interest rates inflation and the aggregate consumption function this paper reports on an empirical study of the effects of interest rates and inflation on aggregate consumption in the united states empirical evidence based on quarterly u s data from the postwar period is first presented in support of the hypothesis that the real rate of interest varies inversely with the rate of inflation at least in the short run regression estimates of an aggregate consumption function for the united states also based on quarterly data from the postwar period are then presented these estimates indicate that the propensity to consume varies inversely with interest rates and directly with the rate of inflation

testing intertemporal budget constraints theory and applications to u s federal budget and current account deficits this paper extends previous tests of intertemporal budget balance and present value relationships by expanding the set of allowable deficit processes and by deriving a testable condition that is sufficient to ensure intertemporal budget balance as long as the expected discount rate is strictly positive using these tests the authors find that both the postwar federal budget deficit process and the process governing accumulation of u s assets by foreigners are consistent with intertemporal budget balance copyright 1991 by ohio state university press

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 u s evidence on optimal taxation over time abstract this paper considers a tax rule in which a uniform tax rate over time becomes optimal its implications are that 1 changes in the tax rate should arise only when there are changes in permanent government expenditures and 2 no variable other than permanent government expenditures should be of any value in predicting the tax rate these implications are tested using u s data for 1937 82 empirical results of the tests reveal that in addition to responding to permanent government expenditures the tax rate also responds to temporary defense purchases the general price level and a time trend

temporary income taxes and consumer spending both economic theory and casual empirical observation of the u s economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones but neither provides much guidance about the magnitude of this difference this paper offers new empirical estimates of this difference and finds it to be quite substantial the analysis is based on an amendment of the standard distributed lag version of the permanent income hypothesis that distinguishes temporary taxes from other income on the grounds that the former are more transitory this amendment which is broadly consistent with rational expectations leads to a nonlinear consumption function though the standard error is unavoidably large the point estimate suggests that a temporary tax change is treated as a 50 50 blend of a normal income tax change and a pure windfall over a 1 year planning horizon a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equ

anticipated versus surprise inflation in household consumption behaviour abstract the purpose of this paper is to look at the question of whether it is the anticipated or surprise inflation or both that matter for household consumption and saving behaviour we use a large data sample from 23 countries covering mostly the period 1960 1979 evidence is overwhelming against the hypothesis that only the surprise part of inflation matters for household consumption and saving behaviour but is a bit mixed on the question of whether the anticipated and surprise parts of inflation affect with equal force which would justify the observed inflation as the appropriate inflation variable in household consumption and saving functions

assessing long term fiscal developments a new approach abstract we use a new approach to assess long term fiscal developments by analyzing the time varying behaviour of the two components of government spending and revenue responsiveness and persistence a feature not captured by automatic stabilisers we are able to infer about the sources of fiscal deterioration improvement drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a three stage least square method for eight european union countries plus the us the results suggest that significant changes in the fiscal stance including those related to the current crisis are reflected in the estimates of persistence and responsiveness

bubble finance and debt sustainability a test of the government s intertemporal budget constraint this paper tests whether the government s budget is intertemporally balanced in a number of ec countries by applying a method first developed to detect speculative bubbles in financial markets the test aims to establish whether the government can engage in buble finance and is based on a comparison between two sets of estimates the first is obtained directly by regressing the stock of outstanding debt on a distributed lag of the primary surplus the second is obtained indirectly from a pair of equations one relating the current debt stock to next period s primary surplus and debt stock the other specifying an ar process for the primary surplus in the presence of a bubble only the first set of estimates is inconsistent and hence the two sets differ it is found that the null of no bubble can be rejected in the cases of italy germany denmark and greece implying that the government is not intertemporally solvent in these countries the other ec member states appear to be on a sustainable path

the political economy of fiscal restrictions implications for europe from the united states abstract this paper analyzes fiscal restrictions in the united states as a way of shedding light on the likely effects of the excessive deficits provisions of the maastricht treaty we consider their impact on levels of deficits on the cost of borrowing and on the stabilization function of fiscal policy if u s experience is any guide maastricht s fiscal restraints are enforceable but if vigorously enforced they could significantly diminish the stabilization capacity of national budgets

the role of intergovernmental aid in defining fiscal sustainability at the sub national level the concept of fiscal sustainability has become increasingly used over the last 20 years however much of the literature on fiscal sustainability at the sub national level ignores the role of intergovernmental fiscal relations to address this gap this paper discusses a sufficient condition for sub national fiscal sustainability and examines the importance of intergovernmental aid in determining that sustainability using panel data of counties and municipalities in the us and using unit root and cointegration analytic techniques this paper finds different levels of fiscal sustainability between counties and municipalities we also find that intergovernmental aid plays an important role for fiscal sustainability for both counties and municipalities

hysteresis in a simple model of currency substitution abstract a cash in advance model in which the cost of buying goods with a foreign currency is decreasing in the economy s accumulated experience in transacting in the foreign currency is shown to display hysteresis in money velocity that is a temporary increase in expected inflation can cause a permanent increase in velocity in addition the model implies that the domestic currency does not have to dominate the foreign currency in rate of return to induce agents to stop using the foreign currency finally inflation rates that trigger currency substitution need not be associated with steady states in which the domestic currency disappears from circulation

household saving out of different types of income revisited the purpose of this paper is to test for two hypotheses about household consumption and saving behaviour namely the substitution hypothesis according to which changes in corporate retained earningshave an offsetting effect on household savingand the hypothesis that consumption and saving out of different types of income vary cross country evidence from 13 oecd countries over the period 1963 80 lies very well in accordance with both of these hypotheses moreover results are robust to alternative specifications of consumption function to additional variables and to estimation methods

is the budget deficit too large yes specifically we find that recent spending and taxing policies of the government if continued violate the government s intertemporal budget constraint as a result government spending must be reduced and or tax revenues must be increased these conclusions are based on tests of whether government spending and revenue are cointegrated in addition to examining real spending and revenue we also normalize these variables by real gnp and population for a growing economy these normalized measures are perhaps more pertinent we also test and find support for the hypothesis that deficits have become a problem only in recent years

determinants of private savings behaviour in turkey this study investigates the effects on private saving rates of a number of policy and non policy variables the analysis covers the period 1968 1994 the empirical private saving model for turkey is estimated the findings support the hypothesis that private saving rates have strong inertia the evidence indicates that government saving does not tend to crowd out private savings and the ricardian equivalence does not hold strictly income level has a positive impact on private saving rate and growth rate of income is not statistically significant from a policy point of view financial depth and development measures in turkey suggest that countries with deeper financial systems tend to have higher private saving rates private credit and real interest rates try to capture the severity of the borrowing constraints and the degree of financial repression for turkey moreover the negative impact of life expectancy rate lends support to the life cycle hypothesis the precautionary motive for saving is suppor

money and the welfare cost of inflation in an r d growth model this study analyzes the effects of inflation on r d and innovation driven growth in the theoretical section we incorporate money demand into a quality ladder model with elastic labor supply and derive the following results if the elasticity of substitution between consumption and the real money balance is less greater than unity then r d and output growth are decreasing increasing in inflation if either labor supply is inelastic or the elasticity of substitution between consumption and the real money balance is unity then social welfare monotonically increases as the nominal interest rate approaches zero i e the friedman rule quantitatively decreasing inflation in the us to achieve price stability improves welfare equivalent to a permanent increase in consumption of at least 0 5 in the empirical section we use cross country data to establish a negative and statistically significant relationship between inflation and r d

consumption and asset returns under non expected utility abstract this paper implements on quarterly time series data for israel the orthogonality conditions derived from an intertemporal consumption based asset pricing model with non expected utility the model s restrictions are not rejected by the sample information and there is evidence against the commonly used expected utility formulation

approximate p values of predictive tests for structural stability abstract we approximate the p values for the non standard asymptotic null distribution of predictive tests proposed by ghysels et al journal of econometrics 1997 82 209 233 the p value response surfaces are approximated by a parametric function using the methodology proposed by hansen journal of business and economic statistics 1997 15 60 67 we illustrate the use of the approximate p values through an application to consumption based asset pricing models

are bond financed deficits inflationary a ricardian analysis this paper considers the possible theoretical validity of the following monetarist hypothesis that a constant positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money the question is studied in a discrete time perfect foresight version of the competitive equilibrium model of sidrauski modified by the inclusion of government bonds as a third asset it is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments but that it is valid under the conventional definition it is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth provided that the difference is less than the rate of time preference these formal conclusions do not take account of possible limitations on taxing capacity arising from default incentives that tend to grow with the stock of bonds

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

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

us deficit sustainability revisited a multiple structural change approach in this article we re examine the long run sustainability of us budget deficits using bai and perron s multiple structural change approach while the deficit would have been weakly sustainable over the full sample 1947 1 2005 3 strong sustainability would appear only between january 1982 and february 1996

what do oecd countries cut first when faced with fiscal adjustments expenditure in this article we explore the relationship between components of government expenditure and government size during the period 1970 2007 for a sample of 25 developed countries to shed light on how fiscal discipline might influence public spending composition in the coming years using the pooled mean group estimation we find that fiscal adjustments protect functions that have both a social and productive character such as education and health spending in addition the most productive spending that related to transport and communications is also isolated from budgetary cuts this result shows evidence of governments reacting to the voter s increasing realization that reducing productive expenditures harms long term economic growth by striking a balance between utility and economic growthenhancing expenditure

currency substitution and the demand for money some evidence for canada recently the possibility that foreign and domestic currencies are substitutes has received considerable attention see 1 2 3 10 19 21 currency substitution has important implications for the working of flexible exchange rates if the degree of currency substitution is high small changes in the money supply would induce large changes in the exchange rate furthermore currency substitution would transmit the effect of monetary disturbances from one country to another indeed significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence this paper examines the empirical importance of currency substitution in the framework of the demand function for money if currency substitution is important the expected change in the exchange rate should be a significant determinant of the demand for home currency in section 2 we undertake such a test for the canadian demand for money during the recent flexible exchange rate period there is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate our own tests confirm these results for canadian data since 1970

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

are state and provincial governments tax smoothing evidence from panel data the theory of debt examined here is known variously as efficient taxation over time optimal taxation over time the equilibrium approach to fiscal policy or tax smoothing tax smoothing results when an efficient government fixes tax rates today to minimize the costs of taxation over time given the long run constraint of a balanced budget if the marginal costs of taxation are an increasing function of the amount of resources taxed i e the tax rate then minimization of the total costs of taxation implies that the planned tax rate will be constant over time tax rate changes will be unpredictable and the tax rate will behave as a random walk efficient governments will not adjust tax rates to accommodate temporary changes in expenditures and revenues instead governments will minimize tax rate changes by tax smoothing smoothing tax rates implies that temporary changes in government spending and output result in deficits and surpluses therefore tax smoothing provides a theory of government debt the model is primarily due to barro 1 the goal of this paper is to contribute to our understanding of government debt the focus of this paper is on state and provincial debt or what is generally referred to as state and local debt nearly every state government in the united states has a balanced budget rule however balanced budget rules are not sufficient to rule out tax smoothing as state governments could build up budget surpluses in good times to smooth budgets over the business cycle if state governments are smoothing tax rates then their budget surpluses are endogenous contrary to the state governments provincial governments in canada have no balanced budget rules if provincial governments are smoothing tax rates it could explain the behavior of their budget deficits and surpluses as shown by barro tax smoothing implies that the overall tax rate behaves as a random walk and the tax rate would be a nonstationary time series with a unit root this study examines the tax smoothing hypothesis in two ways first the random walk implication is examined directly by testing the null hypothesis that the tax rate time series has a unit root second if the tax rate behaves as a random walk then changes in the tax rate should be unpredictable from past information if past information can predict tax rate changes this would provide evidence in favor of an alternative hypothesis a rejection of tax smoothing suggests that state and provincial tax rates respond to current

seigniorage and the welfare cost of inflation abstract this paper empirically investigates the restrictions embodied in a sidrauski type model for the cross relations between consumption money holdings inflation and assets returns using quarterly data for the high inflation economy in israel 1970 1988 using a set of the estimated parameters it is shown that the model s implications for seigniorage are quite different than those from a cagan type model that is while the model is able to account for the observed stability of the seigniorage gnp ratio a cagan type model predicts a laffer curve for seigniorage the estimates also imply sizeable welfare costs of inflation

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

is the greek budget deficit sustainable after all empirical evidence accounting for regime shifts this article re examines the sustainability of the greek budget deficit by using a formal framework based on the government s intertemporal budget constraint the empirical analysis uses annual data from 1960 to 2011 and employs traditional as well as more recent unit root and cointegration techniques that account for linear and nonlinear effects in fiscal policy actions unlike previous studies the evidence suggests that allowing for structural breaks the greek budget deficit is unsustainable the parameter after the second detected break reflects the structural deficiencies of the greek economy

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

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

inflation tight money and household saving behavior finnish evidence the hypothesis put forward by deaton in particular that real income and price innovations have a positive effect on the savings ratio is tested as points of reference two models are used in which consumers uncertainty about relative prices in a cross section and an intertemporal sense respectively plays a major role in completing the models a tight money variable is also introduced as a factor which affects the savings ratio evidence from finnish quarterly data for the period 1966 1979 provides strong support for this hypothesis results are relatively robust with respect to alternative proxies for real income and price innovations as well as to alternative specifications of the tight money variable

currency substitution and speculative attacks on a currency board system abstract a currency board arrangement cba is supposed to be robust against attacks currency substitution complicates life with controversial implications for floating versus fixed exchange rate regimes after reporting evidence of currency substitution in hong kong a monetary model incorporating currency substitution is used to estimate the shadow exchange rate and the probability of speculative attack on the hong kong dollar a decomposition analysis of a markov switching model indicates that the no attack regime was the most durable one this implies that hong kong s quasi cba was relatively robust against both speculative attacks and currency substitution

measuring and understanding behavior welfare and poverty angus deaton delivered his prize lecture on tuesday 8 december 2015 at the aula magna stockholm university these are the lecture slides this abstract was borrowed from another version of this item

international evidence of tax smoothing in a panel of industrial countries a panel of industrial countries is examined for evidence of tax smoothing tax smoothing results when governments minimize tax distortions over time the model provides a positive theory of government debt and is due primarily to barro unit root tests are performed in panel data to test the null hypothesis of nonstationary tax rates panel regressions are then undertaken to test the null hypothesis that tax rate changes are unpredictable and test for evidence of an alternative hypothesis political and economic variables are examined for their ability to predict tax rate changes overall the results cannot reject the null hypotheses and support tax smoothing by national governments

us deficit sustainability a new approach based on multiple endogenous breaks recent empirical work has questioned the consistency of us fiscal policy with an intertemporal budget constraint empirical results have tended to indicate that the deficit process has undergone at least one structural shift during recent decades with the deficit becoming either unsustainable or sustainable in only a weak sense in the post shift period in this paper we re examine sustainability using a new approach based on a cointegration model with multiple endogenous breaks a bayesian methodology is applied incorporating markov chain monte carlo simulators in contrast to previous analyses we find evidence of a sustainable deficit process over the 1947 1992 period despite the occurrence of breaks during the 1970s and 1980s copyright 2000 john wiley sons ltd

public debt in brazil sustentability and its implications abstract this paper tests sustainability of brazilian public debt in the period 1991 to 2009 and analyzes implications of requiring that the brazilian fiscal policy be primarily committed to the sustainability of the public debt the retrospective analysis utilizes a set of unit root tests and avoids some of the criticism leveled at previous studies by using data which has not previously been used for this purpose and concludes that the public debt was sustainable in the period we consider the prospective analysis is based on the dsge model proposed by jodi gali et al 2007 calibrated for brazil using the conclusions of the retrospective analysis for the fiscal parameters the scenarios produced with the help of the model show that maintaining the sustainability of the public debt is consistent with the monetary policy of inflation targeting we also conclude that it is possible to reduce interest rates to levels below those prevalent at the end of 2010 simultaneously maintaining the stability of the trajectory of the public debt

budget institutions and fiscal performance of the brazilian federal government abstract this article aims to assess the impact of federal budget institutions on the primary deficit of the brazilian federal government from 1985 to 2009 a period marked by important changes in these institutions based on the methodology established in the literature on political economy that is linked to the macroeconomic mainstream three sets of budget indices and their respective sub indices are constructed and their behaviour over the period of analysis indicate that the changes made have resulted in institutions that induce greater fiscal discipline regarding the effect of these institutions on the fiscal performance the results allow us to conclude that the institutional changes have contributed to a lower government deficit

are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint abstract time series related to fiscal and external deficits are commonly subjected to stationarity and cointegration tests to assess if the deficits are sustainable such tests are incapable of rejecting sustainability the intertemporal budget constraint proves to be satisfied if either the debt series or the revenue and with interest spending series are integrated of arbitrarily high order i e stationary after differencing arbitrarily often revenues and spending do not have to be cointegrated rejections of low order difference stationarity and of cointegration are thus consistent with the intertemporal budget constraint error correction type policy reaction functions are suggested as more promising for understanding deficit problems

seigniorage and tax smoothing in the united states 1914 1986 abstract when monetary and fiscal authorities cooperate to minimize the distortionary costs of financing an exogenous stream of government expenditures barro s tax smoothing model implies a long run relationship between tax revenues and inflation previous empirical tests of this relationship are reinterpreted in light of recent work on cointegration and are shown to hold only when stochastic temporal variation in the excess burden of taxes and seigniorage is transitory in nature a new test that holds in the presence of nonstationary disturbances is developed and applied annual u s data from the period 1914 to 1986 reject the revenue smoothing hypothesis

the optimal inflation tax in the presence of currency substitution abstract an important result in the optimal inflation tax literature is that if money is modeled as reducing transactions costs the optimal nominal interest rate is zero this paper examines this issue in the context of a small open economy where both domestic and foreign currency circulate as media of exchange it is shown that the presence of foreign money enables the government to reduce the distortion introduced into the economy by a positive foreign nominal interest rate by setting a positive domestic nominal interest rate

government budget deficits and trade deficits are present value constraints satisfied in long term data abstract we test whether long term data from the u s and u k are consistent with the intertemporal government budget constraint and external borrowing constraint both individually and simultaneously a very strong test is provided by our focus on whether the present value constraints pvcs continue to hold despite unusual events such as wars that cause a structural break in the short run dynamic behavior of the variables we find that the pvcs hold over the whole sample period the data also indicate that the pvcs continue to hold following events that cause a structural break in the short run dynamics

saving and inflation some international evidence abstract this note contains empirical results for the disequilibrium saving function specification in which uncertainty about relative prices in a cross section sense plays a major role quarterly time series evidence from several oecd countries over the period 1967 ii 1980 iii lies in striking conformity with the view suggested particularly by deaton that there is a positive relationship between unanticipated inflation and the saving ratio

estimating a fiscal reaction function the case of debt sustainability in brazil this article reviews recent trends in fiscal performance in brazil estimates fiscal reaction functions for the consolidated public sector and different levels of government and tests for the sustainability of the public debt dynamics the empirical analysis based on monthly data for the period 1995 2004 suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets in addition the central government appears to follow a spend and tax policy changes in revenue are affected strongly by expenditure about two thirds of changes in primary spending are offset by higher revenue over the longer term institutions are also found to matter for fiscal sustainability the responsiveness of the sub national fiscal stance to indebtedness as well as that of central government revenue to changes in primary spending appears to have become stronger after 1998 when ceilings on indebtedness were introduced

comparing the welfare costs and initial dynamics of alternative inflation stabilization policies abstract this paper uses calibrated versions of a sticky price currency substitution model to compare the initial dynamics and welfare costs of three types of stabilization program exchange rate based erb money based mb and money based with initial reliquefication mbr erb and mbr programs are found to induce an initial expansion in real activity whereas mb programs are initially contractionary the welfare gains of eliminating high inflation are significant under permanent erb and mbr programs but small under permanent mb programs in addition temporary mb programs are shown to be much more disruptive than temporary erb or mbr programs these results provide an explanation for why mb programs are so rarely implemented and suggest that empirical studies that fail to distinguish mb from mbr programs are likely to be biased toward finding that stabilizations are always expansionary regardless of the nominal anchor

fiscal policy rules and the sustainability of public debt in europe the sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment and not as a statistical concept as in most of the recent literature if debt is not to explode over time policymakers have to respond to the changing conditions in the macroeconomic environment this article defines the conditions that will ensure compliance of fiscal policy with the intertemporal budget constraint in the context of europe s fiscal policy rules the empirical part of the article reveals that european public debt is sustainable in this respect but questions regarding long run liquidity requirements remain unresolved

currency substitution under nonexpected utility some empirical evidence this paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for israel from 1978 to 1988 we find that the elasticity of intertemporal substitution is less than one the elasticity of currency substitution is greater than one relative risk aversion is about seven and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services in most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent s objective function the methodology of this paper can be applied to other interesting cases of currency substitution copyright 1993 by ohio state university press

currency substitution capital mobility and money demand abstract this paper re examines the currency substitution cs issue by specifying a general portfolio balance pb model where domestic residents demand for foreign money is distinguished from their demands for foreign non monetary assets the latter possibility which reflects international capital mobility as opposed to cs per se is already a key feature in the open economy macro literature the inclusion of foreign money leaves the usual asset demand functions unchanged in the pb model that ignores cs at least as far as the appropriate rate of return arguments and their signs are concerned although this suggests that cs is of limited importance in macro modelling it implication for the estimation of money demand functions is pursued an initial attempt is made to empirically isolate the separate efects of high capital mobility and currency substitution for canada germany the united kingdom and the united states the results while not conclusive due to high multicollinearity problems bring into question the empirical as well as the theoretical relevance of currency substitution

an investigation of ricardian equivalence in a common trends model abstract to empirically discriminate between ricardian and non ricardian behaviour we have to use a method that distinguishes between expected and unexpected as well as permanent and transitory changes in taxes and government consumption one method that provides these distinctions between different types of changes is the common trends framework used in this paper which is a var model with cointegrating constraints in the empirical study of us data there is some support for the ricardian hypothesis but there are also some deviations from its predictions however the differences do not lend support to a keynesian view of budget deficits but rather to the view of expansionary fiscal contractions this can be motivated theoretically by uncertainty about future taxes in combination with prudent households

fiscal sustainability and monetary versus fiscal dominance evidence from brazil 1991 2000 under a monetary dominant md regime the primary surplus adjusts to limit debt growth permitting monetary policy to be conducted independently of fiscal financing requirements in brazil some evidence favours an md regime for 1995 1997 but not for the decade of the 1990s as a whole while fiscal adjustments of 1999 yielded a primary surplus of about 3 of gdp consistent with solvency a credible md regime would require further adjustments of the primary surplus if debt increases growth falls or interest rates rise

public debt sustainability and endogenous seigniorage in brazil time series evidence from 1947 1992 abstract in this paper we investigate three central issues in public finance first was the path of public debt sustainable during 1947 1992 second how has the government balanced the budget after shocks to either revenues or expenditures were observed third are expenditures exogenous the results show that i debt is sustainable in econometric tests with the budget being balanced almost entirely through changes in taxes regardless of the cause of the initial imbalance expenditures are weakly exogenous ii the behavior of a rational brazilian consumer may be consistent with ricardian equivalence iii seigniorage revenues are critical in restoring intertemporal budget equilibrium

assessing the mean reversion behaviour of fiscal policy the perspective of asian countries this article investigates fiscal policy sustainability in 10 asian countries by adopting a battery of unit root tests univariate unit root tests reveal that the fiscal stance in these countries follows a nonstationary process while the opposite conclusion was drawn for the same dataset using the commonly employed panel unit root techniques by utilizing the series specific panel unit root test recently developed by breuer et al 2002 suradf seemingly unrelated regression augmented dickey fuller that allows testing for the presence of nonstationarity within individual cross sections of the panel we found that only cross sections four out of 10 countries in the panel are stationary this means that fiscal deficits in most asian countries are in violation of their intertemporal budget constraint and that the deficits are too large

is the budget deficit too large some further evidence i introduction since the early 1980s the u s federal government has run unprecedented peacetime deficits the size of these deficits became a major issue in recent u s presidential elections for example during the 1992 elections ross perot successfully used his simple charts and tables to convey the notion that the size of the deficit was too large economists look at the deficit issue from a different perspective instead of emphasizing the size of the deficit at any particular point in time they are more concerned with the intertemporal solvency condition the present value of debt in the long run this condition focuses on the long run paths of interest inclusive expenditures and revenues unless these two variables trend together over the long run the government will have an incentive to default on the debt losing the confidence of investors from the standpoint of the intertemporal solvency condition are recent deficits too large do they represent boundless growth of government debt as an empirical proposition boundless growth of the debt corresponds to non stationarity of the deficit or the first difference of the debt recent developments in time series econometrics have provided ways to examine the intertemporal solvency condition for example hamilton and flavin 1986 and trehan and walsh 1991 apply stationarity tests to the u s federal deficit similarly hakkio and rush 1991 test for cointegration between interest inclusive expenditures and revenues while bohn 1991 tests for the cointegration of debt non interest expenditures and revenues hakkio and rush s results suggest that the deficit is too large for intertemporal solvency and thus the government has an incentive to default on its debt they conclude that over the period 1950 through 1989 interest inclusive expenditures and revenues are cointegrated but not one to one this suggests that although the present discounted value of the debt tends to zero the undiscounted value of the debt will be unbounded moreover they find that interest inclusive expenditures are not cointegrated with revenues over the period 1964 to 1989 the government debt appears to drift upward without bound overall hakkio and rush s results suggest that the government will have an incentive to default on the debt at some point in the future 1 we look at the issue from a different point of view we believe that a discrete break in the fiscal process occurred in the early 1980s as a result of several policy changes such as the 1981 economic recovery and tax act during the first reagan administration this reagan era change is modeled as a one time upward shift in the constant component of the deficit as mccallum 1984 shows a constant interest inclusive deficit does not imply boundless growth of government debt and should not provide an incentive to inflate away the debt as did previous research we conduct tests for the cointegration of interest inclusive expenditures and revenues as well as stationarity tests on the deficit 2 however we allow a shift in the intercept term of the cointegration and stationarity tests to capture the break in the fiscal process our results show that when the break is included expenditures and revenues are cointegrated with a coefficient not statistically different from unity i e that the deficit is stationary this contradicts the conclusions of hakkio and rush of course the way we choose the break date may be crucial to our analysis our initial choice of break date is based on prior information this is the approach used by perron 1989 who tests the u s gnp with a break chosen using prior information christiano 1992 criticizes perron 1989 on the a priori choice of the break date he suggests that the break date should be chosen using a formal pre test procedure moreover any statistical inference that follows must take this pre test procedure into account

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

are southern poor countries governments more profligate than their northern rich counterparts fiscal criteria and impulse responses this study examines the health of public finances in different geographical regions by emphasising the discrepancies in north versus south and rich versus poor countries the last decade s debt and deficit figures depicting a general fiscal consolidation across regions and income levels show signs of worsening when the fiscal criteria are adjusted for cyclical factors fiscal pressure appears in most countries since the end of the 1990s but has been more persistent in poor countries and in asia the dynamics of governments reaction to debt accumulation reveals however that most regions exhibit consistent anti debt policies to various degrees the exception is the latin american and caribbean region where results suggest a lack of debt fighting policies among income categories rich countries generate the highest primary surpluses when confronted with debt accumulation

tax and spend spend and tax or fiscal synchronization new evidence for ten countries cointegration and vector autoregression are used to test the tax and spend spend and tax and fiscal synchronization for ten countries using annual time series data over the period 1951 to 1996 three of them are part of the newly industrialized countries of asia south korea taiwan and thailand and seven are industrialized countries australia canada japan new zealand south africa uk and the usa this paper includes gdp as a control variable into the model like baghestani and mcnown 1994 ross and payne 1998 and koren and stiassny 1998 the johansen 1988 and johansen and juselius 1990 cointegration test results indicate that these three variables are cointegrated with two cointegrating vectors for south korea one vector for australia canada south africa taiwan uk and the usa and no vector for japan new zealand and thailand the results from granger causality tests suggest unidirectional causality running from revenues to spending supporting the tax and spend hypoth

fiscal transfers and fiscal sustainability we examine whether the u s and german state governments pursue sustainable fiscal policies taking into account fiscal transfers using panel data techniques we investigate whether the debt to gdp ratio had a positive influence on the primary surplus bohn model we show that including excluding fiscal transfers changes the results if fiscal transfers are not included in the primary surplus the test results do not indicate that the u s and german state governments pursued sustainable fiscal policies our results also suggest that fiscal transfers were positively related to debt these findings indicate that intergovernmental transfers have implicitly subsidized debts

tax and spend or spend and tax empirical evidence from greece spain portugal and ireland the paper examines empirically the relationship between government revenues and expenditures in four european countries greece spain ireland and portugal in relative terms all four may be considered as the poorest members of the european union yet they present a fairly diverse picture as far as their macroeconomic performance and fiscal position is concerned the empirical findings from cointegration and causality tests that are reported here indicate that in the case of greece and ireland tax and spending decisions are taken simultaneously by the fiscal authority the tax and spend hypothesis is supported in the case of spain while absence of any causal ordering between government expenditure and tax revenues has been established for portugal

the tax smoothing hypothesis evidence from sweden 1952 1999 this paper tests barro s 1979 tax smoothing hypothesis using swedish central government data for the period 1952 1999 according to the tax smoothing hypothesis the government sets the budget surplus equal to expected changes in government expenditure when expenditure is expected to increase the government runs a budget surplus and when expenditure is expected to fall the government runs a budget deficit the empirical evidence suggests that the model provides a useful benchmark and that tax smoothing behavior can explain about 60 percent of the variability in the swedish central government budget surplus