budget processes and commitment to fiscal discipline abstract we present a framework of investigation into the political economy of the budget process our model suggests that institutional rules governing the budget process can be found to limit the importance of fiscal illusion empirical evidence supports that proposition the choice of rules depends on the political environment as well as the dominant source of uncertainty in the budget process

the behaviour of the innovative firm relations to the environment abstract one of the most interesting results of the ongoing theoretical debate on innovation has been to shift the focus from purely technological aspects to firms behaviour in innovative processes and at the same time to stress the specific and cumulative character which makes these processes somewhat rooted to the context in which they take place along this line in this paper we will hold that innovation is a process that should be considered as a change of the environment of the innovating firm rather than somethin occurring within this environment and more in particular as a learning process which concerns both the firm and its environment and that results in deep changes in both of them these propositions are meant not only as a dynamic methodological principle providing a framework for definition and classification but to have analytical and operational implications that is we maintain that there is a meaningful correlation between the attitude and behaviour of the firm with respect to innovation and the way in which the firm itself considers the environment and relates to it this correlation as we shall see holds with respect to several relevant issues the way of regarding upward and downward integration 1 the interpretation of flexibility the role of human resource as distinct from mere manpower management and so on

the dynamics of sovereign default risk and political turnover abstract this paper develops a stochastic dynamic politico economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt electoral outcomes are characterized by the economic benefits from the incumbent s policies and stochastic idiosyncratic ideological aspects quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties prior to a debt crisis the incumbent government accumulates external debt to foster the probability of remaining in power the dynamic interaction of electoral outcomes external debt and sovereign default supports arguments for imposing institutional constraints on incumbent governments

borrowing costs and the role of multilateral development banks evidence from cross border syndicated bank lending abstract cross border bank lending is a growing source of external finance in emerging and developing countries and could play a key role in infrastructure and development financing this paper looks at the role of multilateral development banks mdbs on the terms of syndicated loans focusing on loan pricing the results show that mdbs participation is associated with higher borrowing costs and longer maturities signaling a greater willingness by mdbs to finance risky projects which may not be financed by the private sector we also show that mdbs are more likely to lend to borrowers located in countries with high credit and financial risk overall our findings suggest that mdbs could play a role in easing access to credit for high risk borrowers

bond markets initiation and tax revenue mobilization in developing countries we analyze the relationship between the introduction of a sovereign bond market bm and tax revenue mobilization behavior using a large sample of 119 developing countries propensity scores matching estimations reveal that bm participation significantly fosters domestic tax revenue mobilization moreover we find that this favorable effect is sensitive to bm countries characteristics namely the stance of monetary and fiscal policies the exchange rate regime the level of economic development and the degree of financial openness and financial development finally our results show that bm participation fosters internal taxes and reduces their instability compared to international trade taxes these findings highlight the strength of bm in promoting structural reforms in developing countries through encouraging them to increase their tax effort and even by contributing to some extent to the fiscal transition process

public sector deficits and macroeconomic performance in the 1980s chronic public sector deficits forced countries to undertake fiscal adjustment the need to face hard choices continues in the 1990s but the problem is not a simple and easily diagnosed one with an obvious solution rather public sector deficits have had widely differing consequences high inflation in some countries low inflation but also low investment and growth in others and in still others no evident short term macroeconomic spillovers this book presents the findings of a world bank research project designed to shed light on the complex dynamics of public sector deficits it includes an in depth examination of eight countries argentina chile colombia cote d ivoire ghana morocco pakistan and zimbabwe these cases are analyzed within a comprehensive theoretical framework elaborated for the study and in conjunction with cross country data from a larger set the book draws the following conclusions the ways chosen to finance deficits money creation debt or arrears go far to explain medium term financial and macroeconomic imbalances but in the short term these relations are blurred deficits tend to be bad for growth they increase financial and price instability and crowd out private investment public saving typically reduces private saving only slightly increasing public saving is a very effective policy instrument for raising national saving fiscal adjustment typically leads to a lower trade deficit and a moredepreciated real exchange rate finally the blame for large systemic public deficits must be placed not on bad luck but on unwise policy choices and conversely sound fiscal policies can set a country on a path leading to stability and growth

optimal fiscal policy in a small open economy with limited commitment abstract we introduce limited commitment into a standard optimal fiscal policy model in small open economies we consider the problem of a benevolent government that signs a risk sharing contract with the rest of the world and that has to choose optimally distortionary taxes on labor income domestic debt and international transfers both the home country and the rest of the world may have limited commitment which means that they can leave the contract if they find it convenient the contract is designed so that at any point in time neither party has incentives to exit we define a small open emerging economy as an economy where the limited commitment problem is active in equilibrium conversely a small open developed economy is an economy in which the commitment problem is not active our model is able to rationalize some stylized facts about fiscal policy in emerging economies i the volatility of tax revenues over gdp is higher in emerging economies than in developed ones ii fiscal policy is procyclical in emerging economies iii emerging economies may graduate from procyclical fiscal policy and adopt countercyclical policies in the long run

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

economic stabilization in the post crisis world are fiscal rules the answer abstract we investigate whether fiscal rules help to reduce the extent of policy procyclicality how government expenditure policy responds to gdp in a dynamic panel framework with 81 advanced emerging and developing countries over 1985 2012 we construct two new fiscal rule indices and investigate whether rules help to dampen procyclical policies we condition our empirical specifications on the degree to which governments appear able to manage and enforce fiscal rules we find that fiscal rules are very effective in reducing procyclicality of policy once a minimum threshold of government efficiency quality has been reached government efficiency alone is not enough to reduce procyclicality of fiscal policy however high government efficiency combined with strong fiscal rules is a potent combination facilitating counter cyclical policy responses to gdp movements

pricing growth indexed bonds abstract growth indexed bonds have been suggested as a way of reducing the procyclicality of emerging market countries fiscal policies and the likelihood of costly debt crises investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle in an effort to reduce such concerns this article presents a simple way of pricing growth indexed bonds as a pleasant by product the analysis tracks the quantitative implications of an increase in the share of growth indexed bonds in total debt measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued

non linear effects of tax changes on output the role of the initial level of taxation this paper estimates the effect of worldwide tax changes on output following the narrative approach developed for the united states by romer and romer 2010 the analysis uses a novel dataset on value added taxes for 51 countries 21 industrial and 30 developing for the period 1970 2014 to identify 96 tax changes it then uses contemporaneous economic records to classify such changes as endogenous or exogenous to current or prospective economic conditions in line with theoretical distortionary and disincentive based arguments and using only exogenous tax changes the main finding is that the effect of tax changes on output is highly non linear the tax multiplier is essentially zero under relatively low moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase based on a global sample these novel non linear findings suggest that the recent consensus pointing to large negative tax multipliers in industrial countries particularly in europe e g alesina favero and giavazzi 2015 i is not a robust empirical regularity and ii is mainly driven by high initial tax rates in these countries the paper also shows that the bias introduced by misidentification of tax shocks critically depends on the procyclical or countercyclical nature of endogenous tax changes the relevance of the arguments is evaluated both for the novel global sample and for romer and romer s u s dataset

procyclicality of fiscal policy in european union countries abstract using real time data we examine whether fiscal policy has been counter or procyclical in a panel of 27 european union eu member states over the period 2000 2015 we also investigate whether fiscal rules and government efficiency improve the cyclical reaction of fiscal policy our results suggest that even though fiscal plans in eu countries have an acyclical stance budgetary outcomes are procyclical government efficiency and fiscal rules seem to reduce fiscal procyclicality further analysis also reveals that fiscal policy seems to be more procyclical in non euro area countries and in times of economic prosperity

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

age or size contributions to job creation small firms have been identified as drivers of job creation although the evidence on their contribution to net employment growth has been disputed this article shows that job turnover and firm growth vary systematically across firm size groups and that smaller firms do indeed make an important contribution to new job creation there is a significant caveat however we find that it is not firm size per se that is driving these results but rather firm age we show that younger firms are consistently more dynamic than older firms we also find a strong inverse relationship between employment growth and size for young firms but this declines very markedly for older age groups this provides some support for the gibrat s law prediction that size and growth are independent but only once the firm has moved beyond the start up stage

the political economy of fiscal deficits a survey this paper surveys recent literature both theoretical and empirical regarding political explanations for fiscal deficits political economy suggests conflicts of interest may lie behind the emergence of deficits 1 opportunistic politicians generate deficits to win elections even in conflict with general welfare 2 conflicts of interests between politicians partisan preferences create incentives for at least some incumbents to run deficits and 3 conflicts of interest between different social groups or regions generate tensions in the allocation of government resources leading to overspending this paper reviews these different strands of the literature it also covers contributions that highlight the crucial role of budget institutions in determining the extent to which the political motivations to generate deficits are indeed translated into poor fiscal outcomes promising avenues for future research are highlighted

average tax rate cyclicality in oecd countries a test of three fiscal policy theories this paper investigates the cyclical properties of the average effective tax rate in 26 oecd countries over 1965 2003 in order to test the validity of three theories of fiscal policy i the standard keynesian theory which recommends that tax policy should be counter cyclical ii the tax smoothing hypothesis which implies that changes in gdp should be uncorrelated with tax rates and iii the positive theory of battaglini and coate 2008 which predicts that the average tax rate should be negatively correlated with gdp our main finding is that the correlations of tax rates with cyclical gdp are generally quite small and statistically indistinguishable from zero this finding is quite robust and is more consistent with the implications of the tax smoothing hypothesis than either the recommendations of the standard keynesian model or the predictions of battaglini and coate s theory

deficits government expenditures and tax smoothing in the united states 1929 1988 abstract barro s tax smoothing hypothesis tsh implies that the government runs a budget deficit whenever it anticipates the growth rate of national income to increase or the growth rate of its expenditure to decline we test this implication of the hypothesis by examining the implied cross equation restrictions on a vector autoregression var model using u s data for the period ranging from 1929 to 1988 our formal tests reject the hypothesis for the full sample period but cannot reject it for the post 1947 period further investigations show that the statistical rejection should be attributed to sharp differences in the statistical properties of the pre 1947 and the post 1947 data rather than the failure of the hypothesis itself

sovereign and private default risks over the business cycle abstract sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector in a sample of emerging economies we find that both sovereign and private interest rate spreads are countercyclical this paper presents a model of a small open economy that accounts for these empirical regularities it includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic productivity risk and a government which borrows internationally and taxes firms to finance public expenditures the model gives rise to endogenous private and sovereign interest rate spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks

cyclical expenditure policy output volatility and economic growth this article provides an empirical assessment of the relation between the cyclicality of fiscal expenditure policy output volatility and economic growth using a cross section of 88 countries over the period 1960 to 2004 identification of the effects of endogenous cyclical expenditure policy is achieved by exploiting the exogeneity of countries political and institutional characteristics which we find to be relevant determinants of the cyclicality of expenditures there are three main results first both pro and countercyclical expenditure policy amplify output volatility much in a way like pure fiscal shocks second output volatility due to variations in cyclical and discretionary fiscal policy is negatively associated with economic growth third there is no direct effect of cyclicality on economic growth other than through output volatility

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

sectoral patterns of technical change towards a taxonomy and a theory abstract the purpose of the paper is to describe and explain sectoral patterns of technical change as revealed by data on about 2000 significant innovations in britain since 1945 most technological knowledge turns out not to be information that is generally applicable and easily reproducible but specific to firms and applications cumulative in development and varied amongst sectors in source and direction innovating firms principally in electronics and chemicals are relatively big and they develop innovations over a wide range of specific product groups within their principal sector but relatively few outside firms principally in mechanical and instrument engineering are relatively small and specialised and they exist in symbiosis with large firms in scale intensive sectors like metal manufacture and vehicles who make a significant contribution to their own process technology in textile firms on the other hand most process innovations come from suppliers these characteristics and variations can be classified in a three part taxonomy based on firms 1 supplier dominated 2 production intensive 3 science based they can be explained by sources of technology requirements of users and possibilities for appropriation this explanation has implications for our understanding of the sources and directions of technical change firms diversification behaviour the dynamic relationship between technology and industrial structure and the formation of technological skills and advantages at the level of the firm the region and the country

the cyclicality of consumption wages and employment of the public sector in the euro area this study empirically examines the business cycle behaviour of public consumption and its main components the public wage bill including its breakdown into compensation per employee and public employment and intermediate consumption in the euro area aggregate euro area countries and a group of selected non euro area organization for economic co operation and development oecd countries denmark sweden the uk japan and the us it looks across a large number of variables and methods using annual data from 1960 to 2005 it finds robust evidence supporting that public consumption wages and employment co move with the business cycle in a pro cyclical manner with 1 2 year lags notably for the euro area aggregate and euro area countries the findings reflect mainly the correlation between cyclical developments but also point to an important role of pro cyclical discretionary fiscal policies

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

sovereign debt in emerging market countries not all of them are serial defaulters avoiding to assign emerging market countries a typical behaviour this article considers the heterogeneity across them and through time to predict their sovereign default episodes moreover it f

co movement of public spending in the g7 abstract the size of government in the g7 countries in the last fifty years follows a common pattern see the left panel of fig 1 below it grows in the first three decades and then turns flat at the beginning of the nineties for all countries alike we highlight this common pattern in a dynamic factor model and argue that a satisfactory explanation for it would be desirable

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

capital market liberalization economic growth and instability summary this paper reviews briefly the arguments for capital market liberalization and identifies their theoretical and empirical weaknesses this provides the foundations for the argument for intervention in short term capital flows the paper concludes with a brief discussion of the various ways in which such interventions may be implemented 2000 elsevier science ltd all rights reserved

a political economy theory of fiscal policy and unemployment this paper presents a political economy theory of fiscal policy and unemployment the underlying economic model is one in which unemployment can arise but can be mitigated by tax cuts and public spending increases such policies are fiscally costly but can be financed by issuing government debt policy decisions are made by a legislature consisting of representatives from different political districts the theory provides a positive account of the simultaneous determination of fiscal policy and unemployment the most important implication of the theory is that debt and unemployment levels should be positively correlated some evidence in support of this prediction is provided using data from a panel of developed countries

redistributive fiscal policies and business cycles in emerging economies abstract government expenditures are pro cyclical in emerging markets and counter cyclical in developed economies we show this pattern is most pronounced in social transfers which are also a large component of total government expenditures 28 39 the discrepancy in the cyclicality of spending on goods and services is smaller by contrast and the category accounts for just 11 16 of total government expenditures in a small open economy model we find disparate social transfer policies can account for about half of the larger cyclical volatility of consumption relative to output in emerging economies compared to developed we analyze how differences in tax policy and the nature of underlying inequality amplify or mitigate this result

the contribution of large and small employers to job creation in times of high and low unemployment we document a negative correlation at business cycle frequencies between the net job creation rate of large employers and the level of aggregate unemployment that is much stronger than for small employers the differential growth rate of employment between initially large and small employers has an unconditional correlation of 0 5 with the unemployment rate and varies by about 5 percent over the business cycle we exploit several datasets from the united states denmark and france both repeated cross sections and job flows with employer longitudinal information spanning the last four decades and several business cycles we discuss implications for theories of factor demand jel d22 e23 e32 j23 l25

are bilateral remittances countercyclical by putting together a relatively large data set on bilateral remittances of emigrants this paper is able to shed light on the important hypothesis of smoothing the smoothing hypothesis is that remittances are countercyclical with respect to income in the worker s country of origin the recipient of the remittance while procyclical with respect to income in the migrant s host country the sender of the remittance the econometric results confirm the hypothesis this affirmation of smoothing is important for two reasons first it suggests that remittances should be placed on the list of criteria for an optimum currency area second it brings into doubt plans by governments in some developing countries to harness remittances for their own use in that government spending in these countries generally fails the test of countercyclicality which remittances pass

shopping for development multilateral lending shareholder composition and borrower preferences this paper proposes two theoretical considerations regarding multilateral development banks mdbs the first is that mdb activities are increasingly driven by the growing economic strength of many developing countries the second is that categorizing mdbs according to the balance of power among shareholders helps explain why countries might prefer one or another mdb we compare three different mdbs operating in latin america one dominated by nonborrowers world bank another controlled by borrowing countries andean development corporation caf and a third more evenly split between borrowers and nonborrowers inter american development bank iadb qualitative and statistical analysis suggests that demand factors play an important role in mdb lending

the futile quest for a grand explanation of long run government expenditure this paper carries out a critical reappraisal of the two contending theories purporting to explain long run government spending wagner s law and different variants of the ratchet effect we analyze data spanning from the early 19 th century until the present day in sweden and the united kingdom hence in contrast to previous studies we evaluate the validity of wagner s law and the ratchet effect hypothesis over a very long time period starting at the beginning of industrialization cointegration analysis is used to investigate the long run relationships between government expenditure and gdp focusing on sub periods and structural breaks moreover we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment according to our main results wagner s law does not hold in the long run although the data are consistent with wagner s law between roughly 1860 and the mid 1970s this can be traced to the formation of the modern public sector including the introduction of public education health care and so forth yet wagner s law did not hold during the initial industrialization phase before 1860 and in recent periods gdp only affects the government spending share when we control for population age structure finally we find some evidence of asymmetric adjustment in the uk particularly in the post wwii period however the ratchet effect is not a general cause of the growth of government spending

commodity windfalls democracy and external debt we examine the effects that windfalls from international commodity price booms have on external debt in a panel of 93 countries during the period 1970 2007 our main finding is that increases in the international prices of exported commodity goods lead to a significant reduction in the level of external debt in democracies but to no significant reduction in the level of external debt in autocracies to explain this finding we show that in autocracies commodity windfalls lead to a statistically significant and quantitatively large increase in government consumption expenditures in democracies government consumption expenditures did not increase significantl

a quantitative model of sovereign debt bailouts and conditionality in times of sovereign debt crises international financial institutions provide temporary financial support contingent on the implementation of specific macroeconomic policies this paper develops a model of sovereign debt and default with endogenous participation rates in bailout programs conditionality enters as a constraint on fiscal policy in the model the insurance character of bailouts generates incentives for debt accumulation quantitative results suggest that bailouts prevent sovereign defaults in the short run but may come at a cost of a greater default probability in the long run increasing the intensity of conditionality lowers the bailout participation rate and generates a hump shaped pattern of sovereign default risk

estimating the permanent income elasticity of government expenditures evidence on wagner s law based on oil price shocks this paper provides instrumental variable estimates of the permanent income elasticity of government expenditures it uses annual variation in the international oil price weighted with countries average oil net export gdp shares as a plausibly exogenous source of within country variation in countries permanent income the short run estimates of the permanent income elasticity are robust across alternative specifications and are below one the estimated elasticity coefficients range between 0 3 and 0 6 and have standard errors of 0 1 and 0 4 respectively point estimates of long run elasticities are somewhat larger but still smaller than unity the investment component of government spending is found to be more elastic than the consumption component whereas elasticity differences between rich and poor countries are insignificant

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

bank ownership and lending behavior this paper examines whether bank ownership public versus private domestic versus foreign is correlated with bank lending behavior over the business cycle the paper finds that state owned banks may play a useful credit smoothing role because their lending is less responsive to macroeconomic shocks than the lending of private banks the paper investigates whether this differential behavior is due to an explicit objective of stabilizing credit or to the presence of lazy public bank managers evidence is found in support of the former hypothesis in the case of foreign owned banks the paper finds that the results are less clear cut and argues that this finding is in line with existing theoretical models

intergovernmental transfers and procyclical public spending this paper tests the predictions that i sub central government expenditures are procyclical and ii sub central government expenditures are likely to be more procyclical than central government spending the predictions are based on the importance of voracity effects and on the proposition that they are systematically more pervasive if spending is financed by intergovernmental transfers evidence from 23 oecd countries between 1995 and 2006 indicates that sub central government spending is more procyclical than central government expenditure

cyclicality of taxes and external debt abstractin their work vegh and vuletin have shown that statutory tax rates are acyclical in developed economies and procyclical in developing ones this article extends their analysis by checking the interaction of statutory tax rates with countries external public debt in general we found that the value added tax rates are changed procyclically in both developed and developing countries i e taxes are raised in bad times and reduced in good times however when the external debt is high in the developing countries the procyclicality increases while the opposite result holds for developed economies this pattern occurs mainly in times of recession when the need for loans is the highest although we found that there was a reduction in procyclicality after the 2000s these findings pose a challenge to policy makers who should think of ways of dealing with lack of foreign funds in difficult times

the impact of inflation on budgetary discipline abstract this paper views the budgetary process as a limited contingencies contract between the treasury and the ministers allowing a minister to ask for budget revisions upon costly verification by the treasury the minister may obtain extra funds for significant state verification costs and for low volatility the contract is non contingent for volatility significant enough the contract becomes state contingent it reduces the initial allocation and reduces the threshold associated with budgetary revisions in volatile economics the projected revenue understates the realized budget and the average budget error is positive the model s predictions are confirmed using data from latin america

fiscal spending and economic growth some stylized facts using an event analysis this paper complements the cross country approach to the study of fiscal correlates of growth data on fiscal expenditures and growth for a database of 140 countries 118 developing countries over 1972 2005 are reorganized around turning points providing a summary but encompassing description of what is in the data for this sample the probability of occurrence of a fiscal event is about 10 and the probability of a growth event once a fiscal event had occurred is around 26 for developing countries fiscal events followed by growth events occur under situations of i significantly lesser deficit ii fewer resources devoted to non interest general public services and iii shift in primary expenditures toward transport communication after controlling for the growth inducing effects of positive terms of trade shocks and of trade liberalization reform probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event moreover the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit confirming that success of a growth oriented fiscal expenditure reform is associate with a stabilized macroeconomic environment through limited primary fiscal deficit

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

the impact of expenditure rules on budgetary discipline over the cycle we study the impact of expenditure rules on the propensity for governments to deviate from their expenditure plans in response to surprising cyclical developments theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a procyclical bias however this tendency may be mitigated by strictly enforced expenditure rules these hypotheses are tested against data from a panel of eu member states our key findings are that 1 deviations between actual and planned government expenditure tend to be positively related to output gap surprises and 2 expenditure rules reduce this procyclical bias these results are particularly pronounced when the analysis is confined to spending items with a high degree of budgetary flexibility

the failure of stabilization policy balanced budget fiscal rules in the presence of incompressible public expenditures abstract we consider an infinite horizon neoclassical model with a government that i balances its budget at each point in time ii faces unavoidable incompressible public expenditures and iii further uses a fiscal rule for the share of variable government spending in output with the purpose of stabilizing the economy we show that insulating this economy from belief driven fluctuations is not possible if the government finances these two components of public spending using a distortionary proportional income tax in this case we always have steady state multiplicity two steady states and global indeterminacy while local indeterminacy is also possible more precisely even if a sufficiently procyclical share of the variable government spending component in output is still able to eliminate local indeterminacy two saddle steady states prevail so that depending on expectations the economy may either converge to the low steady state or to the high steady state this implies that a regime switching rational expectation equilibrium where the economy switches between paths converging to the two different steady states easily arises as expectations influence long run outcomes our model is able to generate large and sudden expansions and contractions in response to expectation shocks

procyclical government spending patterns of pressure and prudence in the oecd this paper tests for differences in the cyclicality of government spending across functional categories evidence from 20 oecd countries suggests that procyclicality is more likely in smaller functional budgets but capital spending is more likely to be procyclical for the larger spending categories

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

the new wave of private capital inflows push or pull abstract this paper studies the determinants and sustainability of the widespread private capital inflows to middle income countries after 1989 the key question is whether these flows are mostly pulled by attractive domestic conditions or pushed by unfavorable conditions in developed countries an analytical model focusing on country risk is developed and used empirically it is argued that the observed improvement in country creditworthiness is mostly due to the decline in international interest rates and that therefore its importance as a proximate cause does not support the pull interpretation all things considered in most countries the key answer that emerges is push

disaggregated capital flows and developing countries competitiveness summary attracting capital and foreign exchange flows is crucial for developing countries yet these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness jeopardizing exports and growth we investigate this dilemma by comparing the impact of six types of flows on real exchange rate behavior in a sample of 57 developing countries covering africa europe asia latin america and the middle east the results reveal that portfolio investments foreign borrowing aid and income lead to real exchange rate appreciation while remittances have disparate effects across regions foreign direct investments have no effect on the real exchange rate contributing to resolve the above dilemma

are windfalls a curse abstract a puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits furthermore those countries that ran current account deficits failed to attain greater post boom growth rates indicating the deficits were consumed or invested in low quality projects the point we make is that the structure of the fiscal process is critical in determining outcomes if fiscal control is unitary then the consumption smoothing effect is operative and representative agent models of the current account have predictive power however if control is divided among several fiscal claimants a voracity effect appears which counteracts the consumption smoothing effect leading to a deterioration of the current account in response to a positive temporary shock we model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself this results in a deterioration of the current account we also show that all the windfall is dissipated with the country experiencing no increase in welfare 1998 elsevier science b v

optimal fiscal policy and different degrees of access to international capital markets abstract empirically the cyclical pattern of fiscal policy differs between developed and developing countries with in particular much greater pro cyclicality and volatility of public investment in developing countries in this paper i provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets if the supply of foreign capital is elastic as in a developed country then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption if the supply of foreign capital is inelastic however as in a developing country the optimal adjustment policy is to reduce public investment by much more than public consumption and to raise consumption taxes

on the flexibility of monetary policy the case of the optimal inflation tax this paper examines optimal monetary policy under uncertainty in a context in which policy makers are able to make credible policy commitments we study an optimal taxation problem of minimizing the social cost of financing a stochastic and exogenous level of government transfers since in the basic model the welfare costs of inflation derive only from expected inflation the optimal monetary policy is highly responsive to the state of nature in a benchmark case in which all shocks are transitory the optimal policy calls for loading all the variability of government transfers on the shoulders of the inflation tax

was this time different fiscal policy in commodity republics abstract we revisit the issue of fiscal procyclicality in commodity rich nations commodity republics in the nomenclature of this paper since commodity prices are plausibly a main driver of fiscal policy outcomes in these countries we focus on the behavior of fiscal variables across the commodity cycle in contrast to behavior across the output cycle which has been the main focus of earlier research on fiscal procyclicality we present evidence of reduced fiscal policy procyclicality in a number of countries our empirical results suggest that improvements in institutional quality have led to a more countercyclical fiscal policy stance in a number of countries the presence of fiscal rules also seems to have made a difference countries that use them displayed a larger shift toward fiscal counter cyclicality between the two episodes

fiscal adjustment and inflation targeting in less developed countries inflation targeting may not be viable in less developed countries ldcs where policymakers rely too heavily on cuts in infrastructure investment to balance the budget using a mix of analytical and numerical methods we demonstrate that the equilibrium ceases to be saddle point stable under active policy when infrastructure cuts account for 30 70 of fiscal adjustment and the return on infrastructure exceeds a comparatively low threshold value the result is robust to the form of the taylor rule the degree of real wage flexibility the initial level of debt the choice of a balanced budget or debt targeting rule and the q elasticity of private investment spending

business cycle fluctuations large macroeconomic shocks and development aid abstract we examine the cyclical properties of development aid using bilateral data for 22 donors and 113 recipients during 1970 2005 we find that bilateral aid flows are on average procyclical with respect to the business cycle in both donor and recipient countries while aid outlays contract sharply during severe downturns in donor countries they rise steeply when aid receiving countries experience large adverse shocks our findings suggest that development aid may play an important cushioning role in developing countries but only during times of severe macroeconomic stress our results are robust to alternate definitions of aid flows specifications and estimation techniques

globalization and developing countries a shrinking tax base abstract this paper evaluates the impact of globalisation on tax bases of countries at varying stages of development we see globalisation as a process that induces countries to embrace greater trade and financial integration this in turn should shift their tax revenue from easy to collect taxes tariffs and seigniorage towards hard to collect taxes value added and income taxes we find that trade and financial openness have a positive association with the hard to collect taxes and a negative association with the easy to collect taxes

the cyclicality of international public sector borrowing in developing countries does the lender matter abstract the paper shows that international government borrowing from multilateral development banks is countercyclical while international government borrowing from private sector lenders is procyclical the countercyclicality of multilateral development bank mdb lending is mostly driven by the behavior of the world bank borrowing from regional development banks tends to be acyclical the paper also shows that mdb lending to latin america and east asia is more countercyclical than mdb lending to other regions private sector lending is instead procyclical in all developing regions while the cyclicality of mdb lending does not depend on domestic or international conditions private lending becomes particularly procyclical in periods of limited global capital flows by focusing on both borrower and lender heterogeneity the paper shows that the cyclical properties of international government debt are mostly driven by credit supply shocks demand factors appear to be less important drivers of procyclical international government borrowing the focus on supply and demand factors is different from the traditional push and pull classification as push and pull factors could affect both the demand and the supply of international government debt

public opinion and foreign aid cuts in economic crises economic crises generally lead to reductions in foreign aid however the widely held view that budgetary constraints caused by economic crises reduce aid is inaccurate because donor government outlays actually tend to increase we develop an argument that aid cuts occur because voters place a lower priority on aid during economic downturns and politicians respond by cutting aid using data from eurobarometer we demonstrate that economic downturns lead to reduced public support for helping the poor abroad these findings are robust across a large number of alternative specifications our findings have implications for how advocates may prevent aid reductions during economic recessions

international evidence on fiscal solvency is fiscal policy responsible abstract we conduct a cross country empirical analysis of fiscal solvency based on dynamic stochastic general equilibrium conditions the results show evidence of fiscal solvency in the form of a robust positive conditional response of the primary balance to changes in public debt in panels for emerging and industrial economies and in a combined panel emerging economies show a stronger response and hence converge to lower mean debt output ratios as observed in the data the results are weaker for countries with debt ratios exceeding panel means and medians hence we can separate countries where fiscal solvency holds from those where it remains in doubt

commodity price risk management and fiscal policy in a sovereign default model abstract commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies we analyze a dynamic stochastic small open economy model of sovereign default featuring endogenous fiscal policy and stochastic commodity revenues the model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates we quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues an event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities we evaluate the conditional and unconditional welfare gains for the representative household generated by financial derivatives and commodity indexed bonds

who creates jobs econometric modeling and evidence for austrian firm level data abstract this paper provides evidence on the role of firm size and firm age for firm level net job creation in the austrian economy between 1993 and 2013 and during the great recession we propose a new estimation strategy based on a two part model to decompose behavioral differences between exiting and surviving firms young firms contribute most to net job creation despite high relative exit rates due to high growth rates among young surviving firms small firms have similar job creation rates conditional on survival as large firms small firms contribution to job creation is however smaller due to higher exit rates the up or out dynamics characterizing less regulated economies such as the us also apply to the more regulated austrian economy during the great recession both the relative net job creation rate conditional on survival and the relative survival probability of young firms decreased the relative contribution of small firms to net job creation by contrast increased due to increased relative job creation rates of small firms conditional on survival

common factors in latin america s business cycles this paper constructs new business cycle indices for argentina brazil chile and mexico based on common dynamic factors extracted from a comprehensive set of sectoral output external trade fiscal and financial variables the analysis spans the 135 years since the insertion of these economies into the global economy in the 1870s the constructed indices are used to derive a business cycle chronology for these countries and characterize a set of new stylized facts in particular we show that all four countries have historically displayed a striking combination of high business cycle volatility and persistence relative to benchmark countries and that such volatility has been time varying with important differences across policy regimes we also uncover a sizeable common factor across the four economies which has greatly limited scope for regional risk sharing

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

what if alexander hamilton had been argentinean a comparison of the early monetary experiences of argentina and the united states abstract the contrast between the early nineteenth century argentinean experience of high inflation and the american experience of low inflation is interpreted in terms of an optimal taxation model it is argued that the two countries experiences diverged because of the different constraints they faced in financing wartime government expenditures in the presence of frequent wars ever tightening access to foreign capital and an inadequate tax base argentina s use of the inflation tax may be viewed as an optimal solution to its wartime problems by contrast with the exception of the revolutionary war the absence of such constraints in the united states required full tax smoothing with only a temporary use of the inflation tax during wartime such policies were embodied in alexander hamilton s fiscal package of 1790 which allowed the united states to bond finance most subsequent wartime expenditures

fiscal policy over the real business cycle a positive theory this paper presents a political economy theory of the behavior of fiscal policy over the business cycle the theory predicts that in both booms and recessions fiscal policies are set so that the marginal cost of public funds obeys a submartingale in the short run fiscal policy can be pro cyclical with government debt spiking up upon entering a boom however in the long run fiscal policy is counter cyclical with debt increasing in recessions and decreasing in booms government spending increases in booms and decreases during recessions while tax rates decrease during booms and increase in recessions data on tax rates from the g7 countries supports the submartingale prediction and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the u s and other countries

technological learning and entrepreneurial behaviour a taxonomy of the chemical industry in venezuela abstract this paper presents a taxonomy of entrepreneurial behaviour vis a vis technology derived from empirical research on a specific sector that of the chemicals industry in venezuela the research focuses heavily on the accumulation of minor innovations through which enterprises acquire their technical knowledge and know how their technological learning we have tried to give a precise empirical meaning to that notion in order to understand which are the most important variables that affect the technical learning process both the process of technological learning and the technical external linkages in particular with foreign firms of venezuelan companies seem to be the fundamental factors in understanding the development of a new competitive industry which adopts a new products oriented strategy but not all firms do respond to such a scheme and it is thus necessary to develop a taxonomy of the industrial sector both for scholarly reasons as well as a policy guide

an instrumental variables approach to estimating tax revenue elasticities evidence from sub saharan africa this paper exploits the significant response of real gdp growth of sub saharan african countries to exogenous international commodity price and rainfall shocks to construct instrumental variables estimates of the tax revenue elasticity iv estimates yield that a 1 increase in gdp increases tax revenues by up to 2 5

over optimism in forecasts by official budget agencies and its implications the paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries in general the forecasts are found i to have a positive average bias ii to be more biased in booms and iii to be even more biased at the 3 year horizon than at shorter horizons this over optimism in official forecasts can help explain excessive budget deficits especially the failure to run surpluses during periods of high output if a boom is forecasted to last indefinitely retrenchment is treated as unnecessary many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or better yet the structural deficit but we also find iv countries subject to a budget rule in the form of euroland s stability and growth pact sgp make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries this effect may help explain frequent violations of the sgp the question becomes how to overcome governments tendency to satisfy fiscal targets by wishful thinking rather than by action chile in 2000 created structural budget institutions that may have solved the problem independent expert panels insulated from political pressures are responsible for estimating the long run trends that determine whether a given deficit is deemed structural or cyclical the result is that chile s official forecasts of growth and the budget have not been overly optimistic even in booms unlike many countries in the north chile took advantage of the 2002 7 expansion to run budget surpluses and so was able to ease in the 2008 9 recession

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

fiscal rules and fiscal counter cyclicality abstract we assess the effect of fiscal rules on a new time varying measure of fiscal counter cyclicality computed for 60 countries over the period 1980 2014 first we find that fiscal counter cyclicality is positive and has been increasing over time being larger in advanced economies second we find that fiscal rules reduce the degree of fiscal counter cyclicality the result is especially strong for debt based rules in advanced economies some design features hinder the degree of fiscal counter cyclicality such as escape clauses or enforcement procedures while others such as transparency foster it

the role of entrepreneurship in us job creation and economic dynamism the united states has long been viewed as having among the world s most entrepreneurial dynamic and flexible economies it is often argued that this dynamism and flexibility has enabled the us economy to adapt to changing economic circumstances and recover from recessions in a robust manner while the evidence provides broad support for this view the outcomes of entrepreneurship are more heterogeneous than commonly appreciated and appear to be evolving in ways that could raise concern evidence along a number of dimensions and a variety of sources points to a us economy that is becoming less dynamic of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy we begin by describing how the concept of entrepreneurship is reflected in existing data on firm age and size the recent addition of firm age to official statistics represents a dramatic improvement in the information available to entrepreneurship researchers we then turn to a discussion of the role of startup firms in job creation business startups account for about 20 percent of us gross total job creation while high growth businesses which are disproportionately young

government spending cyclicality evidence from transitory and persistent shocks in developing countries we revisit the debate of whether government spending is procyclical in developing countries our main contribution is to argue that beyond exogeneity of the income shock an empirical analysis of government spending cyclicality must be carefully tailored to the shock s persistence we first illustrate this point in a simple intertemporal model we then use instrumental variables estimation to characterize the response of government expenditures to exogenous shocks with different degrees of persistence our estimation strategy exploits that i year to year variations in rainfall have a significant positive contemporaneous effect on sub saharan african countries real gdp but this effect is transitory ii year to year variations in the gdp of sub saharan african countries oecd trading partners have a significant positive contemporaneous effect on sub saharan african countries real gdp and this effect is persistent using rainfall as an instrument for sub saharan african countries gdp yields a government consumption expenditures elasticity response of around 0 4 standard error 0 3 when the instrument is the gdp of sub saharan african countries oecd trading partners the estimated government consumption expenditures elasticity response is around 1 1 standard error 0 2 the elasticity response of government consumption expenditures to persistent income shocks is thus significantly higher relative to transitory shocks

is social spending procyclical evidence for developing countries summary this paper studies the cyclical behavior of public spending on health and education in 145 countries during 1987 2007 it finds that spending on education and health is procyclical in developing countries and acyclical in developed countries in addition education and health expenditures follow an asymmetric pattern in developing countries they are procyclical during periods of positive output gap and acyclical during periods of negative output gap furthermore the degree of cyclicality is higher the lower the level of economic development

the competitive externalities and the optimal seignorage this study analyzes the inflation tax in an economy with several competing decisionmakers who can effectively print more money via the central bank the author derives the sequential rational expectation equilibrium and shows that the presence of competing decisionmakers increases the inflation rate and may put the economy on the wrong side of the inflation tax laffer curve the analysis is interpreted for a country consisting of several states or provinces where the centralized government system is weak similar results apply to the case of competing ministers in an economy where the central bank is weak copyright 1992 by ohio state university press

how resilient and countercyclical were emerging economies to the global financial crisis during the crises of the 1990s emerging economies usually lacked the policy tools to deal with external shocks that were available to advanced economies worldwide turbulent episodes found most emerging economies unable to perform countercyclical policies and in many cases their own vulnerabilities and poor institutional frameworks amplified negative external shocks leading to sharper recessions this paper shows that the 2008 2009 global financial crisis represents a structural break in the way emerging economies conduct their policies with more countercyclical policies pursued before and during the global crisis moreover breaking with the past emerging economies did not fall more than developed economies during the global financial crisis thus becoming more similar to developed economies the resilience of emerging economies during the 2008 2009 crisis might be partly attributed to a combination of sounder macroeconomic and financial policy frameworks with a shift towards safer domestic and international financial stances

exogenous shocks foreign aid and civil war the recent civil war literature suggests that negative economic shocks in low income countries increase the risk of civil war foreign aid can be an effective conflict prevention tool in times of severe economic conditions aid cushions government spending from the downward pressures of economic shocks providing recipient governments with resources they can use to make rebellion a less attractive option for aggrieved domestic groups using official development assistance oda data covering 1990 through 2004 we find that foreign aid appears to be a useful tool for preventing civil wars in the wake of negative economic shocks and as such aid should be assessed by donors with these conflict suppressing aspects in mind

a comparison of job creation and job destruction in canada and the united states in recent years a growing number of countries have constructed data series on job creation and job destruction using establishment level data sets this paper provides a description and detailed comparison of these new data series for the united states and canada first the canadian and u s industry level job creation and destruction data are remarkably similar industries with high low job creation in the united states are evidenced by high low job creation in canada the same is true for job destruction in addition the overall magnitudes of gross job flows in the two countries are comparable second the time series patterns of creation and destruction are qualitatively similar but do differ in a number of important respects in both countries job destruction is much more cyclically volatile than job creation this cyclical asymmetry is however more pronounced in the united states in addition the pace of job reallocation exhibits a pronounced upward trend in canada but is essentially trendl