Fiscal Policy Stance Research Articles

Rwanda

Rwanda has made considerable progress in sustaining high and inclusive growth and reducing poverty. Despite numerous shocks, macroeconomic management has been strong and debt risks have remained low. Going forward, the authorities’ National Strategy for Transformation (NST) aims to make progress toward the SDGs, but its financing will be challenging. A more neutral medium-term fiscal policy stance can help, reinforced with commitments for more domestic revenue mobilization and mitigation of fiscal risks. The central bank moved to a new interest-rate based monetary policy framework and, with inflation below its target range, eased the policy stance. To support their policies and NST implementation, the authorities are requesting approval of a 3-year program supported by the Policy Coordination Instrument (PCI).

Structural determinants of potential output growth in Europe and the role of fiscal policy

GDP growth in the Eurozone during the last twenty years continuously decreased. In addition, the global financial crisis and subsequent events seem to have, on average, shifted the trajectory of the Eurozone’s potential output downward. A key question is whether this trend is a permanent result of “secular stagnation” or if economic policies might improve the situation. In this paper, we test the impact of several structural determinants of potential output growth using a dynamic panel data methodology for 11 main EMU members for the period 1996–2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and sovereign debt crises, contributed to the slowdown of potential growth. Estimated results suggest that population, tertiary education, research and development expenditure, trade and financial openness, and institutional quality contributed significantly to potential output growth in the EMU during the period under examination. We further find that debt accumulation affects positively and significantly potential growth for debt values up to 90% of GDP.

The Impact of Government Borrowing Costs on Fiscal Discipline

SummaryThis paper studies the impact of government borrowing costs on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra‐expansionary monetary policies of recent years. Applying the panel data econometric approach for a sample of OECD and 11 early euro area countries over the period 1985–2015, the study suggests a positive and statistically significant impact of government borrowing costs on cyclically adjusted primary balances, indicating that a decrease in borrowing costs leads to a deterioration of fiscal policy stance. The findings herein also suggest that this effect in the euro area seems to be driven by a group of its peripheral rather than core countries and appears to work through the expenditure (more specifically, current expenditure) channel. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra‐low interest rates may cause negative side effects for fiscal discipline.

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

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

Fiscal Pressure of Migration and Horizontal Fiscal Inequality: Evidence from Indian Experience

AbstractThis article examines the patterns and trends in inter‐State migration across the Indian States and observes that along with the demographic factors, migration is also affected by the fiscal profile of States. Controlling for the economic prosperity of States as reflected in their per capita Net State Domestic Product and the nature of fiscal policy stance, econometric estimation using the gravity model suggests that level of vertical federal transfers and its horizontal distribution is an important determinant of the pattern of inter State migration. To correct for the extant horizontal fiscal inequality across the Indian States, the article suggests a relatively more progressive transfer system and a developmental fiscal policy stance at the State level to reduce the pressure of out‐migration to prosperous regions of the country.

Monetary Integration, Fiscal Divergence and Current Account Imbalances in Europe

Abstract The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

Il saldo di bilancio corretto per il ciclo economico: un'analisi empirica del caso italiano

The cyclically adjusted budget balance: An empirical analysis of the Italian case This article presents an estimate of the cyclically-adjusted primary balance in Italy during the new Millennium (1999-2016) in order to assess the fiscal policy stance pursued during the period considered. If it is possible to initially qualify the fiscal policy as counter-cyclical, when the correction is made for the cycle, the budget balance becomes completely acyclical. Therefore, once the budget balance has been adjusted for the automatic influences deriving from the fluctuations of the economic cycle, the discretion of the Government has been explained in the weakening of the original anti-cyclical nature of the fiscal policy. Repeating the analysis in two different sub-periods with the 2008 crisis as a watershed, it emerged that this discretionary reductionist intervention has focused more on the period following the outbreak of the crisis, which highlights how discretionary fiscal policy has failed its expansive contribution in the most difficult moments of the crisis.

Oil price cycles, fiscal dominance and countercyclical monetary policy in Iran

AbstractThe mission of monetary policy is to conduct countercyclical policy, however, this is not a universally practiced norm. Pro‐cyclical fiscal and monetary policies during boom periods have often been observed in developing countries and tend to amplify the impact of positive commodity price shocks. The consequence is strengthening of domestic inflationary pressures and appreciation of the exchange rate. This paper examines counter‐cyclicality of monetary policy and the role of fiscal policy in this regard. The stance of fiscal policy and the manner of financing government expenditures have a significant effect on the conduct of monetary policy. Our empirical observations indicate that, fiscal and monetary policies in Iran are generally expansionary, particularly during economic booms, often resulting in subsequent large depreciation of the domestic currency followed by higher inflation rates and economic slowdown. Under fiscal dominance, monetary policy is ineffective and both targets and instruments of monetary policy will not be under the control of the central bank. A structurally balanced fiscal rule that maintains an aligned exchange rate allows effective countercyclical monetary policies and discourages excessive foreign financing. Moreover, policy measures that increase more reliance on domestic resources are the appropriate policy measures that makes the economy more resistant to external shocks.

The transmission of monetary policy through redistributions and durable purchases

Using a tractable OLG model with government debt, we study a redistribution channel for the transmission of monetary policy. Expansionary open-market operations generate a negative wealth effect, increasing households’ incentives to save and pushing down the real interest rate. This leads to a substitution towards durables, generating a temporary boom in the durable-good sector. With search and matching frictions, the fall in interest rates causes an increase in labor demand, raising aggregate employment. The model mimics the empirical responses of key macroeconomic variables to monetary policy interventions. The fiscal policy stance plays a key role in the transmission mechanism.

The Intervening Influence of Economic Growth on Fiscal Policy Stance and Public Expenditure in Kenya

This paper investigates the intervening influence of economic growth on the relationship between fiscal policy stance and public expenditure in Kenya from 1964 to 2015 using a Vector Error Correction Model. The results indicate that economic growth has an intervening influence on the relationship between fiscal policy stance and public expenditure in Kenya. The findings further show that fiscal policy, economic growth and public expenditure are cointegrated using the Johansen test and the bound test but there is no short-run causality between the variables as indicated by the Wald test statistics. The findings suggest that economic growth explains the extent to which fiscal policy stance affects the level of public expenditure in Kenya even though fiscal policy stance has a negative relationship with public expenditure.

Fiscal Policy Stance and Public Expenditure in Kenya

This paper investigates the relationship between fiscal policy stance and public expenditure in Kenya from 1964 to 2015 using a Vector Error Correction Model. The results indicate that there is a negative relationship between fiscal policy stance and public expenditure. The findings further indicate that fiscal policy and public expenditure are cointegrated using the Johansen test and the bound test but there is no short-run causality between the variables as indicated by the Wald test statistics. This means that fiscal policy stance does not have a strong direct effect on public expenditure as supported by the theory of fiscal policy that policy makers could have a lower incentive to pursue public interests as compared to their personal interests.

Fiscal Consolidations: A Theoretical Essay with a Heterogeneous-Agent Model

ABSTRACTSince the emergence of the financial crisis, most of the EU countries have promoted impressive public interventions to support financial institutions, contributing to a significant rise in general government gross debt-to-GDP ratios. As such, the issue of how to best pursue a fiscal consolidation will become crucial regarding the fiscal policy stance. This paper aims at characterizing four different stylized debt consolidation strategies extensively identified in the literature (one pure revenue-based and three expenditure-based) in order to assess welfare affects and, in particular, the inequality effects involved. For this purpose, we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy and the endogenous cross-section distribution of income and wealth. Moreover, we decompose the impacts on welfare criteria in order to distinguish pure efficiency effects from insurance and inequality effects. According to our simulations, the adjustment based on the reduction of unproductive expenditures came out to be the most welfare-enhancing compared to those based on tax increases or on social transfer reductions.

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

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

Comment

Comment

The Failure of ECB Monetary Policy from a Mises-Hayek Perspective

The paper analyses the common European monetary policy based on a Mises-Hayek overinvestment framework, which is combined with the theory of optimum currency areas. It shows how since the turn of the millennium a too expansionary monetary policy contributed to unsustainable overinvestment booms in the periphery of the European Monetary Union, and more recently in Germany, dependent on the national fiscal policy stances. It is argued that the ECB´s ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth by conserving distorted economic structures. To preserve political stability a timely exit from the ultra-expansionary monetary policy is postulated.

Bond Markets Initiation and Tax Revenue Mobilization in Developing Countries

We analyze the relationship between the introduction of a sovereign bond market (BM) and tax revenue mobilization behavior, using a large sample of 119 developing countries. Propensity Scores Matching estimations reveal that BM participation significantly fosters domestic tax revenue mobilization. Moreover, we find that this favorable effect is sensitive to BM countries' characteristics, namely the stance of monetary and fiscal policies, the exchange rate regime, the level of economic development, and the degree of financial openness and financial development. Finally, our results show that BM participation fosters internal taxes and reduces their instability, compared to international trade taxes. These findings highlight the strength of BM in promoting structural reforms in developing countries, through encouraging them to increase their tax effort and even by contributing to some extent to the fiscal transition process.

La política fiscal frente a los flujos de capital: evidencia para algunos países de América Latina

Los flujos de capital representan oportunidades para financiar el crecimiento y el desarrollo de los países, pero también conllevan riesgos, especialmente de tipo macroeconómico y financiero. Las respuestas de política para mitigar sus efectos, juegan un papel importante especialmente en los mercados emergentes. En este trabajo se evalúa la postura de la política fiscal frente a los choques de los flujos de capital registrados durante las dos últimas décadas en seis economías emergentes de América Latina: Argentina, Brasil, Chile, Colombia, México y Perú. Con base en la caracterización de los diferentes episodios de entradas y salidas súbitas de capital y en la estimación de un modelo de datos de panel con variables instrumentales, se encuentra quelos gobiernos no respondieron con medidas fiscales excepcionales. Por el contrario, su postura fiscal de naturaleza procíclica parece estar asociada al efecto que los flujos de capital produjeron sobre la actividad económica.

Stress testing the EU fiscal framework

This study evaluates the efficiency of the cyclically-adjusted budget balance (CABB) as the central gauge in the reinforced European fiscal framework for evaluating fiscal discipline. We do this by means of a simulation experiment. We use an estimated DSGE model to simulate all the macroeconomic data needed to assess the CABB according to the official EC methodology. Additionally, the model contains an expenditure fiscal rule that accounts for non-automatic variation in the budget, which allows us to observe the true discretionary measures of fiscal policy. Our results indicate that the EC methodology frequently fails to identify the true fiscal policy stance and also frequently fails to correctly signal potential violations of the SGP limit on structural deficit. In the latter case triggering corrective fiscal contractions to comply with the SGP results in increased macroeconomic instability. In addition, we show that allowing for a bigger role for stability-oriented discretionary policy and thus relaxing the SGP limit on structural deficit could enhance the stabilization efficiency of fiscal policy without reducing the degree of compliance with the Maastricht Treaty. These conclusions apply to small countries in a monetary union as well as large countries with independent monetary policy.

Fiscal Pressure of Interest Payments in Serbia - A Time Series Exploration

We focus on the response of primary fiscal balance to interest payments and borrowing costs on Serbian public debt before and in the aftermath of the global financial crisis. Our analysis reveals: i) policy makers financed up to 50% of each percentage point increase in interest payments to GDP ratio with new public debt issuance; ii) the government has responded to rising interest payments and borrowing costs by reducing primary fiscal balance from the onset of the global financial crisis; iii) the response of primary fiscal balance to interest payments mimics the response of primary fiscal balance to the costs of borrowing; iv) fiscal austerity measures adopted after the breach of fiscal rule for public debt have been insufficient to stabilize fiscal policy stance in Serbia.

The Effect of Real-Time Fiscal Policy on Sovereign Interest Rates in OECD Countries

The aim of this study is to investigate the effect of real-time projections of fiscal policy stances on government bonds long-term interest rates using a panel of 20 OECD countries between 1992 and 2008. To deal with endogeneity arising from forecasts of fiscal balances the paper exploits instrumental variables and GMM estimators together with the variation in real-time primary balances. The study shows how a static specification that does not include the one-period lag of the interest rate is prone to serial correlation and to downward bias in standard errors. To correct the bias, a dynamic specification with the lagged interest rates used as explanatory variable should be used due to the intrinsic persistent behavior of the interest rates. Results show that when the persistency of the interest rates is taken into account, it corrects the bias in standard errors of the estimates, and the correlation between fiscal policy variables and sovereign rates disappears: the inertia of the behavior of interest rates is the only variable affecting the relation.