MONETARY AND FISCAL POLICY DESIGN AT THE ZERO LOWER BOUND: EVIDENCE FROM THE LAB

The global economic crisis of 2007–2008 has pushed many advanced economies into a liquidity trap. We design a laboratory experiment on the effectiveness of policy measures to avoid expectation‐driven liquidity traps. Monetary policy alone is not sufficient to avoid liquidity traps, even if it preventively cuts the interest rate when inflation falls below a threshold. However, monetary policy augmented with a fiscal switching rule succeeds in escaping liquidity trap episodes. We measure the effect of fiscal policy on expectations, and report larger‐than‐unity fiscal multipliers at the zero lower bound. Experimental results in different treatments are well explained by adaptive learning. (JEL E70, C92, D83, D84, E52, E62)     

ALTERNATIVE P* MODELS OF INFLATION FORECASTS

This paper reevaluates the inflation forecast performance of M2-based P* models relative to other competing models over the period of 1970–96. Included in the comparative study are newly developed monetary aggregates, including M2+, MZM, and M2*, and direct treatments of velocity changes associated with recent developments in M2. Out-of-sample rolling-horizon forecast exercises suggest that the predictive accuracy of alternative P* model specifications relative to traditional inflation models is not robust to different subsamples. The switching forecast performance between money-based and output-based models across periods highlights the extent of structural instability in the inflation generating process. (JEL E3, E4, C2)     

NONLINEARITIES AND THE SUSTAINABILITY OF THE GOVERNMENT'S INTERTEMPORAL BUDGET CONSTRAINT

We analyze the sustainability of the government's intertemporal budget constraint and the corresponding fiscal reaction function within a nonlinear error‐correction framework. Our empirical analysis, based on Italy, provides some evidence that the Italian government is meeting its intertemporal budget constraint. Nevertheless, we show that the burden of correcting budgetary disequilibria is entirely carried out by changes in the average tax rate, with a weakly exogenous government spending, possibly determined by the political process. We also document some rigidities of the tax instrument, in terms of downward inflexibility of the average tax rate with respect to its long‐run level. Finally, we provide some evidence in favor of a nonlinear adjustment toward a sustainable long‐run equilibrium, as the average tax rate adjusts faster the further away it gets from the equilibrium. By considering the behavior of taxes across the economic cycle, we also provide some evidence of inflexibility of the tax instrument during bad times. (JEL C32, C51, C52, H20, H50)     

Threshold Effects in the U.S. Budget Deficit

We contribute to the debate on whether the U.S. large federal budget deficits are sustainable in the long run. We model the U.S. government deficit per capita as a threshold autoregressive process. We find evidence that the U.S. budget deficit is sustainable in the long run and that economic policy makers will only intervene to reduce per capita deficit when it reaches a certain threshold. (JEL C32 , E62 )     

Fiscal equalisation: Principles and an application to the European Union

The paper derives a normative model for partial fiscal equalisation based on a number of axioms and makes special allowance for the existence of a specific fiscal need in the jurisdictions. A simple version of this idealised equalisation scheme relates net contributions to the equalisation funds to deviations of a jurisdictions gross income from average gross income and a jurisdictions specific needs from average specific needs. The theoretical model is then empirically tested for the case of the European Union using data from 1986–97. It is found that most restrictions of the model appear to hold, in particular, relatively richer countries contribute more and those with greater fiscal needs, approximated by the importance of the agricultural sector, pay less. However, in the EU, an adjustment of net payments to changes in the actual importance of the specific fiscal need for a country is lacking.The paper was presented at the CESifo Area Conference on Public Sector Economics 2001 in Munich and at a research seminar in Berlin. Thanks to the participants, Matthias Brückner, Johann Brunner, Jeremy Edwards, Friedrich Heinemann, Eckhard Janeba, Roland Strausz, and Alfons Weichenreider for helpful comments. Special thanks to an anonymous referee for many detailed suggestions. All remaining errors are our own.     

Effects of Macroeconomic Uncertainty on Investment and Economic Growth: Evidence from Pakistan

The relationship between macroeconomic uncertainty, investment and economic growth is an empirical issue in developing countries. This paper investigates the effects of macroeconomic uncertainty on investment and economic growth in Pakistan for the period 1975–2008 by using the accelerator model of investment and endogenous growth model. The conditional variances, directly estimated through the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is utilized for erecting the uncertainty variables related to fiscal policy, openness and foreign capital inflows. The results clearly indicate that the macroeconomic uncertainty have significant negative effects on investment and per capita income of Pakistan. We conclude that a reduction in macroeconomic uncertainty through appropriate fiscal and monetary policy, stability in capital inflows and improved trade performance could result in high investment and sustainable economic growth in the country.     

EXCHANGE RATE REGIMES AND FISCAL DISCIPLINE: THE ROLE OF CAPITAL CONTROLS

How do exchange rate regimes influence fiscal discipline? This important question has typically been addressed exploiting the classic dichotomy of fixed versus flexible exchange rate regimes assuming perfect capital mobility. However, the role of capital controls cannot be neglected, particularly in developing countries. This paper analyzes the effects of capital controls on fiscal performance by focusing on dual exchange rate regimes. In a model in which the fiscal policy is endogenously determined by a nonbenevolent fiscal authority, dual regimes induce politicians to have higher fiscal deficits than under fixed and flexible regimes operating under perfect capital mobility. The model also shows this effect increases as fiscal authorities become more impatient. Dynamic panel regressions confirm that dual regimes lead to higher fiscal deficits than fixed and flexible regimes operating under unified rates. Using a dummy for pre‐electoral year as an indicator of fiscal authorities' shortsightedness, we also confirm that dual exchange rate has a more adverse effect on fiscal deficits as the authorities become more impatient. (JEL E50, E60, F31, F41)     

IS THE BUDGET DEFICIT “TOO LARGE”?: SOME FURTHER EVIDENCE

The size of the federal budget deficit has alarmed politicians and the general public both. Following recent work, we examine the long-run solvency of the U.S. government by testing for cointegration of federal expenditures and revenues. We include a break term in the cointegrating recession for 1981 to capture a shift in the fiscal process in the first Reagan administration. Tests show the break to be significant; and with the break, in contrast to earlier work, expenditures and revenues are cointegrated with a coefficient of one. Thus, we find the deficit to be stationary and so potentially sustainable.     

MONEY, CREDIT, and WAGES IN HYPERINFLATION: POST-WORLD WAR I GERMANY

An important feature of the German hyperinflation is the way in which accelerating monetization of both government and private debt by the Reichsbank fueled the inflation process. The stimulus to private credit demand arising from more rapid adjustment of money wages over this period is often ignored, however. The present empirical results strongly support the importance of wage pressures in augmenting fiscal influences on nominal money growth during 1920–1923. Our findings also suggest that wage claims provided the main conduit through which higher inflationary expectations were accommodated by faster rates of monetary expansion.     

Being independent from whom? Analysing two interpretations in the paradigm of ‘independent living’

Welfare provision for disabled people in Japan has been transformed from a medical model to an independent living model. However, this rhetorical change does not constitute a complete ideological shift. Consequently, the implementation of the independent living notion by Centres for Independent Living is constrained by tight fiscal budget. This paper reviews two interpretations in the paradigm of ‘independent living’, and demonstrates that the incorporation of the new notion of independent living just provides another approach for the government to continue its old agenda of freeing individuals from depending on the state through market-based reform.     

THE DUAL‐PROCESS DRIFT DIFFUSION MODEL: EVIDENCE FROM RESPONSE TIMES

We introduce a model of response time and choice that borrows from two distinct psychological traditions. As in dual‐process models, rapid (automatic) decisions are qualitatively different from considered decisions. As in the drift diffusion model, delayed (considered) decisions occur when confidence hits a threshold level. We conduct a simple experiment in which our hybrid model matches key properties of the data. As our model predicts, decision times are bimodal, automatic decisions are of far lower quality than considered decisions, and automatic decisions are more prevalent when prior information improves, thereby raising their quality. (JEL D83, D87, C91)     

灰色模型在社会燃气事故预测中的应用

简要介绍灰色预测理论，以及GM（1，1）模型的建模过程。并应用灰色预测模型对南方某大型城市燃气公司管道燃气供应范围内的社会燃气事故死亡人数进行预测并实施检验。检验结果表明应用灰色预测模型预测社会燃气事故死亡人数的发展规律是可行有效的。     

RULES AND DISCRETION WITH NONCOORDINATED MONETARY AND FISCAL POLICIES

The time inconsistency of optimal monetary policy is due to the effects of tax distortions. Thus the issue of how to improve upon the time-consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy. We present a model with three players (the central bark, the fiscal authority, and wage setters) in which distortionary taxes are explicitly modelled. We show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated. We also examine the effects of different degrees of independence of the central bank.     

MEDIATING CUTBACKS IN HUMAN SERVICES: A CASE STUDY IN THE NEGOTIATED ORDER

The nexus between the social world of private nonprofit service organizations (NPOs) and their environment is examined through data from a national study of reductions in fiscal support and through focused interviews with a sample of chief personnel in agencies in Maricopa County, Arizona. As a study in how some organizations adjust to changes in their funding environment, these data provide a basis for assessing the relative impact of fiscal restraint on organizations, as well as accounting theoretically for the impact of structure through interpretive process, social order through social control, and the construction of a negotiated order. When faced with reductions in federal support, NPOs took different courses of action in order to avoid negative impacts. Interpreting the data from a negotiated order perspective suggests that agencies' adjustments were mediated by an awareness of the national and local contexts, the services they offered, the clients they served, and their general capacity to maximize their resource mobilization potential . In some instances this adjustment amounted essentially to redefining their relevant environment, which was accomplished by integrating the format, logic, and criteria of the external world of business. The agencies survived and in some instances prospered, but their distinctive symbolic structure was compromised.     

CENTRAL BANK REPUTATION AND THE MONETIZATION OF DEFICITS: THE 1981 ITALIAN MONETARY REFORM

In 1981 the Bank of Italy was freed from the obligation to purchase the unsold public debt at the Treasury auctions. Since then, the Bank of Italy has reduced debt monetization. The paper seeks to explain this policy shift by analyzing a game between the monetary and fiscal authorities. The fiscal authority is imperfectly informed about the central bank preferences. An equilibrium exists in which the central bank does not monetize, so as to establish a reputation of being independent. Monetization raises fiscal deficits and may raise public debt relative to a non-accommodative policy.     

DESPERATE TIMES CALL FOR DESPERATE MEASURES: GOVERNMENT SPENDING MULTIPLIERS IN HARD TIMES

We investigate state-dependent effects of fiscal multipliers and allow for endogenous sample splitting to determine whether the U.S. economy is in a slack state. When the endogenized slack state is estimated as the period of the unemployment rate higher than about 12%, the estimated cumulative multipliers are significantly larger during slack periods than nonslack periods and are above unity. We also examine the possibility of time-varying regimes of slackness and find that our empirical results are robust under a more flexible framework. Our estimation results point out the importance of the heterogenous effects of fiscal policy and shed light on the prospect of fiscal policy in response to economic shocks from the current COVID-19 pandemic. (JEL C32, E62, H20, H62)     

RISK ASSESSMENT UNDER A NONLINEAR FISCAL POLICY RULE

In the aftermath of the recent debt crisis, many countries are implementing nonlinear fiscal policy rules, whereby the government's responsiveness to debt strengthens at higher levels of debt. This paper examines how a nonlinear fiscal policy rule affects the possibility of future insolvency in a small open economy. We find that (1) the criteria for a nonlinear fiscal rule to eliminate explosive behavior should be tighter than the ones proposed by Bohn (1998); (2) a country that adopts a nonlinear fiscal rule could substantially reduce the probability of a solvency crisis; and (3) a nonlinear fiscal rule allows a country to reduce the possibility of insolvency without large initial responsiveness. (JEL C63, E62, E63, F34, H63)     

BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

Local Government Fiscal Burden in Nonmetropolitan America1

Rising fiscal pressure on local governments in rural areas of the United States is documented in this study. The level of fiscal burden on taxpayers to support local governments in nonmetropolitan areas is found to be higher than that in metropolitan areas between 1977 and 1987. Using a model from the urban fiscal literature, the level of fiscal burden in nonmetropolitan areas is found to be influenced by a combination of demographic, socioeconomic, intergovernmental, and historical factors. Intergovernmental revenue transfers from the state and federal government play a critical role in determining the level of fiscal burden rural taxpayers bear. These findings have implications for rural economic development and for understanding how rural areas are influenced by the larger society.     

DOES EXCHANGE RATE APPRECIATION ‘DEINDUSTRIALIZE’ THE OPEN ECONOMY? A CRITIQUE OF U.S. EVIDENCE

This paper takes a critical look at the conventional view that the dollar exchange rate appreciation during the early 1980s caused a major resource shift in the U.S. economy away from tradables production, such as manufactures, toward nontradables production. We argue that the association of a dollar appreciation with relative strength or weakness in the tradable goods sector depends on the particular shock causing the appreciation, and consequently that the relation between exchange rates and the sectoral composition of output is unlikely to be stable over time. Our empirical analysis finds evidence of instability in the exchange rate–sectoral output link and of a positive association between tradables output and fiscal stimulus.