Fiscal policy is government economic policies that rely on economic regulation and control exercised through government taxation and budgetary policy. These 'fiscal policies' are in contrast to monetary policy which seeks to influence the direction of the economy and regulate levels of economic activity and inflation by control of both the rate of interest (the cost of borrowing money) and the amount of money available within an economy (the money supply).
Problem Revisited: The Role of Fiscal Policy
Soyoung Kim, University of Illinois at Urbana-Champaign - Abstract: The monetary instrument problem is examined in an endowment economy model with various stochastic disturbances, with minimizing the variance of inflation as the policy objective. Following current developments in the theory of fiscal determination of the price level, for different monetary policies, active or passive fiscal policy is specified to guarantee a unique equilibrium.
The responses of inflation to various structural disturbances in the constant money growth rate-passive fiscal (the active monetary-passive fiscal regime, or the conventional regime where Ricardian equivalence and Quantity Theory of Money hold) and the constant interest rate-active fiscal regime (the passive monetary-active fiscal regime, or the regime where fiscal policy determines the price level) are explained based on monetary and fiscal policies role in financing government deficit changes and satisfying the government budget constraint in each regime, which is different from the explanations of past research following Poole. One of interesting findings is that an increase in the steady state real value of nominal government debts (bonds) reduces the variance of inflation in the passive monetary-active fiscal regime.
Non-Keynesian Effects of Fiscal Policy
Francesco Giavazzi, Tullio Jappelli, Marco Pagano (CSEF, University di Salerno, and CEPR)
Abstract: We search for the circumstances in which the response of national saving to fiscal policy contradicts conventional Keynesian predictions, using data from 18 OECD countries. The data suggest that non-Keynesian effects tend to be associated with large and persistent fiscal impulses. Such responses can be traced to changes in taxes and transfers more than to changes in government consumption and are stronger for fiscal contractions than expansions. During large contractions an increase in taxes has no effect on national saving. High or rapidly growing public debt is not a good predictor of non-Keynesian effects. Finally, the composition of the fiscal impulse matters: the non-Keynesian effects of a large fiscal contraction are amplified when this is carried out primarily by raising taxes.
Fiscal Policy, and Free Entry, Luis F. Costa
Abstract: Entry is recognized to be an important issue in macro models considering imperfectly competitive markets. However, two lines of research have been kept apart: the homogeneous-product oligopoly approach, where entry means more firms in the industry, and the monopolistic competition approach, where it means more brands. Our model tries to go beyond these limitations, considering a small open economy within a monetary union (characterised by a fixed exchange rate and perfect financial capital mobility). In this economy each industry produces a differentiated non-tradable good and is composed several Cournot competitors. Competition works at both the intraindustry and sector level. Decisions on both taxes and government expenditure are taken by the economys government, i.e., fiscal policy is decentralised within the monetary union. Since the model generates multiple equilibria, three types of entry are considered: more firms (I), more industries (II), and a combination of both (III). Fiscal policy is shown to be effective on aggregate output under the three cases. Its effect on welfare is mainly walrasian in case II, but it can be keynesian when market power is high in cases I or III.
Fiscal Policy to Stabilise the Domestic Economy in the EMU: What Can We Learn from Monetary Policy? - Lars Calmfors, Institute for International Economic Studies, Stockholm Univ.
An important issue for the EMU countries is to what extent fiscal policy can be used to stabilise the domestic economy in the case of asymmetric macroeconomic shocks. The paper reviews possible reforms of national fiscal policy institutions in order to promote efficient fiscal stabilisation policy: (i) the introduction of a more transparent legal framework for the government's stabilisation decisions; (ii) the establishment of an independent advisory Fiscal Policy Council; and (iii) the delegation of actual stabilisation decisions to an independent Fiscal Policy Committee. The conclusion is that the Fiscal Policy Committee solution has much to speak for itself. It seems possible to delegate fiscal stabilisation policy decisions, in much the same way as monetary policy has been delegated to central banks, at the same time as fiscal policy decisions focusing on income distribution and social efficiency are kept in the political sphere. Such delegation can be made compatible with democratic accountability. (JEL E61, E63, P16)
Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation? - V. Anton Muscatelli and Patrizio Tirelli
This paper provides an overview of recent papers which use estimated New Keynesian models to study the extent to which fiscal policy can be used to stabilize the economy. We use a variety of different New Keynesian models, estimated on data for both the US and for the Euro area, and highlight the diverse transmission channels through which fiscal policy acts in these models. Although we find that fiscal policy can provide a useful complement to monetary policy, especially in models where consumers have finite horizons, there are important limitations to the value added of fiscal policy. (JEL E58, E62, E63)
The Macroeconomic Role of Fiscal Policy
Christopher Allsopp, New College, Oxford, David Vines, Department of Economics and Balliol College, Oxford, Australian National University, and CEPR1
Abstract: This article examines the new consensus that fiscal policy should have no macroeconomic role in flexible inflation targeting regimes. There is little basis for this presumption. Fiscal policy remains important in setting the policy mix and in managing shocks and imbalances. The credibility of an inflation-targeting regime should be enhanced rather than reduced if fiscal policy plays its proper role. It is true, nevertheless, that the costs of focusing fiscal policy narrowly on public-sector concerns may not be very great, most of the time. However, when interest rates cannot be used, the role of fiscal policy must be different. With interest rates at their lower bound of zero, there is no plausible alternative. For asymmetric shocks and adjustments in EMU, fiscal policy needs, ideally, to substitute for the interest-rate policy reaction function of the consensus, but the difficulties are very great. We suggest a policy focus on real exchange rates as a way of resolving some of the dilemmas. There is a serious danger that orthodox views about fiscal policy, drawn from the consensus, will be inappropriately applied, especially in Europe.
Fiscal Policy and the Democratic Process in the European Union
William Roberts Clark, Matt Golder, Sona Nadenichek Golder
The construction of a monetary union with a single currency in Europe raises serious concerns for those who understand the democratic process as one in which social groups compete on different ideological programs. This is because it increasingly constrains national governments of different partisan hues to follow similar fiscal and monetary policies. Recent empirical studies indicate that these concerns might be somewhat misplaced since there is evidence that partisan convergence on macroeconomic policy predates these institutional developments. One problem with these studies, though, is that they fail to include the electoral system as a constraint on partisan behavior. Since electoral systems generate centripetal and centrifugal tendencies, we should expect to find strong evidence for partisan differences only where electoral rules encourage dispersion. We test this argument using data on fiscal policy from European Union countries between 1981 and 1992. We find that there is still no systematic evidence for partisan differences. Given this, it is hard to see how EMU can add to the democratic deficit in the European Union.
Partisan Politics and Fiscal Policy - THOMAS R. CUSACK, Science Center Berlin
Does the partisan character of governing parties play a role in the formation of fiscal policy? The conventional view is that the left tends toward excessive deficits, whereas the right practices a more prudent fiscal policy; however, strong arguments have been advanced that whatever room existed previously for partisanship in fiscal policy making has been sharply reduced by developments in recent decades. These issues are examined with a series of models that have been estimated using data from 14 Organization for Economic Cooperation and Development countries for the period from 1961 through 1991. The evidence suggests that the relationship between partisanship and fiscal policy is contingent on macroeconomic conditions. The evidence also suggests that these differences have been reduced over recent decades.
The Political Economy of Fiscal Policy and Economic Management in Oil
Exporting Countries: Benn Eifert; Alan Gelb and Nils Borje Tallroth
Despite massive oil rent incomes since the early 1970s, the economic performance of oilexporting countries- with notable exceptions-is poor. While there is extensive literature on the management of oil resources, analysis of the underlying political determinants of this poor performance is more sparse.