By the fall of 2008, however, the reserve effects of our liquidity and credit programs threatened to become too large to sterilize via asset sales and other existing tools. Well-designed fiscal rules and medium-term frameworks can also help by enabling uninterrupted access to borrowing at favorable conditions, ensuring expenditure control over the entire cycle, and leaving flexibility to respond to output shocks. This finding, while seemingly obvious, is now backed by numbers to match each question. We thank three referees, John Ashworth, Jim Malley, Anton Muscatelli, Sheilagh Ogilvie, Michael Reutter and Lars Svensson for helpful comments and suggestions. More information Research fields, statistics, top rankings, if available. Our Expanded Toolkit To address the challenges posed by the financial crisis and the subsequent severe recession and slow recovery, the Federal Reserve significantly expanded its monetary policy toolkit.
The global financial crisis revealed two main shortcomings of this simple toolkit. Armed with this database, we lay out some basic facts about fiscal policy in Latin America. The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. In advanced economies, making fiscal policies more stabilizing could cut output volatility by about 15 percent, with a growth dividend of about 0. These surpluses follow a period the eighties of rather exceptional budget deficits. This would reduce output volatility by about 15 percent, which in turn brings about a growth dividend of 0. How does fiscal policy stabilize output? Excessive inflationary pressures could arise if assets were sold too slowly.
Two salient features of our analysis are 1 a systematic test for the government's ambivalent role as a shock absorber and a shock inducer--removing a downward bias present in existing estimates of the impact of automatic stabilizers--and 2 a broad sample of advanced and emerging market economies. Stability is more easily achieved, however, under procyclical fiscal policies. Procyclical fiscal policies, on the other hand, tend to intensify the business cycle as output contractions expansions are met by an increase decrease in the primary surplus. It appears that, in budgetary terms, about half of the discretionary measures add to the areas already covered by automatic stabilisers while the other half address other areas such as investments, industrial sectors and vulnerable groups particularly hit by the crises. There, details are also given on how to add or correct references and citations.
Working Papers describe research in progress by the author s and are published to elicit comments and to further debate Summary: The paper revisits the link between fiscal policy and macroeconomic stability. Finally, and most ambitiously, as a society we should explore ways to raise productivity growth. Also, the destabilizing impact of policy changes not systematically related to the business cycle may not be as robust as suggested in the literature. Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers. In particular, I will focus on whether our existing tools are adequate to respond to future economic downturns. For starters, our ability to use interest on reserves is likely to play a key role for years to come.
The paper revisits the link between fiscal policy and macroeconomic stability. In fact, it is not so complicated, thanks to automatic stabilizers which comprise tax payments that move in sync with income and spending, and social transfers, such as unemployment benefits which automatically boost aggregate demand during downturns and moderate them during upswings. The effect can be large. Another key factor is the marked decline over the past decade, both here and abroad, in the long-run neutral real rate of interest--that is, the inflation-adjusted short-term interest rate consistent with keeping output at its potential on average over time. On the net level, significant inflationary effects cancel each other out. Our estimate finds certain counter-cyclical features on the side of contributions, although expenditures for benefits did not reveal significant effects.
For more information on the standard Taylor rule, see John B. Existing fiscal rules and budgetary planning elements are examined. Even if the tax regime is not the only factor that determines decisions for foreign investments, reducing tax rates in some new Member States has increased the attractiveness of these countries for foreign investors. You can help adding them by using. The figure below is striking. Also, the destabilizing impact of policy changes not systematically related to the business cycle may not be as robust as suggested in the literature.
Paying interest on reserves is a tool commonly used by central banks, including the Bank of England, the Bank of Japan, and the European Central Bank. When shocks occur and the economic outlook changes, monetary policy needs to adjust. In addition, policymakers could have less ability to cut short-term interest rates in the future than the simulations assume. Either way, higher deficit or a lower surplus effectively cushions the blow on output. Moreover, relying too heavily on these nontraditional tools could have unintended consequences.
Thus, we expect to have less scope for interest rate cuts than we have had historically. Differences in predictive accuracy among these forecasters are not statistically significant. Smoothing through the monthly ups and downs, job gains averaged 190,000 per month over the past three months. Two of the Fed's most important new tools--our authority to pay interest on excess reserves and our asset purchases--interacted importantly. As always, it would be important to ensure that any fiscal policy changes did not compromise long-run fiscal sustainability. The ranking of instruments between government spending and labor income taxes depends mainly on the instrument volatility the policymaker will tolerate. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis.
Reserves were initially taken out of the banking system by not reinvesting principal payments from maturing securities and later by selling portions of securities holdings. The paper revisits the link between fiscal policy and macroeconomic stability. We find no evidence supporting this view. Results provide strong support for the view that fiscal stabilization operates mainly through automatic stabilizers. Fiscal sustainability in the wake of the financial crisis - Torben M. Author: Xavier Debrun is deputy chief of the Fiscal Policy and Surveillance Division in the Fiscal Affairs Department of the International Monetary Fund. Our basic presumption is that by definition, the operation of automatic stabilizers should always and everywhere contribute to greater macroeconomic stability output and consumption.