Fiscal Stimulus Research Articles

Economic Resilience: Fiscal Policy, Tourism, and ICT in COVID-19

The COVID-19 pandemic crisis has brought about unprecedented economic and social consequences worldwide. The implementation of isolation measures, including national and international travel restrictions, significantly affected contact-intensive sectors such as tourism. Information and Communication Technology (ICT) was crucial during this lockdown period in maintaining connectivity and enabling remote activities. Governments worldwide implemented discretionary measures to mitigate the crisis's adverse effects on economic activity. This paper aims to analyse whether the level of ICT adoption and the importance of tourism influence the fiscal policy efforts pursued by governments. Based on the results of a linear regression analysis for 154 countries, the findings suggest that governments had to promote higher fiscal stimulus in countries with higher international tourism receipts. At the same time, ICT development diminished the efforts of the fiscal policy response to the crisis since it facilitated economic resilience. The findings of this study can contribute to understanding how governments responded to the pandemic crisis and the factors that influenced their fiscal policy decisions.

Fiscal stimulus and pension contributions: evidence from the TCJA

Abstract We evaluate the impact of the 2017 Tax Cuts & Jobs Act (TCJA) pension tax break on sponsor contributions to defined-benefit retirement plans. We exploit cross-sectional variation in ex-ante exposure to the tax break. We find that the tax break induced an extra $2.8 billion of sponsor contributions to medium- and large-scale plans in 2017. However, we find strong evidence of reversal, both in terms of sponsor contributions and plan funding ratios by 2018. Our contributions model indicates that this reversal is consistent with more binding financial constraints in 2018 relative to 2019. Our results suggest that the TCJA did not have a long-lasting impact on corporate defined-benefit pension funds.

Factors of military Keynesianism in modern economic policy in Russia

Historical aspects, general economic logic and theoretical discussions around military Keynesianism as a policy of stimulating the economy through increased government allocations for defense items are considered. A brief overview of empirical studies on the economic results of military spending is presented. In relation to the period 2022—2024 in the Russian economy, the size of the fiscal impulse due to defense budget items, its positive and negative effects are analyzed. The secondary nature and low controllability of economic effects of defense policy are emphasized. Among the factors hindering the success of military Keynesianism in modern Russia, limited spare capacity and labor are noted, which generate inflationary consequences, as well as the contradiction between tightening monetary conditions and continued fiscal stimulus. The conclusion is made about the predominance and possible aggravation of negative consequences of the expansion of financing through military spending

Fiscal Stimulus, Deposit Competition, and the Rise of Shadow Banking: Evidence from China

The rise of shadow banking and attendant financial fragility in China can be traced to intensified deposit competition following the 2008–2009 global financial crisis (GFC). A large, state-owned bank’s deposits from cross-border money inflows fell significantly following the GFC, and it supported the government’s fiscal stimulus more aggressively than other large banks by issuing larger volumes of new loans. Small and medium-sized banks with more branch-level overlaps with this large bank relied more on shadow banking and issued more wealth management products (WMPs)—short-maturity, off-balance-sheet substitutes for deposits. Greater amounts of WMPs created rollover risks for the issuers, as reflected by higher yields on new WMPs, higher borrowing rates in the interbank market, and lower stock-market performance during liquidity stress. This paper was accepted by Victoria Ivashina, finance. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71272024, 71972051, and 72071117]. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04233 .

Labor markets during COVID-19: gaps and challenges in Latin America.

The effects of the COVID-19 pandemic on Latin American labor markets continue to be quantified, to identify the social and economic impacts that this pandemic had, and to design more efficient public policies that would protect the most vulnerable groups. For this reason, the research question was as follows: what were the changes in the labor formality rates before and two years after the main contingency measures of the COVID-19 pandemic were implemented? Using data from Argentina, Bolivia, Chile, Colombia, Ecuador, Guatemala, Mexico, Peru, and Uruguay, the formality rate (τ) was analyzed, which was calculated using a weighted average between the formal employment rates of the number (i) of economic sectors (p) in a specific period (t). The results suggest that the weighted labor formality rate increased in the countries of the region. These changes in formality could be the result of greater capital accumulation, the integration of productive processes, the integration of commercialization processes, and differentiated fiscal stimuli (i.e., the intrasectoral aspect), but it was not due to the displacement of workers from highly informal economic sectors to more formalized sectors (i.e., the intersectoral component). The findings emphasized the precarious situation of women in the region, regardless of the country, particularly in Ecuador, Peru, Bolivia, and Argentina. These findings suggest the need to design public policies that reverse the current situation of the labor market and prevent future economic shocks, with special emphasis on the informal sector and women.

Paradigm Shift in Finance: Insights from COVID 19

Purpose: This paper analyzes the literature and findings on the COVID-19 impact on the economy and provides insights and policy formulations for future pandemic-like crises. Methodology: Our paper follows secondary research analyzing existing literature on COVID-19 and its impact on the global economy. Our paper adopts a methodical literature survey approach to analyze peer-reviewed finance research articles. This approach has helped to evaluate the policy responses to the pandemic by analyzing studies on fiscal stimulus, monetary interventions, and public health measures. Further, it helps identify common trends, patterns, and gaps in knowledge. Findings: The COVID-19 pandemic has driven a paradigm shift in finance, reshaping how financial institutions operate, how consumers interact with financial services, and how markets function. These changes will likely have lasting effects, driving continued innovation and transformation in the financial sector. A forward-looking fiscal and monetary policy is vital for long-term economic care. The policies include investing in healthcare infrastructure, the digital economy, and education to prepare for future crises. Unique Contribution to Theory, Practice, and Policy: The COVID-19 pandemic undeniably created upheavals in the financial world. It forced a reevaluation of many long-held assumptions and accelerated trends already underway. Our paper demonstrates that future pandemic policies need to be more flexible and adaptable based on the economic structure and intensity of the crisis, along with international cooperation. The COVID-19 highlighted the economic vulnerabilities, transformed consumer behavior, and altered market structures. The paper’s insights provide a mechanism and illustration of how to mitigate and minimize such a crisis. Traditional economic and monetary policies are ill-suited. Countries should be ready for responsive policies and adjustments to manage pandemic-like crises; hence, this paper provides the groundwork for more adaptable policies.

No pain, no gain? Simulation of carbon reduction potential and socioeconomic effects of voluntary carbon trading in China during 2021–2060

Voluntary carbon market has become a key mechanism of stimulating carbon emission mitigation actions globally. In this study, we calculate the emission reduction potential of Carbon Generalized System of Preferences (CGSP), a dominated voluntary carbon trading mechanism in China, including on-going projects of forestry carbon sinks, waste clothes reuse, installation of distributed photovoltaic power generation system, and usage of energy-conserving devices, as well as other extended methods for their future mitigation potentials. We employ a computable general equilibrium model to delve into the effects of CGSP mechanism on carbon price, economic growth and household consumption, assessing its impact on the equitability of social welfares between urban and rural residents during 2021–2060. Our results indicate that employing the current methods for CGSP would lead to around 5.0 Mt CO2 reduction annually. since 2018, whereas adopting the extended methods would yield reductions of 157.1 Mt. Promoting forestry carbon sinks and energy-conserving appliances offers the most prominent emission reduction, while low-carbon travel shows the biggest potential going forward. CGSP will loosen carbon constraints on industries in the market and result in a lower carbon price, reducing the economic cost of carbon trading without compromising China's carbon peaking and carbon neutrality goals. Supplementing CGSP could reduce the GDP loss by up to 0.2 trillion Yuan by 2030 and 0.9 trillion Yuan by 2060, compared to the sole operation of compliance carbon trading market. Provided fiscal stimulus policies, CGSP will further reduce GDP loss by 1.1 trillion Yuan in 2060. Different fiscal stimulus scenarios have a strong implication on welfares of urban and rural residents, wherein monetary equivalent incentive will reduce urban-rural income gap by up to 718 Yuan/capita in 2060.

Effects of supply chain bottlenecks and fiscal stimulus on inflation dynamics in the COVID-19 pandemic era: a case of South Korea*

ABSTRACT We employ an augmented New Keynesian Phillips curve, integrating a global supply chain bottleneck index and comprehensive fiscal stimulus packages, to quantitatively examine the impact of these variables on inflation rates in South Korea using monthly time-series data from 2010 to 2023. The results reveal three key findings. First, the Global Supply Chain Pressure Index (GSCPI), serving as a proxy for global supply chain bottlenecks, has an overall statistically insignificant effect on inflation throughout the observation period. However, during the pandemic, its effect on inflation was statistically significant. Second, the detrended government stimulus packages, proxied by government transfers or government fixed investment, also demonstrated a significant escalating effect on inflation during the pandemic. These findings suggest that both cost-push and demand-pull factors contributed to recent inflation surges. Third, conventional determinants of inflation, such as expected inflation, the domestic output gap, and crude oil prices, consistently influence inflation, aligning with existing literature.

Commodity Price and Indonesian Fiscal Policy: An SVAR Analysis with Non-Gaussian Errors

Abstract This study exploits the non-Gaussianity for identification of a Bayesian SVAR model on newly unexplored monthly Indonesian data from 2007M1–2022M12, where we disentangle the commodity-related revenue from the total government revenues. Our main contribution is in labeling the statistically identified structural shocks as economic shocks by conducting a formal assessment of a set of proposed sign constraints. We simultaneously label a commodity price and three fiscal policy shocks, i.e. fiscal income tax, investment-spending, and consumption-spending shocks. Having evaluated their impacts, among the fiscal policy shocks, we find income tax shock the most impactful on output. Moreover, during the Covid crisis 2020–2021, the launched fiscal economic stimulus package (PEN program) positively contributed to the output. The recession of the Covid crisis could have deepened had the fiscal policymaker not responded at all. Albeit so, we should not overlook the contribution of the rising commodity prices to the output recovery. We also evaluate the commodity boom period in 2007–2009, the tax amnesty program in 2016–2017 and 2022, and the infrastructure spending boost in 2015. Our results suggest that output and retail sales would have been lower without the commodity price shock’s contribution during the commodity boom. Then, we find that tax amnesty and infrastructure spending boost policies contribute to higher retail sales.

Consumption Responses to Income Shocks through Lottery Winning: Evidence from Older Adults in Singapore

AbstractWe study the effects of lottery winning on consumption spending using household survey data of older individuals aged 50–70 years in Singapore. We find strong consumption responses to a transitory income shock from lottery wins, and lottery winners spend about half of their prizes within 12 months of winning. We show that consumption responses are stronger among households with more binding liquidity constraints. The strong consumption response suggests that fiscal stimulus policies or other public transfer programmes could effectively boost consumption spending in the short run.

Government spending, multipliers, and public debt sustainability: an empirical assessment for OECD countries

This paper aims to quantify the linear and non-linear effects of government expenditure on output and public debt sustainability using the Local Projections (LP) approach on a dataset of 14 OECD countries considered for the 1981–2017 period. By employing the Blanchard and Perotti strategy to identify fiscal policy shocks, we show that government spending multipliers are close to one in linear models and that expansionary fiscal policy stimuli reduce the public debt-to-GDP ratio. When considering non-linearities using the smooth transition LP model, findings show that a fiscal policy shock leads to higher multipliers and a stronger reduction in the public debt-to-GDP ratio in economic phases characterised by a high rather than a low debt-to-GDP ratio. All results are confirmed even when government spending expectations are considered.

Fiscal multipliers in Low-income Sub-Saharan African countries

This study estimates country-specific government consumption multipliers for 20 Low-Income Countries in Sub-Saharan Africa. Using a Bayesian random effect PVAR model, we find heterogeneous fiscal multipliers. Our results challenge the prevailing idea of limited fiscal stimulus effectiveness in these economies.

Redistributive fiscal policy and marginal propensities to consume

This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Beyond the basics: mapping the inflation response to fiscal deficit in India with smooth transition autoregressive model

PurposeIndia’s historical fiscal performance has featured elevated deficit levels. Driven by the imperative need for fiscal stimulus measures in response to the crisis, efforts toward fiscal consolidation from 2003 to 2008 were reversed in 2008–2009 due to the financial crisis. These stimulus actions are believed to have wielded a notable influence on inflation dynamics. Presumably, a high inflation rate hinders growth and inflicts severe welfare costs. Accordingly, the principal objective of this paper is to scrutinise the threshold effects of fiscal deficit on inflation within the context of the Indian economy.Design/methodology/approachWe employed the Smooth Transition Autoregressive (STAR) Model, a robust tool for capturing non-linear relationships, to discern the specific threshold level of fiscal deficit. Our analysis encompasses annual data spanning from 1971 to 2020. Additionally, we have leveraged the Toda-Yamamoto causality test to establish the existence and direction of a causal connection between fiscal deficit and inflation in the Indian economy.FindingsOur analysis pinpointed a critical threshold level of 3.40% for fiscal deficit, a value beyond which inflation dynamics in India undergo a marked transition, signifying the presence of significant non-linear effects. Moreover, the results derived from the Toda-Yamamoto causality test offer substantiating evidence of a causal relationship originating from the fiscal deficit and leading to inflation within the Indian economic framework.Research limitations/implicationsThe findings of our study carry significant implications, particularly for the formulation and execution of both fiscal and monetary policies. Understanding the threshold effects of fiscal deficit on inflation in India provides policymakers with valuable insights into achieving a harmonious balance between these two critical economic variables.Originality/valueTo the best of our knowledge, this study is the first of its kind to empirically investigate threshold effects of fiscal deficit on inflation in India from a non-linear perspective using the Smooth Transition Autoregression (STAR) model.

A critical analysis of the European Union’s structure and approach to economic recovery during times of crisis

This essay critically analyses the European Union's (EU) approach to economic recovery during times of crisis, focusing on the 2008 financial crisis and the subsequent eurozone debt crisis. The EU's response included various measures such as bailouts, fiscal stimulus packages, and structural reforms. However, shortcomings in these responses are evident, including a lack of long-term planning and the exacerbation of negative effects by bailout announcements. Moreover, the essay examines structural issues within the EU, particularly regarding the European Central Bank's monetary policies and the lack of cohesive fiscal policies among member states. These structural deficiencies contributed to the severity of the crises. Despite lessons learned, including the need for stricter financial regulations and improved coordination among member states, challenges remain. The analysis suggests that while the EU has undergone reforms, its resilience to future crises remains uncertain.

The Credit Channel of Public Procurement

Public procurement accounts for one-third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase cash flow based lending. I use Portuguese administrative data from 2009 to 2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts. Winning one additional euro from a procurement contract increases firm credit by 7 cents at lower interest rates. This finding highlights a mechanism through which future fiscal stimulus can impact the real economy today: procurement contracts increase firms’ net worth by increasing future cash flows that can be used as collateral to ease borrowing constraints and boost corporate liquidity. Consequently, this enhanced access to credit promotes higher investment and employment, with these effects being more pronounced and persistent in smaller and financially constrained firms. At the aggregate level, I empirically estimate that spending one additional euro in public procurement increases regional output by 1.3 euros with the credit channel accounting for 5% of it.

The Impact of The Covid-19 Pandemic on The Selected Countries in Sub-Saharan Africa in Terms of GDP, Inflation and Balance of Payment (BPM6)

This study examines the impact of the COVID-19 pandemic on selected Sub-Saharan African countries in terms of GDP, Inflation, and Balance of Payment (BPM6) The paper addresses a significant knowledge gap regarding the pandemic's influence on emerging financial markets in Africa. A longitudinal research design was adopted, analyzing data from Ghana, Kenya, Nigeria, and South Africa between 2017 and 2022. The study utilized GDP per capita growth, Inflation, and Balance of Payment as dependent variables, employing a repeated measure of ANOVA for analysis. The use of the 6th edition of the Balance of Payments Manual (BPM6) is an important macro-economic indicator significant in determining the performance of any country with the rest of the world. The results indicate substantial shifts in BPM6, GDP, and inflation rates before and after the pandemic. Specifically, there was a decrease in BPM6 deficits, an increase in inflation rates, and a slowdown in GDP growth post-pandemic, highlighting COVID-19's significant economic impact. The study recommends implementing policies to stabilize the economy, focusing on fiscal stimuli to boost GDP, controlling inflation, and managing external debts to improve the balance of payments. This research provides valuable insights for policymakers, investors, and stakeholders to effectively navigate financial market dynamics in Africa during and beyond the pandemic era.

INCREASING FISCAL AND ECONOMIC RESILIENCE POST PANDEMIC: EVIDENCE FROM SOUTH ASIAN COUNTRIES

The South Asia region faced extremely difficult economic challenges from the Coronavirus (COVID-19) pandemic. Almost two billion people living in South Asia were affected by the pandemic. The unprecedented shock in South Asia disturbed the pace and pattern of development and increased the vulnerabilities of the region. The region faced the problems of inequality, high inflation, rising fiscal deficit, disrupted growth, and environmental challenges further increasing the region’s vulnerabilities. Traditional macroeconomic policies are not enough to cope with this problem. In the face of these shocks, South Asian countries need to build robust fiscal and monetary policies and efficient use of remaining resources to build a more resilient economy for the protection of the population. Economic resilience might be effective to overcome such external shocks and support the recovery of all countries especially South Asian countries. Post-pandemic action in South Asian countries thus has become moreimportant, especially with restrained scope of fiscal and monetary stimulus. This examines the impact of COVID-19 on South Asian countries. The paper addresses the economic challenges faced by South Asian Countries in the pre- and post-pandemic period. It also briefly discusses the fiscal stimulus packages released by the South Asian countries to build stronger economies.

The Impact of Economic Incentives on Small and Medium Enterprises in Oman During COVID-19: Applied Study, Case of Dhofar Governorate in Oman

The study examined the impact of economic inducement on small and medium enterprises (SMEs) in Dhofar Governorate, Oman, during the COVID-19 pandemic. Two variables were adopted: economic incentives as the independent variable and the recovery of SMEs as the dependent variable. Three dimensions were adopted to evaluate the economic incentives experienced by small and medium enterprises, which are “facilitation of granting loans,” “reducing taxes and fees,” and “technical assistance.” The study population consisted of the employees of 8 SME companies. Primary data was collected from a convenient sample of 104 via electronic questionnaire (due to the directives related to social distancing in light of the global health crisis (Covid 19). Data were evaluated through Statistical Packages for Social Sciences SPSS. The study found a strong correlation (90.9%) between economic incentives and the recovery of minor and medium enterprises. Key factors such as facilitating loans, reducing taxes and fees, and providing technical assistance had a strong impact (82.1%) on their recovery. The Omani government should prioritize projects based on local labor and supply chains to reduce leakages and create short-term jobs, enhancing household income during the pandemic. The study facilitates data analysis and obtaining clear results of the impact of economic incentives by using a descriptive-analytical method.Governments must execute fiscal and procedural stimulus to regain lost yield potential from COVID-19, considering the macroeconomic context, monetary policy, debt, trade globalization, and SDGs.

Supply Disruptions and Fiscal Stimulus: Transmission through Global Value Chains

We study the impact of demand and supply factors on bottlenecks and inflation during the COVID-19 pandemic. Initial policy interventions, from lockdowns to fiscal stimuli, triggered shifts in consumer spending and supply chain disruptions. The reopening of economies normalized consumption patterns, but attributing bottlenecks to specific factors remains challenging due to diverse policy responses. This paper empirically integrates fiscal spending, mobility measures, and supply constraints to analyze interconnected factors influencing bottlenecks and inflation internationally. We find an important role played by fiscal shocks and the international propagation of demand and supply forces in shaping bottlenecks and inflation dynamics.