Self-defeating austerity shocks
Reda Cherif, Fuad Hasanov, 3 May 2013
Europe’s austerity-first approach has triggered research-based efforts to evaluate the effectiveness of debt-reduction strategies. This column, based on a US empirical study, suggests that an ‘austerity shock’ in a weak economy may be self-defeating. Public-debt reduction historically occurs gradually amid improved growth. If policymakers, firms and households respond as in the past, we should expect lower deficits amid higher growth and, eventually, decreasing debt ratios.
In many advanced countries, in the wake of the 2008 global financial crisis, deficits skyrocketed and public debt ballooned (see Figure 1). In fact, fiscal stimulus accounted for only a small fraction of the increase in debt, whereas collapsing revenues and higher unemployment and social benefits contributed the largest share (IMF 2011).
Topics: Global crisis
Tags: austerity, Eurozone crisis, fiscal policy
Why do emerging markets liberalise capital-outflow controls? Fiscal versus net capital flow concerns
Joshua Aizenman, Gurnain Kaur Pasricha, 2 May 2013
Recent years have seen a return to the capital controls policy debate. Presenting new data, this column argues that liberalisation of capital-outflow controls can allow emerging-market economies to reduce net capital inflow pressures, but may cost emerging economies the fiscal revenues that external financial repression generates.
Recent years have seen a re-emergence on the capital controls policy debate:
Topics: International finance, Monetary policy
Tags: capital outflow, fiscal policy
Should the role of preparing budgetary projections be delegated to an independent agency?
Rossana Merola, Javier J. Pérez, 1 May 2013
Who should we trust when it comes to fiscal forecasts: governments or independent agencies? This column argues that this question is, in fact, a red herring: empirical evidence suggests that in the past, international agencies’ fiscal forecasts were partially affected by the same problems that the literature widely acknowledges for governmental forecasts. An attractive solution is independent national forecasters.
The debate about fiscal forecasts has recently been growing more intense in Europe. At its root, there is the evidence of planned government deficits significantly exceeding recurrent budgetary plans in recent years. This comes at a time of high public deficit and debt levels for EU member states.
Topics: Global crisis, Monetary policy
Tags: Eurozone crisis, fiscal policy, forecasting
Budget balance, structural unemployment and fiscal adjustments: The Spanish case
Javier Andrés, Rafael Doménech, 5 April 2013
Fiscal adjustment and structural reform are key parts of Eurozone bailout packages (or key features of government policy that aims to avoid such bailouts). This column argues that patience is the most prized virtue of policymakers implementing fiscal adjustment and structural reform. Reducing unemployment and fiscal consolidation are mutually reinforcing, but they move at different speeds.
One of the most important questions in the current process of fiscal consolidation in many developed economies concerns the size and the pace of the adjustment. An excessive and/or too-fast fiscal retrenchment can have dramatic effects on unemployment and growth, while if it is too slow, it can prove to be ineffective and lack credibility in the eyes of the financial markets.
Topics: Europe's nations and regions
Tags: Eurozone crisis, fiscal policy, Spain, structural adjustment, unemployment
Fiscal consolidation and implications of social spending for long-term fiscal sustainability
Rossana Merola, Douglas Sutherland, 31 March 2013
During the economic and financial crisis, fiscal positions across OECD countries deteriorated sharply. This column agues that population ageing and trends in social spending will further challenge the sustainability of fiscal balances. Research suggests that the scale of fiscal consolidation that will be needed to ensure long-term sustainability is large, but policymakers can look at the potential benefits of policy reform in mitigating budget pressures.
Predicted demographic developments over the coming decades are well known. Due to low fertility rates and rising life expectancy, OECD nations will see a ‘greying’ of their populations. The fiscal implications have been widely discussed (Kotlikoff 2012).
Topics: Monetary policy, Poverty and income inequality, Welfare state and social Europe
Tags: Ageing, fiscal policy, pensions
Fiscal policy and consumption
Tullio Jappelli, Luigi Pistaferri, 23 March 2013
Crisis-stricken governments have enacted large stimulus packages to counteract the recent recession. But how are these financed, and are consumers responding? This column argues that we must understand marginal propensity to consume in order to optimally design fiscal policy, outlining new research on how to get the best measurements. Through several policy simulations, it’s clear how important it is to truly understand the relationship between stimulus packages and marginal propensities to consume.
Governments on both sides of the Atlantic have enacted large fiscal stimulus packages to counteract the Great Recession. The effectiveness of these interventions crucially depends on:
Topics: Global crisis, Macroeconomic policy
Tags: consumption, fiscal policy
Stephen Grenville, 24 February 2013
What would the overt monetary financing of fiscal deficits involve? This column explains the differences between “printing money”, quantitative easing, and overt monetary finance. Lord Turner’s proposed “helicopter drop” raises issues for banks’ balance sheets and central bank independence.
In the current debate about monetary policy, two terms are bandied about to the detriment of clarity: ‘printing money’ and ‘helicopter money’ (Sinn 2011).
Topics: Macroeconomic policy, Monetary policy
Tags: Bank of England, fiscal policy, Overt Monetary Finance, QE, quantitative easing
Misplaced concerns about central-bank independence
Marco Annunziata, 12 February 2013
Economists and policymakers are increasingly concerned that central-bank independence is being threatened. This column argues that central banks are not losing their independence, but that their room for manoeuvre is being eroded by a lack of structural reforms and fiscal adjustment. The financial crisis has caused mission creep, pushing central banks well beyond their comfort zones and as the time comes to pull back, independent monetary policy could still be powerless against fiscal dominance.
Concerns are rising that central-bank independence is at risk, already curtailed by governments eager to control all other levers of growth. The Japanese government’s none-too-subtle strong-arming of the Bank of Japan is one of the most blatant examples (e.g. King 2013).
But the current debate on the risks to central-bank independence misses the point.
Topics: Institutions and economics, Monetary policy
Tags: Central Banks, ECB, Fed, Federal Reserve, fiscal policy, independence
Who really pays social security contributions and labour taxes?
José M. González-Páramo, Ángel Melguizo, 6 February 2013
In spite of its policy relevance, academics and policymakers cannot agree on who bears the brunt of a tax on labour. This column uses meta-regression techniques to argue that economic institutions, the tax wedge definition, and the time horizon are crucial in determining who actually pays. Results based on 52 empirical papers suggest that in the long run, workers bear between two thirds of the tax burden in Continental and Anglo-Saxon economies, and nearly 90% in Nordic ones.
For almost two decades, a common policy recommendation to boost job creation from academic and international institutions has been to reduce social contributions.
Topics: Labour markets, Macroeconomic policy
Tags: fiscal policy, meta-analysis, Social security, taxation
Monetary alchemy, fiscal science
Jeffrey Frankel, 29 January 2013
2013 marks the 100th anniversary of US federal income tax and the establishment of the Federal Reserve. What lessons have we learnt about macroeconomic policy since then? This column assesses the postwar lessons and argues that fiscal expansion is much more likely to be effective in the short term than any monetary expansion stimulus. Indeed, compared with fiscal policy, monetary policy seems more alchemy than science.
The year 2013 marks the 100th anniversary of two major institutional innovations in US economic policy:
Topics: Global crisis, Macroeconomic policy
Tags: Federal Reserve, fiscal policy, Great Depression, Keynes, monetary policy