After the Global Financial Crisis, a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is ...unsettled, mired by the difficulty of identifying multipliers from observational data. This article, reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom.
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BFBNIB, FZAB, GIS, IJS, INZLJ, IZUM, KILJ, NLZOH, NMLJ, NUK, OILJ, PILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
Through a survey of the literature on the economics of the coronavirus (COVID-19) pandemic, this study explores the effects of the pandemic and proposes potential policy directions to mitigate its ...effects. Our survey reveals that adverse economic effects have been observed due to the COVID-19 pandemic in addition to fatalities. Furthermore, the survey indicates the need for greater coordination at national and international levels. This study concludes by suggesting coordination among monetary, macroprudential, and fiscal policies (trio) to mitigate the adverse economic effects of COVID-19. Finally, this study explores potential directions for future research.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions ...depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained.
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Clearing Up the Fiscal Multiplier Morass Leeper, Eric M.; Traum, Nora; Walker, Todd B.
The American economic review,
08/2017, Volume:
107, Issue:
8
Journal Article
Peer reviewed
Open access
We quantify government spending multipliers in US data using Bayesian prior and posterior analysis of a monetary model with fiscal details and two distinct monetary-fiscal policy regimes. The ...combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Short-run output multipliers are comparable across regimes—posterior means around 1.3 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—90 percent credible sets of 1.5, 1.9 versus 0.1, 0.4 in present value, when estimated from 1955 to 2016.
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•We study the effects of announcements of future changes in government spending.•Theoretically they depend on the monetary-fiscal policy mix.•They are contractionary in the monetary regime and ...expansionary in the fiscal regime.•Extensive empirical analysis shows that data support this theoretical result.•When a VAR is estimated conditional on the regime in place, shocks are fundamental.
Announcements of future government spending have different effects on economic activity depending on the monetary-fiscal policy mix. Upon announcement, they are contractionary in the monetary regime but expansionary in the fiscal regime, in contrast with the expansionary nature of government spending at implementation in both regimes. Anticipation effects can therefore help empirically distinguish between the two regimes. Data support our theoretical insight, reconciling conflicting results in the empirical literature that disappear once conditioning on the policy regime. This evidence suggests that it could be (un)wise to anticipate future fiscal policies, depending on the regime in place.
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36.
Fiscal Volatility Shocks and Economic Activity Fernández-Villaverde, Jesús; Guerrón-Quintana, Pablo; Kuester, Keith ...
The American economic review,
11/2015, Volume:
105, Issue:
11
Journal Article
Peer reviewed
Open access
We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to ...uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism.
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This article analyses the impact of strained government finances on macroeconomic stability and the transmission of fiscal policy. Using a variant of the model by Cúrdia and Woodford (2009), we study ...a 'sovereign risk channel' through which sovereign default risk raises funding costs in the private sector. If monetary policy cannot offset increased credit spreads because it is constrained by the zero lower bound or otherwise, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy may become self-fulfilling. In addition, sovereign risk may amplify the effects of cyclical shocks. Under those conditions, fiscal retrenchment can help curtail the risk of macroeconomic instability and, in extreme cases, even bolster economic activity.
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This paper develops a model of investment decisions in which uncertainty about a one-time change in tax policy induces the firm to temporarily stop investing—to adopt a wait-and-see policy. After the ...uncertainty is resolved, the firm exploits the tabled projects, generating a temporary investment boom.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
Using an analytically tractable heterogeneous agent New Keynesian model, we show that whether incomplete markets resolve New Keynesian “paradoxes” depends on the cyclicality of income risk. ...Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these “puzzles.” Procyclical risk permits determinacy under a peg; countercyclical risk may generate indeterminacy even under the Taylor principle. By affecting the cyclicality of risk, even “passive” fiscal policy influences the effects of monetary policy.
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AbstractThe COVID-19 pandemic severely disrupted financial markets and the real economy worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing the ...unusual nature of the shock, the academic community has produced an impressive amount of research during the last year. Macro-finance models have been extended to analyze the impact of epidemics. Empirical papers study the origins and consequences of the disruptions and the impact of policy interventions. New research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This special issue contains early contributions to this important and rapidly developing literature.1
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