Fiscal Policy Innovations In Advanced Economies

Ackon, Kwabena Meneabe (2020): Fiscal Policy Innovations In Advanced Economies. Forthcoming in:

Abstract

Unprecedented 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 and wages. 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, Econometrics, Investment, Economic Growth, Interest Rates, Inflation
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E0 - General > E03 - Behavioral Macroeconomics; 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 > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F0 - General; H - Public Economics > H1 - Structure and Scope of Government; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm; H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H51 - Government Expenditures and Health; H - Public Economics > H5 - National Government Expenditures and Related Policies > H52 - Government Expenditures and Education; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs; H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions

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.

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.

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.

FATÁS, A. & MIHOV, I. 2001. The effects of fiscal policy on consumption and employment: theory and evidence, Centre for Economic Policy Research.

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.

GALI, J. 1994. Government size and macroeconomic stability. European Economic Review, 38, 117-132.

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.

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.

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.

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.

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

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.

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.

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.

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