Panel data evidence on non-Keynesian efects of fiscal policy in the EU New Member

Borys, Paweł and Ciżkowicz, Piotr and Rzońca, Andrzej (2011): Panel data evidence on non-Keynesian efects of fiscal policy in the EU New Member.

Abstract

There is growing evidence that fiscal consolidation may contribute to economic growth even in the short term. In this paper we review recent research on such non-Keynesian fiscal policy effects and apply panel data econometric techniques to examine the consequences of fiscal consolidation in the EU New Member States. We extend the analysis to test potential channels through which non-Keynesian effects may operate. The results confirm that composition of the consolidation determines the output response. Moreover, we find evidence that all types of fiscal consolidations stimulate private investments, while export acceleration is observed only when consolidations involve mostly expenditure curtailment. Private consumption reaction to fiscal policy shows signs of nonlinearity - in the case of minor adjustments Keynesian effects dominate, but they are cancelled out when sizable consolidations are considered.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal consolidation, non-Keynesian efects, New Member States, panel data
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Alesina A. (2010). 'Fiscal Adjustments: Lessons from Recent History' paper prepared for the ECOFIN meeting, Madrid.

Alesina A., Ardagna S. (1998). 'Tales of fiscal adjustment', Economic Policy: A European Forum, Vol. 27, pp. 487-546.

Alesina A., Ardagana S. (2010). 'Large changes in fiscal policy: taxes versus spending', Tax Policy and the Economy, Vol. 24., pp. 35-68.

Alesina A., Ardagna S., Perotti R., Schiantarelli F. (1999). 'Fiscal Policy, Profits, and Investment', NBER Working Paper, No. 7207, National Bureau of Economic Research, Cambridge, http://www.nber.org/papers/ w7207.

Alesina A., Perotti R. (1996). 'Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects', NBER Working Paper, No. 5730, National Bureau of Economic Research, Cambridge, www.nber.org/ papers/w5730.pdf.

Alesina A., Perotti R., Tavares J. (1998). 'The Political Economy of Fiscal Adjustments', Brookings Papers on Economic Activity, No. 1, pp. 197-266.

Afonso A. , Nickel C., Rother P. (2005). 'Fiscal consolidations in the Central and Eastern European countries', ECB Working Paper Series, No. 473, European Central Bank, Frankfurt, www.jstor.org/stable/ 40441098.

Almonacid R. D. (2003). 'The Determinants of Nominal Income, Output and the and the price level: A synthesis of the Keynesian and neo-classical views', Journal of International Money and Finance, Vol. 22, pp. 747-772.

Arellano M., Bond S. (1991). 'Some Test of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations', Review of Economic Studies, Vol. 58, pp. 277-97.

Arellano M., Bover O. (1995). 'Another Look at the Instrumental Variable Estimation of Error-Components Models', Journal of Econometrics, Vol.68, pp. 29-51.

Aslund A. (2002). 'Building Capitalism: The Transformation of the Former Soviet Bloc', Camridge University Press, New York. Baldacci E., Kumar M. (2010). 'Fiscal Deficits, Public Debt, and Sovereign Bond Yields', IMF Working Paper, No. 10/184, International Monetary Fund, Washington D.C. http://www.imf.org/external/pubs/ft/ wp/2010/wp10184.pdf.22

Baltagi B.H. (2003). 'Econometric Analysis of Panel Data', John Wiley & Sons, Chichester.

Barro R., Redlick C. (2009). 'Macroeconomic Effects from Government Purchases and Taxes', NBER Working Papers , No. 15369, National Bureau of Economic Research, Cambridge , www.nber.org/papers/w15369.

Beck N., Katz J. (1995). 'What to Do (and Not to Do) with Time-Series Cross-Section Data', American Political Science Review , Vol. 89, pp. 634-647.

Bertola G., Drazen A. (1993). 'Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity', The American Economic Review, Vol.83, No. 1, pp. 11-26.

Bhattacharya R. (1999). 'Private Sector Consumption Behavior and Non-Keynesian Effects of Fiscal Policy', IMF Working Paper, No. 99/112, International Monetary Fund, Washington D.C., http://www.imf.org/ external/pubs/ft/wp/1999/wp99112.pdf.

Blanchard O. J. (1985). 'Debt, Deficits, and Finite Horizons', The Journal of Political Economy , Vol. 93, No. 2, pp. 223-247.

Blanchard O. J. (1990 a). 'Comment on Giavazzi and Pagano', NBER Macroeconomics Annual 1990, National Bureau of Economic Research,Cambridge.

Blanchard, O. J. (1990 b). 'Suggestions for a New Set of Fiscal Indicators', OECD Economics Department Working Papers, No. 79, Organization for Economic Cooperation and Development, Paris, www.oecd.org/ dataoecd/16/41/2002735.pdf.

O. J., Perotti R. (2002). 'An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output' Quarterly Journal of Economics, Vol. 107, pp. 1329-68.

Bleaney M., Gemmell N., Kneller R. (2001). 'Testing the endogenous growth model: public expenditure, taxation, and growth over long run', Canadian Journal of Economics, No. 1.

Broadbent B., Daly K. (2010). 'Limiting the Fall-Out from Fiscal Adjustment' Goldman Sachs Global Economics Paper No. 195

Chenery H. B. (1952). 'Overcapacity and the acceleration principle', Econometrica, Vol. 20, No. 1, pp. 1-28.

Chirinko R. S. (1993). 'Business fixed investment spending: modeling strategies, empirical results and policy implications', Journal of Economic Literature, Vol. 31, pp. 1875-1911.

Christiano L., Eichenbaum M., Rebelo S. (2009). 'When is the Government Spending Multiplier Large?' NBER Working Paper, No. 15394, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w15394.

Clinton K., Kumhof M., Laxton D. and Mursula S. (2010). 'Budget Consolidation: Short-Term Pain and Long-Term Gain' IMF Working Paper,

No. 10/163, International Monetary Fund, Washington D.C., www.imf.org/external/pubs/ft/wp/2010/wp10163.pdf.

Corsetti G. , Meier A., Muller G. (2009). 'Fiscal Stimulus with Spending Reversals', CEPR Discussion Papers, No. 7302, Centre for Economic Policy Research, London.

Costa Carvalho V.M. (2009) 'Non-Keynesian Efiects of Fiscal Policy in a New-Keynesian General Equilibrium Model for the Euro Area', doctoral thesis at Universidade do Porto,http://repositorio-aberto.up.pt/bitstream/10216/20601/2/TESEVMCC.pdf.

Davig T., Leeper E., (2009). 'Expectations And Fiscal Stimulus' CEPR Working Papers 2009-006, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington, papers. ssrn.com/sol3/papers.cfm?abstractfiid=1416885.

Easterly W., Rodriguez C. A., Schmidt-Hebbel K. (1994). 'Public Sector Deficits and Macroeconomic Performance', The World Bank, Washington D.C.

Engen E. M., Hubbard R. G. (2004). 'Federal Government Debt and Interest Rates', NBER Macroeconomics Annual, Vol. 19, pp. 83-138.

Finn M. (1998). 'Cyclical Efiects of Government's Employment and Goods Purchases', International Economic Review, Vol. 39, No.3, pp. 635-657.

Fischer S. (1993). 'The Role of Macroeconomic Factors in Growth', Journal of Monetary Economics, Vol. 32, pp.485-512.

Giavazzi F., Jappelli T., Pagano M. (1999). 'Searching for Non-Keynesian Effects of Fiscal Policy', CSEF Working Paper, No. 16, Centre for Studies in Economics and Finance, University of Naples, Naples citeseer.ist. psu.edu/viewdoc/summary?doi=10.1.1.9.2997.

Giavazzi F., Jappelli T., Pagano M. (2000) 'Searching for Non-Linear Effects of Fiscal Policy: Evidence from Industrial and Developing Countries', NBER Working Paper, No. 7460, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w7460.

Giavazzi F., Pagano M. (1990). 'Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries', NBER Macroeconomics Annual 1990, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w3372.

Giavazzi F., Pagano M. (1996). 'Non-Keynesian Efiects of Fiscal Policy Changes: International Evidence and the Swedish Experience', NBER Working Paper, No. 5332, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w5332.

Giavazzi F., Jappelli T., Pagano M. , Benedetti M. (2005). 'Searching for Non-Monotonic Efiects of Fiscal Policy: New Evidence', NBER Working Papers, No. 11593, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w11593.

Girouard N., Andrfie C. (2005). 'Measuring Cyclically-adjusted Budget Balances for OECD Countries', OECD Economics Department Working Papers, No. 434, Organization for Economic Cooperation and Development, Paris, http://www.oecd-ilibrary.org/economics/...78762600844/.

Gomulka S. (1998). 'Teoria innowacji i wzrostu gospodarczego', Centrum Analiz Spoleczno-Ekonomicznych, Warszawa.

Hall R. E. (2009). 'By How Much Does GDP Rise If the Government Buys More Output?', Brookings Papers on Economic Activity 2009:2, Fall, pp. 183-231.

Hay, D.A., Morris, D.J. (1991). 'Industrial economics and organization: theory and evidence', Oxford University Press, Oxford.

Hemming R., Mahfouz S., Schimmelpfennig A. (2002). 'Fiscal Policyand Economic Activity During Recessions in Advanced Economies', IMF Working Paper, International Monetary Fund, Washington D.C., http: //www.imf.org/external/pubs/ft/wp/2002/wp0287.pdf.

Hicks J. R. (1937). 'Mr. Keynes and the Classics; A Suggested Interpretation', Econometrica, Vol. 5, April, pp. 147-59.

Horvfiath fiA., P. Kiss G., Jakab M. Z. and Pfiarkfianyi B. (2006). 'Myths and Maths: Macroeconomic Efiects of Fiscal Adjustments in Hungary', MNB Occasional Paper 2006/52, Hungarian National Bank, Budapest. http://www.mnb.hu/Root/Dokumentumtar/op 52.pdf.

IMF (2010). 'Will It Hurt? Macroeconomic Efiects of Fiscal Consolidation' in IMF, 'World Economic Outlook:Recovery, Risk, and Rebalancing', survey by the staff the International Monetary Fund, Washington D.C. Joumard I., Minegishi M., Andrfie C. , Nicq C., Price R. (2008). 'Accounting for One-off Operations when Assessing Underlying Fiscal Positions', OECD Economics Department Working Papers 642, Organization for Economic Cooperation and Development, Paris, http://www.oecd.org/officialdocuments/displaydocumentpdf?cote=eco/wkp%282008%2950&doclanguage=en.

Kattai R., Kangur A., Liiv T., Randveer M. (2003). 'Automatic fiscal stabilisers in Estonia: the impact of economic fluctuations on general government budget balance', Eesti Pank, Tallinn.

Keynes J. M. (1936). 'The General Theory of Employment, Interest andMoney', Macmillan Cambridge University Press. Cambridge.

Kiss G. P., Szapfiary G. (2000). 'Fiscal Adjustment in the Transition Process: Hungary, 1990-1999', Post-Soviet Geography and Economics, Vol. 41, No. 4, pp. 233-264. Kiss G. P., Vadas G. (2004). 'Mind the gap - watch the ways of cyclical adjustment', MNB Working Paper, No. 2004/7, Hungarian National Bank, Budapest, http://pdc.ceu.hu/archive/00004403/01/wp2004fi7v.pdf.

Klyviene V. (2003). 'Cyclical adjustments - the main problems and challenges from a Lithuanian perspective', Fiscal forecasting, monitoring and analysis in the ESCB Workshop, Berlin, 17-18 September.

Kneller R., Bleaney M., Gemmell N. (1998). 'Growth, Public Policy and the Government Budget Constraint': Evidence from OECD Countries, Department of Economics Discussion Paper, No.14, University of Nottingham, Nottingham, www.nottingham.ac.uk/.../98-14.pdf.

Lane P. R., Perotti R. (2001). 'The Importance of Composition of Fiscal Policy: Evidence from Difierent Exchange Rate Regimes', Trinity College Dublin CEG Working Papers, No. 2001/11, Trinity College Dublin Economics Department, Dublin, www.tcd.ie/Economics/TEP/2001fipapers/TEPNo16PL21.pdf.

Laxton J.L., Mourougane A., Muir D., Mursula S., Resende C., Roberts J., Roeger W., Snudden S., Trabandt M. and in 't Veld J. (2010). 'Effects of Fiscal Stimulus in Structural Models' IMF Working Paper, No. 10/73, International Monetary Fund, Washington D.C., www.imf.org/external/pubs/ft/wp/2010/wp1073.pdf.

Leeper E., Walker T. , Yang S. (2009). 'Government Investment and Fiscal Stimulus in the Short and Long Runs', NBER Working Papers, No. 15153, National Bureau of Economic Research, Cambridge, www.nber. org/papers/w15153.

Laubach T. (2009). 'New Evidence on the Interest Rate Efiects of Budget Deficits and Debt', Journal of the European Economic Association, Vol. 7, No. 4, pp. 858-85.

Levine R., Renelt D. (1992) 'A Sensitivity Analysis of Cross-Country Growth Regression', American Economic Review, Vol. 82, No. 2, September, pp. 942-963.

Mankiw G. N., Summers L. H. (1984). 'Are Tax Cuts Really Expansionary?', NBER Working Paper, No. 1443, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w1443.

McDermott J. C., Wescott R. F. (1996). 'An Empirical Analysis of Fiscal Adjustments', IMF Staff Papers, Vol. 43, No. 4, International Monetary Fund, Washington D.C., http://www.jstor.org/pss/3867367.

Miller M., Skidelsky R., Weller P. (1990). 'Fear of Deficit Financing: Is it Rational?' in: Dornbusch R., Draghi M. (eds.), 'Public Debt Management: Theory and History', Cambridge University Press, Cambridge.

Morawski W. (2002). 'A general history of money and banking', Wydawnictwo TRIO, Warsaw (in Polish).

Morris R. and Schuknecht L. (2007). 'Structural Balances and Revenue Windfalls: the Role of Asset Prices Revisited', ECB Paper Series, No.737, European Central Bank, Frankfurt, www.ecb.int/pub/pdf/scpwps/ ecbwp737.pdf

Mulas-Granados C. , Baldacci E., Clements B., Gupta S. (2002). 'Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries', IMF Working Papers, No. 02/77, International Monetary Fund, Washington D.C., www.imf.org/external/pubs/ft/wp/2002/wp0277.pdf.

Neicheva M. (2007) 'Non-Keynesian Effects of Government Spending: Some Implications for the Stability and Growth Pact', MPRA Paper, No. 5277, University Library of Munich, http://mpra.ub.uni-muenchen.de/5277/.

Obstfeld M.(1998). 'The Global Capital Market: Benefactor or Menace?', Paper prepared for the Journal of Economic Perspectives.

Perotti R. (1999). 'Fiscal Policy in Good Times and Bad', Quarterly Journal of Economics, Vol. 114 , pp.1399-1436.

Perotti R. (2002). 'Estimating the Efiects of Fiscal Policy in OECD Countries', ECB Working Paper, No. 168, European Central Bank, Frankfurt, www.ecb.int/pub/pdf/scpwps/ecbwp168.pdf.

Pesaran M. H., Smith R. (1995). 'Estimation of Long-Run Relationships from Dynamic Heterogeneous Panels', Journal of Econometrics, Vol. 68,pp. 79-114.

Ramey V.A. (2011). 'Identifying Government Spending Shocks: It's All in the Timing', The Quarterly Journal of Economics,Vol. 126, pp.1-50.

Reinhart C. M., Rogoff S. and Savastano M. A. (2003). 'Debt Intolerance', NBER Working Paper, No. 9908, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w9908.

Romer C. , Romer D. (2007). 'The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks', NBER Working Papers, No. 13264, National Bureau of Economic Research, Cambridge, www.nber.org/papers/w13264.

Rzońca A. (2004). 'Non-keynesian efiects of fiscal contraction. Modified Blanchard model', Bank i Kredyt, Vol.35, No.10 (in Polish).

Rzońca A. (2005). 'Portfolio crowding out and fiscal multipliers. Part I. Modified Silber model. Part II. Modified Friedman model', Bank i Kredyt,Vol. 36, No.1 (in Polish). Rzońca A. (2007). 'Effects of Tight Fiscal Policy in Modified Mankiw and Summers Model', Journal on Economics and Finance, No. 6, pp. 24-38. Segura-Ubiergo A. , Simone A. and Gupta S. (2006). 'New Evidence on Fiscal Adjustment and Growth in Transition Economies', IMF Working Paper, No. 06/244, International Monetary Fund, Washington D.C., www. imf.org/external/pubs/ft/wp/2006/wp06244.pdf. Silber W. L. (1970). 'Fiscal Policy in IS-LM Analysis: A Correction', Journal of Money, Credit and Banking, Vol. 2, pp 461-72.

Stepanyan V. (2003). 'Reforming Tax Systems: Experience of the Baltics, Russia, and Other Countries of the Former Soviet Union', IMF Working Paper, No. 03/173, http://www.imf.org/external/pubs/ft/wp/2003/ wp03173.pdf. Sutherland A. (1995). 'Fiscal Crises and Aggregate Demand: Can High Public Debt Reverse the Efiects of Fiscal Policy', CEPR Discussion Paper, No. 1246, Centre for Economic Policy Research, London, http://www. cepr.org/pubs/new-dps/dplist.asp?dpno=1246.

Tagkalakis A. (2009). 'Fiscal adjustments and asset price movements', Working Papers 106, Bank of Greece, Athens, www.bankofgreece.gr/BogEkdoseis/Paper2009104.pdf.

Tsibouris G. C., Horton M. A., Flanagan M. J. and Maliszewski W. S. (2006). 'Experience with Large Fiscal Adjustments', IMF Occasional Paper No. 246, International Monetary Fund, Washington D.C., www.imf. org/external/pubs/nft/op/246/op246.pdf.

Von Hagen J. (2002). 'More Growth for Stability - Reactions on Fiscal Policy in Euroland', ZEI University of Bonn, Bonn, www.zei.de/download/zeifiemu/emu-9/vonhagen.pdf.

Von Hagen J. and Strauch R. (2001). 'Fiscal Consolidations: Quality, Economic Conditions, and Success' Public Choice, Vol. 109, No. 3-4, pp.327-46.

Von Hagen J., Traistaru I. (2004). 'Macroeconomic Adjustment in the New EU Member States', Third ECB Central Banking Conference, 21st-22nd October, Frankfurt.