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The Brazilian developmental state changed significantly after 1985, with new rhetoric about equality, a commitment to fighting inflation, and a three-pronged policy set combining fiscal responsibility, a floating exchange rate, and inflation targeting. Yet many elements of the “old” developmental state remained intact, including a large state role, a complex monetary regime, muscular industrial policies, low economic integration, and a segmented labor market. The fight against inflation generated incentives for politicians to employ “fiscally opaque” policy instruments drawn from the tool kit of the developmental state. The fiscal imperative combined with fiscally opaque instruments contributed to the high cost of credit and low investment, driving firms to demand state succor. The fiscal imperative and the power of interest groups meant that the burden of balancing the fiscal accounts fell disproportionately on the less well-off. The ensuing demand for social spending meant that economic growth, by default, became a residual.
Under the Trump administration, a transatlantic trade conflict has been escalating step by step. First, it was about tariffs on steel and aluminium, then about retaliation for the French digital tax, which is suspended until the end of the year. Most recently, the US administration threatened the European Union with tariffs on cars and car parts because of Canadian seafood being subject to lower import duties. As simulations with NiGEM show, a further escalation of the transatlantic trade conflict has the potential to slow down economic growth significantly in the countries involved. This is a considerable risk given the fact that the countries have to cope with the enormous negative effects of the pandemic shock. Furthermore, the damage caused by the trade conflict depends on the extent to which the affected countries use fiscal policy to stabilise their economies.
This chapter examines four flaws in the most essential assumptions underlying the single currency’s original stability set-up that were exposed by the crisis. The first concerns market discipline. The chapter looks at some of the key explanations for the failure of market discipline, in particular, those professed by the ECB. The second flaw concerns the instrument of public discipline. The shortcomings of this instrument were already visible in the early 2000s when France and Germany violated the Stability and Growth Pact. The chapter analyses these violations, the court case to which they gave rise and the reform of the Stability and Growth Pact that followed it in 2005. The third flaw concerns the excessive attention for budgetary discipline. In its preoccupation with ensuring fiscal prudence, the original set-up was blind to risks stemming from other corners of the economy, especially the banking sector. The fourth flaw is the cardinal one. Geared to safeguarding price stability, the single currency’s legal set-up left another stability dangerously exposed: financial stability. The chapter discusses its importance and the need to have it protected by a ‘lender of last resort’.
A central bank is expected to produce results that are generally beneficial to the people to whom (through parliament) it is accountable. In the late twentieth century, the belief that monetary policy was a tool in fighting short-run economic problems gave way to thinking about monetary stability as providing a framework within which better informed judgements about long-run decisions could be made. The period is punctuated by two traumatic recessions. The early 1980s collapse in large part was the intentional result of a radical change in macro-economic strategy; the second was a product of the aftermath of a loose money period with excessive credit growth and then a collapse of a housing bubble. Both occurred in a wider international economic setting: in the early 1980s in the wake of the second oil price shock and of the 1979 anti-inflationary turn in US monetary policy; in the early 1990s the responses to the fiscal and monetary shock of German unification, a US slowdown and a new oil price spike after the first Gulf War. In both cases, the UK output performance was significantly poorer than that of other major industrial countries.
Governments have great difficulties designing politically sustainable responses to rising public debt. These difficulties are grounded in a limited understanding of the popular constraints during periods of fiscal pressure. For instance, an influential view claims that fiscal austerity does not entail significant political risk. But this research potentially underestimates the impact of austerity on votes because of strategic selection bias. This study addresses this challenge by conducting survey experiments in Spain, Portugal, Italy, the UK and Germany. In contrast to previous findings, the results show that a government's re-election chances greatly decrease if it proposes austerity measures. Voters object particularly strongly to spending cuts and, to a lesser extent, to tax increases. While voters also disapprove of fiscal deficits, they weight the costs of austerity policies more than their potential benefits for the fiscal balance. These findings are inconsistent with the policy recommendations of international financial institutions.
Chapter 9 deals first with the reforms needed for the cornerstones of the EMU macroeconomic policies, i.e. the common monetary policy and the macro-prudential regulation that has recently added to it. As to the former, one of the main proposals is to raise its optimal target, for reasons that add to those recently suggested by some eminent economists; in addition, the prohibition to the ECB to act as a lender of last resort to governments should be reconsidered. As to the latter, the need arises of strengthening the existing legislation. On the other hand, fiscal policy is the Cinderella of the EMU macroeconomic policies and its deflationary and asymmetric orientation, to which the fiscal compact has recently added, is to be radically reconsidered, moving towards a fiscal union. Finally, wage policy can be implemented in a way to help dealing with the different country structural problems in a way that cannot be done by the common monetary policy.
We investigate the presence of nonlinear effects of government spending shocks during good and bad times in a panel of 17 emerging markets through the lens of a Bayesian panel threshold VAR model. We find that the responses of gross domestic product, consumption, investment, trade balance, real exchange rate, and real interest rates vary depending on the state of the economy. Particularly, in slump periods, both consumption and investment may respond negatively to a government purchase stimulus, unlike in normal times. Our estimated government spending multipliers are less than one in the two regimes and can be zero in bad times.
In Chapter 12, we explain the course of public policy – specifically, the degree to which governments intervene in citizens’ social and economic affairs. We argue that scale is negatively related to the level of government intervention through decreased social cohesion, representativeness and trust, particularism, and concentration, and through increased economies of scale. We also discuss the role of trade dependence, which we argue likely has ambivalent (countervailing) effects on intervention. In the empirical section, we turn to a variety of empirical terrains including the growth of the American state, the experience of small states (everywhere), and four policy realms – moral, fiscal, personnel, and social. Our results point to a stark contrast between subnational and national-level analyses. While subnational analyses show either a negative relationship between scale and intervention, or no relationship at all, national-level analyses show a strong (negative) relationship between the size of communities and the size of government. This apparent paradox has many possible answers, and so we leave it for future research to tease apart which factor(s) might be responsible.
Latin America is one of the world's only regions to have witnessed a fall in income inequality during the 2000s. This paper evaluates the role fiscal policy played in this change. Recent scholarship has examined this in individual countries; lacking is a regional perspective. We examine the effects of nine fiscal instruments on income inequality in 17 countries between 1990 and 2014. Fiscal policy had a positive – albeit small – effect in reducing income inequality, especially from 2003, working best at the urban level. Public spending on education, personal income taxes and social contributions were especially instrumental in reducing income inequality.
We assess the long-run growth effects of automation in the overlapping generations framework. Although automation implies constant returns to capital and, thus, an AK production side of the economy, positive long-run growth does not emerge. The reason is that automation suppresses wage income, which is the only source of investment in the overlapping generations model. Our result stands in sharp contrast to the representative agent setting with automation, where sustained long-run growth is possible even without technological progress. Our analysis therefore provides a cautionary tale that the underlying modeling structure of saving/investment decisions matters for the derived economic impact of automation. In addition, we show that a robot tax has the potential to raise per capita output and welfare at the steady state. However, it cannot induce a takeoff toward positive long-run growth.
This paper studies the government spending multiplier in the presence of the cost channel of the nominal interest rate. I find that the spending multiplier of normal times declines markedly when this channel is introduced. The rise in government spending leads to a rise in the nominal interest rate and, with the cost channel, to a rise in the marginal cost and inflation. In turn, this leads to a bigger rise in the nominal interest rate and the expected real interest rate, hence a lower multiplier, than in a model that abstracts from the cost channel. On the other hand, in a liquidity trap, the cost channel makes the spending multiplier larger. Therefore, by ignoring the cost channel, the spending multiplier is overestimated in normal times and underestimated during liquidity trap episodes. Since liquidity traps are rare, however, the spending multiplier is mostly lower than in previous estimates.
Over recent years, a consensus has emerged that 'policy failures that allowed imbalances to get so large' were probably the main root cause of the Euro area crisis. Reflecting this, the new Euro area governance arrangements include a Macroeconomic Imbalances Procedure (MIP) that seeks to identify and take corrective action against emerging imbalances. This chapter uses a Bayesian structural VAR model to assess the feasibility of managing macroeconomic imbalances in the Euro area using four macroeconomic policy tools: fiscal policy, macroprudential policy, product market structural reforms and labour market reforms. Consistent with the emerging literature, it finds that managing macroeconomic imbalances is likely to be difficult. However, it raises the tantalising prospect that a combination of eliminating structural rigidities before macroeconomic imbalances arise plus using macroprudential policy to manage emerging macroeconomic imbalances could be effective.
Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it? We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration into its main components, we can see a significant positive role for financial and political integration in the long run. However, the first seems to have beneficial effects for the core only, while the opposite holds for the political integration, which influences positively the periphery.
Fiscal and monetary policy are among the most basic tools governments use to manage their economies. These tools have evolved in dramatic fashion during the twentieth and early twenty-first centuries. This chapter examines that evolution and its implications for socioeconomic performance. I begin by explaining what these tools are. Second, I discuss the basic debates about how they ought to be used and how the general approach to fiscal and monetary policy evolved from the Keynesian era beginning roughly in the 1930s to the neoliberal era beginning in the late 1970s. My intention is not to delve into the intricacies of economic theory or the minutiae of economic policy but rather to summarize these things with broad strokes.
This chapter summarizes the main episodes of output contraction and crises across subsequent decades and relevant sub-periods in the long twentieth century. It interprets the main findings of the book and draws lessons for the design and implementation of policies that can be effective to anticipate and cope with macrocrises and main recessions.
Chapter 4 documents the worldwide intensity and duration of the Great Depression and focuses on the causes and consequences of the Depression in center and periphery economies. It examines the role played by the gold exchange standard, the lack of an international hegemonic power to coordinate and guide an effective international response to the shock, the response of monetary and fiscal policies, the timing of leaving the gold standard, and other factors. The chapter discusses the role of price deflation in exacerbating/ameliorating economic decline and the effects of war preparation in the United States, Germany, and other countries to put these economies back in a growth track.
We build an open-economy dynamic stochastic general equilibrium (DSGE) model that allows us to: (i) derive a time series for labor informality in Brazil spanning the period 2004–2018, whose evolution is consistent with the behavior of the main series provided by Pesquisa Nacional por Amostra de Domicílios (PNAD); (ii) run dynamic simulations showing that, in the presence of a large informal labor market (around 50% of the total labor force), expenditure-cutting measures lead, at worst, to mild short-run recessions in the formal sector and are likely to foster public debt sustainability. Likewise, adjustments through some kinds of distortionary taxation, mainly the corporate tax, and to a lesser extent, the consumption tax, also seem to improve both public debt dynamics and fiscal collection without a significant cost in terms of output. Thus, in countries with large informal economies experiencing fiscal woes, expenditure-based consolidations, as well as some sorts of tax-based adjustments, should be relied upon.
Recent work on optimal monetary and fiscal policy in New Keynesian models has tended to focus on policy set by an infinitely lived benevolent policy maker, often with access to a commitment technology. In this paper, we explore deviations from this ideal, by allowing (time-consistent) policy to be set by a process of bargaining between two political players with different weights on elements of the social welfare function. We characterize the (linear) Markov perfect equilibrium and, in a series of numerical examples, we explore the resultant policy response to shocks which cannot be perfectly offset with the available instruments due to their fiscal consequences. We find that, even although the players, on average, have the socially desirable objective function, the process of bargaining implies an outcome which deviates from the time-consistent policy chosen by the benevolent policy maker. Moreover, the range of instruments available mean that policy makers will bargain across the entire policy mix, sometimes implying outcomes which are quite different from those that would be chosen by a single policy maker. These policy outcomes depend crucially on the nature of the conflict and also the level of government debt.
We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.
To describe the development of Fiji’s fruit and vegetable fiscal policies between 2010 and 2014 and explore the impact they have had on import volumes.
Qualitative case study and in-depth analysis of policy process. Policy impact was assessed using publicly available import volume data and prices of food products.
Senior government policy makers, non-communicable disease officers from the Ministry of Health and Medical Services (MoHMS) and supermarket managers.
In 2011, the Fijian Government introduced an import excise of 10 % on vegetables and reduced the import fiscal duty on fruit that was also grown in Fiji by 10 %. The import tax on vegetables was removed in 2012 in response to a MoHMS request. Policy makers from several sectors supported the MoHMS request, recognized their leadership and acknowledged the importance of collaboration in achieving the removal of the excise. Tariff reductions appear to have contributed to increases in the volume of vegetables (varieties not grown in Fiji) and fruit (varieties grown in Fiji) imported, but it is not clear if this increased population consumption.
Reductions in import duties appear to have contributed to increases in volumes of vegetables and fruit imported into Fiji. This case study has demonstrated that governments can use fiscal policy to meet the needs of a range of sectors including health, agriculture and tourism.