Transmission Mechanism Of Fiscal Policy Research Articles

HOUSEHOLD DEBT AND THE EFFECTS OF FISCAL POLICY

AbstractWe examine how the effects of government spending shocks depend on the balance sheet position of households. Employing U.S. household survey data, we find a large, positive consumption response for households with mortgage debt, smaller response for renters, and an insignificant response for outright homeowners, in response to a positive government spending shock. We consider a model with three types of households and show that it can successfully account for these findings. Liquidity constraints and wealth effects play a crucial role in shock propagation. Our findings suggest the importance of household mortgage debt position in the transmission mechanism of fiscal policy.

The Macroeconomic Effects of Income and Consumption Tax Changes

This paper estimates the effects of exogenous changes in income and consumption taxes. The tax shocks are proxied with a narrative account of tax liability changes in the United Kingdom. Income tax cuts have large effects on GDP, private consumption, and investment. The effects of consumption tax cuts are modest and not statistically significant on GDP and its components. Shifting the burden of taxation from income to consumption is expansionary. Consistent with conventional public finance theories, these results indicate that it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy. (JEL E21, E22, E23, H24, H25)

The Impact of Fiscal Policy on Aggregate Economic Activity: A Regime Dependent Impulse Response Analysis

Asymmetries in fiscal policies cannot be captured by linear time series models. In order to examine the asymmetry responses of output in different phases of the business cycle, Markov Regime Switching (MRS) model is an alternative technique that is used to achieve the objective. The main objective of this study is to empirically explore the effects of fiscal shocks (spending and taxes) on Pakistan’s overall economic activity GDP while utilizing Markov Switching MS-VAR model. The model is characterized to allow for the variation in mean, coefficients and in error variances. The study results show that the effect of shocks and the size of multiplier varies across regimes confirming the asymmetric behavior of fiscal policy transmission mechanism. Moreover, the impact of positive spending shock has a stronger effect on output in the recession as compared to boom. One surprising result of the study is that the tax shock increases the output both in recession and boom. Lastly, spending and revenue behave a-cyclically.
 JEL Classification Codes: C11; C32; E62

How Fiscal Policy in Bulgaria may Affect the Transition to a Low Carbon Economy?

The adaptation of traditional macroeconomic policy goals to new ecological realities assigns a specific role to macroeconomic policy. We model the short-run transmission mechanism of fiscal policy under Currency Board Arrangements in Bulgaria in order to assess the fiscal policy potential to boost sustainable economic development and compensate for the economic growth losses due to decarbonisation of the economy. We find that fiscal policy instruments in Bulgaria have no statistically significant effect on GDP components considered separately but they do have a complex effect on macroeconomic environment in the country. This indicates that specific fiscal policy effects to support the transition to a low-carbon economy in Bulgaria cannot be expected and the structural policies should be followed.

Fiscal policy transmission mechanism in Pakistan: A general equilibrium analysis

This paper explores the impact of fiscal spending on key macroeconomic indicators for Pakistan economy using an estimated open economy new Keynesian dynamic stochastic general equilibrium (DSGE) model. Results show that a positive shock to government consumption leads to fall in private consumption, private investment and exports owing to negative wealth effect, rise in interest rate and domestic currency appreciation, respectively. Imports and inflation also rise. Estimated values of present value fiscal multipliers are 0.54, 0.29 and 0.18 after 1 year, 5 years and 10 years, respectively. These results show that although positive in the short run, yet the magnitude of the fiscal multiplier is very low in the case of Pakistan. Sensitivity analysis shows that the value of the multiplier marginally rises with rise in degree of price stickiness. Transitory shocks have a substantially higher multiplier relative to persistent shocks.

China’s Fiscal Multiplier and Its State Dependence

This paper studies the effects of government spending on China’s output with a threshold structural vector autoregressive model. The empirical findings suggest that increasing government expenditure significantly raises China’s aggregate output. Contrary to the evidence of countercyclical fiscal multipliers in the advanced economies, China’s fiscal multiplier tends to be procyclical, suggesting a novel fiscal policy transmission mechanism in China.

Fiscal Policy Effects in Ukraine

This paper empirically analyses fiscal policy effects in Ukraine using different identification strategies within the framework of a vector error correction model (VECM). For quarterly data from 2001 to 2016, we find a robust positive impact of both government expenditure and net revenue upon output in Ukraine, which closely corresponds with the predictions of the Mankiw-Summers model in the case of high demand for money in relation to consumption expenditure combined with significant investment elasticity in relation to the interest rate. In other respects, the fiscal policy transmission mechanism exhibits several standard features (such as an increase in government expenditure after a positive shock to revenue or a widening of the budget deficit following an interest rate hike). The results suggest the feasibility of revenue-based fiscal consolidation policies in Ukraine, as better tax collection may contribute to economic growth even in the short run. Since there is a robust conventional inverse relationship between interest rate and output, one of the puzzling results is that government expenditure puts downward pressure on the former, with net revenues being neutral in this respect. Real exchange rate (RER) depreciation is behind the decrease in output in the baseline model, but alternative identification schemes suggest that it is likely to be contractionary in the short run while turning expansionary in the long run.

Macroeconomic effects of fiscal policy in the European Union, with particular reference to transition countries

This study empirically investigates the short- to medium-term effects of fiscal policy on output and other macroeconomic variables in European Union countries between 1995 and 2012, with particular reference to transition countries. It applies Panel Vector Auto Regression with recursive identification of government spending shocks as the most appropriate method for the aim of the study and the sample used. The main results indicate that expansionary spending shocks have a positive, but a relatively low effect on output, with the fiscal multiplier around one in the year of the shock and the following year, and lower thereinafter. There are indications that this result is driven by the recent crisis, as multipliers are considerably lower in the pre-crisis period. Effects of fiscal policy are strongly dependent on country structural characteristics. Fiscal multipliers are higher in new European Union member states, in countries with low public debt and low trade openness. Further, spending shocks are followed by rising debt levels in old member states, which could be related well to the recent European debt crisis. Finally, the analysis of the transmission mechanism of fiscal policy yields results that are consistent with both extended Real Business Cycle models and extended New Keynesian models.

Asymmetric effects of fiscal policy in EU and OECD countries

In this article, we take account of an evaluation of the short- and medium-term effects of the transmission mechanism of fiscal policy in EU and OECD countries and their dependence on the state of the economy and fiscal behaviour. Our findings indicate that (i) across EU member states the impact of government spending on economic performance is larger in the accession than in core member states, (ii) since the onset of the economic/financial crisis the government spending multipliers have become larger in both core and accession EU member states, and (iii) a comparison with fiscal responses in the OECD countries shows robustness of our estimates. The conclusion implies that the austerity measures present a substantial drag for economic activity in accession EU countries. Thus, we may state that not considering the fiscal behaviour and state of the economy gives misleading fiscal multiplier effects, which in turn lead to the adoption of inappropriate fiscal measures that even worsen a country's economic situation.

In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area

This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.

In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area

SummaryThis paper applies the DSGE‐VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand‐to‐mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE‐VAR model (i.e. an impact output multiplier larger than one and a crowding‐in of private consumption). The estimated share of hand‐to‐mouth consumers is too small to replicate the positive response of private consumption. Copyright © 2016 John Wiley & Sons, Ltd.

The Effects of Rent-Seeking Behavior on the Efficiency of Fiscal Policy in Ukraine

Abstract The paper analyses the distinctive features of fiscal regulation of Ukrainian economy as a crucial factor of ensuring national security. The authors reveal the structure of fiscal policy transmission mechanism and highlight the peculiarities of its channels under macroeconomic stabilization. The theoretical and empirical analysis unveils certain obstacles that arise in the Ukrainian economy on the way to establishing macroeconomic efficiency of its fiscal impulses. The most important obstacles of such sort are formation of rentier economy and counterproductive rent-seeking behavior of economic actors. The study of this phenomenon and of their influence on the efficiency of fiscal policy instruments in national economy made it possible to suggest a number of practical recommendations. These recommendations cover bureaucracy reduction, improvement in efficiency and transparency of public administration, provision of clear specification of property rights, implementation of civilized justice system, and enhancement of possibilities for public control of budget spending and use of public property and assets.

Monetary and fiscal policy under deep habits

Allowing habits to be formed at the level of individual goods – deep habits - can radically alter the fiscal policy transmission mechanism as the counter-cyclicality of mark-ups this implies can result in government spending crowding-in rather than crowding-out private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple policy rules to mimic fully optimal policy. We find that the presence of deep habits at empirically estimated levels can imply large externalities that significantly affect the conduct of monetary and tax policy. However, despite the rise in government spending multipliers implied by deep habits, government spending is barely used as a stabilisation tool under the optimal policy.

Special Features of the Ukrainian Fiscal Policy Transmission Mechanism under Increasing Macroeconomic Instability

The paper describes the key features of functioning of the post-communist economies, which determine the specificity, essential to transmission mechanisms of economic policy. The analysis reveals existing significant influence of institutional factors on the efficiency of fiscal policy transmission mechanism in transition economies. The authors prove a heavy dependence of efficiency of fiscal policy transmission mechanism in Ukrainian economy from institutional factors such as management of government expenditures, consumers’ expectations and the level of fiscal decentralization.

Impact of fiscal policy in an intertemporal CGE model for South Africa

This paper uses an intertemporal computable general equilibrium model to investigate the consequences of an expansive fiscal policy designed to accelerate economic growth in South Africa. A key contribution is made to existing literature on the transmission mechanism of fiscal policy in African economies. To the best of our knowledge, no published study has empirically analyzed the macroeconomic effects of fiscal policy in the context of an open, middle-income sub-Saharan African economy like South Africa using an integrated intertemporal model with such disaggregated production structure. The paper shows that an expansive fiscal policy would have a temporary impact on gross domestic product (GDP) but would translate into higher debt relative to GDP. Using increased taxation to finance the additional spending would lessen this impact but would also negatively affect macroeconomic variables. Increased investment spending would improve long-term GDP, under any financing scheme, and would decrease debt-to-GDP ratio as well as deficit-to-GDP ratio. This outcome is driven by the positive impact infrastructure has on total factor productivity. Sensitivity analysis shows that these conclusions are qualitatively similar for wide values of the elasticity of the total factor productivity to infrastructure. In fact, the conclusions hold even when comparing different financing schemes.

GDP steady-state multipliers under monopolistic competition revisited

New Keynesian general-equilibrium static models showed the fiscal multiplier is an increasing function of the degree of monopoly. Here, I develop a simple intertemporal model allowing us to study the steady-state role of optimal capital stock (and depreciation) in the fiscal policy transmission mechanism. The GDP multiplier may be locally decreasing in the degree of monopoly when the number of firms is fixed, but results depend strongly on the set of parameter values chosen. Using a net-output definition or allowing for free entry leads to unambiguous dominance of the long-run monopolistic multiplier over the Walrasian one.

In Search of the Transmission Mechanism of Fiscal Policy [with Comments and Discussion

Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that in general, private consumption and the real wage will fall, while some neo-Keynesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the United States and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the U.S. input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.

Estimating tax and benefit multipliers in Europe

This paper derives estimates for key fiscal multipliers in the major economies of Europe. Newly estimated consumption functions incorporating disaggregated wealth components facilitate a close examination of the impact of liquidity constraint effects on the transmission mechanism of fiscal policy. Analysis shows that multipliers are affected by the interest rate response to fluctuations in output and inflation and to the proportion of liquidity constrained agents in the economy. Multipliers which impact through the current value of real wealth display a positive relation with the degree of consumption smoothing, while multipliers which impact through current disposable income display a negative relation. Moreover, we gauge the impact on the multiplier response across countries when we assume that the proportion of liquidity constrained consumers is the same everywhere.

Demand Elasticity and Fiscal Policy

In this paper we study the transmission mechanism of fiscal policy based on possible changes in the elasticity of demand. These are obtained by assuming that firms face a balance of public and private demands, each characterized by different price elasticity. We show that in this set-up there exists a range of the technological conditions under which fiscal policy is expansionary, independently of the pro or counter-cyclical nature of its impact on the desired mark-up