This paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that differ depending on individual characteristics. We use data ...from the Consumption Expenditure Survey to estimate individual-level responses and multipliers for government spending. We find that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels: the wealthiest individuals tend to behave according to predictions of standard Real Business Cycle (RBC) models, whereas the poorest ones behave according to standard IS-LM (non-Ricardian) models, most likely due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality.
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BFBNIB, FZAB, GIS, IJS, INZLJ, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
•Debt-to-GDP ratios positively predict stock returns at short and long horizons in the U.S. and other advanced economies.•Higher debt is associated with higher bond premia and lower risk-free ...rates.•Fiscal policy uncertainty increases with government debt.•Fiscal multiplier is smaller during high-debt periods.•The fiscal risk premium is significant and debt-dependent in a quantitative equilibrium model.
Risk premia increase with government debt. Debt-to-GDP ratios positively predict stock returns at short and long horizons in the U.S. and other advanced economies. Higher debt is also associated with higher bond premia and lower risk-free rates. Major government debt theories (liquidity, safety, crowding out) either do not address or are inconsistent with these findings. New evidence suggests that the increased risk premia provide compensation for larger fiscal risk; during periods of elevated debt, fiscal policy becomes more uncertain and less effective and can lead to debt crises. I quantify these mechanisms in an equilibrium model.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPUK
•We study optimal fiscal policy in a deep recession characterized by a liquidity trap.•It is optimal to increase public spending and to shift its composition to public investment.•The 2009 ARRA was ...insufficiently oriented towards public investment.
We study optimal fiscal policy in an economy plunged into a deep recession characterized by a liquidity trap, and in which the government can allocate spending both to consumption and investment goods. Public investment increases the stock of public capital subject to a time-to-build constraint. The zero lower bound on the nominal interest rate binds as a result of a large shock that increases households’ desire to save in the risk-free asset, pushing the natural rate of interest below zero. Under nominal rigidities and sub-optimal monetary policy, the shock leads to a large decline in private consumption and investment. We show that the optimal response to such a shock is to temporarily raise public spending above the level that would be dictated by classical principles, and to tilt its composition towards public investment. This compositional shift lasts well after the natural rate has ceased to be negative. Our results suggest that the American Recovery and Reinvestment Act of 2009 was insufficiently oriented towards public investment.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPUK
Uncertain Fiscal Consolidations Bi, Huixin; Leeper, Eric M.; Leith, Campbell
The Economic journal (London),
February 2013, Volume:
123, Issue:
566
Journal Article
Peer reviewed
Open access
This article explores the macroeconomic consequences of fiscal consolidations whose timing and composition — either tax—or spending— based — are uncertain. We find that the composition of the fiscal ...consolidation, its duration, the monetary policy stance, the level of government debt, and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary or successful in stabilising government debt. We argue that the conditions that could render fiscal consolidation efforts expansionary are unlikely to apply in the current economic environment.
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BFBNIB, FZAB, GIS, IJS, INZLJ, IZUM, KILJ, NLZOH, NMLJ, NUK, OILJ, PILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
In this paper, we build a dynamic stochastic general-equilibrium model with housing and household debt, and compare the effectiveness of monetary policy, housing-related fiscal policy, and ...macroprudential regulations in reducing household indebtedness. Excessive household debt arises due to exuberance shocks on house price expectations, which drive a wedge between the actual and the underlying fundamental value of houses. The estimated model also features long-term fixed-rate borrowing and lending across two types of households, and differentiates between the flow and the stock of household debt. Our main findings can be summarized as follows: (i) Monetary tightening is able to reduce the stock of real mortgage debt, but leads to an increase in the household debt-to-income ratio. (ii) Among the policy tools we consider, tightening in mortgage interest deduction and regulatory loan-to-value (LTV) are the most effective and least costly in reducing household debt, followed by increasing property taxes and monetary tightening. (iii) Although mortgage interest deduction is a broader tool than regulatory LTV, and therefore potentially more costly in terms of output loss, it is effective in reducing overall mortgage debt, since its direct reach also extends to home equity loans. (iv) Lowering regulatory LTV and mortgage interest deductions from their current levels would be welfare improving, while we find weak support for systematic leaning against household imbalances through monetary policy.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPUK, ZRSKP
This paper studies the effect of inflation targeting (IT) on fiscal policy volatility. Using data for 83 developing countries over 1985-2020, estimations based on impact analysis methods reveal that ...IT adoption reduces fiscal policy volatility. This result is robust when using a wide set of alternative specifications related to additional control variables, different samples, alternative measures of the main variables, or alternative estimation methods. Consequently, contributing to the ongoing literature on fiscal policy volatility, our results suggest that reforms of the monetary policy management in the form of IT adoption may provide a useful policy for fighting fiscal discretion towards a reduction of fiscal policy volatility.
•The effect of inflation targeting on fiscal policy volatility is explored.•Inflation targeting reduces this volatility.•This result is robust to several tests.•This evidence may vary with time and some structural factors.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPUK, ZAGLJ, ZRSKP
Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic ...implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: (1) by alleviating cash flow problems of the regional governments and (2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPUK, ZAGLJ, ZRSKP
48.
Effects of Austerity Alesina, Alberto; Favero, Carlo; Giavazzi, Francesco
The Journal of economic perspectives,
04/2019, Volume:
33, Issue:
2
Journal Article
Peer reviewed
Open access
We review the debate surrounding the macroeconomic effects of deficit reduction policies (austerity). The discussion about "austerity" in general has distracted commentators and policymakers from a ...very important result, namely the enormous difference, on average, between expenditure- and tax-based austerity plans. Spending-based austerity plans are remarkably less costly than tax-based plans. The former have on average a close to zero effect on output and lead to a reduction of the debt/GDP ratio. Tax-based plans have the opposite effect and cause large and long-lasting recessions. These results also apply to the recent episodes of European austerity, which in this respect were not especially different from previous cases.
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CEKLJ, IZUM, KILJ, NUK, ODKLJ, PILJ, SAZU, UL, UM, UPUK
American politics have been characterized by a high degree of partisan conflict in recent years. Combined with a divided government, this has led not only to significant Congressional gridlock, but ...also to spells of high fiscal policy uncertainty. The unusually slow recovery from the Great Recession during the same period suggests the possibility that the two phenomena may be related. In this paper, I investigate the hypothesis that political discord depresses private investment. To this end, I construct a novel high-frequency indicator of partisan conflict. The partisan conflict index (PCI) uses a semantic search methodology to measure the frequency of newspaper articles reporting lawmakers’ disagreement about policy. I find a negative relationship between the PCI and aggregate investment in the US. Moreover, the decline is persistent, which may help explain the slow recovery observed since the 2007 recession ended. Partisan conflict is also associated with lower capital investment rates at the firm level, even when economic policy uncertainty and macroeconomic conditions are controlled for. I estimate that about 27% of the decline in corporate investment between 2007–2009 can be attributed to a rise in partisan conflict.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPUK, ZRSKP
How big (small?) are fiscal multipliers? Ilzetzki, Ethan; Mendoza, Enrique G.; Végh, Carlos A.
Journal of monetary economics,
03/2013, Volume:
60, Issue:
2
Journal Article
Peer reviewed
Open access
Contributing to the debate on the macroeconomic effects of fiscal stimuli, we show that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level ...of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries; (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rates but is zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are smaller than in closed economies; (iv) fiscal multipliers in high-debt countries are negative.
► We estimate the fiscal multiplier using an SVAR with a new quarterly database. ► The fiscal multiplier is larger in industrial than in developing countries. ► The fiscal multiplier is larger under fixed than under flexible exchange rates. ► Fiscal multipliers in open economies are smaller than in closed economies. ► Fiscal multipliers in high-debt countries are negative.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPUK