Three Essays on the Role of Fiscal Stress for the Size of the Government Spending Multiplier PDF Download

Author: Felix Strobel
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Author: Felix Strobel
Publisher:
ISBN:
Category :
Languages : en
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The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy, which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment?While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB,multipliers in this model can be considerably larger than one. JEL Classification: E32, E 44, E62

Author: Gillian Brunet
Publisher:
ISBN:
Category :
Languages : en
Pages : 117

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A key question in macroeconomics is the government's ability to stimulate economic activity through expansionary fiscal policy. How much economic activity results when the government increases spending by one dollar, and how does the economic and institutional context affect the answer to that question? This dissertation uses a variety of empirical techniques to explore aspects of this question using historical data on U.S. military spending. In chapter one I use state-level variation in war production spending to measure the fiscal multiplier during World War II, and examine how features of the wartime economy influenced the size of the fiscal multiplier. Chapter two focuses on how the measurement of government spending influences the estimated size of the multiplier. I introduce a new time series measure of aggregate defense spending. In chapter three I return to World War II, but this time examine the effects of wartime military spending on the post-war economy, establishing causal evidence for its role in driving the immediate post-war boom. In chapter one I use war production spending to quantify the idiosyncratic factors affecting estimates of the fiscal multiplier during World War II. World War II is often viewed as a quintessential example of government spending stimulating the economy, and is interesting both because it was such a significant economic event and because it strongly influences estimates of the multiplier whenever it is included in the sample. Newly digitized war supply contract data allow me to construct state-level panel data on U.S. spending for 1940-45 and examine state-level outcomes. Using state-level variation I estimate a relative multiplier of 0.25 to 0.3, depending on the estimation approach. This implies an aggregate multiplier of roughly 0.3 to 0.4 given wartime economic conditions. I find small employment effects: an additional job-year is associated with $165,000 to $255,000 of spending (in 2015 dollars), also depending on the estimation approach. I also find evidence that the effects of stimulus were systematically larger in states that had lower employment levels pre-war. To explain why the stimulative effects of war spending were so small, I look for guidance from the historical narrative. I show that unique features of the wartime economy significantly reduced the stimulative impact of wartime spending. Conversion from civilian manufacturing to war production reduced the initial stimulus from war production. At least 75 percent of the income generated by war spending went into increased saving and income taxes, implying that the add-on effects from increased consumption were minimal in the short run. Chapter two focuses on how the measurement of government spending influences the estimated fiscal multiplier. Economists have previously focused on measuring shocks to expectations rather than the measurement of government spending itself. My approach is driven by the observation that government spending is a long and complex process. Specifically, I introduce an alternative measure of government spending, called budget authority, which uses authorizations to measure the government's commitment to spend. Budget authority is established annually as part of the congressional budget process, and is readily available from 1976 onward. I use historical budget publications to construct defense budget authority for 1938 to 1975, extending the available data backwards by several crucial decades. Using annualized data (for purposes of comparison) to estimate the aggregate fiscal multiplier using shocks to defense spending, budget authority produces similar point estimates to the traditional NIPA measure, but much more precisely estimated. Budget authority is conceptually different from the best-known measure of shocks to anticipated defense spending, Ramey's narrative measure, particularly in how it measures shocks to expectations and how it treats uncertainty. Budget authority implies an aggregate fiscal multiplier of 0.8, while Ramey's narrative measure implies a much smaller fiscal multiplier, around 0.1. Budget authority shows consumption responses to spending more clearly than other available measures, and also picks up strong investment responses over a one-year time horizon. Ramey's narrative measure shows significant investment responses over all time horizons up to three years. While shocks to all three measures predict strong responses in total government spending, it appears that both budget authority and Ramey's measure understate the response of government spending due to timing differences between those measures and NIPA. The definition of spending mostly closely aligned to national accounting is subtly different from the definition that is most relevant for measuring the stimulative effect of government spending. Thus using the NIPA definition of spending creates a downward bias in measuring the fiscal multiplier. A fourth measure of spending, budget outlays, allows me to estimate a lower bound for the magnitude of this bias. When this bias is corrected, budget authority implies an aggregate fiscal multiplier of 1.3 to 1.4, and potentially as large as 1.4 to 1.6. Chapter three examines the influence of World War II spending in the U.S. on household consumption and savings in the immediate post-war years (1946-1949). Chapter three uses geographic variation in war spending to measure the effects of World War II spending on household consumption and savings behavior after the war ended and rationing was relaxed. I find that compared to households in locations receiving less war spending, similar households in locations which received more war spending were significantly more likely to purchase both cars and houses in the immediate post-war years. These households also had higher liquid asset holdings and, conversely, higher total debt. With the exception of debt, all of these effects were stronger for households headed by an individual age 45-64, which was the age cohort most likely to have worked in war production.

Author: M. Ayhan Kose
Publisher: World Bank Publications
ISBN: 1464815453
Category : Business & Economics
Languages : en
Pages : 403

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The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.

Author: Adalgiso Amendola
Publisher: International Monetary Fund
ISBN: 1498322913
Category : Business & Economics
Languages : en
Pages : 57

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We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Author: Mark Gertler
Publisher: Mit Press
ISBN: 9780262072533
Category : Business & Economics
Languages : en
Pages : 432

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The NBER Macroeconomics Annual presents pioneering work in macroeconomics by leading academic researchers to an audience of public policymakers and the academic community. Each commissioned paper is followed by comments and discussion. This year's edition provides a mix of cutting-edge research and policy analysis on such topics as productivity and information technology, the increase in wealth inequality, behavioral economics, and inflation.

Author: Yair Listokin
Publisher: Harvard University Press
ISBN: 0674976053
Category : Law
Languages : en
Pages : 281

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A distinguished Yale economist and legal scholar’s argument that law, of all things, has the potential to rescue us from the next economic crisis. After the economic crisis of 2008, private-sector spending took nearly a decade to recover. Yair Listokin thinks we can respond more quickly to the next meltdown by reviving and refashioning a policy approach whose proven success is too rarely acknowledged. Harking back to New Deal regulatory agencies, Listokin proposes that we take seriously law’s ability to function as a macroeconomic tool, capable of stimulating demand when needed and relieving demand when it threatens to overheat economies. Listokin makes his case by looking at both positive and cautionary examples, going back to the New Deal and including the Keystone Pipeline, the constitutionally fraught bond-buying program unveiled by the European Central Bank at the nadir of the Eurozone crisis, the ongoing Greek crisis, and the experience of U.S. price controls in the 1970s. History has taught us that law is an unwieldy instrument of macroeconomic policy, but Listokin argues that under certain conditions it offers a vital alternative to the monetary and fiscal policy tools that stretch the legitimacy of technocratic central banks near their breaking point while leaving the rest of us waiting and wallowing.

Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 1451844239
Category : Business & Economics
Languages : en
Pages : 33

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Recently, monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence. Simultaneously, in the fiscal area, market development has allowed public debt managers to focus more on cost minimization. This “divorce” of monetary and debt management functions in no way lessens the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. This paper analyzes these issues based on a review of the relevant literature and of country experiences from an institutional and operational perspective.

Author:
Publisher: World Bank Publications
ISBN: 9780195211238
Category : Political Science
Languages : en
Pages : 164

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Assessing Aid determines that the effectiveness of aid is not decided by the amount received but rather the institutional and policy environment into which it is accepted. It examines how development assistance can be more effective at reducing global poverty and gives five mainrecommendations for making aid more effective: targeting financial aid to poor countries with good policies and strong economic management; providing policy-based aid to demonstrated reformers; using simpler instruments to transfer resources to countries with sound management; focusing projects oncreating and transmitting knowledge and capacity; and rethinking the internal incentives of aid agencies.

Author: World Bank Group
Publisher: World Bank Publications
ISBN: 1464816131
Category : Business & Economics
Languages : en
Pages : 412

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Although the global economy is emerging from the collapse triggered by COVID-19, the recovery is likely to be subdued, and global GDP is projected to remain well below its pre-pandemic trend for a prolonged period. Several risks cloud the outlook, including those related to the pandemic and to rapidly rising debt. The pandemic has further diminished already-weak growth prospects for the next decade. Decisive policy actions will be critical in raising the likelihood of better growth outcomes while warding off worse ones. Immediate priorities include supporting vulnerable groups and ensuring a prompt and widespread vaccination process to bring the pandemic under control. Although macroeconomic policy support will continue to be important, limited fiscal policy space amid high debt highlights the need for an ambitious reform agenda that bolsters growth prospects. To address many of these challenges, global cooperation will be key. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). The January edition includes in-depth analyses of topical policy challenges faced by these economies, while the June edition contains shorter analytical pieces.