy: real sector, external sector, government sector and monetary sector. Such efforts are expected not just to maximise the synergies across the two different approaches but also to minimise the challenges and limitations associated with them. This paper then discusses the empirically driven results from the application of Costa Rican economy and finally ends with a number of macro-policy implications and suggests topics for future research.

Speculative runs on interest rate pegs

We analyze a new class of equilibria that emerges when a central bank conducts monetary policy by setting an interest rate (as an arbitrary function of its available information) and letting the private sector set the quantity traded. These equilibria involve a run on the central bank׳s interest target, whereby money grows fast, private agents borrow as much as possible against the central bank, and the shadow interest rate is different from the policy target. We argue that these equilibria represent a particular danger when banks hold large excess reserves, such as is the case following periods of quantitative easing. Our analysis suggests that successfully managing the exit strategy requires additional tools beyond setting interest-rate targets and paying interest on reserves; in particular, freezing excess reserves or fiscal-policy intervention may be needed to fend off adverse expectations.

Optimal Monetary Policy Rules in an Open Economy: Theory and Evidence

The main objective of this paper is to provide a theoretical and empirical framework for monetary policy rule in an open economy. Our model is an optimal but simple forward looking model. Our estimate shows that at least, the trinity of inflation gaps, the structure of the economy and the fiscal policy intervention should be used in each optimal and simple monetary policy reaction function. In this model the gap between domestic inflation and the world inflation make the reaction function appropriate for open economy. Our result especially the value of domestic inflation gap coefficient support the finding of Taylor (1993) and Calarida, Gali and Gertler (2000). Another important finding of this paper is the ability to estimate time-varying long-term interest rate. The fluctuation of the short-term interest rate around the long-term can be used as another important criterion to analyze the conduct of monetary policy.

Nonlinear effects of asset prices on fiscal policy: Evidence from the UK, Italy and Spain

We test for nonlinear effects of asset prices on the fiscal policy of three major European economies (the UK, Italy and Spain). We model primary government spending and government revenue as time-varying transition probability Markovian processes (TVPMS). We find that while in Italy fiscal policy is substantially neutral vis-a-vis asset price movements, fiscal authorities in the UK and Spain seem to track the dynamics of wealth. In particular, revenue-based fiscal policy interventions in the UK are particularly effective in counteracting shocks in the asset markets induced by sharp wealth fluctuations. Similarly, in Spain, the spending-side of the fiscal policy plays a dominant role in stabilizing stock and housing markets.

Fiscal Policy in an Expectations-Driven Liquidity Trap

We study the effects of fiscal policy interventions in a liquidity trap in a model with nominal rigidities and an interest rate rule. In a liquidity trap caused by a self-fulfilling state of low confidence, higher government spending has deflationary effects that reduce the spending multiplier when the zero lower bound is binding. Instead, cuts in marginal labor tax rates are inflationary and become more expansionary when the zero lower bound is binding. These findings contradict popular views about the effects of fiscal policy in a liquidity trap.

The amended Government Procurement Agreement : challenges and opportunities for South Africa

General government procurement (including for defence) accounts for 20 per cent and 15 per cent of Gross Domestic Product (GDP) of Organisation for Economic Co-operation and Development (OECD) and non-OECD countries, respectively. Despite liberalisation of trade under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), government procurement largely continues to have high levels of home-bias. This is primarily so because a multiplicity of objectives drive government procurement. Considerations of government procurement as a policy instrument very often override cost-effectiveness as the primary consideration in determining it. For example, government procurement is commonly used as a policy tool for developing target sections of populations, industry, regions etc. In addition, according to Keynesian arguments, government procurement is the key instrument for fiscal policy intervention to kick-start a slowing economy. These multiple objectives create complexity because there are usually trade-offs involved between them in that attaining one is usually at the cost of the another.

Death of a Theory

The author discusses the effectiveness of fiscal approaches to stabilization policy. The conventional wis dom before 2007 was that fiscal policy intervention as a stabilization tool had little to recommend it, mostly due to political constraints and to the unlikely effectiveness of many types of temporary fiscal policy actions. However, with short-term nominal interest rates near zero, attention turned again toward fiscal stabilization policy. The author describes and critiques two theories of how fiscal policy might be viewed as effective in such circumstances. One, heavily studied, is that a tax-financed increase in govern ment expenditures would temporarily increase total output in the economy. The other, lightly studied but rhetorically forceful, is that increased government expenditures may inspire confidence. Both theo ries have drawbacks, but the author argues the first is dying because of three considerations: (i) actual political systems are ill-suited to implement the advice from the theory; (ii) monetary stabilization policy has been quite effective, making fiscal experiments redundant; and (iii) governments pushed distortion

How the UK economy weathered the financial storm

Prior to the global financial crisis of 2008, the UK had the largest banking sector asset to GDP ratio among large countries, and had experienced rapid real property price increases as well as a persistent current account deficit in the preceding decade. These factors, together with its role as an international financial centre, made the UK economy particularly vulnerable to the onset of the global financial crisis. Although the initial drop in real GDP was steep, we provide evidence that the economy has weathered the financial storm better than many feared, and has fared no worse than its peer group of major economies. In this paper we assess the reasons underlying this outcome, including the possibility of exaggerated vulnerabilities, global economic recovery, the flexible supply side of the UK economy, as well as fiscal, financial and monetary policy interventions. Our analysis suggests that all of these factors played a role in cushioning the impact on the UK real economy, leading to a more benign outcome than most observers expected.

Activist Fiscal Policy

During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

The UK transport carbon model: An integrated life cycle approach to explore low carbon futures

Current debate focuses on the need for the transport sector to contribute to more ambitious carbon emission reduction targets. In the UK, various macro-economic and energy system wide, top-down models are used to explore the potential for energy demand and carbon emissions reduction in the transport sector. These models can lack the bottom-up, sectoral detail needed to simulate the effects of integrated demand and supply-side policy strategies to reduce emissions. Bridging the gap between short-term forecasting and long-term scenario “models”, this paper introduces a newly developed strategic transport, energy, emissions and environmental impacts model, the UK Transport Carbon Model (UKTCM). The UKTCM covers the range of transport–energy–environment issues from socio-economic and policy influences on energy demand reduction through to life cycle carbon emissions and external costs. The model is demonstrated in this paper by presenting the results of three single policies and one policy package scenario. Limitations of the model are also discussed. Developed under the auspices of the UK Energy Research Centre (UKERC) the UKTCM can be used to develop transport policy scenarios that explore the full range of technological, fiscal, regulatory and behavioural change policy interventions to meet UK climate change and energy security goals.

Heterogeneous resources and the financial crisis: implications of strategic management theory

The recent financial crisis and subsequent economic downturn are among the most important global economic events since the Great Depression of the 1930s (Elmendorf, 2009). In response to these events, macroeconomists have mustered their traditional theories to understand the causes of the crisis and, equally important, what might be done to help the economy recover more quickly. On op-ed pages, news talk shows and – apparently – in the highest halls of governments worldwide, discussions about fiscal and monetary policy intervention have dominated much of the conversation about the crisis and what to do about it (Coy, 2009), and have led to talk of a return to the ideas of John Maynard Keynes (Fox, 2008). Economic policy decisions today, derived mostly from traditional macroeconomic theories, may have implications for the economy for decades to come (Elmendorf, 2009). Thus, the stakes are high, since the prosperity – and even survival – of billions of people around the world depend on a healthy and growing world economy. In the midst of this obsession with macroeconomics, we would like to propose an alternative thesis: macroeconomics, by itself, is not well equipped to deal with the current crisis and, in particular, a sole reliance on macroeconomic theory is likely to slow rather than accelerate economic recovery. The reason for this is that mainstream macroeconomic theories, whatever their stripe, all adopt the assumption that factors of production, STRATEGIC ORGANIZATION Vol 7(4): 467–484 DOI: 10.1177/1476127009346790 © The Author(s), 2009 Reprints and Permissions: http://www.sagepub.co.uk/journalsPermissions.nav http://so.sagepub.com

Fiscal Policy and the Global Financial Crisis

The financial crisis raises demands for fiscal policy interventions. While a fall in aggregate demand is an important consequence of the crisis, it also reflects more underlying structural problems and changes. Hence, appropriate policy designs have to take account of the nature of the crisis and the underlying need for structural changes. While fiscal policy should mainly rely on automatic stabilizers in normal situations, a more active fiscal policy strategy is called for in the present situation. The effectiveness of various types of fiscal instruments and conceivable tensions between short and long-run objectives are discussed. Past experience shows that deep recessions become persistent due to marginalization of unemployed, and therefore labour market policies have to be considered as an integral part of policy packages. Finally the question of international policy coordination is addressed.