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Ilian Mihov - One of the best experts on this subject based on the ideXlab platform.
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Fiscal Policy as a Stabilization Tool
The B.E. Journal of Macroeconomics, 2012Co-Authors: Antonio Fatas, Ilian MihovAbstract:We analyze empirically the cyclical behavior of Fiscal Policy among a group of 23 OECD countries. We introduce a framework to capture the Fiscal Policy stance in a way that brings together automatic stabilizers and discretionary Fiscal Policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary Fiscal Policy. When compared across countries, changes in Fiscal Policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary Fiscal Policy more aggressively. For all countries discretionary Policy has become more aggressive in recent decades.
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Fiscal Policy as a stabilization tool
B E Journal of Macroeconomics, 2012Co-Authors: Antonio Fatas, Ilian MihovAbstract:We analyze empirically the cyclical behavior of Fiscal Policy among a group of 23 OECD countries. We introduce a framework to capture Fiscal Policy stance in a way that brings together automatic stabilizers and discretionary Fiscal Policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary Fiscal Policy. When compared across countries, changes in Fiscal Policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary Fiscal Policy more aggressively. For all countries discretionary Policy has become more aggressive in recent decades.
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the case for restricting Fiscal Policy discretion
Quarterly Journal of Economics, 2003Co-Authors: Antonio Fatas, Ilian MihovAbstract:This paper studies the effects of discretionary Fiscal Policy on output volatility and economic growth. Using data for 91 countries, we isolate three empirical regularities: (1) governments that use Fiscal Policy aggressively induce significant macroeconomic instability; (2) the volatility of output caused by discretionary Fiscal Policy lowers economic growth by more than 0.8 percentage points for every percentage point increase in volatility; (3) prudent use of Fiscal Policy is explained to a large extent by the presence of political constraints and other political and institutional variables. The evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth.
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the case for restricting Fiscal Policy discretion
Social Science Research Network, 2002Co-Authors: Antonio Fatas, Ilian MihovAbstract:This Paper studies how discretionary Fiscal Policy affects output volatility and the rate of economic growth. Using data on fifty-one countries we isolate five empirical regularities: (1) Governments that use often Fiscal Policy make their economies volatile; (2) The use of Fiscal Policy is explained to a large extent by the presence of political constraints and other political and institutional variables; (3) The volatility of output induced by discretionary Fiscal Policy lowers economic growth by 0.6 percentage points for every percentage point increase in volatility; (4) There is evidence that the increase in volatility is in part due to electoral cycles; nevertheless, we do find that political constraints restrain Fiscal Policy beyond their impact on the traditional election-year volatility; (5) Rules-based Fiscal Policy identified by the degree of automatic stabilizers in the economy helps to stabilize business cycles. The evidence in the Paper argues in favour of imposing institutional restrictions on governments as a way of reducing output volatility and increasing the rate of economic growth.
Antonio Fatas - One of the best experts on this subject based on the ideXlab platform.
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Fiscal Policy as a Stabilization Tool
The B.E. Journal of Macroeconomics, 2012Co-Authors: Antonio Fatas, Ilian MihovAbstract:We analyze empirically the cyclical behavior of Fiscal Policy among a group of 23 OECD countries. We introduce a framework to capture the Fiscal Policy stance in a way that brings together automatic stabilizers and discretionary Fiscal Policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary Fiscal Policy. When compared across countries, changes in Fiscal Policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary Fiscal Policy more aggressively. For all countries discretionary Policy has become more aggressive in recent decades.
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Fiscal Policy as a stabilization tool
B E Journal of Macroeconomics, 2012Co-Authors: Antonio Fatas, Ilian MihovAbstract:We analyze empirically the cyclical behavior of Fiscal Policy among a group of 23 OECD countries. We introduce a framework to capture Fiscal Policy stance in a way that brings together automatic stabilizers and discretionary Fiscal Policy. We show that, for most countries, automatic changes in the budget balance play a stronger role in stabilizing output than discretionary Fiscal Policy. When compared across countries, changes in Fiscal Policy stance are predominantly linked to differences in government size. Tax revenues are close to being proportional to GDP and, combined with a relatively stable government spending, this leads to a countercyclical budget balance, which in turn helps stabilize aggregate demand. Furthermore, countries with less responsive automatic stabilizers, like the United States, tend to use countercyclical discretionary Fiscal Policy more aggressively. For all countries discretionary Policy has become more aggressive in recent decades.
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Fiscal Policy and the Current Account
IMF Economic Review, 2011Co-Authors: S M Ali Abbas, Antonio Fatas, Jacques Bouhga-hagbe, Paolo Mauro, Ricardo C VellosoAbstract:This paper examines the relationship between Fiscal Policy and the current account, drawing on a large sample of advanced, emerging, and low-income economies and using a variety of statistical methods: panel regressions, an analysis of large Fiscal Policy and current account changes, and panel vector autoregressions (VAR). On average, across estimation methods, a strengthening in the Fiscal balance by 1 percentage point of GDP is associated with a current account improvement of about 0.3 percentage point of GDP. With our preferred estimation method (quarterly structural VAR using government consumption to identify Fiscal Policy shocks), the relationship is stronger, in the 0.3–0.5 range. The association is stronger in emerging markets and low-income countries; in economies that are more open to trade; and when the economy is somewhat overheated to begin with. The effect is, however, notably weaker during episodes of large Fiscal Policy and current account changes, suggesting that Fiscal Policy may have a more limited role in correcting large external imbalances.
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the case for restricting Fiscal Policy discretion
Quarterly Journal of Economics, 2003Co-Authors: Antonio Fatas, Ilian MihovAbstract:This paper studies the effects of discretionary Fiscal Policy on output volatility and economic growth. Using data for 91 countries, we isolate three empirical regularities: (1) governments that use Fiscal Policy aggressively induce significant macroeconomic instability; (2) the volatility of output caused by discretionary Fiscal Policy lowers economic growth by more than 0.8 percentage points for every percentage point increase in volatility; (3) prudent use of Fiscal Policy is explained to a large extent by the presence of political constraints and other political and institutional variables. The evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth.
-
the case for restricting Fiscal Policy discretion
Social Science Research Network, 2002Co-Authors: Antonio Fatas, Ilian MihovAbstract:This Paper studies how discretionary Fiscal Policy affects output volatility and the rate of economic growth. Using data on fifty-one countries we isolate five empirical regularities: (1) Governments that use often Fiscal Policy make their economies volatile; (2) The use of Fiscal Policy is explained to a large extent by the presence of political constraints and other political and institutional variables; (3) The volatility of output induced by discretionary Fiscal Policy lowers economic growth by 0.6 percentage points for every percentage point increase in volatility; (4) There is evidence that the increase in volatility is in part due to electoral cycles; nevertheless, we do find that political constraints restrain Fiscal Policy beyond their impact on the traditional election-year volatility; (5) Rules-based Fiscal Policy identified by the degree of automatic stabilizers in the economy helps to stabilize business cycles. The evidence in the Paper argues in favour of imposing institutional restrictions on governments as a way of reducing output volatility and increasing the rate of economic growth.
Carlos A Vegh - One of the best experts on this subject based on the ideXlab platform.
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procyclical Fiscal Policy in developing countries truth or fiction
National Bureau of Economic Research, 2008Co-Authors: Ethan Ilzetzki, Carlos A VeghAbstract:A large empirical literature has found that Fiscal Policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical. The idea that Fiscal Policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical Fiscal Policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of Fiscal Policy. To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea that procyclical Fiscal Policy in developing countries is in fact truth and not fiction. We also find evidence that Fiscal Policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours."
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tax base variability and procyclical Fiscal Policy in developing countries
Journal of Development Economics, 2005Co-Authors: Ernesto Talvi, Carlos A VeghAbstract:Abstract Based on a sample of 56 countries, we show that Fiscal Policy in the G7 countries appears to be acyclical while Fiscal Policy in developing countries is procyclical (i.e., Fiscal Policy is expansionary in good times and contractionary in bad times). To explain this puzzle, we develop an optimal Fiscal Policy model in which running budget surpluses is costly because they create pressures to increase public spending. Given this distortion, a government that faces large fluctuations in the tax base–as is the case for developing countries–will find it optimal to run a procyclical Fiscal Policy.
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tax base variability and procyclical Fiscal Policy
National Bureau of Economic Research, 2000Co-Authors: Ernesto Talvi, Carlos A VeghAbstract:Based on a sample of 56 countries, we find that while Fiscal Policy in the G-7 countries appears to be broadly consistent with Barro's tax smoothing proposition, in developing countries government spending and taxes are highly procyclical (i.e., government spending rises and taxes fall during expansions, while the reverse is true in recessions). To explain this puzzle, we develop an optimal Fiscal Policy model in which running budget surpluses is costly because they create pressures to increase public spending. Given this distortion, a government that faces large (and perfectly anticipated) fluctuations in the tax base will find it optimal to run a procyclical Fiscal Policy. We argue that the differences in Fiscal Policy between the G-7 countries and developing countries can be traced back to the fact that the tax base is much more volatile in developing countries than in the G-7 countries.
David Vines - One of the best experts on this subject based on the ideXlab platform.
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The Macroeconomic Role of Fiscal Policy
Social Science Research Network, 2008Co-Authors: Christopher Allsopp, David VinesAbstract:This article examines the new consensus that Fiscal Policy should have no macroeconomic role in `flexible inflation targeting` regimes. There is little basis for this presumption. Fiscal Policy remains important in setting the Policy mix and in managing shocks and imbalances. The credibility of an inflation-targeting regime should be enhanced rather than reduced if Fiscal Policy plays its proper role. It is true, nevertheless, that the costs of focusing Fiscal Policy narrowly on public-sector concerns may not be very great, most of the time. However, when interest rates cannot be used, the role of Fiscal Policy must be different. With interest rates at their lower bound of zero, there is no plausible alternative. For asymmetric shocks and adjustments in EMU, Fiscal Policy needs, ideally, to substitute for the interest-rate Policy reaction function of the consensus, but the difficulties are very great. We suggest a Policy focus on real exchange rates as a way of resolving some of the dilemmas. There is a serious danger that orthodox views about Fiscal Policy, drawn from the consensus, will be inappropriately applied, especially in Europe.
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the macroeconomic role of Fiscal Policy
Oxford Review of Economic Policy, 2005Co-Authors: Christopher Allsopp, David VinesAbstract:This article examines the new consensus that Fiscal Policy should have no macroeconomic role in 'flexible inflation targeting' regimes. There is little basis for this presumption. Fiscal Policy remains important in setting the Policy mix and in managing shocks and imbalances. The credibility of an inflation-targeting regime should be enhanced rather than reduced if Fiscal Policy plays its proper role. It is true, nevertheless, that the costs of focusing Fiscal Policy narrowly on public-sector concerns may not be very great, most of the time. However, when interest rates cannot be used, the role of Fiscal Policy must be different. With interest rates at their lower bound of zero, there is no plausible alternative. For asymmetric shocks and adjustments in EMU, Fiscal Policy needs, ideally, to substitute for the interest-rate Policy reaction function of the consensus, but the difficulties are very great. We suggest a Policy focus on real exchange rates as a way of resolving some of the dilemmas. There is a serious danger that orthodox views about Fiscal Policy, drawn from the consensus, will be inappropriately applied, especially in Europe. Copyright 2005, Oxford University Press.
Robert M. Solow - One of the best experts on this subject based on the ideXlab platform.
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Rethinking Fiscal Policy
Social Science Research Network, 2008Co-Authors: Robert M. SolowAbstract:The use of Fiscal Policy as a stabilization device has all but vanished, more or less explicitly in Europe and de facto in the United States. The practical consequences have not been entirely satisfactory, in either place. So it is important and timely that the Oxford Review is devoting a special issue to the macroeconomics of Fiscal Policy. In this paper I want to discuss two underlying questions about the eclipse of Fiscal Policy. Why did this happen and was it a good idea? And if it was not a good idea, then what follows?
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Rethinking Fiscal Policy
Oxford Review of Economic Policy, 2005Co-Authors: Robert M. SolowAbstract:The use of Fiscal Policy as a stabilization device has all but vanished, more or less explicitly in Europe and de facto in the United States. The practical consequences have not been entirely satisfactory, in either place. So it is important and timely that the Oxford Review is devoting a special issue to the macroeconomics of Fiscal Policy. In this paper I want to discuss two underlying questions about the eclipse of Fiscal Policy. Why did this happen and was it a good ideaq And if it was not a good idea, then what followsq Copyright 2005, Oxford University Press.
