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This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 23 EU countries over the 1980-2007 period. The depe...
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This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 23 EU countries over the 1980-2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that a high concentration of parliamentary seats in a few parties would increase public spending volatility.
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Single-equation estimates of fiscal reaction functions, which relate primary surpluses to past debt GDP ratios and control variables, are subject to potentially serious simultaneity bias that can produce misleading inferences abou...
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Single-equation estimates of fiscal reaction functions, which relate primary surpluses to past debt GDP ratios and control variables, are subject to potentially serious simultaneity bias that can produce misleading inferences about fiscal behavior. Biases arise from failure to model the general equilibrium relationships between government debt and surpluses, relationships that bring in the forward-looking nature of nominal debt valuation and the role of monetary policy in that valuation. (C) 2016 Elsevier B.V. All rights reserved.
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Fiscal policies that stabilize debt may not provide the fiscal backing necessary for monetary policy to successfully target inflation. Appropriate backing is provided by passive fiscal behavior. Understanding the distinction betwe...
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Fiscal policies that stabilize debt may not provide the fiscal backing necessary for monetary policy to successfully target inflation. Appropriate backing is provided by passive fiscal behavior. Understanding the distinction between stabilizing and passive fiscal policies is central to the design of fiscal rules. (C) 2017 Elsevier B.V. All rights reserved.
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Opposite to mainstream economics, (post-) Keynesian economics has defended the need of a discretionary fiscal policy that helps to maintain economic activity at a full employment level, offsetting the cyclical deviations from that...
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Opposite to mainstream economics, (post-) Keynesian economics has defended the need of a discretionary fiscal policy that helps to maintain economic activity at a full employment level, offsetting the cyclical deviations from that level of output. In this sense, it is implicitly assumed that any discretionary management of public finance is, by definition, efficient. The Spanish case shows that public authorities can make an inefficient use of the discretionary room of fiscal policy, thus exacerbating the existing macroeconomic and fiscal imbalances. Consequently, there is a need for rules that constrain the discretionary management of public finance.
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Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and en...
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Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and enforceability. Simplicity has been sacrificed to ensure that more contingent (i.e. flexible) rules remained enforceable. The resulting arrangements have failed to adequately guide fiscal policy, undermining formal compliance, and ultimately, popular and political support for rules. To mitigate the risk that countries abandon rules-based policymaking, we suggest downplaying enforceability-i.e. the role of formal sanctions through enforcement-and enhancing the reputational costs of breaching rules. At the limit, the rule could consist of a simple quantitative benchmark for a key fiscal indicator. To boost reputational effects, independent fiscal councils should focus on debunking the "fiscal alchemy," clearing the public debate from partisan smokescreens, and fostering popular support for sound fiscal policies.
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This paper analyzes the different characteristics of fiscal policy using a two-step estimation procedure. First, we decompose both government spending and government revenue into three components: responsiveness, persistence and d...
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This paper analyzes the different characteristics of fiscal policy using a two-step estimation procedure. First, we decompose both government spending and government revenue into three components: responsiveness, persistence and discretion. Second, we assess the determinants of these characteristics. Using data from 132 countries, our results show that fiscal policy is more persistent than responsive to economic conditions, which implies that the authorities may have less leeway in the short-run notably to curb spending behavior. In addition, countries characterized by greater fiscal persistence have less discretion and responsiveness. Finally, macroeconomic, institutional and geographic variables explain cross-country variation in fiscal characteristics.
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Current economic turbulence has revived interest in interwar macroeconomic instability and policy. This paper provides a guide to the current state of knowledge on British macroeconomic policy between 1929 and the eve of the Secon...
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Current economic turbulence has revived interest in interwar macroeconomic instability and policy. This paper provides a guide to the current state of knowledge on British macroeconomic policy between 1929 and the eve of the Second World War for today's economists and policy-makers. Mindful that some will seek 'lessons' from this earlier age, it makes clear the very particular economic and policy context of the time, including the marked difference between British and American economic performance and policies and the challenge posed by the massive rise in debt brought about by the First World War. Knowledge transfer is possible here for policy learning, but what transpires is that lessons are typically stronger as negatives than as positives: namely what should not be done in general, as against what might be done, this largely situation specific. The focus is the role and effectiveness of the monetary and fiscal policies pursued together with an assessment of the principal policy not adopted, namely the Keynesian solution of significant loan-financed public works to remedy mass unemployment. The analysis is comparative with respect to US macroeconomic economic performance and policy; it explores the different macroeconomic shocks of the 'contraction' phase (the term 'Great Depression' is not really appropriate to the British experience) in the two countries; comparative policy regimes; and then, in turn, analyses the policy mix and policy effectiveness of monetary and fiscal policy, including for Britain the counterfactual Keynesian solution. A business-cycle periodization is adopted, with the key role for the abandonment of the gold standard in terms of regaining freedom of choice in macroeconomic policy, itself experiencing significant developments after 1931. The traditional role of the cheap-money-induced housing boom in Britain's post-1932 economic recovery is reaffirmed; the impact of the fiscal policies actually pursued are then discussed, as are assessments of the likely effectiveness of the Keynesian solution had the 1929 Liberal Party's 'We can conquer unemployment' spending package been implemented.
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The governmental response to the crises of 2008 and 2020 was determined by the vision of the economy being an institution of businesses. While some help was given to households, most government assistance went directly to business...
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The governmental response to the crises of 2008 and 2020 was determined by the vision of the economy being an institution of businesses. While some help was given to households, most government assistance went directly to businesses and their owners. This mainstream influence met with little consolidated effort opposing those policies and the result has been to save the wealth of a few while allowing the many to flounder. It is inevitable that another crisis is not far away, and the Institutional community must begin to organize a response now. A response with popular appeal must be planned now so that when the next collapse occurs, political pressure can be created to force political leaders to help all households, not just the shareholding class.
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Purpose - This paper aims to address a growing empirical literature which measures the size of the fiscal multiplier at the state and local levels. This literature generally fails to consider the reaction function of the central b...
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Purpose - This paper aims to address a growing empirical literature which measures the size of the fiscal multiplier at the state and local levels. This literature generally fails to consider the reaction function of the central bank, which typically should be expected to offset local increases in spending by reducing it elsewhere in the currency area. This is true under rather orthodox assumptions, such as an inflation targeting central bank meeting its target. Design/methodology/approach - The author reviews prominent examples of the literature and establishes the extent to which the empirical methodology avoids the issue he raises. Subsequently, the author discusses its importance. Findings - Certain papers in the literature, especially Nakamura and Steinsson (2014), are careful about the issue. Most papers reviewed, however, are not. Practical implications - There are severe limitations to papers using these methodologies. They are either contingent on very specific assumptions regarding central banks or lack policy relevance. Earlier methodologies, such as vector autoregression and the "narrative" method, deserve higher relative credence among methodologies applied to studying the size of the fiscal multiplier. Originality/value - The current literature either entirely ignores the issue raised here or it is very briefly brushed aside. Considering the orthodoxy of the assumptions, at the very least, the issue deserves far greater recognition in the future. It may demand a broader re-evaluation of the family of methods.
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Recent research suggests that intergovernmental grants, own-source revenues, and changes in government investment play a crucial role in helping local governments in advanced economies to adjust their fiscal positions in response ...
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Recent research suggests that intergovernmental grants, own-source revenues, and changes in government investment play a crucial role in helping local governments in advanced economies to adjust their fiscal positions in response to budget shocks. Little is known, however, about the dynamic of local fiscal adjustments in emerging economies, and there are reasons to expect distinct fiscal stabilization patterns, for instance, due to lower fiscal capacity. A panel dataset of more than 900 municipalities in Colombia shows that in line with some of the results for developed countries: (1) intergovernmental grants react significantly to increases in government spending; (2) the response of own-source revenues to innovations in government spending in large cities is higher than in the small ones; (3) government investment is highly volatile and responds to innovations in all other budgetary components; and (4) there is no empirical evidence of a reduction in fiscal effort following increases in intergovernmental grants.
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