چرخه های رونق_رکود و سیاست های مالی هم جهت در یک اقتصاد باز کوچک
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|29449||2012||20 صفحه PDF||سفارش دهید||9180 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Policy Modeling, Volume 34, Issue 5, September–October 2012, Pages 735–754
The PIGS countries have suffered economic instability and fiscal havoc in the aftermath of the Financial Crisis. We argue this is the consequence of pursuing procyclical fiscal policies. We add a fiscal rule, which varies public spending with the cycle, to an otherwise standard RBC model of a small open economy. This procyclical reaction of fiscal policy to output distorts intertemporal allocation decisions. Procyclical spending generates very volatile cycles in investment and the current account. Our model is able to replicate the relationship between the degree of cyclicality of fiscal policy and the volatility of consumption, investment and the current account we observe in OECD countries. A policy that let automatic stabilisers work can effectively smooth economic fluctuations, especially after structural reforms that raise the responsiveness of the economy.
Textbook macroeconomics tells us that for a given level of public spending, taxes should be smoothed along the cycle in order not to exacerbate the distortionary effect of taxation, or the government should let taxes and spending adjust in a countercyclical fashion to stabilise income. Automatic stabilisers fulfil these functions. Discretionary intervention might strengthen the countercyclical response under some specific circumstances. However, in practice governments do not reinforce the working of automatic stabilisers, but usually overturn them. Instead of dampening cyclical swings in output, governments give an additional boost to the economic cycle in a boom with spending hikes or tax cuts. They also often raise taxes – but omit reducing spending – in an economic crisis. Evidence for OECD countries shows that procyclical fiscal policies are mostly driven by government expenditure (Hauptmeier et al., 2011, Hercowitz and Strawczynski, 2004 and Lane, 2003). Lavish spending is possible as the economic boom provides the treasury with plenty of additional tax revenues. In particular, in countries like Portugal, Ireland, Greece or Spain, public spending has often continued to grow during the economic boom as it was fuelled by buoyant tax receipts flowing to the treasury.3 The surge in tax revenues often triggered tax cuts, with apparently little effect on total revenues. This fiscal relaxation has given an excessively strong boost to internal and external demand. Unwinding these fiscal imbalances in the Financial Crisis is much harder for the PIGS countries. Shrinking tax bases makes tax revenues dwindle, and forces cuts in spending at a time fiscal support would probably be needed most. Efforts to keep deficits in check set off the reverse procyclical mechanism and further aggravate the bust. In this paper, we develop a simple RBC model to analyse the effect of procyclical fiscal policies in a small open economy. We model fiscal policy with a simple reaction function in which the government changes spending in response to the economic cycle.4 The cyclical response of public spending distorts economic decisions. A boost to spending during a boom further inflates the economic outlook and spurs consumption and investment. The additional need for external financing of this domestic boom deepens the current account deficit. Unsurprisingly then, such policies contribute to economic imbalances and create a boom–bust cycle. A calibration of the model on Ireland shows that consumption is about a quarter more volatile than if the government would simply let the automatic stabilisers do their work. Our model is able to replicate the positive relationship between the degree of cyclicality of fiscal policy, and the volatility of consumption, investment and the current account observed in OECD countries. There is substantial evidence that large governments display less volatile economies (Fatas and Mihov, 2001 and Galí, 1994). As in Andrès, Domenech, and Fatas (2008), a shift in the composition of total output towards public spending reduces economic volatility. But in addition to this composition effect, we find that the procyclical use of fiscal policy may offset this effect of government size. Procyclical policy also has long-term consequences. As procyclical policy result in less economic stabilisation, it also discourages capital accumulation. Our model therefore establishes a link between two empirical regularities: (a) bad macroeconomic policies induce higher macroeconomic volatility (Acemoglu et al., 2003 and Woo, 2009), and (b) countries with highly volatile output grow at a lower rate (Ramey & Ramey, 1995). Reform of fiscal policy that ensures the working of automatic stabilisers in the PIGS countries would pay off with substantial gains in economic stability in the short run, which would translate also in increased economic activity in the long term. Rigid labour and closed financial markets in the PIGS countries might have reduced the effect of procyclical policies in the past, but integration into the EMU reveals the cost of sticking to procyclical policies. Structural reforms must therefore be accompanied by a fiscal reform too. The paper is organised as follows. In Section 2, we review the evidence on procyclical policies. In Section 3 we present the RBC model of a small open economy and introduce the spending rule. Section 4 then analyses the macroeconomic effects of varying spending over the cycle. Robustness checks are presented in Section 5. We conclude in Section 6.
نتیجه گیری انگلیسی
This paper presents a model that shows why some small open economies – like Ireland or Spain – that pursued procyclical fiscal policies have suffered such wide swings between economic boom and bust. We include a fiscal rule that let expenditure vary with the cycle in a simple RBC model of a small open economy. We calibrate the model on data for Ireland, and simulate the effect of different spending policies in response to economic shocks. The main finding is that procyclical fiscal policy fuels the economic cycle, inflates investment and deepens the current account deficit, and so rolls the economy into wide boom–bust cycles. Our model replicates the positive relationship between the degree of cyclicality of fiscal policy, and the volatility of consumption, investment and the current account that we detect in OECD countries. The model also establishes a link between a specific distortion to policy, probably rooted in political institutions, to high macroeconomic volatility and reduced economic growth for which there is also empirical support (Acemoglu et al., 2003 and Woo, 2009). If the government would simply let the automatic stabilisers on the spending side do their work, consumption would be about a quarter less volatile. These numbers are especially high as the economic transmission mechanism in Ireland exacerbates the effects of procyclical fiscal policy. EU membership has raised prospects of economic convergence of the PIGS countries in the last two decades. Their economies have become very much integrated in international financial markets, especially since its participation in EMU. Rigid labour markets have somewhat reduced the impact of procyclical policy. But labour market reform requires fiscal reform too that makes spending countercyclical. Sorting out the economic crisis in the PIGS countries may require fiscal adjustment in the short term, but the long-term goal should be to reduce the distortions in fiscal policy. This reform may either seek to tackle the procyclicality in spending directly, for example by restraining fiscal policy by an expenditure rule (Hauptmeier et al., 2011) or a deficit rule (Tanner, 2004), or set up institutions that promote fiscal sustainability, such as a Fiscal Council.