Fiscal Surplus Research Articles

Modern Monetary Theory (MMT) と主流派の齟齬と一致を解剖する(An Analysis of Difference and Coincidence between MMT and Mainstream Economics)

Japanese Abstract: 日本語要約： 本稿では、MMT派と（いわゆる）主流派の間における経済論議上の齟齬と一致について、大きく3つのカテゴリー（財政問題、金融システムと金融政策論、及び財政政策論）に分けて論じた。財政問題に関しては、通貨発行権と変動相場制を有する国での受動的な財政不履行の不在についてMMT派・主流派が相互に一致し得ることを確認した。その上で、「再定義された財政破綻」について双方の主張を吟味し、各々批判を加え、さらに止揚的な解として長期停滞モデルが有用なのではないかという示唆を行なった。財政「黒字」問題、及び政府部門赤字と民間部門赤字の非対称性についても、MMT派・主流派の両面から検討した。金融システム・金融政策論については、信用創造理解、及び内生的貨幣供給理論の点での両者の乖離を指摘しつつ、主流派側による整合論について、主に政策金利と総需要の間の関係の不確実性と不安定性の面から批判を加えた。そうした批判は、MMT派からだけでなく、最近の主流派内部の議論からも成り立つことを確認した。財政政策論については、まずクラウディング・アウトとマンデル・フレミング効果について論じ、MMT派的な金融財政理解をモデルに組み込む方向性としてIS-MPを検討することで、いずれの効果も自明ではない（成立しないことがありうる）ということを論じた。リカード=バローの中立問題、FTPL、政府債務の将来世代負担問題については、いずれも財政の持続可能性の状況についての前提によって議論が左右されることを確認した。最後に、財政の硬直化については、ミンスキーの系譜を引くMMT のカンザスシティ・アプローチにおける懸念と主流派の経済学/財政学の懸念が協調的であることを指摘した。 English Abstract: This paper discusses the difference and coincidence in economic debates between MMT and (so-called) mainstream economics in three major categories: financial system & monetary policy, and policy. Regarding I confirmed that MMT and mainstream economists can mutually agree on the absence of passive default in currency-issuing government and floating exchange rate systems. The paper then examines both sides' arguments for a redefined collapse, criticizes each side's arguments, and suggests that the secular stagnation model may be useful as an integrated solution. The issue of fiscal surplus and the asymmetry between government and private sector deficits are also examined from both MMT and mainstream perspectives. With regard to the financial system & monetary policy, I pointed out the divergence between MMT and mainstream economics in terms of the understanding of money creation and the theory of endogenous money supply, and criticized the mainstream's consistent view between money multiplier and endogenous money mainly from the perspective of the uncertainty and instability of the relationship between the policy rate and aggregate demand. I confirmed that such criticism is not only from the MMT, but also from the recent internal debate within mainstream economics. Regarding policy argument, I first discussed crowding out and the Mandel-Fleming effect, and then argued that both effects are non-trivial (and may not hold) by examining IS-MP as a direction to incorporate the MMT's understanding of monetary and policy into the model. Regarding the Ricardo-Barro equivalence theorem, the FTPL, and the issue of the burden of government debt on future generations, I confirmed that the debates depend on assumptions about the state of sustainability. Finally, regarding rigidity, I pointed out that the concerns in the Kansas City Approach of MMT, which is of Minsky's lineage, and those of mainstream economics/public finance studies are coordinated.

U.S. Macro Policies and Global Economic Challenges

This paper overviews different exit strategies for the U.S. from the debt-overhang, and analyses their implications for emerging markets and global stability. These strategies are discussed in the context of the debates about secular-stagnation versus debt-overhang, the fiscal theory of the price level, the size of fiscal multipliers, prospects for a multipolar currency system, and historical case studies. We conclude that the reallocation of U.S. fiscal efforts towards infrastructure investment aiming at boosting growth, followed by a gradual tax increase, aiming at reaching a modest primary fiscal surplus over time are akin to an upfront investment in greater long-term global stability. Such a trajectory may solidify the viability and credibility of the U.S. dollar as a global anchor, thereby stabilizing Emerging Markets economies and global growth.

Did profitable slave trading enable the expansion of empire?: The Asiento de Negros, the South Sea Company and the financial revolution in Great Britain

In 1711, British Parliament chartered the South Sea Company, a public–private corporation chartered to reduce the cost of government borrowing by swapping illiquid short-term government debt for tradeable shares of the South Sea Co. To attract subscribers, the government also awarded the South Sea Co. an international monopoly in the trade of African slaves to Spanish America—the Asiento de Negros. This paper considers the extent to which Asiento-related slave trading was profitable for South Sea Co. shareholders and beneficial to the British financial revolution between 1713 and 1743. First, we use historical financial data to estimate the parameters of a capital asset pricing model of excess returns for South Sea Co. shareholders. We find that the Asiento contract increased risk-adjusted excess returns on South Sea Co. stock between 18 and 24% per year. Second, we estimate profit margins in the South Sea Co. Asiento slave trade. These show a stark positive correlation with company share prices before and after the South Sea Bubble of 1720. Adding slave ship departures to the CAPM specifications confirms the direct contribution of slave trading to shareholder returns. We also find that the Asiento and Asiento-related slave trading increased central government fiscal surplus by 16%. This suggests that profitable slave trading by the South Sea Co. under the Asiento enhanced Great Britian’s fiscal capacity, which could be utilized to enhance a military capacity necessary for securing an empire.

Fiscal Sustainability during the COVID-19 Pandemic

The Great Lockdown implemented in response to the COVID-19 pandemic has led to a severe world-wide economic crisis. In euro area countries, sovereign debt-to-GDP ratios are on the rise and reductions in expected fiscal surpluses raise sustainability concerns amongst investors. This paper provides novel estimates of non-linear state-dependent fiscal limits based on Bi (2012) for the five largest euro area countries. Within the DSGE model I build a COVID-19 scenario calibrated to match the decline in real GDP growth forecasts between April and February 2020 and the fiscal stimulus packages announced up to the end of March 2020. On average, fiscal space contracts by 58.4 percent of national GDP. In a worst-case scenario fiscal space is 28.6 percent for Italy and 65.9 percent of national GDP for Germany.

TAX REVENUE PERFORMANCE IN SUB-SAHARAN AFRICA COUNTRIES: ARE THERE EMPIRICAL EVIDENCE FOR MACROECONOMIC VARIABLES?

This study, examines the dynamic effects of macroeconomic factors on the overall tax revenue performance of thirty-three (33) Sub-Saharan African countries for eighteen years that range from 2000-2017 employing the system generalized method of moments methodology. This study provides empirical evidence for the dynamic and significant effects of macroeconomic variables on tax revenue performance in SSA countries. Arising from our empirical findings, the study recommends that, on the average, governments of SSA countries should establish the necessary macroeconomic preconditions for the effective and efficient administration of the countries’ tax systems to further boost her taxable capacity and fiscal surpluses.

Macroeconomic policies in Brazil before and after the 2008 global financial crisis: Brazilian policy-makers still trapped in the New Macroeconomic Consensus guidelines

Abstract Even though the New Macroeconomic Consensus (NMC) guidelines have been under review by mainstream economists from developed countries since the 2008 global financial crisis, Brazilian policy-makers are still following these old recommendations. The NMC was adapted in Brazil in 1999 as a policy arrangement known as the macroeconomic tripod: a combination of inflation targeting, floating exchange rates and targets for the primary fiscal surplus. The theoretical basis of this policy arrangement is thus closely aligned to that of the NMC: a reduced (if any) role for fiscal policy and an exclusive focus on price stability for monetary policy. Particularly with respect to the experience of inflation targeting in Brazil, by implementing a vector autoregression model for the period 2000–17, we show that (i) inflation dynamics are mostly cost-push rather than demand-pull; (ii) inflation rates show low sensitivity to changes in interest rates; and (iii) the main variables negatively affected by an increase in the Brazilian policy rate are the nominal exchange rate (i.e. the Brazilian real tends to appreciate) and output growth. It follows that the macroeconomic tripod is unsuitable to the Brazilian economy, especially considering that, as it is also shown in this article, such arrangement has contributed to perpetuating trends of high real interest rates, domestic currency overvaluation and low economic growth in Brazil in the last two decades. The article ends calling for a new macroeconomic arrangement to reverse these adverse long-term trends.

Government fiscal projection and debt sustainability

This paper reconsiders Japan’s fiscal sustainability. We investigate whether a simulation conducted under the political constraint imposed by a fiscal reaction function supports the official projection. First, we obtain Japan’s fiscal reaction function by estimating the response of the primary surpluses to the past debt for a panel data set of 23 OECD countries. Next, we investigate the political feasibility of the official projection using our estimated reaction function. When the Cabinet Office criterion is used for the debt-to-GDP ratio, the government can attain the policy target of nonnegative fiscal surpluses and realize fiscal sustainability. Notably, the negative growth-adjusted bond yield and the high growth rate contribute to this finding.

The Priority of Exploiting Fiscal Revenue or Lessening Public Expenditure: Evidence from China

In the past 28 years, we find that except for the fiscal revenue of 5,132.1 billion yuan in 2007, which is greater than the fiscal expenditure of 4,978.1 billion yuan, presenting a fiscal surplus, the fiscal expenditure of the rest years is greater than the fiscal revenue, showing the situation of public sector net cash requirement (psncr), especially in 2011, the deficit( the gap between fiscal expenditure and fiscal revenue) is 537.3 billion yuan. Since then, the gap between expenditure and revenue has been increasing with each passing year. In 2015, the fiscal deficit is 2,368 billion yuan. In 2018, the fiscal deficit has been expanded to 3,754.4 billion yuan. In order to avoid the continuous increment of the deficit. This paper discusses the causal relationship between China's fiscal revenue and public expenditure from 1990 to 2018. If fiscal revenue has a positive impact on public expenditure, showing that the government shall reduce fiscal deficit through tax increment. On the contrary, it makes public expenditure continue to expand, leading to the continuous deterioration of fiscal deficit, so as to further decide whether China's future fiscal policy should adopt increasing fiscal revenue or deducting public expenditure policy to reduce the deficit.

A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt

I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following periods of deficit, to repay accumulated debt, but surpluses do not respond to arbitrary unexpected inflation and deflation, so fiscal policy remains active. This specification avoids many puzzles and counterfactual predictions of standard active-fiscal specifications. The model produces reasonable responses to fiscal and monetary policy shocks, including smooth and protracted disinflation following monetary or fiscal tightening. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

MOLES: A New Approach to Modeling the Environmental and Economic Impacts of Urban Policies

This paper presents the Multi-Objective Local Environmental Simulator (MOLES), an urban Computable General Equilibrium model with selected microsimulation features that links urban land use, mobility patterns and their environmental impacts. The model is tailored to uncover the trade-offs between environmental and economic performance in urban areas. It is also designed to capture the synergetic effects of urban planning and transportation policies. We demonstrate the model’s structure, functions and algorithms through an application to Auckland, New Zealand. The application explores the environmental, fiscal and welfare impacts of a reform that promotes a massive switch to public transportation. We show that, in order to achieve that objective, such a reform should drastically increase the kilometer cost of car use and provide considerable subsidies to public transportation. We find that, in spite of these subsidies, the reform will have a fiscal surplus and will generate substantial welfare gains.

Estimation and determinants of Chinese banks’ total factor efficiency: a new vision based on unbalanced development of Chinese banks and their overall risk

The paper estimates banks’ total factor efficiency (TFE) as well as TFE of each production factor by incorporating banks’ overall risk endogenously into bank’s production process as undesirable by-product in a Global-SMB Model. Our results show that, compared with a model incorporated with banks’ overall risk, a model considering only on-balance-sheet risk may over-estimate the integrated TFE (TFIE) and under-estimate TFE volatility. Significant heterogeneities of bank TFIE and TFE of each production factor exist among banks of different types and regions, as a result of still prominent unbalanced development of Chinese commercial banks. Based on the estimated TFIE, the paper further investigates the determinants of bank efficiency, and finds that shadow banking, bank size, NPL ratio, loan to deposit ratio, fiscal surplus to GDP ratio and banking sector concentration are significant determinants of bank efficiency. Besides, a model with risk-weighted assets as undesirable outputs can better capture the impact of shadow banking involvement.

A Theory of the Nominal Character of Stock Securities

We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence.

Fiscal Sustainability During the COVID-19 Pandemic

The "Great Lockdown" implemented in response to the COVID-19 pandemic has led to a severe world-wide economic crisis. In euro area countries, sovereign debt-to-GDP ratios are on the rise and reductions in expected fiscal surpluses raise sustainability concerns amongst investors. This paper provides novel estimates of non-linear state-dependent fiscal limits based on Bi (2012) for the five largest euro area countries. Within the DSGE model I build a COVID-19 scenario calibrated to match the decline in real GDP growth forecasts between April and February2020 and the fiscal stimulus packages announced up to the end of March 2020. On average, fiscal space contracts by 58.4 percent of national GDP. In a worst-case scenario fiscal space is 28.6 percent for Italy and 65.9 percent of national GDP for Germany.

Cyprus

Following a period of very rapid growth in the aftermath of the crisis, growth is gradually settling in at a more sustainable but still relatively robust pace despite the external slowdown. Output is projected to rise by around 3 percent in 2019–20, supported by construction and services sectors. Good progress has been made in addressing domestic and external stability risks arising from legacies of the financial crisis. Sales of non-performing loans (NPLs), amendments to the foreclosure and insolvency framework and resolution of a large systemic bank have helped strengthen bank balance sheets. Large fiscal surpluses have reduced risk premia to historical lows and reduced financing risks. Nonetheless, vulnerabilities remain: political pressure to unwind some of these reforms has recently escalated; NPLs in the banking system and debt levels are still high; bank profitability remains low; and difficulties in debt workouts and the resulting debt overhang weigh on productive investments. Productivity growth has also been weak, reflecting financial sector difficulties as well as a slower pace of technological diffusion and institutional inefficiencies.

An evaluation of alternative fiscal adjustment plans: The case of Italy

What advice can be given to the policymaker to reduce the burden of public debt after a crisis? In this situation, the debt consolidation calls for fiscal surplus based on increases in taxes and/or reductions in public spending. This paper aims at answering to the above question. Specifically, it evaluates different policy options on the table using the estimated model of the Italian dynamic General Equilibrium Model (IGEM). Our main message is that plans aimed at reducing the public debt based on tax increases rather than expenditure reductions are more effective. Therefore, consolidation should be designed on the former.

Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Using macroeconomic data for 1960–2018, this article analyzes the origins of the crisis of the “post-Maastricht Treaty order of Italian capitalism.” After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform, and real wage restraint—and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment, and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy’s domestic demand and exports—and resulted not just in economic stagnation and a generalized productivity slowdown but in relative and absolute decline in many major dimensions of economic activity. Italy’s chronic shortage of demand has clear sources: (1) perpetual fiscal austerity; (2) permanent real wage restraint; and (3) a lack of technological competitiveness, which in combination with an overvalued euro weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization; reduce firm profitability; and hurt investment, innovation, and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy’s “technological competitiveness” and stop the structural divergence between the Italian economy and that of France/Germany. The issue is not just to revive demand in the short run (which is easy) but to create a self-reinforcing process of investment-led and innovation-driven process of long-run growth (which is difficult).

Cyprus

Economic growth is gradually decelerating but remains strong, buoyed by the services and construction sectors, partly financed with foreign direct investment. While employment is picking up, wage pressures and inflation remain low. A large fiscal surplus is helping to lower public debt after a sizable one-off increase related to the sale of Cyprus Cooperative Bank (CCB) last year. The removal of CCB’s non-performing loans (NPLs) and securitization of a large NPL portfolio has led to a sharp reduction in NPLs, earning Cyprus a sovereign rating upgrade back to investment grade status. Nevertheless, NPLs are still among the highest in the EU, public and private debt levels remain elevated and efforts to clean up bank balance sheets and build capital buffers are ongoing.

Brazilian Social Funds: The lessons learned from the Norway fund experience

Since the middle of the last century, the world has seen the emergence of Sovereign Wealth Funds (SWF). According to the Sovereign Wealth Funds Institute (2012), these legal entities can be defined as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports.” The SWFs are governed by the Santiago Principles, a document constructed by the IMF's International Working Group of Sovereign Wealth Funds (IWG) to recommend and to standardize the applications and investments of this kind of fund. SWFs are created in order to meet macroeconomic demands, using a series of investments strategies, which including foreign assets acquisitions. For instance, the Norwegian Government Pension Fund is one of the world's model SWFs. Its revenue is obtained from petroleum exploitation and is considered a savings fund, although part of the financial return can be applied in budget deficit. Following this example, Brazil created the Pre-Salt Social Fund to invest pre-salt petroleum revenues, and consists of a savings fund, according to the IMF classification. The present article focuses on the analysis and comparison of the legal structures of the Norwegian Government Pension Fund (GPF) and the Brazilian Pre-Salt Social Fund (SF), aiming to understand if the Brazilian fund applies the Norwegian standards.

Lost in Deflation: Why Italy’s Woes Are a Warning to the Whole Eurozone

Using macroeconomic data for 1960-2018, this paper analyzes the origins of the crisis of the ‘post-Maastricht Treaty order of Italian capitalism’. After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform and real wage restraint — and the country was undeniably successful in bringing down inflation, moderating wages, running primary fiscal surpluses, reducing unemployment and raising the profit share. But its adherence to the EMU rulebook asphyxiated Italy’s domestic demand and exports — and resulted not just in economic stagnation and a generalized productivity slowdown, but in relative and absolute decline in many major dimensions of economic activity. Italy’s chronic shortage of demand has clear sources: (a) perpetual fiscal austerity; (b) permanent real wage restraint; and (c) a lack of technological competitiveness which, in combination with an overvalued euro, weakens the ability of Italian firms to maintain their global market shares in the face of increasing competition of low-wage countries. These three causes lower capacity utilization, reduce firm profitability and hurt investment, innovation and diversification. The EMU rulebook thus locks the Italian economy into economic decline and impoverishment. The analysis points to the need to end austerity and devise public investment and industrial policies to improve Italy’s ‘technological competitiveness’ and stop the structural divergence between the Italian economy and France/Germany. The issue is not just to revive demand in the short run (which is easy), but to create a self-reinforcing process of investment-led and innovation-driven process of long-run growth (which is difficult).

Paradox of plenty: Norway’s macroeconomic policy dilemmas during the oil price crash, 2014-15

Norway, a country at the top of global rankings in terms of gross domestic product (GDP) per capita and human development was also in an enviable position with large current account and fiscal surpluses, as well as a massive stock of public assets. Then came a shock; between June 2014 and early 2016 oil prices tumbled by more than 70 percent. As a major oil exporter, Norway’s current account was severely impacted but could this actually draw Norway into a macroeconomic crisis? Couldn’t it just fund its way out of the contractionary pressures building up in the economy using its stock of foreign currency reserves being held in a sovereign wealth fund? This article explores the fiscal and monetary policy challenges that Norway faced in preempting falling GDP growth and rising unemployment while at the same time, warding off a housing bubble going bust.