Fiscal Shocks Research Articles

The distributional effects of government spending shocks in developing economies

AbstractWe construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long‐lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low‐income countries vs. emerging markets). An additional contribution of the paper is the computation of the medium‐terminequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1% of gross domestic product over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.

The fiscal response to revenue shocks

We study the impact of fiscal revenue shocks on local fiscal policy. We focus on the very volatile revenues from the immovable property gains tax in the canton of Zurich, Switzerland, and analyze fiscal behavior following large and rare positive and negative transitory revenue shocks. We apply causal machine learning strategies and implement the post-double-selection LASSO method to identify the effect of revenue shocks on public finances. We find that local policymakers predominantly smooth transitory fiscal shocks.

Do we reject restrictions identifying fiscal shocks? identification based on non-Gaussian innovations

This paper is devoted to fiscal shock identification based on the assumption of non-Gaussianity of the errors, which can be easily tested. We use additional co-kurtosis conditions in GMM estimation of the AB-model to estimate the dynamic effects of fiscal shocks and find fiscal multipliers in the U.S. economy. Our approach results in higher tax multipliers on average relative to Blanchard and Perotti (2002) and Leeper et al. (2013). Testing the restrictions, we are not able to reject them in the Blanchard and Perotti (2002) model. Once we control for fiscal foresight, we can reject restrictions both individually and altogether. Finally, comparing elasticities of tax revenue to output to elasticities found in the literature, rejecting most of them, we are not able to reject the one of Caldara and Kamps (2017).

ERROR CORRECTION MODEL FOR ANALYSIS OF INFLUENCE OF FISCAL POLICY ON ECONOMIC GROWTH IN EU

Ensuring fiscal sustainability in the Member States of the European Union has become an extremely important goal in the current economic context. The formulation of appropriate policies can lead to fiscal consolidation, and the manifestation of a fiscal shock with direct implications on national budgets and can be mitigated by a rational approach. The aim of this paper is to examine issues related to ensuring fiscal sustainability and to identify the necessary fiscal policy instruments in this regard. Using a data set for EU member states for the period 2000–2019, we researched fiscal policy objectives for economic development and the volume of public and private investment. The error correction model (ECM) was used as a derivative of the autoregressive model with distributed lags (ARDL) to assess the short-term variation of Gross Domestic Product under the influence of seven fiscal indicators. The study highlights the aspects of fiscal policies at EU level as well as the correlation between economic development and the fiscal behaviour of the authorities. We contribute to the existing literature by providing empirical evidence on the existence of a direct relationship between economic growth and the volume of private investment.

Incumbency and expectations of fiscal rule compliance: Evidence from surveys of German policy makers

We analyze politicians’ expectations about future compliance with a fiscal rule, and in particular the dependence of the expectations on their role in parliament (opposition vs. incumbent government coalition). We study this in the context of the German debt brake, which became a constitutional provision in 2009 but is binding for the sub-national states from 2020 onwards only. Via a unique survey, we analyze compliance expectations of parliamentarians of all 16 German state parliaments. A strong incumbency effect is identified from parliamentarians who move in and out of government, showing that politicians from the governing coalition are more optimistic than those from the opposition. A negative fiscal shock has little effects on the former, but a strongly negative one on the latter. We offer a theoretical model that is consistent with an increasing incumbency effect over time, as the result of wishful thinking by politicians concerning their reelection chances and a dynamic reputation effect for policymakers when compliance with the fiscal rule is achieved. • Analyze politicians' expectations about compliance with the German debt brake. • Use customized survey of parliamentarians of all 16 German state parliaments. • Identify an incumbency effect: government politicians are more optimistic than from opposition. • Theoretical model builds on wishful thinking by politicians concerning their reelection chances.

Locally financed and outside financed regional fiscal multipliers

The size of regional fiscal multipliers determines the efficacy of fiscal stimulus, the costs of fiscal austerity and whether countercyclical fiscal policy is more effective at the federal or local level. This paper studies fiscal multipliers in regions of a monetary union—US states, Eurozone members, or countries with a hard exchange-rate peg—and how multipliers are affected by the way spending is financed: local deficit financing, local tax financing or outside financing (federal or foreign aid). I present analytical and quantitative government purchase and transfer multipliers using a New Keynesian model consistent with estimated transfer multipliers in Pennings (2021), focusing on the persistence of the fiscal shock. I find that at business-cycle frequencies, financing has little effect on impact multipliers: outside-financed multipliers are only about 0.07–0.16 larger than local deficit-financed multipliers. This suggests efforts to enable local countercyclical fiscal policy may be a partial substitute for greater fiscal centralization or foreign financing.

Empirical analysis of asymmetry phenomenon in the public debt structure of Sub-Saharan Africa's five biggest economies: A Markov-Switching model

This study examined the sustainability of the future path of public debts in sub-Saharan Africa's five biggest economies.In light of the COVID 19 outbreak, the study adopts the Markov-switching model (MSM) to analyse the un(sustainability) of public debt in sub-Saharan Africa's five biggest economies (namely Nigeria, South Africa, Angola, Ghana and Ethiopia). The MSM approach is motivated by the idea that a country might be solvent in the short term but may face fiscal shocks which may violate sustainability in future. More importantly, the Markov-switching model provides us with the unusual advantage of estimating precise answers as to the probabilities of a regime switch as well as the time they would occur.Using the log-likelihood and information criteria, the result supports a two-state regime for all the 5 countries selected in this study. State 1 is the low-debt ratio state (sustainable debt) with a standard deviation lower than state 2, while the high-debt ratio state (unsustainable debt) is the regime with the higher standard deviation (State 2). The result also indicates that the probability of transitioning between both regimes are highly persistent. One economic implication of the forecast result is that future public debt levels in sub-Saharan African countries might not aid Africa Union's 2063 development targets.

Fiscal adjustment in a panel of countries 1870–2016

The financial crisis from 2007 and, even more so, the Covid-19 pandemic caused large increases in public sector deficits and debts in many countries and prompted concern about fiscal adjustment. This paper examines fiscal adjustment to debt and deficits for a panel of 17 countries over 1870–2016 using the Jordà–Schularick–Taylor Macrohistory Database. This long span panel is informative since it contains many examples of large fiscal shocks similar to those recently experienced. The results from reduced-form models suggest that large deficits or surpluses tend to prompt stabilising feedbacks, mainly through changes in revenue, and there is greater pressure to adjust on countries running a deficit versus those running a surplus. However, the debt–GDP ratio prompts much less stabilising feedback by expenditure or revenue.11I am very grateful to Professor Ron P. Smith (Birkbeck, University of London) for all the useful comments and providing truly invaluable support in writing this paper. I also greatly appreciate very useful comments provided by an anonymous referee that helped to further enrich the paper.

Fiscal adjustments: lessons from and for the Baltic states

ABSTRACT This paper aims to investigate the effects of various fiscal policy measures for small and open economies by analysing the implications of fiscal shocks in the Baltic countries based on data for the period from 1995 to 2018. For this purpose, we have chosen structural VAR estimation methods following Blanchard, O., & Perotti, R. (2002). An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics, 117(4), 1329–1368, approach and relied on local projections for robustness checks. We find that the impact on growth of direct taxes, government consumption and public investment is strong and persistent in the analysed cases. Although the responses of FDI to fiscal shocks are less consistent as compared to output, in most cases, we get strong and persistent negative reactions in FDI to increasing tax burden.

Impulse response estimation via flexible local projections

This paper introduces a flexible local projection that generalizes the model by Jord\'a (2005) to a non-parametric setting using Bayesian Additive Regression Trees. Monte Carlo experiments show that our BART-LP model is able to capture non-linearities in the impulse responses. Our first application shows that the fiscal multiplier is stronger in recession than in expansion only in response to contractionary fiscal shocks, but not in response to expansionary fiscal shocks. We then show that financial shocks generate effects on the economy that increase more than proportionately in the size of the shock when the shock is negative, but not when the shock is positive.

Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits

Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits

Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits

Inflation Past, Present and Future: Fiscal Shocks, Fed Response, and Fiscal Limits

Modeliranje osetljivosti sektora na makroekonomske šokove - dokaz iz Nigerije

The Nigerian economy has been repeatedly hit by macroeconomic shocks, primarily owing to its overreliance on crude oil and poor resource management. Given the limited resilience capacity of Nigeria's economic sectors, this study examined the sensitivity of these sectors to macroeconomic shocks using the Vector Autoregression (VAR) and the Vector Error Correction (VEC) models in whose frameworks the study was carried out for the period between 2010Q1 and 2021Q4. The findings revealed the high responsiveness of the services and agricultural sectors to fiscal shocks, as well as the high sensitivity of the industrial sector to interest rate shocks. Also, the services sector was found to be more resilient to oil price shocks than the other sectors. Therefore, this study advocates for developing strategies to boost sectoral productivity and skillfully blend the fiscal and monetary policies so as to cushion the effects of macroeconomic shocks. Overall, this study provides the evidence of the sectoral effects of macroeconomic shocks in Nigeria.

General Equilibrium Effects of Cash Transfers: Experimental Evidence From Kenya

How large economic stimuli generate individual and aggregate responses is a central question in economics, but has not been studied experimentally. We provided one‐time cash transfers of about USD 1000 to over 10,500 poor households across 653 randomized villages in rural Kenya. The implied fiscal shock was over 15 percent of local GDP. We find large impacts on consumption and assets for recipients. Importantly, we document large positive spillovers on non‐recipient households and firms, and minimal price inflation. We estimate a local transfer multiplier of 2.5. We interpret welfare implications through the lens of a simple household optimization framework.

Macroeconomic impacts of fiscal shocks on the Moroccan economy: a disaggregated SVAR analysis

PurposeThe present paper aims to evaluate the structural impact of exogenously induced fiscal shocks on the Moroccan economy. This entails an analysis of the effect on the GDP of COVID-19-induced fiscal shocks manifesting in terms of budgetary revenues and expenditures. A key aspect of this analysis addresses the size of the tax and fiscal multipliers.Design/methodology/approachThe study examines the structural relationship between five variables during the period between Q1 2009 and Q2 2020 using an SVAR approach that allows for a dynamic interaction between ordinary expenditures and revenues on a quarterly basis.FindingsPositive structural shocks on public spending are likely to negatively impact economic growth. Negative economic growth, in turn, will damage price levels and interest rates, mainly over the long term. However, public-revenue-multiplier-associated shocks exceed these price- and interest-rate multiplier-associated shocks. Indeed, a structural shock to ordinary revenues can have a positive but insignificant impact on the GDP stemming from the ensuing decrease in the government budget deficit that proceeds from the increase in government revenues.Originality/valueThis is one of the first studies in the Moroccan context to assess the impact of the current worldwide pandemic on public finances. In addition, this study highlights the importance of boosting economic recovery through public spending.

Revisiting the theory of revenue diversification: Insights from an empirical analysis of municipal budgetary solvency

AbstractHow does revenue diversification shape the budgetary solvency of city governments? Previous studies informed by the public choice/fiscal illusion perspective suggest that diversification leads to unsustainable government expansion and budgetary imbalance. In contrast, the organizational adaptation/modern portfolio theory suggests that diversification enables government to prepare for external fiscal shocks. We use different measures of revenue diversification and rely on audited financial information to develop general fund‐based and government‐wide budgetary solvency measures for more than 500 midsized and large cities in the United States from 2006 to 2012. Addressing omitted variable bias, the results of the econometric analyses indicate that the type of diversification matters. Specifically, diversifying to non‐tax sources improves budgetary solvency as indicated by higher government‐wide operating ratio and reserves, whereas diversifying within the tax structure produces the opposite effects. The contradictory results point to the need to rethink current theories of diversification, which do not recognize the different ways that revenue structures can be broadened, and how these produce distinct effects on fiscal performance. We lay out the critical first step in clarifying and further developing a more nuanced theory by proposing three causal mechanisms outlining the pathways through which the types of diversification can influence budget outcomes.

Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

Fiscal policy in times of high debt: tale of Lebanon

ABSTRACT This study empirically identifies fiscal shocks and traces their effect on GDP and its components using structural VAR framework in a highly indebted economy of Lebanon. Empirical findings of this study point to an inefficiency of fiscal policy in stimulating economic activities, stipulating that fiscal policy is conducted with non-Keynesian features. Government expenditure multiplier exhibits near zero effect with magnitude of 0.068 on impact and insignificant otherwise. Also, we document evidence in favor of crowding out effect given central government's borrowings are mainly from the local financial market. Policy implication of this paper is twofold. First, given a non-Keynesian effect of fiscal policy, policy makers should refrain from using fiscal tools to counteract business-cycle fluctuations. Second, in order to break through government expenditure inefficiency, government officials must curb a rising budget deficits to harness an increasing cost of capital and, therefore, impeding potential growth of private sector. Previous fiscal policy practice has invoked concerns about sustainability of public debt time path and triggered a sovereign crisis which has been translated into a BOP crisis.

Fresh insight through the VAR approach to investigate the effects of fiscal policy on environmental pollution in Pakistan.

This study explores the impact of fiscal policy on environmental pollution, employing the vector autoregressive (VAR) model on annual data from 1976 to 2018 in Pakistan. We estimate the effect of total expenditure, total revenue, education expenditures, health expenditures, and other dynamic determinants such asgross domestic product (GDP), private investment, market rate, and crude oil price on carbon dioxide (CO2)emissions in particular. Further, this study creates impulse response functions to check the fiscal shocks, coordinating with five scenarios of public expenditures, segregated into government revenue, and education and health expenditures. The outcomes indicate that government spending in the public sectors (education and health) had a diminishing effect on CO2 emissions, whereas government revenue that was collected from taxes improved economic growth but at a cost of environmental pollution. In Pakistan, a fiscal policy scenario has been implemented that increases government expenditures to alleviate the effects of CO2 emissions. Therefore, policymakers should provide the right direction for the feasible distribution of resources in every public sector through a powerful structure, which will ultimately reduce the overall level of environmental deficit.

Fiscal decentralization and regional economic growth: Evidence from Mexico since the 2000s

AbstractThis study aims to examine whether decentralization causes regional economic growth for the states of Mexico in the period 1998–2016. We employ Granger causality tests and a Panel data Vector Autoregression model to account for the dynamics of fiscal federalism and endogeneity of federal transfers and economic growth. Impulse responses and variance decomposition are also employed to examine the time path of economic growth after unitary fiscal shocks from transfers. Among the results, we find federal transfers positively affect economic growth. The slim response of growth and its puzzling response to investment shocks possibly signal a soft budget problem.