Advanced Macroeconomics II. Fiscal Policy. Jordi Galí. Universitat Pompeu Fabra April 2018

Transcription

1 Advanced Macroeconomics II Fiscal Policy Jordi Galí Universitat Pompeu Fabra April 2018

2 Dimensions of Fiscal Policy (a) Expenditures - purchases of goods and services (e.g. administration, public goods) - transfers: redistribution (e.g. unemployment bene ts, pensions) - subsidies: incentives (externalities) - interest expenses (on public debt) (b) Revenues (taxes) - nancing of public expenditures - discourage/punish certain activities Di erence between (a) and (b): de cit/surplus! issuance of debt/accumulation of assets! seignorage Fiscal policy and economic uctuations! stabilization tool! independent source of uctuations

3 Fiscal Policy in the Basic RBC Model Government budget constraint in period t: G t + (1 + r t 1 )B g t 1 = n t W t N t + T t + B g t Household s budget constraint in period t: C t + B t = (1 n t )W t N t + (1 + r t 1 )B t 1 + D t T t De nitions: G t : public consumption B G t : government debt n t : labor income tax T t : lump-sum tax (non-distorting).

4 Modi ed intratemporal optimality condition: U n;t + (1 n t )W t U c;t = 0 for t = 0; 1; 2; ::: Example + log-linear version: w t = c t + 'n t log(1 n t )

5 Equilibrium Goods market Y t = C t + G t Log-linear version (ignoring constants): y t = (1 s g )c t + s g g t where s g G=Y. Labor market c t + 'n t log(1 n t ) = a t n t + log(1 ) Asset market Technology b t = b g t c t = E t fc t+1 g y t = a t + (1 1 (r t ) )n t

6 Equilibrium values (ignoring constants and using log(1 n t ) ' n t ): n t = (1 s g )a t (1 s g ) n t + s g g t (1 ) + (1 s g )( + ') y t = (1 + ')(1 s g)a t (1 )(1 s g ) n t + (1 )s g g t (1 ) + (1 s g )( + ') c t = (1 + ')a t (1 ) n t s g ( + ')g t (1 ) + (1 s g )( + ') w t = [ + '(1 s g)]a t + (1 s g ) n t s g g t (1 ) + (1 s g )( + ') Discussion - Fiscal shocks ( n t ; g t ) - Ricardian equivalence - Countercyclical policies r t = + E t fc t+1 g

7 Empirical Evidence on the E ects of Fiscal Shocks The "identi cation problem" E ects of tax changes: Romer & Romer (AER 2010) - "narrative" approach - focus on exogenous tax changes: legislative action (not automatic) motivated by: - need to reduce inherited debt/de cit - long term goals - estimated equations: KX y t = + k T t k + u t y t = + KX k=0 k=0 k T a t k + KX k=0 k T i t k + u t

8 Source: Romer and Romer AER 2010

9 Source: Romer and Romer AER 2010

10 Source: Romer and Romer AER 2010

11 E ects of government purchases: Galí, López-Salido and Vallés (JEEA 2007) - scal policy rule: - macroeconomic e ects: g t = z t = KX 0 kx t k=1 KX k " g t k=0 k + " g t k + u t E ects of scal consolidations: IMF WEO (Oct. 2010) - 15 countries, scal consolidations (aimed at de cit reduction) - estimated equations: KX z t = + k f t k + u t k=0

12 Source: Galí, López-Salido and Vallés, JEEA 2007

13 Source: IMF WEO, October 2010

14 Source: IMF WEO, October 2010

15 Source: IMF WEO, October 2010

16 Source: IMF WEO, October 2010

17 Debt and De cit Dynamics Government budget constraint: B g t = (1 + r t 1 )B g t 1 + G t T t De cit DEF t r t 1 B g t 1 + G t T t Primary de cit Structural (or cyclically adjusted) de cit DEF p t G t T t DEF t r t 1 B g t 1 + G(Y t ) T (Y t ) Structural primary de cit DEF p; t G(Y t ) T (Y t )

18 Debt Dynamics: B g t = (1 + r t 1 )B g t 1 + DEF p t 1 + b g rt 1 t = b g t g + def p t t where b g t B g t =Y t, def p t DEF p t =Y t and g t (Y t Y t 1 )=Y t 1 b g rt 1 g t t = b g t g + def p t t Stationary case: Stability condition: Steady state debt ratio: b g t = r g 1 + g r < g b g t b g = 1 + g g r def p 1 + def p

19 Primary Deficit and Debt Dynamics: r<g g b t def p > > > > > > > > > > > > > > > > < < < < < < < r g b g t 1 + def 1+ g p g bt 1

20 Primary Deficit and Debt Dynamics: r<g g b t def p 1 def p 0 > > > > > > > > > > > > > > > > > > > > > < < < < g bt 1 r g b g t 1 + def 1+ g p

21 Primary Deficit and Debt Dynamics: r>g g b t r g b g t 1 + def 1+ g p < < < < < < < < < < < < < < < < def p > > > > > > g bt 1

22 Primary Deficit and Debt Dynamics: rb ( ) g t 1 g b t def p > > > > > > > > > > > > < < < < < < < g rb ( t 1) g b g t 1 + def 1+ g > > > > > p g bt 1

23 Euro Area Government Bond Spreads

24 Debt Reduction Strategies Lower primary de cit Higher growth Default or debt restructuring (or in ation) Financial repression Sale of public assets (privatization)

25 Fiscal Rules in Europe EU treaty: - "no bail out" clause - "no monetization" clause - limits to de cits and debt ratios (3/30); Stability and Growth Pact (1997): - "preventive branch": scal balance or surplus in the medium-term (stability and convergence programs) - "corrective branch": excessive de cit procedure (EDP): correction in 2 years, sanctions (0.2% of GDP) Reform: focus on "structural de cit" (<1% medium term; 0.5% correction per year); more exceptions. Euro Plus Pact (May 2011): - strengthening of sanctions (inverted quali ed majority) - EDP for excessive debt (>60%); annual correction of 1/20 - ceiling on government spending growth (= medium term GDP growth)

26 Fiscal Compact (March 2012) - need for national " scal stability laws" - maximum structural de cit = 0.5% October 2012: European Stability Mechanism starts operating Spain - September 2011: Constitutional amendment (Art 135) - April 2012 "Ley Estabilidad Presupuestaria": structural de cit<0%, 0.8% adjustment until 2020 Bailouts - Greece I (May 2010), 110bn - Ireland (November 2010), 85bn - Portugal (May 2011), 78bn - Greece II (March 2012), with restructuring, 130bn - Spain (June 2012), bank capitalization, 100bn - Cyprus (April 2013), 10bn - Greece III (August 2015), 86bn

27 Source: IMF WEO, April 2018 Source: Fiscal Monitor, April 2018

28 Source: Fiscal Monitor, April 2018

29 Source: IMF Fiscal Monitor, April 2018

30 Source: Fiscal Monitor, April 2018