•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.
Uncertain Fiscal Consolidations Bi, Huixin; Leeper, Eric M.; Leith, Campbell
The Economic journal (London),
February 2013, Letnik:
123, Številka:
566
Journal Article
Recenzirano
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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.
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.
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.
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.
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.
How big (small?) are fiscal multipliers? Ilzetzki, Ethan; Mendoza, Enrique G.; Végh, Carlos A.
Journal of monetary economics,
03/2013, Letnik:
60, Številka:
2
Journal Article
Recenzirano
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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.
By recovering measures of income dispersion from the European Commission Consumer Survey, this analysis addresses whether conventional and unconventional monetary policies affect income inequalities ...in the Euro Area and the impact thereof on monetary transmission. First, in a VAR framework, the effects of both types of monetary policy on income distribution are evaluated. Second, the marginal effect of income dispersion on the consumption elasticity to monetary shocks is investigated using the same framework. The results suggest high cross-country heterogeneity in the impact of monetary policy and non-linearities associated with the redistributive strength of fiscal policy and the maturity of the household portfolio. Standard expansionary monetary measures typically have a small contractionary effect on income distribution. Mildly high-income dispersion is beneficial for the transmission of the monetary shocks to consumption because it overcomes the negative effect of consumption smoothing. However, for what concerns Q.E. measures, poorly redistributive fiscal policy and highly sensitive households’ portfolio might trigger these results.
We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, ...exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Using questions expressly added to the Consumer Expenditure Survey, we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income ...hypothesis. We exploit the unique, randomized timing of rebate receipt across households. Households spent 20 to 40 percent of their rebates on nondurable goods during the three-month period in which their rebates arrived, and roughly two-thirds of their rebates cumulatively during this period and the subsequent three-month period. The implied effects on aggregate consumption demand are substantial. Consistent with liquidity constraints, responses are larger for households with low liquid wealth or low income.
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