a model based indicator of the fiscal stance we argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint pvbc is of limited practical use we propose an alternative measure that focuses on short run fluctuations in the fiscal stance namely a model based indicator that compares a target level of the debt gdp ratio at a given point in the future with a forecast based on the government budget constraint gbc where the forecasts are obtained using a recursively estimated var by log linearising the gbc the index can be decomposed into the various different components of which it is comprised using data from 1970 to 2011 we conduct a detailed time series study of the fiscal stances of four countries the united states the united kingdom germany and greece and we calculate the index for 11 other eu countries for most countries the index shows that their fiscal stances vary from being too loose to too tight almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession

moments based spillovers across gold and oil markets abstract in this paper we use intraday futures market data on gold and oil to compute returns realized volatility volatility jumps realized skewness and realized kurtosis using these daily metrics associated with two markets over the period of december 2 1997 to may 26 2017 we conduct linear nonparametric and time varying rolling tests of causality with the latter two approaches motivated due to the existence of nonlinearity and structural breaks while there is hardly any evidence of spillovers between the returns of these two markets strong evidence of bidirectional causality is detected for realized volatility which seems to be resulting from volatility jumps evidence of spillovers are also detected for the crash risk variables i e realized skewness and for realized kurtosis as well with the effect on the latter being relatively stronger based on a moments based test of causality evidence of co volatility is deduced whereby we find that extreme positive and negative returns of gold and oil tend to drive the volatilities in these markets in our robustness check we identify a causal chain in the realized volatility from oil to gold via the financial stress our results have important implications for not only investors but also policymakers

common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

the sustainability of government deficits implications of the present value borrowing constraint this paper introduces a new methodology for evaluating the sustainability of fiscal policy the new methodology is distinguished from most existing tests in two important respects first it allows for stochastic real interest rates and second it is both necessary and sufficient results from the application of the new test suggest that recent fiscal policy in the united states has not been sustainable the paper contrasts its findings with those of james d hamilton and marjorie a flavin 1986 copyright 1989 by ohio state university press

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

public budgetary rules and gdp growth an empirical study on oecd and twelve european countries we study the long term effects of budgetary rules on gdp growth rate and analyse the determinants of the short term gdp growth dynamics for both a sample of 19 oecd and a subsample of 12 european countries we show that in the long run improvements in the cyclically adjusted budget balance as well as increases in the tax burden have negative effects on gdp growth the highest effect of fiscal policy on gdp growth would be obtained if the structural deficits were used to increase the market size by reducing the tax burden in line with barro 1990 a deficit financed reduction of tax burden has a stronger effect for european than for oecd countries because in europe the government size with respect to market size is too large therefore if gdp growth is a dominant policy objective in europe specific actions should redress the 2012 treaty toward a reduction of the tax burden

fiscal policy and monetary integration in europe fiscal policy economists policy makers and the media often argue that the maastricht treaty and the stability and growth pact make it difficult for governments of emu countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment our empirical analysis offers little support to this view discretionary budget deficits have actually become more counter cyclical in emu countries after the maastricht treaty as well as in the other eu and non eu industrialized countries we study and while public investment has declined recently in emu countries a similar tendency is apparent in other countries and started well before the maastricht treaty was signed jordi gali and roberto perotti

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

money does granger cause output in the bivariate money output relation abstract a bivariate granger causality test on money and output finds statistically significant causality when data are measured in log levels but not when they are measured in first differences of the logs bootstrap simulation experiments indicate that most probably the first difference results reflect lack of power whereas the level results reflect granger causality that is actually in the data the reason for the lack of power in the first difference f statistic is that first differencing the data appears to entail a specification error by showing that money does granger cause output in the bivariate relation we remove a potential embarrassment for models that assign an important role to money in business fluctuations

debt deficits and inflation an application to the public finances of india abstract the paper studies the solvency of the indian public sector and the eventual monetization and inflation that would be implied by stabilization of the debt gnp ratio in the absence of changes in the primary deficit the nonstationarity of the discounted public debt suggests that indefinite continuation of the pattern of behavior reflected in the historical time series process is inconsistent with the maintenance of solvency this message is reinforced by the recent behavior of the debt gnp ratio and of the ratio to gnp of the sum of the primary budget surplus and seigniorage our estimates of the base money demand function suggests that even maximal use of the inflation tax would not be sufficient to restore solvency measures to reduce the primary deficit are therefore unavoidable

excessive deficits sense and nonsense in the treaty of maastricht maastricht s fiscal rules willem buiter giancarlo corsetti and nouriel roubini the maastricht treaty on economic and monetary union in the ec has specified limits on both government debt and fiscal deficits satisfying these criteria is necessary for getting into emu once inside violating these limits will also incur penalties the fiscal requirements especially the debt criterion are much tougher than is required to ensure public sector solvency trying to attain these targets will force the ec initially into substantial deflation and recession failure to correct for real growth inflation and the business cycle makes the nominal deficit a poor basis for any policy or target ambiguity about how fiscal targets will in fact be interpreted might provide a way out but cannot today be relied upon to do so supranational fiscal rules are sometimes claimed to be justified by externalities in national fiscal policies we find this justification wanting both in theory and empirically a better case might be built on the imposition of external commitments to offset domestic political distortions that systematically induce excessive deficits even so we conclude that the fiscal convergence criteria on balance are harmful and should be disregarded or applied very loosely to avoid the risk of serious fiscal overkill

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

testing for linear and nonlinear granger causality in the stock price volume relation linear and nonlinear granger causality tests are used to examine the dynamic relation between daily dow jones stock returns and percentage changes in new york stock exchange trading volume we find evidence of significant bidirectional nonlinear causality between returns and volume we also examine whether the nonlinear causality from volume to returns can be explained by volume serving as a proxy for information flow in the stochastic process generating stock return variance as suggested by clark s 1973 latent common factor model after controlling for volatility persistence in returns we continue to find evidence of nonlinear causality from volume to returns

time inconsistency and free riding in a monetary union in monetary unions a time inconsistency problem in monetary policy leads to a novel type of free rider problem in the setting of non monetary policies the free rider problem leads union members to pursue lax non monetary policies that induce the monetary authority to generate high inflation free riding can be mitigated by imposing constraints on non monetary policies without a time inconsistency problem the union has no free rider problem then constraints on non monetary policies are unnecessary and possibly harmful this theory is here detailed and applied to several non monetary policies labor market policy fiscal policy and bank regulation

money and output viewed through a rolling window abstract we examine the extent to which fluctuations in the money stock anticipate or granger cause fluctuations in real output using a variety of rolling window and increasing window estimation techniques various models are considered using simple sum as well as divisia measures of m 1 and m 2 income prices and both the t bill rate and the commercial paper rate findings indicate that the relation between income money prices and interest rates is stable as long as sufficient data are used and that there is cointegration among the variables considered although cointegration spaces become very difficult to estimate precisely when smaller windows of data are used further both m 1 and m 2 are shown to be important predictors of income for the entire period from 1960 2 1996 3 based on modified versions of what we term the most damaging specifications from friedman and kuttner 1993 and thoma 1994 our new evidence is based in part on a rather novel model selection approach to examining the relationship between money and income 1998 elsevier science b v all rights reserved

contingent deficit sanctions and moral hazard with a stability pact abstract we show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification moreover with sanctions contingent on the observed state of the economy the pact avoids aggravating the situation of a country in recession moral hazard problems arise if the state also depends on unobservable politically costly fiscal effort this could explain why sanctions under the actual stability and growth pact are only automatically waived in extreme recessions and why the procedure linking observed deficits and sanctions involves a long and detailed assessment of a country s situation

the real time predictive content of money for output abstract data on monetary aggregates are subject to periodic redefinitions presumably in part to improve their link to measures of output money data are also revised on a regular basis taking these data imperfections into account we reassess the evidence on the marginal predictive content of m1 and m2 for real and nominal output in particular first by using the latest version of the data that is available and then using sequences of historical time series that would have been available to forecasters in real time we are able to provide a comprehensive assessment of whether money is useful for predicting output we conclude that the generally significant marginal predictive content of m1 or m2 for output that is found using a recently revised data set is not duplicated in a real time setting although m2 is shown to remain useful when 1 year ahead forecasts are constructed using fitted vector autoregressive models

efficient tests of long run causation in trivariate var processes with a rolling window study of the money income relationship this paper develops a simple sequential multiple horizon non causation test strategy for trivariate var models with one auxiliary variable we apply the test strategy to a rolling window study of money supply and real income with the price of oil the unemployment rate and the spread between the treasury bill and commercial paper rates as auxiliary processes ours is the first study to control simultaneously for common stochastic trends sensi tivity of causality tests to chosen sample period null hypothesis over rejection sequential test size bounds and the possibility of causal delays evidence sug gests highly significant direct or indirect causality from m1 to real income in particular through the unemployment rate and m2 once we control for cointe gration

energy consumption and real gdp in g 7 multi horizon causality testing in the presence of capital stock abstract this paper applies two recent time series methods to re examine the causal relationship among energy consumption real gdp and capital stock in g 7 countries these methods the dufour et al 2006 journal of econometrics 132 337 362 multiple horizon causality testing and the hill 2007 journal of applied econometrics 22 747 765 sequential causality testing allow to test for non causality in a multivariate framework and can further reveal the time profile of causal effects the presence of causation delays and the direct or indirect nature of the causal effects given the trending nature of the time series employed we further take into account the presence of structural breaks in the form of trend changes our empirical results show that multi horizon causality testing does uncover crucial information with respect to the dynamic interaction among energy consumption real gdp and capital stock while structural breaks do exist and appear to be critical for causality inference in regard to causality direction we find that real gdp dominates in anticipating energy consumption in g 7 countries

political and monetary institutions and public financial policies in the industrial countries institutions and policies vittorio grilli donato masciandaro and guido tabellini why do countries as similar as the industrialized oecd countries go through such different experience in terms of public deficits and debts or in terms of inflation the answer cannot come from macroeconomic policy responses to different disturbances nor from the principles of optimal taxation but rather from politics this article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers the electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts what seems to matter most it is found is the effect of the durability of governments governments with short horizons act myopically and never quite tackle the hard choices such governments typically exist in countries with an electoral system favouring many small political parties central bank independence promotes low inflation with no apparent costs in terms of real economic performance irrespective of the political institutions in fact there is no link between monetary and fiscal discipline these findings carry powerful implications for countries facing high indebtedness or stubborn inflation but also for the construction of the european economic and monetary union

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

the salomon brothers electric utility model another challenge to market efficiency in each year from 1977 to 1981 portfolios of stocks identified as undervalued by salomon brothers inc s electric utility model outperformed portfolios identified as overvalued furthermore monthly returns on the undervalued portfolios ranked in the top three deciles in 34 of 58 months whereas the most overvalued portfolios ranked in the lowest three deciles in 31 of the 58 months the performance of the portfolios cannot be explained in terms of traditional risk measures the two most undervalued portfolios fall in the middle of the sample in terms of beta and offer excess returns after adjustment for systematic risk the most overvalued portfolio has the highest beta and negative risk adjusted returns tests of the portfolios using arbitrage pricing theory risk factors yield similar results could risk factors other than the market wide variables captured by the capital asset pricing model and arbitrage pricing theory affect the model s results undervaluation by the salomon model does appear to be associated with small firm size and large investment in uncompleted nuclear plant even when these variables are taken into account however significant association between undervaluation and high return remains finally inclusion of transaction costs diminishes the returns on the most undervalued portfolios but does not destroy their return advantage the evidence indicates that the model distinguishes between over and undervalued stocks and suggests that investors may make profitable use of this information

fixed versus flexible exchange rates which provides more fiscal discipline abstract conventional wisdom holds that fixed rates provide more fiscal discipline than do flexible rates in this paper we show that this wisdom need not hold in a standard model in which fiscal policy is endogenously determined by a maximizing fiscal authority the claim that fixed rates induce more discipline stresses that sustained adoption of lax fiscal policies must eventually lead to an exhaustion of reserves and thus to a politically costly collapse of the peg hence under fixed rates bad behavior today leads to punishment tomorrow under flexible rates bad behavior has costs as well the difference is in the intertemporal distribution of these costs flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate hence bad behavior today leads to punishment today if fiscal authorities are impatient flexible rates by forcing the costs to be paid up front provide more fiscal discipline and higher welfare for the representative private agent the recent experience of sub saharan countries supplies evidence that matches the predictions of the model

on the relationship between impulse response analysis innovation accounting and granger causality we derive a general characterization of granger non causality between two vectors x and x in terms of impulse responses when a third vector of auxiliary variables x is also used to forecast it is observed that the usual characterizations of non causality in terms of impulse responses or variance decompositions can be misleading in such situations a numerical illustration is also provided