Periods Of Slack Research Articles

Debt-financed fiscal stimulus in South Africa

Levels of government debt-to-GDP have been rising substantially for over a decade in emerging market economies such as South Africa, which has led to much debate around the implementation of large-scale debt-financed fiscal stimulus programs in response to the economic fallout of the global covid-19 pandemic. Debt-financed fiscal policies directly stimulate aggregate demand through government expenditure or tax cuts, but their effectiveness is highly dependent on direct crowding-out of private sector expenditure, spill-over effects to the private sector through a higher risk premium on interest rates, and the interaction between fiscal policy and monetary policy. Using an open-economy dynamic stochastic general equilibrium model for South Africa, we identify the effect of six different fiscal policy instruments on short-term and long-term interest rates. These disaggregated expenditure and revenue shocks raise long-term real yields between 18 and 29 basis points, but there are non-negligible differences in the dynamic responses to each fiscal instrument. Our main findings suggest that, in the context of fiscal sustainability, an investment-driven debt-financed fiscal stimulus programme would reduce the government debt-to-GDP ratio, especially in periods of economic slack when monetary policy would typically be more accommodative. In fact, since the global financial crisis, monetary policy has reduced the burden of fiscal adjustment in response to rising debt and a rising risk premium. But further shocks to the risk premium could offset any gains from the current stance of monetary policy (for example, a credit rating shock raises the long-term government bond rate 155 basis points).

Energy inflation and consumption inequality

This paper examines the effects of higher energy prices on consumption inequality for a large panel of 129 advanced and developing economies during the period 1970–2013. The results suggest that energy inflation increases the Gini measure of consumption inequality and reduces (increases) the share of consumption of lower (higher) income deciles. These effects are larger in developing economies, in countries with limited access to finance, in those with weaker monetary policy frameworks, during periods of economic slack and in cases where government transfers do not compensate the poorer deciles during times of adverse income shocks.

The government spending multiplier at the zero lower bound: International evidence from historical data

SummaryBased on a large historical panel dataset, this paper provides evidence that the government spending multiplier can be significantly higher when interest rates are at or near the zero lower bound (ZLB). We estimate multipliers that are as high as 1.5 during ZLB episodes but small and statistically indistinguishable from zero during normal times. Our results are robust to different definitions of ZLB episodes, alternative ways of identifying government spending shocks, controlling for the exchange rate regime, and other potentially important state variables. In particular, we show that the difference in multipliers is not driven by multipliers being higher during periods of economic slack.

Regional Effects of Exchange Rate Fluctuations

AbstractWe exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade‐weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state‐level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross‐sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.

The role of expenditure duration in fiscal multipliers over the business cycle

Projects funded by the Department of Transportation that are authorized to begin construction during periods of slack are completed more quickly than during expansions. The results suggest fiscal multipliers of authorized funds may vary over the business cycle.

Nonlinear Business Cycle and Optimal Policy: A VSTAR Perspective

This paper studies optimal macroeconomic policy when nonlinearity in the business cycle is described by a vector smooth transition autoregression (VSTAR). A structural identification of the VSTAR that yields a low-dimension and certainty-equivalent nonlinear quadratic regulator (NLQR) problem is derived. Optimal rules are calculated by adapting from the engineering theory the approach of State Dependent Riccati Equation, which allows standard dynamic programming techniques to solve NLQR problems. The methodology is employed to study optimal conventional and quantitative easing (QE) monetary policy using a VSTAR model esti-mated on data for the United States during 1979-2018. The model allows for regime changes during periods of economic slack and when interest rates are near the zero lower bound. The results highlight the quantitative significance of nonlinearity in the analysis of optimal monetary policy and how the size, timing and composition of QE can influence macroeconomic dynamics.

The Euro-Area Government Spending Multiplier at the Effective Lower Bound

We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Crises and emissions: New empirical evidence from a large sample

In this paper, we empirically assess by means of the local projection method, the impact of different types of financial crises on a variety of pollutant emissions categories for a sample of 86 countries between 1980 and 2012. We find that financial crises in general lead to a fall in CO2 and methane emissions. When hit by a debt crisis, a country experiences a rise in emissions stemming from either energy related activities or industrial processes. During periods of slack, financial crises in general had a positive impact on both methane and nitrous oxide emissions. If a financial crisis hit an economy when it was engaging in contractionary fiscal policies, this led to a negative response of CO2 and production-based emissions.

The Euro-Area Government Spending Multiplier at the Effective Lower Bound

We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies

The paper estimates the dynamic macroeconomic effects of labor and product market reforms on output, employment and productivity, and explores how these vary with prevailing macroeconomic conditions and policies. We apply a local projection method to a new dataset of major country- and country-sector-level reform shocks in various areas of labor market institutions and product market regulation covering 26 advanced economies over the past four decades. Product market reforms are found to raise productivity and output, but gains materialize only slowly. The impact of labor market reforms is primarily on employment, but it varies across types of reforms and depends on overall business cycle conditions—unlike that of product market reforms. Reductions in labor tax wedges and increases in public spending on active labor market policies have larger effects during periods of slack, in part because they usually entail some degree of fiscal stimulus. In contrast, reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can become contractionary in periods of slack. The economy’s response to such reforms is significantly improved when they are accompanied by fiscal or monetary stimulus.

Economic Policy Uncertainty Spillovers in Booms and Busts

We estimate a nonlinear VAR to quantify the impact of policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during booms. Counterfactual simulations lead to the identification of a novel economic policy uncertainty spillovers channel. According to this channel, jumps in US uncertainty foster policy uncertainty in Canada in the first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.

Economic Policy Uncertainty Spillovers in Booms and Busts

We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel “economic policy uncertainty spillovers channel”. According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in the first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results.

The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies

This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.

The Macroeconomic (and Distributional) Effects of Public Investment in Developing Economies

This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.

Does Slack Influence Public and Private Labour Market Interactions?

We empirically analyze the impact of public employment and wages' shocks on private labor market outcomes by studying if policies operate differently in periods of economic slack than in normal times. We use local projection methods and focus on the Spanish and euro area aggregate cases. We find that the degree of economic slack is key to determine: (i) if public employment crowds-out private employment, and (ii) the degree and extent of public wage influence on the private sector.In addition, we find that the specific features of the economy also count. In the case of Spain, when fiscal consolidation is implemented at times of economic distress, the contractionary effects of public employment cuts appear more damaging for the economy than those of public wage cuts, while the opposite happens for the euro area as a whole. These differences are likely to be related to specific features of the labor markets in both cases.

Das Public Kapital: How Much Would Higher German Public Investment Help Germany and the Euro Area?

Given the backdrop of pressing infrastructure needs, this paper argues that higher German public investment would not only stimulate domestic demand in the near term and reduce the current account surplus, but would also raise output over the longer-run as well as generate beneficial regional spillovers. While time-to-build delays can weaken the impact of the stimulus in the short-run, the expansionary effects of higher public investment are substantially strengthened with an accommodative monetary policy stance—as is typical during periods of economic slack. The current low-interest rate environment presents a window of opportunity to finance higher public investment at historically favorable rates.

Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jorda’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the United States and Canada. Using Jorda's (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the United States. In every case, they are below unity. We do find evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

Confidence and the transmission of government spending shocks

Is impacting confidence an important channel by which government spending shocks affect economic activity? In a standard structural VAR, an empirical measure of confidence does not significantly react to spending shocks and output multipliers are around one. In a non-linear VAR, confidence rises following an increase in spending during periods of economic slack and multipliers are much larger. The systematic response of confidence is irrelevant for the output multiplier during normal times, but is critical during recessions. Spending shocks during downturns predict productivity improvements through a persistent increase in government investment relative to consumption, which is reflected in higher confidence.

Adaptive Automation in a Naval Combat Management System

<para xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink"> There is a continuing trend of letting fewer people deal with larger amounts of information in more complex situations using highly automated systems. In such circumstances, there is a risk that people are overwhelmed by information during intense periods or, on the other hand, do not build sufficient situational awareness during periods of slack to deal with situations where human intervention becomes necessary. A number of studies show encouraging results in increasing the efficiency of human–machine systems by making the automation adapt itself to the human needs. Current literature shows no examples of adaptive automation in real operational settings, however. We introduce a fine-grained adaptation methodology based on well-established concepts that is easy to comprehend and likely to be accepted by the end user. At the same time, we let the machine operate like a virtual team member in that it continuously builds its own view of the situation independent from the human. Working agreements between human and machine provide lower and upper bounds of automation that are in advance determined by the end user so that unwanted appropriation of responsibility by the machine is avoided. The framework is domain neutral and therefore thought to be applicable across a wide range of complex systems, both military and civilian. It gives researchers an architecture that they can use in their own work to get adaptive automation up and running quickly and easily. </para>