scholarly journals Fiscal Austerity in Ambiguous Times

2019 ◽  
Vol 11 (1) ◽  
pp. 89-131
Author(s):  
Axelle Ferriere ◽  
Anastasios G. Karantounias
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Public Debt ◽  
Optimal Policy ◽  
Government Spending ◽  
Ambiguity Aversion ◽  
Elasticity Of Substitution ◽  
Long Run ◽  
Optimal Fiscal Policy ◽  
Fiscal Austerity

This paper analyzes optimal fiscal policy with ambiguity aversion and endogenous government spending. We show that without ambiguity, optimal surplus-to-output ratios are acyclical and that there is no rationale for either reduction or further accumulation of public debt. In contrast, ambiguity about the cycle can generate optimally policies that resemble “austerity” measures. Optimal policy prescribes higher taxes in adverse times and front-loaded fiscal consolidations that lead to a balanced primary budget in the long run. This is the case when interest rates are sufficiently responsive to cyclical shocks, that is, when the intertemporal elasticity of substitution is sufficiently low. (JEL D81, E32, E43, E62, H21, H61, H63)

scholarly journals Fiscal policy in an open economy

2016 ◽  
Vol 16 (1) ◽  
Author(s):  
Amit Friedman ◽  
Zvi Hercowitz ◽  
Jonathan Sidi
Keyword(s):  
Fiscal Policy ◽  
Open Economy ◽  
Public Debt ◽  
Government Spending ◽  
Tax Rates ◽  
Productivity Shocks ◽  
Policy Regime ◽  
Domestic Production ◽  
Long Run ◽  
Macroeconomic Implications

AbstractThis paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target – following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it’s implementation leads to higher output in the long-run.

HABIT FORMATION AND GOVERNMENT SPENDING IN A SMALL OPEN ECONOMY

2003 ◽  
Vol 7 (3) ◽  
pp. 407-423 ◽  
Author(s):  
Cem Karayalçin
Keyword(s):  
Fiscal Policy ◽  
General Equilibrium ◽  
Current Account ◽  
Open Economy ◽  
Equilibrium Model ◽  
Government Spending ◽  
Time Preference ◽  
Small Open Economy ◽  
Long Run ◽  
Fiscal Shocks

The paper studies the effects of an expansionary fiscal policy in a general equilibrium model of a small open economy. Households are assumed to possess habit-forming, endogenous rates of time preference. In response to fiscal shocks, the model generates cyclical endogenous persistence and procyclical time paths for consumption, employment, and investment, as well as a countercyclical path for the current account. Furthermore, fiscal shocks are shown to have positive long-run effects on output and negative long-run effects on consumption.

scholarly journals The Unpleasant Arithmetic of the Taylor Rule

2020 ◽  
Vol 8 (3) ◽  
pp. p89
Author(s):  
Alejandro Rodriguez-Arana
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Phillips Curve ◽  
Taylor Rule ◽  
Independent Component ◽  
Elasticity Of Substitution ◽  
Interest Rate Rule

This paper analyzes the effect of a monetary policy that raises the reference interest rate in order to reduce inflation in a situation where the fiscal policy parameters remain constant. In an overlapping generation’s model and in the presence of an accelerationist Phillips curve and a Taylor rule of interest rates, it is observed that increasing the independent component of said rule leads to a solution that at least in a large number of cases is unstable. In the case where the elasticity of substitution is greater than one, inflation falls temporarily, but then it can increase in an unstable manner. One way to achieve stability is to establish an interest rate rule where Taylor’s principle is not met. However, in this case many times the increase in the independent component of this rule will generate greater long-term inflation.

scholarly journals Social development and public debt sustainability

2021 ◽  
Vol 14 (2) ◽  
pp. 79
Author(s):  
Chara Vavoura ◽  
Ioannis Vavouras
Keyword(s):  
Fiscal Policy ◽  
Social Development ◽  
Public Debt ◽  
Debt Crisis ◽  
Necessary Condition ◽  
Debt Sustainability ◽  
Long Run ◽  
Policy Measures ◽  
Of Greece

The issue of public debt sustainability is of exceptional importance in the case of Greece. As a rule, the relevant analysis is limited to the examination of the fiscal policy measures reported to contribute to reducing public debt leaving out the investigation of the factors that caused the country’s debt crisis. The objective of the present paper is to explore the determinants of Greece’s debt crisis and the strategy required to address it. Our work highlights the issue of social development, which is found to be a necessary condition for ensuring the long run sustainability of the country’s public debt.

Fiscal Policy and Government Spending

2010 ◽  
Vol 214 ◽  
pp. F61-F66 ◽  
Author(s):  
Ray Barrell ◽  
Simon Kirby
Keyword(s):  
Fiscal Policy ◽  
Government Spending ◽  
Future Generations ◽  
Coalition Government ◽  
The Third ◽  
Long Run ◽  
Full Capacity ◽  
Government Deficit ◽  
The Government ◽  
The Cost

In June the Coalition Government produced a budget that aimed to reduce the government deficit quickly. The plan was based mainly on cuts in current expenditure and reductions in transfers to individuals. There are four possible reasons for reducing the deficit, and all have been used to justify the policy. The first reason might be that the cost of borrowing is currently too high, and the second could be that if deficits persist the markets could lose confidence and the cost of borrowing would rise. The third reason might be that we have to reduce the debt stock in order that we prepare for the next crisis, whilst the fourth, and perhaps most persuasive in the long run, is that it is unfair to borrow so much and therefore reduce the consumption of future generations. If either of the first two had merit there would be a case for swift consolidation, whilst if the third or fourth predominate, we should not be in any rush to act until output is nearer full capacity.

scholarly journals O Impacto da Política Fiscal nos Spreads dos Países Emergentes

2012 ◽  
Vol 10 (1) ◽  
pp. 31
Author(s):  
Katia Rocha ◽  
Ajax Moreira
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Emerging Market ◽  
External Shocks ◽  
Sovereign Spreads ◽  
Relevant Role ◽  
Fiscal Austerity ◽  
The Impact ◽  
Fiscal Policy Sustainability ◽  
Budget Surplus

Country risk or sovereign spreads affect directly the investment of companies and sovereigns, being an important figure to domestic interest rates and to economic growth. This paper analyzes the impact of fiscal policy on the determinants of the sovereign risk of 23 emerging market countries between 1995-2008. The results associate lower spreads to fiscal austerity, i.e. an accumulation of primary budget surplus that keeps the debt to GDP ratio constant over time. An increase of 1% on primary budget surplus decreases the spreads around 50 basis point. It evidences that fiscal policy sustainability plays a relevant role in determining the sovereign spreads besides contributing as a policy that mitigates external shocks.

scholarly journals Analysis of the Viability of Fiscal and Monetary Policies on the Recovery of Household Consumption Expenditures Because of the Covid-19 Pandemic

2021 ◽  
Vol 3 (1) ◽  
Author(s):  
Fahrul Riza ◽  
William Wiriyanata
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Government Spending ◽  
Positive Impact ◽  
Household Consumption ◽  
Series Data ◽  
Consumption Expenditure ◽  
Consumption Expenditures ◽  
Long Run ◽  
The Government

The Covid-19 outbreak disrupted economic activity in almost all countries. The Indonesian economy entered a recession phase as a result of the continued contraction in economic growth in the second and third quarters of 2020. According to Keynesian economic theory, the combination of fiscal policy and monetary policy was more effective in recovering the economy from the crisis, this study aims to measure the effect of government spending, money supply, inflation and interest rates on aggregate household consumption expenditure. This study used a quantitative method, using monthly time series data from January 2015 to December 2020. The data were analyzed using the Vector Error Correction Model (VECM). The results show that government spending has a negative impact on household aggregate expenditure in the long run meanwhile interest rate has a positive impact on household consumption expenditure. Inflation do not affect aggregate household consumption expenditure, both in the short and long term. The results of the analysis are useful for evaluating the policies taken by the government to overcome the economic crisis due to the spread of the Covid-19 outbreak. The government increases aggregate expenditure to cover the decline in household aggregate consumption expenditure due to a decrease in household real income. Then expansionary monetary policy in the long run will increase aggregate demand. Therefore, the Ministry of Finance together with Bank Indonesia needs to design other policies that will have a positive impact on economic recovery in the short term. This study has not included other macro indicators that affect household consumption expenditures such as unemployment, taxes and the household marginal propensity to saving (MPS). Keywords: Household Aggregate Expenditure; Government Expenditure; Inflation; VECM

scholarly journals Cyclical Fluctuation, Growth, and Stabilization: An Empirical Investigation of Dual Policy Objectives in Bangladesh

2020 ◽  
Author(s):  
Richmond Sam Quarm ◽  
Mohamed Osman Elamin Busharads
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Business Cycle ◽  
Interest Rates ◽  
Money Supply ◽  
Macroeconomic Policy ◽  
Output Growth ◽  
Long Run ◽  
Short Run ◽  
The Business Cycle

In conventional economics, two types of macroeconomic policy i.e. fiscal policy and monetary policy are used to streamline the business cycle. This paper has examined the cyclical behavior of these variables over the business cycle of Bangladesh. The objective of this examination is to show whether policies (fiscal policy and monetary policy) in Bangladesh are taken with a motive to stabilize the economy or only to promote economic growth. In other words, it has examined whether the policies in Bangladesh are procyclical or countercyclical or acyclical. Hodrick Prescott (HP) filter has been used to separate the cyclical component of considered variables. Both correlation and regression-based analysis have provided that in Bangladesh government expenditure and interest rates behave procyclically, but money supply behaves acyclically over the business cycle. Besides, this paper has tried to identify the long-term as well as the short-term relationship between real GDP and the macroeconomic policy variables with the help of the Johansen cointegration test, vector error correction model (VECM), and block exogeneity Wald test. Through these analyses, this study has found that fiscal policy has a significant impact on GDP growth both in the short-run and long-run. In the case of monetary policy, although the interest rate has an impact on real output both in the short-run and long-run, the money supply has neither a short-run nor long-run effect on output growth.

scholarly journals Introduction: Private Wealth and Public Debt

2021 ◽  
pp. 1-13
Author(s):  
Carl Christian von Weizsäcker ◽  
Hagen M. Krämer
Keyword(s):  
Fiscal Policy ◽  
Interest Rate ◽  
Life Expectancy ◽  
Interest Rates ◽  
Public Debt ◽  
Real Interest Rate ◽  
Retirement Planning ◽  
First Century ◽  
Twenty First Century ◽  
Real Assets

AbstractIn the economic area comprising the OECD countries plus China, almost half of private wealth consists of net public debt. Private wealth is nearly twice the size of private real assets. Due to the continuing rise in life expectancy, the share of public debt in private wealth is growing. As long as public debt does not become too great, real interest rates can be low, but positive in the twenty-first century. The main reason for this is private retirement planning in light of high life expectancy. Investment cannot keep up with increasing private saving. In the twenty-first century, public debt is a macroeconomic steering instrument. Fiscal policy uses it to ensure that a positive, but low real interest rate level continues to prevail.

scholarly journals The sustainability of public debt in Romania in economic and financial crisis

2010 ◽  
Author(s):  
Marian Dobranschi
Keyword(s):  
Fiscal Policy ◽  
Public Debt ◽  
Debt Management ◽  
Policy Action ◽  
Financial Transfers ◽  
Long Run ◽  
Fiscal Restraint ◽  
Private And Public ◽  
Sustainability Of Public Debt ◽  
Real Returns

Public finances are key driver in the EU for economic recovery as the debth of the recession and credit constraints require fiscal policy action. This paper emphasis the needed review of public debt and its role in economic development as a particular challenge for emerging economies such as Romania. We explore the most important effects of public debt on economic growth like crowding-out effect, the realtionship between private and public financial transfers, the effect of public debt over GDP growth, inflation and on the sustainability of fiscal policy on the long run. Finnaly we estimate that the composition of public debt can suport debt stabilization and how debt management can stabilize the debt to GDP ratio in face to real returns and outputs growth and thus supports fiscal restraint in ensuring sustainability.

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