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Fiscal space, government spending, and tax rate cyclicality patterns

Fiscal space, government-spending, and tax-rate cyclicality patterns: A cross-country comparison, 1960-2016

The upward trajectory of policy interest levels in OECD countries will impose growing fiscal challenges, testing their fiscal convenience of countercyclical policy and therefore their resilience. This column compares fiscal cyclicality across countries and identifies measures of fiscal space. The results reveal a mixed fiscal scenery, where over fifty percent of countries are characterised by limited fiscal space, and fiscal policy is either procyclical or acyclical.

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Fiscal stabilisation in monetary unions

Stabilisation of common and asymmetric shocks

The stabilisation from market mechanisms and other existing instruments is bound, and this may be the economic rationale for fiscal stabilisation in a monetary union. Factor mobility really helps to smooth the result of large shocks (Asdrubali et al. 1996, Nikolov 2016), however the Great Recession showed that market stabilisation is normally inadequate (Berger et al. 2018) because markets have a tendency to behave pro-cyclically (Furceri and Zdzienicka 2015, Ferrari and Rogantini-Picco 2016).

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Fiscal shocks in a globalised world

Ramifications of fiscal shocks in a globalised world

The impact of fiscal policy on exchange rates is of key interest to policymakers. This column argues that unexpected government spending instantly affects exchange rates. The finding, predicated on daily data reporting of the united states Defence Department, may claim that unexpected government spending has broader macroeconomic effects aswell. The results, however, usually do not hold is low-frequency data are used instead.

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Fiscal shocks

Fiscal shocks

323 years of UK national debt

A fresh dataset for the marketplace value of British government debt makes a long-run analysis of fiscal sustainability and debt management possible. It implies that the 20th century saw a shift to financing debt by inflation and low bondholder returns, instead of through fiscal surpluses. This column runs on the counterfactual analysis showing that long bonds have already been an expensive method of financing debt, especially after a financial meltdown. Had the federal government issued only three-year bonds since 1914, the amount of debt in 2017 could have been lower by 28% of GDP.

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Fiscal policy responses to crises the social impacts

Counting the social impact

Lost in a lot of the discussion on fiscal-policy procyclicality has been the social impact of contractionary fiscal policy during recessions – things such as for example:

  • the poverty rate,
  • income inequality,
  • the unemployment rate, and
  • domestic conflict.

In a recently available research paper we look at the way the fiscal-policy responses to GDP crises have affected social indicators such as for example those in the above list (Vegh and Vuletin 2014). We find that contractionary fiscal policy during crises has tended to worsen social indicators both in Latin America and, recently, in the Eurozone, which calls into question recent claims on ‘expansionary fiscal austerity.’

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Fiscal rules for the eurosystem from “free talk” to effective incentive schemes vox, cepr policy po

How about existing fiscal arrangements?

Created within the Maastricht Treaty, the SGP targets discipline in public areas budgets, primarily with a complicated excessive deficit procedure. It hasn’t been executed and was loosened in 2005. National ministers deciding by qualified majority and getting the final say have preferred a cooperative approach up to now – because so many students would if deciding collectively who’ll pass their exams. The EU is finalising another SGP reform. You will have a fresh preventive part, but probably no automatic sanctions (Kafsack 2011).

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Fiscal prioritisation lessons from three wars

Fiscal prioritisation lessons from three wars

‘Lessons of the past’

What were these ’lessons of the past’ that may suggest significantly less than rigid compliance to previous promises? Before the Civil War, the united states had fought three major wars. Two of the wars, the brand new War and The War of 1812, had also resulted in fiscal crises.

In 1790, through the US’ first fiscal crisis, then Secretary of the Treasury Alexander Hamilton crafted an idea to restructure the Continental and state debts incurred throughout the brand new War. Under this course of action, Hamilton gave first priority to foreign creditors, paying down Dutch creditors completely (see Table 9 of Garber 1991). Hamilton then reduced the promised interest payments to domestic bondholders while preserving their promised principal payments. This decrease in the interest was a kind of repudiation, though perhaps Hamilton repudiated significantly less than had been expected through the 1780s, earning him substantial gratitude from 1780s speculators. However, not all government creditors fared so well. Holders of Continental Dollars received only 1% of their face value.

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Fiscal policy remains in the stone age

Fiscal policy remains in the stone age

With unemployment remaining saturated in the euro area and core inflation well below target, Simon Wren-Lewis argues that German fiscal policy, specifically, is too tight, calling for stimulus by means of public investment.

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Fiscal policy remains in the stone age.

Or maybe the center ages, but definitely not anything more recent compared to the 1920s. Keynes advocated using fiscal expansion in what he called a liquidity trap in the 1930s. Nowadays we use a different terminology and discuss the necessity for fiscal expansion when nominal interest levels are stuck at the zero lower bound or effective lower bound. (I slightly choose the latter terminology since it is up to central banks to choose at what point reducing nominal interest levels further will be risky or counterproductive.) The logic may be the same today since it was in the 1930s. When monetary policy loses its reliable and effective instrument to control the economy, you must bring in another best reliable and effective instrument: fiscal policy.

Covid-19

A hamiltonian glimpse in europe

A Hamiltonian glimpse in Europe

Thorsten Beck believes that as the compromise reached on the European recovery support will never be enough to overcome the COVID-19 challenges in the EU, it really is an important first rung on the ladder.

First posted on:

The European Council has come to a compromise on the European recovery support, after four days of negotiations. The primary pillars as proposed by Macron and Merkel time ago still stand – joint financing and a significant grant element. However the grant amounts have been down and many forward-looking programmes, including support for climate change, have already been reduced. So, is this a glass half empty or a glass half full? Taking the viewpoint a year ago none of the could have been even imaginable is a valid point if one takes the long-term view towards a slow move towards European fiscal policy integration. As my buddy Sony Kapoor highlights, however, this will not remember that the COVID-19 crisis constitutes a massive risk to the complete European project, you start with the euro, when there is asymmetric recovery and divergence over the EU (and again, especially the euro area). Many economists, including yours truly, have therefore called in early stages for a joint recovery effort on the European level, on economic, political and social grounds. And as a decade ago with the banking union, when these calls were first dismissed as unrealistic, it ultimately did happen. Angela Merkel and Emmanuel Macron have stepped up to the task.

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A guide to directed search

Directed search: Matching partners with pricing data

Randall Wright, Philipp Kircher, Benoit Julien, Veronica Guerrieri 07 January 2018

Search models have vastly improved our knowledge of important market events that aren’t explained by classical economic theory, however they have a tendency to treat price formation as an afterthought. This column introduces a survey of the literature on ‘directed search’, which aims to keep carefully the explanatory power of search models but permits a meaningful role of prices in determining where people visit a trading partner.