US Fiscal Research Articles

Estimating US Fiscal and Monetary Interactions: From Volcker Chairmanship to the Great Recession

Locating the appropriate degree of interaction between fiscal and monetary policy plays a crucial role in ensuring economic stability. Their joint impact is, however, still unclear. We observe significant differences in the transmission of shocks, in particular between the Great Recession and the Great Moderation, and find a high degree of interactions between monetary and fiscal policy. Further, government revenues largely influence decisions on spending, while spending does not influence tax decisions. Spending stimuli are more effective in expanding output than tax cuts. Under certain conditions regarding private agent expectations, spending increases can result in high and persistent growth.

The Deterioration in the US Fiscal Outlook, 2001–2010

Executive Summary From 1999 to 2001, US budget surpluses averaged 2% of GDP. By 2011, the Congressional Budget Office was projecting persistent “current policy” budget deficits exceeding 6% of GDP, even after the economy recovered from the recession. This paper reviews the remarkable deterioration in the US fiscal outlook. It shows that more than half of the deterioration occurred before the 2007–9 recession, as a combination of tax cuts, increased spending, and worse than expected economic performance shifted the budget from surplus to deficit. The further deterioration since 2007 has two main components. Spending on Medicare, Medicaid, and Social Security is projected to increase by almost 3% of GDP over the first 10 years of baby boomer retirements, and interest costs are rising both because of the underlying fiscal imbalance and also as a result of the recession. The paper also discusses proposals for reducing the deficit, longer-term fiscal challenges, and the political economy of fiscal reform.

Introduction

Introduction

The US Fiscal Situation: Causes and Remedies

We need a rule to control the growth in government, says Edward Lazear. “Inflation plus One” would eliminate the federal budget deficit in 8 years.

Fixing US Fiscal Policy

Fixing US Fiscal Policy

Fixing US Fiscal Policy

The U.S. current account deficit has grown from about 1 percent of GDP in the 1990s to about 6 percent of GDP today. Simply decreasing the budget deficit has not directly translated to a reduction of the current account deficit, so other facets of U.S. fiscal policy must serve as the solution to this problem. If no action is taken, forced spending and higher tax rates could shift the United States’ position in the global economy from one of economic strength to one of economic weakness.