Fiscal Policy in a Depressed Economy
22 Mar 2012-Vol. 2012, Iss: 1, pp 233-297
TL;DR: In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks.
Abstract: In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks Then even a small amount of hysteresis—even a small shadow cast on future potential output by the cyclical downturn—means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present value of future potential output Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times Whereas many economists have assumed that the path of potential output is invariant to even a deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed a factor Although nothing in our analysis calls into question the importance of sustainable fiscal policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation
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13 Sep 2020
TL;DR: In this paper, the authors examined whether government spending efficiency is associated with differential effects of public investment on debt-to-GDP ratio for a panel data consisting of 16 developing countries in Asia-Pacific region over the period 2007-2017.
Abstract: Public investment is central to implementing the UN 2030 Agenda for Sustainable Development – but persistent levels of high public debt without sufficient debt-servicing capacity poses serious risks. This study examines whether government spending efficiency is associated with differential effects of public investment on debt-to-GDP ratio for a panel data consisting of 16 developing countries in Asia-Pacific region over the period 2007-2017. The empirical results indicate that public investment efficiency moderates debt-to-GDP ratio whereas public investment in the midst of public sector corruption accentuates debt-to-GDP ratio. The results have important policy implications.
TL;DR: In this paper, the authors analyse elementare Wechselwirkungen zwischen staatlichen Defiziten und gesamtwirtschaftlicher Entwicklung, deren Kenntnis fA¼r eine makroA¶konomisch fundierte Beurteilung staatsverschuldenpolitik unerlA¤sslich ist.
Abstract: Die Staatsverschuldung gerA¤t immer wieder in die wirtschafts- und finanzpolitische Diskussion. FA¼r die einen ist sie Hauptursache wirtschaftlicher Krisen, fA¼r die anderen wesentliches Instrument zu deren Behebung. Der vorliegende Beitrag analysiert elementare Wechselwirkungen zwischen staatlichen Defiziten und gesamtwirtschaftlicher Entwicklung, deren Kenntnis fA¼r eine makroA¶konomisch fundierte Beurteilung staatlicher Schuldenpolitik unerlA¤sslich ist.
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TL;DR: In this article, the authors identify sustainable full capacity utilisation of the economy as a sound objective for fiscal policy; make a proposal for a framework consisting of four components; and develop detailed proposals for initial re-form steps to begin implementing this framework in Germany, including an adjustment of the cyclical component of the debt brake, introducing an investment fund for municipal investments, and adding a watchman indicator for rising interest costs.
Abstract: The sustainability of public finances should be measured by the debt-to-GDP ratio; the debt-to-GDP ratio is best controlled by keeping the deficit in check. For decades, these ideas shaped German fiscal policy. In 2009, with the introduction of the debt brake, this approach found its way into the German constitution. Recent research, however, has shown that this paradigm yields suboptimal results in the current environment: It neither ensures the long-term sustainability of public finances, nor limits external imbalances, nor effectively contributes to solving the challenges Germany faces today, in particular decarbonisation and demographic change. As this is increasingly being recognised, a lively debate on the future of fiscal rules has developed, both in Germany and internationally. This working paper contributes to that debate by developing reform ideas that depart from a positive goal for fiscal policy rather than from the deficiencies of the current rules. The paper starts off with an overview over the current reform debate. Following this literature review, three closely related questions are answered: what is the right objective for fiscal policy? What might an institutional framework look like to put this objective into practice? And what concrete, politically realistic reform options could move us in that direction? In response to the three questions, we identify sustainable full capacity utilisation of the economy as a sound objective for fiscal policy; make a proposal for a framework consisting of four components; and develop detailed proposals for initial re-form steps to begin implementing this framework in Germany, including an adjustment of the cyclical component of the debt brake (governed by ordinary law), introducing an investment fund for municipal investments, and adding a watchman indicator for rising interest costs.
TL;DR: In this article , the authors develop an endogenous equilibrium-selection mechanism by integrating a global-game approach into a secular-stagnation model, which generates strategic complementarity in households' decision-making, resulting in a unique equilibrium choice.
Abstract: In secular-stagnation models, multiple equilibria can arise, implying that monetary policy may not be able to achieve an inflation target even when the target is sufficiently high and the government is perfectly credible. Under perfect information about fundamentals, a unique equilibrium cannot be pinned down because agents’ beliefs are perfectly coordinated. I relax the assumption of perfect information and develop an endogenous equilibrium-selection mechanism by integrating a global-game approach into a secular-stagnation model, which generates strategic complementarity in households’ decision-making,"my action depends on my belief of your action", resulting in a unique equilibrium choice. In contrast to the existing literature on Secular Stagnation, I find that given an inflation target, a temporary fiscal expansion or an average-inflation-targeting policy (AIT) can raise the likelihood that a better equilibrium is chosen by reinforcing strategic complementarity, which promotes households’ ability to coordinate to resolve the demand shortage. In a calibrating example, I find that the selection probability of a secular-stagnation equilibrium was high in the US after the Great Recession but more fiscal expansion and AIT reduced it.
TL;DR: In this paper , the play hysteresis model is applied to analyze the effect of short-term market shocks on the dynamics of aggregate employment, and the model is implemented by means of a switching employment equation that summarizes the magnitude of the hysteretic effects.
Abstract: Hysteresis, referring to the property of a system whereby some temporary shocks cause permanent effects, has showed to be important to explain the dynamics of aggregate employment. What is not yet addressed properly in the literature is the differentiation of hysteresis effects according to activity sectors. This subject is important in order to understand whether severe recessions, like the one that followed the COVID-19 pandemic with its recognized heterogeneous immediate effects at the sectoral level, have permanent effects, and prospectively for applying adequate stabilizing fiscal and monetary policies, and possibly other specific measures, to prevent excessive market shocks even if they are perceived to be temporary. For this purpose, we apply the play hysteresis model, which describes a dynamic process whereby non-convex adjustment costs create intervals of weak reaction of employment to forcing variables, and spurts in employment in reaction to large or cumulative small labour demand shocks. The model is implemented by means of a switching employment equation. The switching parameter is interpreted as an ‘employment band of inaction’ that summarizes the magnitude of the hysteretic effects. We have found significant hysteresis effects in the employment dynamics across sectors, and these are especially important for industry. [ FROM AUTHOR]
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01 Jan 1936
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.
15,146 citations
13,200 citations
TL;DR: In this article, the authors examine how recent econometric policy evaluation research on monetary policy rules can be applied in a practical policymaking environment, and the discussion centers around a hypothetical but representative policy rule much like that advocated in recent research.
8,414 citations
"Fiscal Policy in a Depressed Econom..." refers background in this paper
...If, as Taylor (2011) argues, fiscal stimulus enlarges government deficits but does not increase spending, then its benefits will not be realized....
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TL;DR: In this paper, the theory of interest was restated and the output of capital goods and of consumption was analyzed in terms of uncertainty and fluctuations of investment, and demand and supply for output as a whole.
Abstract: I. Comments on the four discussions in the previous issue of points in the General Theory, 209. — II. Certain definite points on which the writer diverges from previous theories, 212. — The theory of interest restated, 215. — Uncertainties and fluctuations of investment, 217. — III. Demand and Supply for output as a whole, 219. — The output of capital goods and of consumption, 221.
5,476 citations