Clearing Up the Fiscal Multiplier Morass Leeper, Eric M.; Traum, Nora; Walker, Todd B.
The American economic review,
08/2017, Letnik:
107, Številka:
8
Journal Article
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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.
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.
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.
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.
We study the role of fiscal and monetary policies in a financially constrained economy. An active monetary–passive fiscal regime amplifies technology shocks, mitigates preference shocks, and ...neutralizes the expansionary effects of fiscal shocks through “debt deflation” and “real interest rate” channels, compared to an active fiscal–passive monetary policy regime. Several features of the data suggest that in the aftermath of the 2007 Financial crisis, the monetary policy in the United States was more dovish than in the Euro Area while fiscal policy seemed less concerned about the dynamics of sovereign debt, implying that the distinct post-crisis dynamics of the United States and the Euro area can be rationalized through different fiscal and monetary policy mixes.
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.
Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and ...enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999, the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficits and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older.
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.
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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