Fiscal Policy Through Time-Varying Tax Rates If and How

PurposeThis study reexamines the sustainability of fiscal policy in Sweden.Design/methodology/approachTo test the sustainability of fiscal policy, two approaches are used; the methodology of Kejriwal and Perron (2010), testing for multiple structural changes in a cointegrated regression model and time-varying cointegration test of Bierens and Martins (2010), and Martins (2015).FindingsUsing the first approach of testing for multiple structural changes in a cointegrated regression model, the results indicate that government spending and revenue are cointegrated with two breaks. An estimation of a two-break long-run model shows that the slope coefficient increases from 0.678 to 0.892 from the first to the second regime, implying that fiscal deficits were weakly sustainable in the first two regimes, from 1800 to 1943, and from 1944 to 1974. Further, results from time-varying cointegration test indicate that cointegration between spending and revenue in Sweden is time-varying. Fiscal deficits were found to be unsustainable for the periods 1801–1811, 1831–1838, 1853–1860 , 1872–1882, 1897–1902, 1929–1940 and 1976–1982 and weakly sustainable over the rest of the study period.Research limitations/implicationsA number of implications arise from this study: (1) Accounting for breaks in cointegration analysis and in the estimation of the level relationship between spending and revenue is very important because ignoring breaks may lead to an overestimated slope coefficient and hence a bias on the magnitude of fiscal deficit sustainability. (2) In testing for cointegration between spending and revenue, assuming a constant cointegrating slope when it is actually time-varying can also be misleading because deficits can be sustainable for a period of time and unsustainable over another period.Originality/valueThe contribution of this study is three-fold; first, the study uses a long series of annual data spanning over a period of two centuries, from 1800 to 2011. Second, because of the importance of structural change in economics, to examine the existence of a level relationship between spending and revenue, the study uses the methodology of Kejriwal and Perron (2010) to test for multiple structural changes in a cointegrated regression model, as well as time-varying cointegration of Bierens and Martins (2010) and Martins (2015).

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A baseline supermultiplier model for the analysis of fiscal policy and government debt

Review of Keynesian Economics ◽

10.4337/roke.2020.03.02 ◽

2020 ◽

Vol 8 (3) ◽

pp. 313-338 ◽

Cited By ~ 1

Author(s):

Fabio Freitas ◽

Rodrigo Christianes

Keyword(s):

Fiscal Policy ◽

Income Distribution ◽

Government Debt ◽

Monetary Theory ◽

Tax Rates ◽

Wage Share ◽

Endogenous Variables ◽

Government Deficit ◽

The Interest Rate ◽

Sraffian Theory

The article presents a basic Sraffian supermultiplier model for the analysis of fiscal policy and government debt. First, we discuss the assumptions and the equilibrium and stability properties of the model. Next, we investigate the effects on the main endogenous variables of the model (including the primary government deficit and debt ratios) of changes in the rate of growth and composition of autonomous demand, in the tax rates on profits and wages, and in the rate of interest. The analysis of the impacts of changes in the interest rate is conducted according to two possible closures for the Classical/Sraffian theory of income distribution. In the first closure the changes in the rate of interest do not affect income distribution between wages and profits, which implies that its influence over the endogenous variables operates only through the financial component of total government deficit. The second closure is the monetary theory of distribution, according to which there is an inverse relationship between the rate of interest and the wage share. In this case, besides the pure financial effect, we show that the change in the rate of interest affects the economy through the equilibrium value of the supermultiplier and the tax burden.

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A time-varying approach to analysing fiscal policy and asset prices in South Africa

Journal of Financial Economic Policy ◽

10.1108/jfep-01-2013-0003 ◽

2014 ◽

Vol 6 (1) ◽

pp. 46-63 ◽

Cited By ~ 5

Author(s):

Rangan Gupta ◽

Charl Jooste ◽

Kanyane Matlou

Keyword(s):

Fiscal Policy ◽

Stock Prices ◽

Asset Prices ◽

Marked Change ◽

Var Model ◽

Time Varying ◽

Content Type ◽

Vector Autoregressive ◽

Time Varying Parameter ◽

The Impact

Purpose – This paper aims to study the interplay of fiscal policy and asset prices in a time-varying fashion. Design/methodology/approach – Using South African data since 1966, the authors are able to study the dynamic shocks of both fiscal policy and asset prices on asset prices and fiscal policy based on a time-varying parameter vector autoregressive (TVP-VAR) model. This enables the authors to isolate specific periods in time to understand the size and sign of the shocks. Findings – The results seem to suggest that at least two regimes exist in which expansionary fiscal policy affected asset prices. From the 1970s until 1990, fiscal expansions were associated with declining house and slightly increased stock prices. The majority of the first decade of 2000 had asset prices increasing when fiscal policy expanded. On the other hand, increasing asset prices reduced deficits for the majority of the sample period, while the recent financial crises had a marked change on the way asset prices affect fiscal policy. Originality/value – This is the first attempt in the literature of fiscal policy and asset prices to use a TVP-VAR model to not only analyse the impact of fiscal policy on asset prices, but also the feedback from asset prices to fiscal policy over time.

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FISCAL POLICY, INCREASING RETURNS, AND ENDOGENOUS FLUCTUATIONS

Macroeconomic Dynamics ◽

10.1017/s1365100501010112 ◽

2002 ◽

Vol 6 (5) ◽

pp. 633-664 ◽

Cited By ~ 24

Author(s):

Jang-Ting Guo ◽

Kevin J. Lansing

Keyword(s):

Steady State ◽

Fiscal Policy ◽

Multiple Equilibria ◽

Returns To Scale ◽

Increasing Returns ◽

Global Dynamics ◽

Tax Rates ◽

Endogenous Fluctuations ◽

Nonlinear Equilibrium ◽

Capital Tax

This paper examines the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits local indeterminacy, we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10-cycles, quasiperiodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. We show that the use of local steady-state analysis to detect the presence of multiple equilibria in this class of models can be misleading. For a plausible range of capital tax rates, the log-linearized dynamical system exhibits saddle-point stability, suggesting a unique equilibrium, whereas the true nonlinear model exhibits global indeterminacy. This result implies that stabilization policies designed to suppress sunspot fluctuations near the steady state may not prevent sunspots, cycles, or chaos in regions away from the steady state. Overall, our results highlight the importance of using a model's nonlinear equilibrium conditions to fully investigate global dynamics.

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Debt Overhang, Gazelles’ Growth, and Fiscal Policy: A Note from the Quantile Regression Approach

Sustainability ◽

10.3390/su131810457 ◽

2021 ◽

Vol 13 (18) ◽

pp. 10457

Author(s):

Sorin Gabriel Anton ◽

Mihaela Onofrei ◽

Emilia Gogu ◽

Bogdan Constantin Neculau ◽

Florin Mihai

Keyword(s):

Fiscal Policy ◽

Quantile Regression ◽

Firm Growth ◽

Tax Rates ◽

Lower Growth ◽

Effective Tax Rates ◽

Debt Overhang ◽

Regression Approach ◽

Negative Effect ◽

The Impact

The paper aims to examine the relationship between leverage and firm growth and the impact of fiscal policy on this relationship using a panel data quantile regression approach. Employing a sample of gazelles from emerging Europe for the 2006–2014 period, we find that debt overhang negatively affects firm growth only for the lower growth quantiles. In addition, we found that the negative effect is higher for the gazelles located in countries with lower corporate income effective tax rates. However, for the higher growth quantiles, the impact of debt on firm growth is positive and statistically significant. Our results reconcile the mixed results of the previous studies and have practical implications for financing strategies in emerging markets.

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Tax Cuts And Interest Rate Cuts: An Empirical Comparison Of The Effectiveness Of Fiscal And Monetary Policy

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v2i8.2906 ◽

2011 ◽

Vol 2 (8) ◽

Cited By ~ 1

Author(s):

Tricia Coxwell Snyder ◽

Donald Bruce

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Error Correction ◽

Relative Effectiveness ◽

Explanatory Power ◽

Tax Rates ◽

Stabilization Policy ◽

Federal Funds ◽

Federal Funds Rate ◽

Fiscal And Monetary Policy

Can expansionary fiscal or monetary policy stimulate the U.S. economy in light of recent events?  Using an Error-Correction-Vectorautoregression, we examine the relative effectiveness of both types of governmental stabilization policy. Unlike previous studies, we use a more general error correction vectorautoregression (ECM) approach.  Our focus is on determining the relative explanatory power of measures of monetary policy (M2 and the Federal Funds Rate) and fiscal policy (marginal income tax rates and government spending) in explaining movements in consumption, investment, and output.  Results suggest that monetary policy is relatively more powerful than fiscal policy.

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Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy

SSRN Electronic Journal ◽

10.2139/ssrn.2340367 ◽

2013 ◽

Author(s):

Makoto Nirei ◽

Sanjib Sarker ◽

Kazufumi Yamana

Keyword(s):

Fiscal Policy ◽

Time Varying

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