"Perspectives Fiscal Policy as a Stabilization Tool: Discretionary and Non Discretionary Policies"

Global financial crisis of 2008 and the Covid 19 led slowdown have brought Keynesian fiscal stabilization policies back to the forefront of all academic debates. But what the world is experiencing should be treated as an exceptional situation that should not be used to advance the case to fine-tune the economy every time using discretionary fiscal measures. The pre-crisis broad macroeconomic consensus still holds, and stabilization should first be left to monetary policy. On the fiscal front government should rely more on rule-based inbuilt stabilizers for short-term management of cyclical fluctuations in case of demand shocks and long-run fiscal policy should focus more on growth and developing enabling factors to attract more investment. Fiscal stabilizers on the expenditure side should be strengthened to provide an adequate safety net to economically vulnerable sections of the society.

Viral Solidarity? EU Solidarity and Risk-Sharing in the COVID-19 Crisis

Fiscal integration has long been regarded as a necessary condition to ensure the long-term stability of the euro. In the aftermath of the euro crisis, concerns about a populist backlash of Eurosceptic voters constrained national governments in their ability to pursue such integration. However, during the COVID-19 pandemic, national leaders were able to agree to the Next Generation EU, a pandemic recovery fund of over 750 billion euro establishing an unprecedented, far-reaching, albeit temporary, fiscal stabilization capacity. Still, we know very little about citizens’ preferences towards the pandemic recovery fund? To answer this question, we conducted an original survey experiment on public support for different designs of a European pandemic recovery fund. We fielded the survey in five European countries (France, Germany, Italy, the Netherlands, and Spain) in July 2020, at the time that national leaders agreed on the recovery fund. Our results show that there is surprisingly high support for a joint European fiscal instrument and that citizens react to different elements of the pandemic recovery fund. They prefer a broad program that is directed at countries in need, but they are skeptical about common debt. Yet, citizens’ skepticism towards common debt is not important enough for them to negatively evaluate the program as a whole. Overall, the pandemic recovery fund agreed under ‘Next Generation EU’ is a well-tailored instrument to generate widespread political support across European member states.

POLITICAL CONFLICT AND BARGAINING IN A NEW KEYNESIAN MODEL OF FISCAL STABILIZATION

Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.

OUTPUT VOLATILITY IMPACTS ON FISCAL POLICY SUSTAINABILITY, CASE OF GEORGIA

EU Home(current) About Us Services Blog ვაჟა კილაძე Create Posts Title Body The article discusses how fiscal stability affects macroeconomic sustainability and whether stability means strong economic growth in Georgia.The results of the analysis conducted in the article is supported by those numerous studies which indicate that fiscal stabilization reduces output volatility. Based on the existing analysis, we can say that fiscal policy can make a significant contribution to stabilizing output. Fiscal Stability Indicator (FISCO) for Georgia has been calculated and cross-country analysis has been performed. It has been found that fiscal policy contributes more to stabilization of output in developed economies than in transitional markets and developing countries. The fiscal stabilization indicator for Georgia is 0.42 and is statistically significant, which indicates that one percentage point change in output causes 0.42 percentage point change in the total budget balance (as a share of GDP). The FISCO indicator is 0.41 for developed countries and 0.24 for transitional markets and emerging economies. Based on the correlation analysis, it has been revealed that higher fiscal stability is associated with lower output volatility. However, here also, the difference between the groups of developed and transition and developing countries is significant: in developed countries- the relationship between fiscal stabilization and output fluctuation is stronger and sharply negative than in transition and developing economies. More often, fiscal policy is used as a stabilization mechanism when the economy lags behind the desired pace of growth; And are less likely to resort to policy mechanisms when booming. Due to the proven importance of the fiscal stabilization in economic sustainability it can be concluded that the use of fiscal stabilization as a mechanism only in the «black days» can greatly worsen the sustainability of government debt, as governments appear to lack the advantage that they can reduce deficits and create fiscal buffers to better address future negative shocks in times of growth.

MACROECONOMIC STABILIZATION AND LONG-TERM GROWTH: THE ROLE OF POLICY DESIGN

Do fiscal stabilization policies affect the long-term growth of the economy? If so, are the long-term effects growth enhancing or growth reducing? When addressing these questions from a theoretical perspective, the literature has typically emphasized the importance of structural aspects such as the modeling approach of endogenous technological change while paying less attention to an elaborate design of the considered fiscal stabilization policies. This paper uses an agent-based macroeconomic model that generates endogenous business cycles to emphasize the role of the policy design for long-term growth effects of stabilization policies. By comparing a demand-oriented consumption policy and two different investment subsidizing policies, it can be shown that these policies are successful in smoothing the business cycle but differ in terms of their effects on economic long-term growth. This highlights the importance of policy design for the analysis of long-term effects of stabilization policies.