estimates of effective marginal tax rates on factor incomes this chapter describes a method of calculating summary measures of effective factor income tax rates in the united states using readily available data the numbers resulting from application of this method in a study are reported in the chapter and some of their possible uses are discussed the estimated factor income tax rates behave over time in a manner quite consistent with the behavior of other broad measures of federal tax policy the postwar movement in the tax rate on income from labor relative to that on income from capital or more accurately the relevant components of these tax rates provides suggestive support for the miller scholes hypothesis that the federal personal income tax has been moving in the direction of a pure consumption tax the tax rates reported in the chapter are consistent with other studies that show a decrease since the 1950s in rates of taxation at the corporate level of income from corporate held capital they are also consistent with the view that rates of taxation of such income at the noncorporate level have risen but not quite sufficiently to offset the decline in the corporate tax burden

a reevaluation of the macroeconomic effects of positive trend inflation abstract to date most of the papers which have examined the effects of trend inflation on the properties of new keynesian model were based on relatively simple sticky prices dsge models and whose realism was sometimes questionable in this paper we re evaluate the macroeconomic effects of non zero trend inflation building on the model of ascari 2004 as one of the most cited papers in the literature on the effects of trend inflation we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date we propose a refinement of this model by introducing two theoretical important ingredients namely investment adjustment costs and a roundabout production structure once we add these features to make the model more realistic as commonly for medium scale models we find that the standard new keynesian model without real frictions overestimates the short term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term

the impact of fiscal policy on profits i introduction a large number of policy making decisions rely on the key issue of the impact of fiscal policy on the economy therefore it is not surprising that the effect of fiscal policy on macroeconomic aggregates has been extensively studied in the empirical literature 1 several authors starting with blanchard and perotti 2002 have attempted to estimate the effect of government spending shocks on output and other variables in the context of structural var models see perotti 2008 for a survey this interest has been renewed since the 2008 2009 recession given the unprecedented size of fiscal packages worldwide barro and redlick 2009 hall 2009 an important part of this literature focuses on the theoretical and empirical investigation of the fiscal policy transmission channels theories of fiscal policy transmission differ in their implications regarding the response of different macroeconomic variables to government spending shocks for example the neoclassical model predicts a negative impact of government spending on real wages and consumption while this prediction is challenged by new keynesian models to that end an important branch of empirical literature on fiscal multipliers has investigated the transmission channels of fiscal policy by looking mainly at the response of private consumption and real wages 2 this paper deals with an important but relatively under investigated channel of fiscal policy transmission which is the effect of fiscal policy on profits as pointed out by hall 2009 the impact of fiscal shocks on the markup of price over marginal cost is important for understanding the functioning of the fiscal multiplier in the purely neoclassical general equilibrium model a rise in government spending produces a negative wealth effect the labor supply curve shifts outward and real wages and consumption fall this implies that the output multiplier will be well below unity a keynesian type fiscal multiplier implying a large positive output effect and positive responses of private consumption and real wages to increased government spending relies on a negative response of the markup of price over marginal cost to an increase in economic activity the intuition is that a decrease in the price marginal cost markup in response to higher government spending allows a rise in wages or at least a smaller reduction in wages compared with the case when the markup is constant a rise in wages would then imply that households will substitute away from leisure and into consumption therefore if the markup is countercyclical conditional on government spending shocks sizeable output multipliers of fiscal spending are consistent with existing empirical evidence that fiscal shocks are not related to strong decreases in real wages or consumption blanchard and perotti 2002 fatas and mihov 2001 gall david lopez salid and valles 2007 perotti 2005 2008 in general a new keynesian model with sticky prices implies a countercyclical markup ratio as input prices rise in a boom while output prices stay constant however for understanding the fiscal policy transmission the key factor is markup and not price stickiness itself as a countercyclical markup could also be implied by models with flexible prices when the desired markup changes in response to a shock 3 a model which assigns a central role to markups for fiscal policy transmission has been presented by ravn schmitt grohe and uribe 2007 assuming that demand has a price inelastic component that is a function of deep habits a government spending shock that leads to a positive output response increases the share of the price elastic component of demand causing a rise in the overall demand elasticity and a corresponding decline in the optimal markup 4 thus for a sufficient decline in the markup the resulting rise in wages induces households to substitute away from leisure and into consumption thereby more than offsetting the negative wealth effect of government spending predicted by the neoclassical model

asset returns and business cycles in models with investment adjustment costs we show that adjustment cost models with labor supply can explain both asset returns and business cycle facts when adjustment costs penalize the changes of investment this conclusion stands in contrast to results obtained in the literature with adjustment costs that penalize the changes of capital

the british model in britain failing slowly in 1990 britain reorganised its electricity industry to run on competitive lines the british reforms are widely regarded as successful and the model used provides the basis for reforms of electricity industries worldwide the main reason for this perception of success is major reductions in the real price of electricity with no reduction in service quality this paper examines whether the reputation of the british reforms is justified it concludes that the reputation is not justified and that serious fundamental problems are beginning to emerge the central question is have the british reforms resulted in the creation of efficient wholesale and retail markets on this criterion the reforms have failed the wholesale market is dominated by obscure long term contracts privileged access to the market and self dealing within integrated generator retailers leaving the spot markets with minimal liquidity and unreliable prices the failure to develop an efficient wholesale market places the onus on consumers to impose competitive forces on electricity companies by switching regularly small consumers will not do this and they are paying too much for their power for the future there is a serious risk that the electricity industry will become a weakly regulated oligopoly with a veneer of competition

targeted transfers and the fiscal response to the great recession abstract between 2007 and 2009 government expenditures increased rapidly across the oecd countries while economic research on the impact of government purchases has flourished in the data most of the increase in expenditures was in government transfers after documenting this fact we argue that future research should focus on the positive impact of transfers towards this we present a model in which there is no representative agent and ricardian equivalence does not hold because of uncertainty imperfect credit markets and nominal rigidities targeted lump sum transfers are expansionary both because of a neoclassical wealth effect and because of a keynesian aggregate demand effect

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

do actions speak louder than words household expectations of inflation based on micro consumption data survey data on household expectations of inflation are routinely used in economic analysis yet it is not clear how accurately households are able to articulate their expectations in survey interviews we propose an alternative approach to recovering households expectations of inflation from their consumption expenditures we show that these expectations measures have predictive power for consumer price index cpi inflation they are better predictors of cpi inflation than household survey responses and more highly correlated with professional inflation forecasts except for highly educated consumers consistent with the view that more educated consumers are better able to articulate their expectations we also document that households inflation expectations respond to inflation news as measured by the unpredictable component of inflation predictions in the survey of professional forecasters the response to inflation news tends to increase with households level of education consistent with the existence of constraints on household s ability to process this information

does neoclassical theory account for the effects of big fiscal shocks evidence from world war ii much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks we test the theory using data from world war ii which is by far the largest fiscal shock in the history of the united states we take observed changes in fiscal policy during the war as inputs into a parameterized dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock

the fiscal multiplier in a liquidity constrained new keynesian economy we study the effects of fiscal policy on the macroeconomy using a liquidity constrained new keynesian model in which government bonds are liquid and private financial assets are only partially liquid we find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective in this model a bond financed fiscal expansion can stimulate output because higher public borrowing improves liquidity by increasing the proportion of liquid assets in private sector wealth

household debt and fiscal multipliers we study the size of government spending multipliers in a general equilibrium model with search and matching frictions in which we allow for different levels of household indebtedness the main results are a the presence of impatient households and private debt helps to generate government spending multipliers greater than 1 b as financial conditions worsen the size of the government spending multiplier falls c conversely employment vacancies and unemployment multipliers are larger in a credit crunch d the model explains the observed pattern of responses of labour market variables housing prices and private debt to a fiscal shock reasonably well

marginal tax rates and income new time series evidence this paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the united states over the 1950 2010 period after isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach i find large positive effects of tax cuts in the top 1 of the income distribution in contrast to earlier findings based on tax return data i also find large effects in other income percentile brackets a hypothetical tax reform cutting marginal rates only for the top 1 leads to sizeable increases in top 1 incomes and has a positive effect on real gdp there are also spillover effects to incomes outside of the top 1 but top marginal rate cuts lead to greater inequality in pre tax incomes

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

who chooses to inflation target abstract in this article we seek what are the factors behind a country s decision to move to inflation targeting we find that high past inflation low debt levels and the absence of a nominal exchange rate anchor increase the probability that a country will end up opting for it

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

from great depression to great credit crisis similarities differences and lessons the great depression of the 1930s and the great credit crisis of the 2000s had similar causes but elicited strikingly different policy responses while it remains too early to assess the effectiveness of current policy it is possible to analyse monetary and fiscal responses in the 1930s as a natural experiment or counterfactual capable of shedding light on the impact of current policies we employ vector autoregressions instrumental variables and qualitative evidence for 27 countries in the period 1925 39 the results suggest that monetary and fiscal stimulus was effective that where it did not make a difference it was not tried they shed light on the debate over fiscal multipliers in episodes of financial crisis they are consistent with multipliers at the higher end of those estimated in the recent literature and with the argument that the impact of fiscal stimulus will be greater when banking systems are dysfunctional and monetary policy is constrained by the zero bound miguel almunia agustin benetrix barry eichengreen kevin h o rourke and gisela rua

on measuring the effects of fiscal policy in recessions we do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies almost entirely ignore the state of the economy and estimate the government multiplier which is presumably a weighted average of the one we care about the multiplier in a recession and one we care less about the multiplier in an expansion notable exceptions to this general claim sug gest this difference is potentially large our lack of knowledge stems significantly from the focus on linear dynamics vector autoregressions and linearized or close to linear dynamic stochastic general equilibrium dsge models our lack of knowledge also reflects a lack of data deep recessions are few and nonlinearities hard to measure the lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial equilibrium responses in disaggregated data microeconomic estimates of the partial equilibrium causal effects of a policy can discipline the causal channels inherent in any dsge model of the general equilibrium effects of policy microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general equilibrium effects of fiscal policy on the state of the

political influence on the central bank international evidence political influence on the central bank is measured bere by looking at the probability that a central bank governor will be replaced shortly after a political change of government the governor changes about half the time witbin six months of a nonconstitutional or other radical change of government a military coup or a restoration of democracy the governor is much less likely to change within six months following a routine change in the head of government about one fourth of the time in developing countries and one tenth in industrial countries these indicators vary across countries and correlate statistically with inflation and its variability and with real growth and real interest rates differences in the vulnerability of the central bank to political instability in political instability itself and in central bank turnover in nonpolitical periods seem to be a major part of the explanation for why developing countries have on average higher and more variable inflation than industrial countries do

post neoliberal electricity market re reforms in argentina diverging from market prescriptions this paper focuses upon the policy and institutional change that has taken place within the argentine electricity market since the country s economic and social crisis of 2001 2 as one of the first less developed countries ldcs to liberalise and privatise its electricity industry argentina has since moved away from the orthodox market model after consumer prices were frozen by the government in early 2002 when the national currency was devalued by 70 although its reforms were widely praised during the 1990s the electricity market has undergone a number of interventions ostensibly to keep consumer prices low and to avert the much discussed energy crisis caused by a dearth of new investment combined with rising demand levels this paper explores how the economic crisis and its consequences have both enabled and legitimised these policy and institutional amendments while drawing upon the specifics of the post neoliberal market re reforms to consider the extent to which the government appears to be moving away from market based prescriptions in addition this paper contributes to sector specific understandings of how despite these changes neoliberal ideas and assumptions continue to dominate argentine public policy well beyond the postcrisis era

fiscal policy in good and bad times in this paper we analyze whether the effect of fiscal policy differs across the business cycle to tackle this question we use a regime switching error correction framework where nonlinearities are only modeled in the short run and have no impact on the long run equilibrium regime specific shocks to government revenue and government purchases are identified using sign restrictions linear combinations of the impulse responses of these basic shocks are used to construct a deficit spending shock and a deficit financed tax cut shock we find that active spending policies have a stronger impact in recession with multipliers exceeding unity and should be preferred to deficit financed tax cuts

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

flexible inflation targets forex interventions and exchange rate volatility in emerging countries abstract emerging economies with inflation targets it face a dilemma between fulfilling the theoretical conditions of strict it which imply a fully flexible exchange rate or applying a flexible it which entails a de facto managed floating exchange rate with foreign exchange forex interventions to moderate exchange rate volatility using a panel data model for 37 countries we find that although it lead to higher exchange rate instability than alternative regimes forex interventions in some it countries have been more effective to lower volatility than in non it countries which may justify the use of flexible it by policymakers

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

discretionary tax changes and the macroeconomy new narrative evidence from the united kingdom abstract this paper provides new estimates of the macroeconomic effects of tax changes using a new narrative dataset for the united kingdom identification is achieved by isolating exogenous tax policy changes using the romer and romer narrative strategy i find that a 1 percent cut in taxes increases gdp by 0 6 percent on impact and 2 5 percent over three years the findings are remarkably similar to romer and romer narrative estimates for the united states reinforcing the view that tax changes have powerful and persistent effects exogenous tax changes are also shown to have contributed to important episodes in the uk business cycle jel e23 e32 e62 h20 h61

the heterogeneous responses of consumption between poor and rich to government spending shocks government spending shocks have substantially different effects on consumers across the income distribution consumption increases for the poor whereas it decreases for the rich in response to a rise in government expenditure i shed light on this issue by incorporating a progressive tax scheme and productive public expenditure into a heterogeneous agent model economy with indivisible labor the model economy is able to successfully match aggregate and disaggregate effects of government spending shocks on consumption when the government increases its spending and accompanies it by a rise in tax progressivity the poor are employed and increase their consumption since after tax wage rates increase while the rich decrease their consumption because of a fall in after tax wage rates

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

variation in central bank independence across countries some provisional empirical evidence in this paper seven hypotheses to explain variation in central bank independence across countries are tested the predictions based upon the theory that delegation of authority by politicians to the central bank is used as a commitment device are not supported central bank independence is not higher the larger the employment motivated inflationary bias the higher political instability or the larger the government debt central bank independence is positively related to historical inflation experience and negatively with political instability we do only find limited support for the view that countries with a universal banking system and countries whose central banks do not regulate financial institutions have more independent central banks

measuring the effects of fiscal policy measuring the effects of discretionary fiscal policy is both difficult and controversial as some explicit or implicit identifying assumptions need to be made to isolate exogenous and unanticipated changes in taxes and government spending studies based on structural vector autoregressions typically achieve identification by restricting the contemporaneous interaction of fiscal and non fiscal variables in a rather arbitrary way in this paper we relax those restrictions and identify fiscal policy shocks by exploiting the conditional heteroscedasticity of the structural disturbances we use this methodology to evaluate the macroeconomic effects of fiscal policy shocks in the u s before and after 1979 our results show substantive differences in the economy s response to government spending and tax shocks across the two periods importantly we find that increases in public spending are in general more effective than tax cuts in stimulating economic activity a key contribution of this study is to provide a formal test of the identifying restrictions commonly used in the literature

rule of thumb consumers meet sticky wages it has been argued that rule of thumb consumers substantially alter the determinacy properties of simple interest rate rules and the dynamics of an otherwise standard new keynesian model in this paper we show that nominal wage stickiness helps re establishing standard results key findings are that wage stickiness i affects the shape of determinacy regions in the parameters space restoring the relevance of the taylor principle for the conduct of monetary policy ii implies that a rise in consumption in response to an innovation in government spending is not a robust feature of the model

using stock returns to identify government spending shocks this article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches the new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large us military contractors this strategy is used to estimate the dynamic responses of output hours consumption and real wages to a government spending shock we find that positive government spending shocks are associated with increases in output hours and consumption real wages initially decline after a government spending shock and then rise after a year we estimate the government spending multiplier associated with increases in military spending to be about 1 5 over a horizon of 5 years

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

heterogeneous consumers and fiscal policy shocks this paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that are allowed to di er depending on their individual characteristics we use data from the consumption expenditure survey cex to estimate individual level impulse responses as well as multipliers for government spending the main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels in particular the wealthiest individuals tend to behave according to the predictions of standard rbc models whereas the poorest individuals tend to behave according to standard is lm non ricardian models most likely due to credit constraints furthermore government spending policy shocks tend to decrease consumption inequality forthcoming in journal of money credit and banking

aggregate consumption and saving in the postwar united states two commonly used sources of aggregate expenditure data are personal consumption expenditures in the national income and product accounts and the consumer expenditure surveys administered by the bureau of labor statistics we adjust both data sources to incorporate the service flows from owner occupied housing and other consumer durables a comparison of the two estimates of aggregate expenditure reveals that the differences between the two data sets have been growing over time by 1989 the level of aggregate expenditure in the national accounts exceeds that reported in the consumer expenditure surveys by 1224 billions less than half of this difference can be attributed to definitional differences in the two data sources

government spending entry and the consumption crowding in puzzle this article documents empirically that net firm entry robustly rises after a u s government spending expansion we use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding in after positive expenditure shocks endogenous entry models typically fail to generate the observed joint increase in consumption and entry model features that dampen the wealth effect such as rule of thumb households or complementarity between labor and consumption in preferences tend to reduce entry we show that utility or productivity enhancing public spending can reconcile the model with our documented fact and performs well empirically

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

factor hoarding and the propagation of business cycles shocks this paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle to this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding we find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents environments the strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents environments in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate u s output other authors have argued that standard real business cycle rbc models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms these features include the observed positive serial correlation in the growth rate of output the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data

fiscal policy the real exchange rate and traded goods we estimate the effects of government spending shocks on the cpi real exchange rate the trade balance and their co movements with gdp and private consumption we decompose the variations of the cpi real exchange rate into variations of the traded goods real exchange rate and the relative price of traded to non traded goods we reach three main conclusions a rise in government spending induces a depreciation of the cpi real exchange rate and a trade balance deficit private consumption rises in response to a government spending shock and therefore co moves positively with the real exchange rate both components of the cpi real exchange depreciate we employ vector auto regression var techniques to estimate the effects of fiscal policy and in particular government spending on the cpi real exchange rate and the trade balance in the us and three other oecd countries our empirical analysis delivers two key results first a rise in government spending tends to induce a real exchange rate depreciation and a trade balance deficit although especially in the us the latter effect tends to be small second in all countries private consumption rises in response to a government spending shock and therefore co moves positively with the real exchange rate two important implications follow from these results our evidence provides support for a traditional twin deficit hypothesis in stark contrast with a recent study by kim and roubini 2008 a second implication concerns the consistency of facts and theory both the response of the real exchange rate and its co movement with private consumption and the trade balance are at odds with a benchmark general equilibrium open economy model featuring complete financial markets in fact while the model is successful in replicating the negative response of the trade balance to a government spending shock that we observe in the data and also in linking the magnitude of that response to the degree of openness it has counterfactual predictions on the response of the real exchange rate and of private consumption we argue that the key failure of the model lies in the equilibrium behaviour of private consumption in the model as a result of a typical wealth effect on labour supply private consumption falls in response to a rise in government spending whereas the opposite is true in the data this in turn explains the behaviour of the real exchange rate in the reference model with complete asset markets a risk sharing arbitrage condition ties the ratio of the marginal utilities of consumption across countries to the real exchange rate via this condition and provided that deviations from purchasing power parity are feasible the fall in consumption is accompanied by an equilibrium appreciation of the real exchange rate we proceed by investigating further the sources of the cpi real exchange rate movements in the data a traditional approach decomposes the real exchange rate into two terms

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

on fiscal multipliers estimates from a medium scale dsge model this paper contributes to the debate on fiscal multipliers in the context of a structural model i estimate a micro founded dynamic stochastic general equilibrium model that features a rich fiscal policy block and a transmission mechanism for government spending shocks using bayesian techniques for us data

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

the grin of the cheshire cat abstract throughout the 1990s privatisation liberalisation de regulation in short the british model dominated the policy agenda for electric utilities at the heart of these reforms was a desire to transform the electricity industry from a monopoly into a competitive market so that electricity could be bought and sold like other commodities and products however from 2001 onwards cracks in this policy became visible rather than admit the policy s failings its advocates have tried to fix the model by re introducing planning as planning replaces competition increasingly all that is left of the competitive element of the model is the free market rhetoric the grin of the cheshire cat but when supply security can no longer be guaranteed politicians will be forced to act for developed countries the problems will be significant but they willingly opted for liberalisation and have the financial resources to deal with these problems so sympathy must be limited by contrast developing countries often had little choice but to comply with the wishes of the international financial institutions ifis their industries have often suffered serious under investment in the privatised market it is these countries that the developed world has a duty to help and the ifis must urgently re assess their policies and widely acknowledge their mistakes

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

fiscal policy in a tractable liquidity constrained economy we analyse the effects of fiscal expansions when public debt is used as liquidity by the private sector aggregate shocks are introduced into an incomplete market economy where heterogenous agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations debt financed increases in spending facilitate self insurance by bond holders and may crowd in private consumption they also loosen the borrowing constraints faced by firms thereby raising labour demand and possibly the real wage whether private consumption and wages rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock

inflation targeting with imperfect information in a global games setup with imperfect commitment technology we show that low targets the ones close to the optimal inflation under perfect commitment are unattainable leading to a trade off between low and credible targets moreover since noisy public information helps to coordinate expectations around the announced target our article supports unconventional policy prescriptions first weaker countries need to impose higher targets second less transparency helps to make the announced target credible and then reduces the optimally announced target results are based on a general central bank loss function encompassing models traditionally used to discuss central bank decisions

fiscal policy and occupational employment dynamics we document substantial heterogeneity in occupational employment dynamics in response to government spending shocks in the united states employment rises most strongly in service sales and office pink collar occupations by contrast employment in blue collar occupations is hardly affected by fiscal policy we provide evidence that occupation specific changes in labor demand are key for understanding these findings we develop a business cycle model that explains the heterogeneous occupational employment dynamics as a consequence of composition effects due to heterogeneous employment changes across industries and occupation specific within industry employment shifts due to differences in the short run substitutability between labor and capital services across occupations

identifying discretionary fiscal policy reactions with real time data we propose a method of identifying discretionary fiscal policy reactions using real time data automatic stabilizers should depend on true gdp while discretionary fiscal policy is contingent on the information that policy makers have in real time we can compute a real time measurement error by comparing the first release of gdp data with later revisions discretionary fiscal policy is influenced by this measurement error whereas automatic fiscal policy is not we use this identification approach to test the central identifying assumption of blanchard and perotti s 2002 seminal structural vector autoregression var according to this assumption fiscal policy makers do not react to gdp developments contemporaneously in a discretionary fashion we find that government expenditure is adjusted upward if gdp growth in real time is lower than true gdp this suggests that fiscal policy makers use short term funds to buy goods and services in response to their perception of gdp dynamics

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

the effects of government spending shocks on the real exchange rate and trade balance in turkey the aim of this study is to investigate the effects of government spending shocks on the real exchange rate and foreign trade balance in turkey for the period of 2002 01 2012 04 within a structural var framework the analysis shows that a positive shock to the government spending tends to induce real exchange rate appreciation and deterioration in trade balance we also find that the composition of the government spending matters although shocks to the government nonwage consumption generate an appreciation in the real exchange rate and worsening of the trade balance the effects of government investment shocks remain insignificant furthermore the analysis demonstrates that shocks to government spending are associated with a rise in taxes which is indicative of a spending driven tax adjustment process in turkey

disinflation inequality and welfare in a tank model we investigate the redistributive and welfare effects of disinflation in a two agent new keynesian tank model characterized by limited asset market participation lamp and wealth inequality we highlight two key mechanisms driving our long run results i the cash in advance constraint on firms working capital cia ii dividends endogeneity these two channels point in opposite directions lower inflation softens the cia and by raising labor demand lowers inequality but the disinflation also raises dividends and this increases inequality the disinflation is always welfare improving for asset holders we obtain ambiguous results for non asset holders who suffer substantial consumption losses during the transition

has fiscal policy helped stabilize the postwar u s economy abstract in this paper i consider whether postwar fiscal policy has helped stabilize the u s economy i do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data these rules allow fiscal policies to respond to current and lagged output and labor hours i use the estimated policy rules to see if postwar fiscal policy reduces output volatility and or lengthens expansions and shortens recessions i find that fiscal policy in general provides little stability on either count i also find that the endogenous feedback links by themselves can provide some stabilization

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

on the size of government spending multipliers in europe this article compares the size of government spending multipliers in europe by applying a panel structural vector autoregression analysis on 11 eurozone and 8 non eurozone countries using quarterly data from 1991q1 to 2012q4 we find that i spending multipliers are smaller in eurozone compared to non eurozone countries ii across the euro area the impact of government spending on gdp has been higher before than after the introduction of the euro iii spending multipliers are larger in the eurozone periphery than in the core countries and iv since the beginning of the recent financial crisis spending multipliers have become larger both for eurozone and for non eurozone countries we relate these results to an emerging theoretical literature linking the size of fiscal multipliers to the monetary policy stance we also discuss the implications of our findings for the effectiveness of fiscal policy in europe

fiscal stimulus with spending reversals abstract the short run effects of fiscal policy depend not only on current tax and spending choices but also on expectations about future policy adjustment while general equilibrium models typically restrict medium term adjustment to taxation we highlight the importance of government spending dynamics first we provide time series evidence for the united states suggesting that an exogenous increase in government spending prompts a rise in public debt followed over time by a reduction in spending below trend second we show how expected spending reversals alter the short run impact of fiscal policy in a new keynesian model bringing it closer in line with the evidence

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

habit formation adjustment costs and international transmission of fiscal policy abstract the paper studies the effects of fiscal policy in an integrated world economy the setup is one with habit forming endogenous rates of time preference and adjustment costs in investment most of the predictions of the model are in line with the recent empirical literature on fiscal policy for instance in response to a balanced fiscal expansion we obtain positive long run output multipliers long run increases in employment short and medium run increases in wages and decreases in investment our results suggest that short run government spending multipliers are smaller than tax multipliers most importantly we show that the model can generate positive short and medium run consumption responses to a positive fiscal shock this is relevant as negative consumption responses are considered to be one of the main challenges facing neo classical models of fiscal policy

a cohort analysis of saving behavior by u s households the aim of this paper is to shed some light in the decline in personal saving rates in the united states in the 1980s for a such a purpose the paper analyses the only u s data set containing information on consumption and income at the household level the consumer expenditure surveys cex from 1980 to 1991 because the cex is not a panel most of the analysis is conducted using average cohort techniques the paper identifies a typical age profile for saving rates such a profile is hump shaped and peaks around age 57 the paper also argues that such a profile was shifted down for the cohorts born between 1920 and 1939 relative to the younger and older cohorts considered these cohorts are the parents of the baby boom generation the paper also argues that these cohort effects can account for a non neglible proportion of the decline in aggregate saving because these cohorts were during the 1980s in the ages when saving rates are typically highest the result is robust to the consideration of several controls and holds for several definitions of consumption the only exception is when durable expenditure is considered as saving rather than consumption

the effects of public spending externalities abstract we conduct a positive analysis on the effects of externalities produced by government spending to this effect we estimate using u s data an rbc model with two salient features first we allow government consumption to directly affect the marginal utility of consumption second we allow public capital to shift the productivity of private factors we provide an identification analysis that supports the strategy adopted for estimating the parameters governing these two channels on one hand private and government consumption are robustly estimated to be substitute goods because of substitutability labor supply reacts little to a government consumption shock so the estimated output multiplier is much lower than in models with separabilities on the other hand our results point towards public investment being unproductive

what do british historical data tell us about government spending multipliers british data from the early 1700s through world war i reflect the results of numerous high quality natural experiments of government spending britain frequently participated in wars increasing military spending massively wartime distortions were relatively limited because the government generally adopted tax smoothing policy and rarely implemented interventions government spending multiplier estimates are low or negative and significantly below unity this paper finds no evidence that the multiplier was higher in the slack state than in the normal state jel e32 e62

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

challenges when electricity markets face the investment phase abstract deregulation of electricity industry in europe has tended to start with a grace period of energy surplus inherited from the previously expansive coordinated economies and further amplified by better resource utilisation from extended international trade the regulatory challenge has therefore primarily been to allocate existing generation to consumers in an efficient way however as energy demand increases due to economic growth the challenge of providing new capacity surfaces the nordic region which has been a pioneer in internationalising and deregulating electricity is now approaching this stage ahead of most of the rest of europe while the nordic case is characterised by specificities related to hydropower it also raises the more general challenge of capacity expansion under a deregulated market economy the article therefore discusses how the nordic investment challenges of today shed light on more generic challenges that may become more general european challenges of tomorrow in a final section the article discusses policy options available to address the investment price hike challenge the argument is put forward that recursion to some degree of coordinated governance might seem necessary if solutions are confined within large scale technical systems however within the context of a small scale decentralised technological development one may be more confident of competitive solutions

fiscal multipliers in the 21st century fiscal multipliers appear to vary greatly over time and space based on vars for a large number of countries we document a strong correlation between wealth inequality and the magnitude of fiscal multipliers in an attempt to account for this finding we develop a life cycle overlapping generations economy with uninsurable labor market risk we calibrate our model to match key characteristics of a number of oecd economies including the distribution of wages and wealth social security taxes and government debt and study how a fiscal multiplier depends on various country characteristics we find that the fiscal multiplier is highly sensitive to the fraction of the population who face binding credit constraints and also to the average wealth level in the economy these findings together help us generate a cross country pattern of multipliers that is quite similar to that in the data

the age specific burdens of short run fluctuations in government spending abstract we study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households ricardian households and rule of thumb consumers we demonstrate that an unexpected increase in government spending decreases income and wealth inequality in contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations we find that debt financing also harms ricardian households during retirement the crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt

the macroeconomic effects of war finance in the united states world war ii and the korean war during world war ii government expenditures were financed primarily by issuing debt during the korean war expenditures were financed almost exclusively by higher taxes reflecting president truman s preference for balanced budgets this paper evaluates quantitatively the economic effects of the different policies used to finance these two wars counterfactual experiments are used to explore the implications of financing world war ii like the korean war and financing the korean war like world war ii the author finds that using a korean war policy during world war ii would have resulted in much lower output and welfare relative to the actual policy copyright 1997 by american economic association

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

habit formation and fiscal transmission in open economies in this paper we analyze the ability of an open economy version of the neoclassical model to account for the time series evidence on fiscal policy transmission revisiting the evidence we find that i government spending raises output while inducing a simultaneous decline of investment and the current account and ii the responses of output and investment are more muted in more open economies while current account deficits tend to be larger turning to the model we explore the role of habit formation for fiscal policy transmission specifically we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques

fiscal policy pricing frictions and monetary accommodation this paper empirically investigates whether the theoretical conditions for government expenditure expansions to be effective hold for the data we ask whether the necessary conditions for fiscal effectiveness are relevant on average and in special circumstances that capture features of the recent crisis fiscal policy can be an effective countercyclical tool if monetary policy accommodates the fiscal expansion if expectations about future output growth and inflation are constant and if structural relationships are invariant to the policy change recent expansions are unlikely to produce large output multipliers or have important debt or inflation effects credible deficit and debt reduction schemes can produce sizeable output multipliers fabio canova and evi pappa

exchange rate based stabilisation durables consumption and the stylised facts in this article we show that a model featuring durable consumer goods imperfect substitution between domestic and foreign assets and weak credibility can explain the qualitative and quantitative aspects of the stylised facts associated with exchange rate based stabilisation including the tremendous increase in real interest rates following a temporary reduction in the crawl total consumption spending rises 14 26 the real exchange rate appreciates 20 37 and the current account deficit swells to 10 15 of gross domestic product despite large capital inflows the real interest rate increases from 10 to 20 100