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

the stability pact more than a minor nuisance stability pact more than a minor nuisance the stability and growth pact will lead member countries to aim for cyclically balanced budgets until this steady state is reached europe will continue its efforts at de cit cutting while so doing politicians are less likely to undertake the dif cult labour market reforms that are really needed is further scal retrenchment wise the paper reviews the reasons that have been advanced in favour of a stability pact and nds them wanting the most serious justi cations such as the systemic risk of bank crisis following a government s failure to service its debt can be better dealt with in other ways for example by prudential limits on banks exposure to public debts moreover our analysis reveals that the macroeconomic costs of the stability pact while sizeable are not as dangerous as often believed the costs will be barely visible once the steady state is reached the true macroeconomic costs are front loaded they concern the next few years after a decade already dominated by convergence efforts barry eichengreen and charles wyplosz

the holmes smyth effect some preliminary exercises with the uk demand for narrow money the primary purpose of this paper is to test a plausible data coherent representation of the consumption based model of the demand for money against and analogus representation of the standard income based formulation on the basis of non nested tests neither model canbe maintained consequently the possibility of tax cuts being contractionary the holmes smyth effect is still an open question

ten commandments for a fiscal rule in the e m u abstract fiscal rules in a monetary union should 1 be simple 2 ensure the solvency of the state 3 relate to the consolidated general government and central bank 4 be neutral as regards the size of the public sector 5 avoid pro cyclical behaviour of the fiscal policy instruments 6 make sense also in the long run 7 allow for important differences in economic structure and initial conditions 8 aggregate into behaviour that makes sense at the level of the union as a whole 9 be credible and 10 be enforced impartially and consistently the paper reviews the rules of the stability and growth pact the uk s golden rule and sustainable investment rule and buiter and grafe s permanent balance rule and enhanced permanent balance rule from the perspective of how well they meet these 10 criteria key words fiscal rules stability and growth pact golden rule financial sustainability journal of economic literature classification system e61 e62 e63 f33 f42 h62 h87 e32 e42 willem h buiter european bank for reconstruction and development one exchange square london ec2a 2jn united kingdom tel 44 0 20 7336 6805 fax 44 0 20 7338 6110 1 e mail buiterw ebrd com office e mail willembuiter whsmithnet co uk home www http www nber org wbuiter

fiscal deficits output growth and inflation targets in ghana abstract inflation appears to be the macro problem for which no antidote has been found under the economic recovery programme it is possible that either a wrong diagnosis has been made of the problem or that certain factors within the economy are preventing inflation from staying within target levels using an error correction model ecm the paper estimates an inflation equation for ghana the convenience of this model is in the fact that all the data series exhibit an autoregressive scheme of order one that is they are i 1 series in such an instance the granger engle theorem shows that the ecm provides the most efficient model further the ecm unveils some of the short run dynamics which are missing in other estimation techniques the results of the econometric regression show that inflation in ghana either in the long run or short run is influenced more by output volatility than by monetary factors an examination is made of the consistency of fiscal deficit the hypothesis is that an unsustainable fiscal policy would make government miss some macroeconomic targets it is shown that in 1985 and 1989 fiscal policy was consistent inflation was well within target in 1985 for 1986 1988 the government did not maintain consistent fiscal deficits and inflation in those years was well above targets it is recommended that to control inflation in ghana more attention should be paid to supply factors further government should pursue consistent fiscal policies

the hybrid transmission grid architecture benefits in nodal pricing recently we proposed a capacity expansion approach for transmission grids that combines the upgrade of transmission capacity with a transition in system structure to improve grid operation the key to this concept is a particular hybrid ac dc transmission grid architecture which is obtained by uprating selected ac lines via a conversion to hvdc we have shown that this system structure improves optimal power flow opf solvability and that it can reduce the total generation costs in this paper we study the benefits of this hybrid architecture in the context of a deregulated electricity market we propose an efficient and accurate nodal pricing method based on locational marginal prices lmps that utilizes a second order cone relaxation of the opf problem applicability of this method requires exactness of the relaxation which is difficult to obtain for conventional meshed ac transmission grids we prove that the hybrid architecture ensures applicability if the lmps do not coincide with certain pathological price profiles which are shown to be unlikely under normal operating conditions using this nodal pricing method we demonstrate that upgrading to the hybrid architecture can not only increase the effective transmission capacity but also reduce the separation of nodal markets and improve the utilization of generation

natural resource booms and inequality theory and evidence we develop a theory in the context of a two sector growth model in which learning by doing drives growth to explain the time path of income inequality following natural resource booms in resource rich countries under the condition of a relatively unskilled labor intensive non traded sector inequality falls immediately after a boom and then increases steadily over time until the initial impact of the boom disappears using data for 90 countries between 1965 and 1999 we find evidence in support of the theory especially for oil and mineral booms we also find that uncertainty about future commodity prices increases long run inequality

on computational issues of market based optimal power flow the deregulated electricity market calls for robust optimal power flow opf tools that can provide a deterministic convergence b accurate computation of nodal prices c support of both smooth and nonsmooth costing of a variety of resources and services such as real energy reactive energy voltages support etc d full active and reactive power flow modeling of large scale systems and e satisfactory worst case performance that meets the real time dispatching requirement most prior research on opf has focused on performance issues in the context of regulated systems without giving much emphasis to requirements a c this paper discusses the computational challenges brought up by the deregulation and attempts to address them through the introduction of new opf formulations and algorithms trust region based augmented lagrangian method tralm step controlled primal dual interior point method scipm and constrained cost variable ccv opf formulation are proposed the new formulations and algorithms along with several existing ones are tested and compared using large scale power system models

the consequences of fiscal stimulus on public debt a historical perspective the current policy agenda of neoclassical macroeconomics as expressed within conservative political circles in the uk and european union is that fiscal contraction is the lever that can bring about recovery from the current economic downturn allegedly the reason is that when business sees that the government balance sheet is improving and public debt declining there will be greater confidence in the country s economic prospects and this increased confidence will lead to higher investment this in turn will lead to growth and the road to economic recovery this study examines the impact of government stance on public debt for 11 oecd countries for which data on the relevant factors are available from 1881 to 2011 contrary to traditional predictions it turns out that over this long historical span fiscal contractions deteriorated rather than improved public debt as a percentage of gdp this implies that fiscal austerity exacerbates the lack of demand and deteriorates rather than enhances the prospects of economic recovery

on a simple rule for the optimal inflation rate in second best taxation abstract the optimal inflation rate is analyzed in the framework of dynamic second best with endogenous factor prices it is shown that when the marginal excess burden of taxation is relatively small the optimal inflation rate is approximated by a simple rule the paper also analyzes the robustness of this rule to the specification of the model money as an input in utility or production

trade in financial services capital flows and the value at risk of countries in light of the recent financial crises in the emerging markets the coming into force of the financial services agreement under the gats has been considered a success while the agreement provides for little new liberalization but rather formalizes the status quo it was feared that governments could even backtrack on previous commitments in the belief that more open markets could increase the degree of susceptibility by undermining financial stability strengthening the financial system s ability to evaluate and manage risk has therefore been identified as a precondition for more ambitious liberalization efforts in the future dobson and jacquet 1998 encouragingly in some countries banks have begun to implement value at risk approaches as a tool to assess their balance sheet vulnerability as this paper argues such an approach could also play a useful role in determining the extent of market risk on the macroeconomic level with potentially important implications regarding trade in financial services capital account convertibility and international crisis management

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

poincare s stabilization abstract the data and press commentaries studied in this paper call for a reinterpretation of the french inflationary crisis and its stabilization in 1926 in contrast with sargent s interpretation there is evidence that the budgetary situation was well in hand and that only fear of a capital levy made the public unwilling to buy government bonds as a result the government had to repay the bonds coming to maturity with monetary financing only when poincare introduced a bill to shift the tax burden off bondholders did the demand for government bonds recover and inflation stop

continuous locational marginal pricing clmp this paper proposes a solution to eliminate the step change in the curve of location marginal price lmp with respect to load variation the new solution is named continuous locational marginal pricing continuous lmp or clmp because it is a continuous function with respect to load the present lmp methodology leads to a step change when a new constraint either transmission or generation becomes binding as load increases similarly there is also a step change of lmp if an existing constraint is no longer binding when load decreases the proposed clmp methodology smooths the step changes in the price curve and introduces a fourth component future limit risk flr price in addition to the present three lmp components energy price congestion price and loss price also flr is an indication of how close the present system state moves to the next constraint an algorithm is proposed in this paper to give a technically efficient method to calculate clmp and flr price two case studies are presented to demonstrate the proposed clmp methodology

a guide to public sector debt and deficits government deficits reinterpreted willem h buiter public sector debt and deficits are a matter of concern to governments throughout the world after presenting data on the public debt and deficits in the uk and abroad this paper considers four key issues first does an increase in the budget deficit today make an increase in inflation in the future more likely in economies like the uk the answer is no because the scope for raising revenue by money creation is limited compared to raising taxes second how does one evaluate the consistency of a given spending and tax programme a number of measures are presented which indicate the adjustment that must be made to spending and tax plans if the government is to remain solvent third it is often argued that an increase in budget deficits will merely crowd out private spending the paper shows that the truth of this proposition depends critically on the state of the economy the time horizon and whether the increased deficit is temporary or permanent finally the question of deriving a suitable measure of fiscal stance is considered developing an index of fiscal impact requires a suitable economic model and a number of different measures are considered and criticized conventional deficit measures whether actual cyclically corrected or inflation corrected are a poor indicator of the government s true fiscal stance

disaggregate supply evidence for the uk 1989 disaggregate supply evidence for the uk applied economics vol 21 no 10 pp 1397 1409

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

assessing the fiscal stance in the european union and the united states 1970 2011 the huge increases in debt gdp ratios following the 2007 2009 global financial crisis which are unprecedented except in times of war has focused attention on the viability of the fiscal positions of eu countries and the us how to assess this and the likely future evolution of these positions this paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt gdp targeted given the forecasts of future deficit and interest rates obtained from an unrestricted recursively estimated var model the index is easy to compute and can be decomposed to disclose the different contribution of revenue expenditure nominal yields inflation and growth to the fiscal stance for this reason it provides a transparent and detailed measure of the fiscal stance particularly suitable for multi country surveillance as a result the index improves on the tax gap indicators widely used by governments and international agencies and is far more informative than formal econometric tests of fiscal sustainability the time series of the indicator for individual eu countries and the us show that their fiscal position has fluctuated considerably over the last 40 years and has particularly deteriorated since 2007 the index predicts that the adjustment required to restore pre crisis debt gdp levels are higher for high debt countries like greece italy and portugal they become more severe the shorter is the time horizon for the adjustment as a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator

is the euro zone on the mend latin american examples to analyze the euro question several european countries face challenges reminiscent of those faced by the emerging economies of latin america the economic booms in some peripheral euro zone countries financed by large capital inflows the credit and asset price booms and then the busts including sudden stops in capital flows the strong interaction between sovereign debt and domestic banking systems the role of foreign banks and contagion and all in the context of a fixed exchange rate are familiar plotlines for latin american audiences for those euro zone countries that built up large euro denominated external liabilities latin america s experience is particularly relevant and worrisome still europe may be in a better position to navigate a path out of the crisis given cooperative mechanisms that were absent in latin america particularly the availability of massive liquidity support nonetheless while such support buys time it does not guarantee success this paper argues that reflecting on latin america s experience provides useful lessons for europe to improve the chances for a successful resolution

prospects for commodity exporters those low income countries that export non agricultural commodities are in the midst of a resource transfer it is undoubtedly the biggest opportunity for transformative development that these societies have experienced dwarfing both aid and previous commodity booms to get it in proportion in 2004 commodity exports from sub saharan africa accounted for 146 billion us dollars or 28 percent of the region s gdp while aid amounted to 5 percent of gdp compared with the boom of the 1970s many more countries are beneficiaries the push to diversify sources of supply has resulted in exploitable discoveries in places that were previously political no go areas further whereas the boom of the 1970s was conjured up by the opec cartel this one is grounded in asian growth and so is intrinsically less precarious in this paper the authors draw on a range of new research that provides a prognosis of prospects a diagnostic of likely problems and prescribes an agenda for international action the paper is organized around these three objectives

modeling private investment in egypt abstract this paper presents an empirical model of private investment that takes into account certain features of a developing economy such as the oligopolistic structure of markets putty clay technology the inelastic supply of non traded capital goods and financial repression the model is tested on egyptian data using error correction and cointegration the results for egypt indicate that at the macroeconomic level private investment depends on mark ups internal financing demand and the cost of investment goods defined not as the interest rate but as the outcome of the interaction of supply and demand in the market for capital goods the effects of government policy on private investment are mixed with some evidence of crowding out in credit markets and of crowding in as a result of government investment in infrastructure

the rise in unemployment a multi country study one of the most remarkable features of recent economic history has been the remorseless rise in unemployment throughout the industrialized countries however while the trend to higher unemployment is universal the experience of individual countries also differs widely the increase is especially marked within the european community where unemployment rates rival those reached in the interwar years by contrast in the scandinavian countries and japan unemployment is lower and has risen very much less experience in the united states lies somewhere between these extremes and in the last few years unemployment there has fallen sharply

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

bohn s test of fiscal sustainability of the american state governments the dramatic fall in state revenues during the great recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability i employ a model based approach proposed by bohn 1998 to test for sustainability in this approach a positive and significant reaction of the ratio of primary surplus ratio s to lagged debt constitutes a sufficient condition for sustainability based on a panel of 48 contiguous states 1961 2008 and several model specifications i find robust evidence in favor of sustainability further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side the response of s is also found to be asymmetric with respect to the level of debt finally the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and own revenue and no deficit carryover provisions in particular

borrowing to defend the exchange rate and the timing and magnitude of speculative attacks abstract the paper analyses the implications for the timing and magnitude of a speculative attack on a fixed exchange rate of government borrowing to increase the stock of international reserves it is shown that such borrowing reduces the likelihood of an early collapse and increases the likelihood of an eventual collapse the magnitude of the speculative attack also increases

fiscal regimes and fiscal sustainability in sri lanka this paper employs the regime switching model based fiscal sustainability test which relaxes the linear fiscal reaction function approach there is evidence of a regime switching fiscal rule in sri

optimal funding rules abstract the operation of automatic fiscal stabilisers may prevent interest rates from falling during times of recession while they may lower interest rates during recovery thereby exacerbating the private sector business cycle we demonstrate that the government funding authority may devise rules for debt issuance which minimise the variance of the government s overall funding requirement this is done by switching issuance between different debt instruments in such a way that interest and redemption payments counteract the cycle in the underlying funding requirement thereby removing any autocorrelation in the net funding requirement we illustrate the application of such a funding rule to the borrowing requirement of the united kingdom government this has the effect of smoothing out the borrowing requirement over the business cycle