Essays In Fiscal Policy And State Dependence Fiscal Policy Innovations Using A New Econometric Approach

Nkrumah, Kwabena Meneabe (2018): Essays In Fiscal Policy And State Dependence Fiscal Policy Innovations Using A New Econometric Approach. Forthcoming in:

Abstract

Unparalleled is a word that best describes the current state of advanced economies. Interest rates are low in many advanced countries and negative in a few others suggesting that monetary policy has lost its effectiveness. The economic policy tool that has not been implemented yet by many advanced economies is fiscal policy. This thesis studies the effect of fiscal policy in USA, UK and Germany and find positive effects of extra government purchases on output, inflation, private consumption, business investment, wages and hours worked. As a contribution to the academic literature on fiscal policy, this thesis estimates the impact of automatic stabilisers on economic activity and finds it holds predictive content for the path of output and inflation with both showing a positive response. Furthermore, this thesis adds to the literature on state-dependence fiscal policy by using a novel econometric approach to study the effect of expansionary fiscal policy during recessions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Policy, Government, Investment, Econometrics, state dependence fiscal policy, economic policy, Business Investment, wages, Gross Domestic Product, Consumption, IS-LM, Inflation Dynamics, USA, UK and Germany
• Subjects: A - General Economics and Teaching > A2 - Economic Education and Teaching of Economics; A - General Economics and Teaching > A2 - Economic Education and Teaching of Economics > A20 - General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; F - International Economics > F1 - Trade; H - Public Economics > H1 - Structure and Scope of Government; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; H - Public Economics > H4 - Publicly Provided Goods; H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H6 - National Budget, Deficit, and Debt; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations

References

ARPAIA, A. & TURRINI, A. 2008. Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment. European Union Economic and Financial Affairs Economic Papers, 300.

AUERBACH, A. J. & GORODNICHENKO, Y. 2012. Measuring the Output Responses to Fiscal Policy. American Economic Journal: Economic Policy, 4, 1-27.

BACHMANN, R. & SIMS, E. R. 2012. Confidence and the transmission of government spending shocks. Journal of Monetary Economics, 59, 235-249.

BELFIELD, C., CRIBB, J., HOOD, A. & JOYCE, R. 2015. Living Standards, Poverty and Inequality in the UK: 2015. In: PAYNE, J. (ed.). United Kingdom: Institute for Fiscal Studies.

BERNANKE, B. 2013. The Federal Reserve And The Financial Crisis: Lectures by Ben S. Bernanke, Princeton and Oxford, Princeton University Press.

BERNANKE, B. S., GERTLER, M. & GILCHRIST, S. 1999. The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393.

BLANCHARD, O. & LEIGH, D. 2013. Growth Forecast Errors and Fiscal Multipliers. IMF Working Paper Series, 13/1.

BLANCHARD, O. & PEROTTI, R. 2002. An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. The Quarterly Journal of Economics, 117, 1329-1368.

BRAUN, R. A., BONEVA, L. & WAKI, Y. 2016. Some unpleasant properties of loglinearized solutions when the nominal rate is zero. Bank of England Staff Working Paper, No. 553.

BRAUN, R. A. & KÖRBER, L. M. 2011. New Keynesian dynamics in a low interest rate environment. Journal of Economic Dynamics and Control, 35, 2213-2227.

BURNSIDE, C., EICHENBAUM, M. & FISHER, J. D. M. 2004. Fiscal shocks and their consequences. Journal of Economic Theory, 115, 89-117.

CALDARA, D. & KAMPS, C. 2008. What are the effects of fiscal policy shocks? A VAR-based comparative analysis. ECB Working Paper, 877.

CANZONERI, M., COLLARD, F., DELLAS, H. & DIBA, B. 2016. Fiscal Multipliers in Recessions. The Economic Journal, 126, 75-108.

CARNOT, N., KOEN, V. & TISSOT, B. 2005. Economic Forecasting, United Kingdom, Palgrave, Macmillan.

CHRISTIANO, L., EICHENBAUM, M. & REBELO, S. 2009. When is the government spending multiplier large? : National Bureau of Economic Research.

CHRISTIANO, L. J., EICHENBAUM, M. S. & TRABANDT, M. 2015. Understanding the Great Recession. American Economic Journal: Macroeconomics, 7, 110-67.

COGAN, J. F., CWIK, T., TAYLOR, J. B. & WIELAND, V. 2010. New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control, 34, 281-295.

COLLARD, F. & DELLAS, H. 2008. Financial accelerator and the propagation of fiscal shocks. mimeo, University of Bern.

COLLARD, F. & MATHERON, J. 2006. Short–Run Restrictions: An Identification Device? University of Toulouse.

CURDIA, V. & WOODFORD, M. 2010. Credit spreads and monetary policy. Journal of Money, Credit and Banking, 42, 3-35.

DUPOR, B. 2016. Local and Aggregate Fiscal Policy Multipliers. FRB St. Louis Working Paper, 2015.269-88.

ESTRELLA, A. & HARDOUVELIS, G. A. 1991. The term structure as a predictor of real economic activity. The Journal of Finance, 46, 555-576.

ESTRELLA, A. & MISHKIN, F. S. 1996. The yield curve as a predictor of US recessions. Current Issues in Economics and Finance, 2.

FALAGIARDA, M., MCQUADE, P. & TIRPÁK, M. 2015. Spillovers from the ECB’s nonstandard monetary policies on non-euro area EU countries: evidence from an event-study analysis. ECB Working Paper, No 1869.

FEDERAL RESERVE BANK OF ST. LOUIS AND US. 2016. Federal Reserve Bank of St. Louis and US. Office of Management and Budget, Federal Surplus or Deficit [-] as Percent of Gross Domestic Product [FYFSDFYGDP], retrieved from FRED, Federal Reserve Bank of St. Louis April 28, 2016.

HALL, R. E. 2011. The Long Slump. American Economic Review, 101, 431-69.

HALTOM, R. C. & SARTE, P.-D. G. 2011. Is stimulative fiscal policy more effective at the zero lower bound? Richmond Fed Economic Brief, Aug.

HICKS, J. R. 1937. Mr Keynes and the "Classics"; A Suggested Interpretation. Econometrica, 5, 149-159.

IRS 2010. The 400 individual income tax returns reporting the largest adjusted gross incomes each year 1992-2010. USA: Internal Revenue Service.

JAPPELLI, T. & PISTAFERRI, L. 2014. Fiscal Policy and MPC Heterogeneity. American Economic Journal: Macroeconomics, 6, 107-36.

JORDÀ, Ò. 2005. Estimation and inference of impulse responses by local projections. American economic review, 161-182.

KALECKI, M. 1943. POLITICAL ASPECTS OF FULL EMPLOYMENT1. The Political Quarterly, 14, 322-330. KEYNES, J. M. 1930. The Great Slump of 1930, London, The Nation & Athenæum.

KEYNES, J. M. 1936. The General Theory of Employment, Interest and Money, Cambridge, Palgrave McMillan.

KIRSANOVA, T., STEHN, S. J. & VINES, D. 2005. The Interactions between Fiscal Policy and Monetary Policy. Oxford Review of Economic Policy, 21, 532-564.

KRUGMAN, P. 2000. How complicated does the model have to be? Oxford Review of Economic Policy, 16, 33-42.

KYDLAND, F. E. & PRESCOTT, E. C. 1982. Time to build and aggregate fluctuations. Econometrica: Journal of the Econometric Society, 50, 1345-1370.

LÜTKEPOHL, H. 2005. New introduction to multiple time series analysis, Springer Science & Business Media.

LÜTKEPOHL, H. 2006. New introduction to multiple time series analysis, Berlin, Springer Science.

LÜTKEPOHL, H. & KRÄTZIG, M. 2004. Applied Time Series Econometrics, Cambridge, Cambridge University Press. MARTIN, F. M. 2016a. Revisiting GDP Growth Projections. Economic Synopses, No 5.

MARTIN, F. M. 2016b. Where Did All the New Liquidity Go? The Regional Econmist, 2016-01, 12-13.

MERTENS, K. & RAVN, M. O. 2011. Understanding the aggregate effects of anticipated and unanticipated tax policy shocks. Review of Economic Dynamics, 14, 27-54.

MISHEL, L. & BIVENS, J. 2011. Occupy Wall Streeters are right about skewed economic rewards in the United States. Briefing Paper. USA: Economic Policy Institute.

MOUNTFORD, A. & UHLIG, H. 2009. What are the effects of fiscal policy shocks? Journal of Applied Econometrics, 24, 960-992.

NKRUMAH, K. M. 2015. US Domestic Money, Output, Inflation and Unemployment. Mpra paper, 68095.

PIKETTY, T. 2014. Capital in the Twenty-First Century, Cambridge, Massachussetts, The Belknap Press of Harvard University Press.

PIKETTY, T. 2016. Chronicles On Our Troubled Times, United Kingdom, Viking Penguin Random House.

PORTES, J. & WREN-LEWIS, S. 2015. Issues in the Design of Fiscal Policy Rules. The Manchester School, 83, 56-86.

RAMEY, V. A. 2011. Identifying government spending shocks: it’s all in the timing. Quarterly Journal of Economic, 126, 51-102.

RAMEY, V. A. & SHAPIRO, M. D. 1998. Costly Capital Reallocation and the Effects of Government Spending. NBER Working Paper, 6283.

RAMEY, V. A. & ZUBAIRY, S. 2014. Government spending multipliers in good times and in bad: evidence from US historical data. National Bureau Of Economic Research Working Paper, No w20719.

RAVN, M. O., SCHMITT-GROHÉ, S. & URIBE, M. 2012. Consumption, government spending, and the real exchange rate. Journal of Monetary Economics, 59, 215-234.

REUTERS 2016. DoubleLine's Gundlach says negative interest rates backfiring. Money, Thursday April 7, 2016 3.53pm EDT.

ROMER, C. & BERNSTEIN, J. 2009. The job impact of the American recovery and reinvestment plan.

SIMS, C. A. 1980. Macroeconomics and reality. Econometrica: Journal of the Econometric Society, 1-48.

SMETS, F. & WOUTERS, R. 2007. Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review, 97, 586-606.

STIGLITZ, J. 2012. The price of inequality, Penguin UK.

STIGLITZ, J. E. 2016. How to Restore Equitable and Sustainable Economic Growth in the United States. American Economic Review, 106, 43-47.

TAGKALAKIS, A. 2008. The effects of fiscal policy on consumption in recessions and expansions. Journal of Public Economics, 92, 1486-1508.

THE ECONOMIST 2016. The problem with profits. The Economist. United Kingdom: @TheEconomist (Accessed at http://www.economist.com/news/leaders/21695392-big-firms-united-states-have-never-had-it-so-good-time-more-competition-problem).

THOMAS, A. H. 1998. The Effects of Tax Wedges on Hours Worked and Unemployment in Sweden. IMF Working Paper, 98-152.

TODA, H. Y. & YAMAMOTO, T. 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of econometrics, 66, 225-250.

TONKIN, R. 2015. The Effects of Taxes and Benefits on Household Income. Statistical Bulletin. United Kingdom: Office for National Statistics.