چشم انداز رفاه برروی ترکیب سیاست مالی، پولی: نقش ابزار مالی جایگزین

The need of fiscal consolidation is likely to dominate the policy agenda in the next decade; starting from statistical evidence on the conduct of fiscal policy in the EMU area over the last decade, this paper addresses the optimality of alternative fiscal consolidation strategies. In this paper, we explore the welfare properties of debt-targeting fiscal policy implemented through, alternatively, distortionary taxation on consumption, labour and capital income or productive and wasteful government expenditure. We build a general equilibrium model with various distortions in order to evaluate the welfare ranking of alternative fiscal policy configurations under different monetary policy regimes. Our results show the welfare superiority of fiscal adjustments based on productive government expenditure, whereas the use of a capital income tax rate as fiscal instruments yields the highest welfare loss.

The process of cutting-back the massive stock of public debt accumulated after the 2008-2009 recession is likely to dominate the policy debate over the next decade. Table 1 shows the change in levels of the debt/GDP ratio in major industrialized countries from 2007 to 2010.These figures suggest that the question is not so much whether to implement a fiscal consolidation, but rather how to do it. Specifically, whether it would be preferable to carry it out by cutting public expenditure or by increasing average tax rates on factor incomes and consumption. The issue of whether fiscal adjustments should rely on the expenditure rather than the revenue side is hardly a new topic in the policy debate. Its importance was already emphasized by the January 2004 ECB Monthly Bulletin (p.46) “The composition of the budgetary adjustment is particularly relevant, there being evidence that an expenditure-based adjustment tends to be more growth-friendly and long-lived than a tax-based adjustment without expenditure retrenchment.” Looking at the case-studies of Ireland and Denmark in the Eighties, Giavazzi and Pagano (1990) were the first ones to suggest that fiscal adjustments implemented on the government spending side could be expansionary. This view is confirmed by Alesina and Perotti (1997), who examine a full sample of OECD countries and find that adjustments relying on government expenditure cuts had a better chance of being successful and expansionary; on the other hand, if they are based on tax increases and cuts in public investments, tend not to be non-persistent and contractionary. This result is strengthened by Alesina and Ardagna (2009) who extend the analysis up to 2007. Using a panel OECD from 1970 to 2007, they define fiscal adjustments (stimuli) as episodes where the cyclically adjusted primary balance improves (deteriorates) by at least 1.5 per cent of GDP. Subsequently they investigate whether such episodes – that differ in size and composition – are associated with booms or recessions and with success in debt stabilization. Their conclusion is that most successful fiscal adjustments are those in which a larger share of the reduction of primary deficit is due to cuts in current spending (wage and non-wage component) and to subsidies. Based on these considerations, in this paper we introduce a new dimension to assess the desiderability of alternative debt-stabilizing plans: what are the welfare effects (and not simply the growth effects) of fiscal adjustments based on the expenditure rather than on the revenue side? To accomplish this task, we adopt a suitable DSGE framework calibrated on the Euro area, as the focus of our analysis is mainly targeted at the EU policy debate. As we employ a workhorse for policy analysis, as the DSGE model has become, we also refer to the related rich literature on the interactions between monetary and fiscal policy. The seminal contribution by Leeper (1991), featured by Ricardian environment and lump-sum taxation, established the parameter conditions for local equilibrium determinacy based essentially on the size of monetary policy’s response to inflation. If Taylor’s principle holds, determinacy is preserved regardless on fiscal policy’s active or passive stance. This implies that monetary policy is conducted without any influence arising from fiscal considerations: the fiscal authority merely raises tax revenue so to balance the intertemporal budget constraint, and the dynamic of debt is the main factor determining the tax stance1. If, alternatively, monetary policy’s feedback rule is not enough to affect the real interest rate,an active role of fiscal policy is needed to restore equilibrium determinacy. In particular, another strand of literature (“the fiscal theory of the price level”, Woodford, 1994 and Sims, 1994, (Canzoneri, Cumby, & Diba, 2001)) stresses the likely emergence of price level adjustments that are automatically needed in order to guarantee the intertemporal solvency of government budget constraint. Ever since Leeper (1991) the literature began to relax some of the simplifying assumptions which were part of the original framework, in order to be able to study the interactions between fiscal and monetary policy in a richer and more realistic framework2.Basically, contributions differ insofar as they employ alternatives strategies to depart from Ricardian equivalence. One strand of literature models the presence of non-Ricardian consumers à-la Blanchard (1985), by assuming a non-zero probability of death for households (Leith and Wren-Lewis, 2000 and Chadha and Nolan, 2007). Under this specification, consumers’finite-horizon implies a wealth effect of government debt on aggregate consumption via the Euler equation. In this scenario Leith and Thadden (2008) prove not only that steady-state government debt becomes a crucial state variable for determinacy of local equilibrium and its dynamics, but also that its level is important: the required degree of fiscal discipline is an increasing (but yet discontinuos) function of the debt level when monetary policy is to become more active3. Other contributions have broken Ricardian equivalence by introducing distortionary taxation, and have looked at the non-trivial interactions with monetary policy (Schmitt-Grohé and Uribe, 2004c, Schmitt-Grohé and Uribe, 2007, Edge and Rudd, 2002 and Linnemann, 2006). Our paper follows this latter approach, insofar as we introduce (multiple) distortionary taxation and implement a welfare analysis via second-order perturbation methods. Furthermore, the novelty of our contribution lies in the emphasis on the choice of the fiscal instrument. Particularly, we build a dynamic stochastic general equilibrium (DSGE) model with multiple sources of distortions, and perform a welfare evaluation of the use of different fiscal instruments. In particular, we compare the welfare properties of rules for fiscal policy that prescribe changes in different tax rates or types of government spending. Within each of these two categories, we operate a further distinction: on the spending side between government consumption and productive public spending, whereas on the revenue side between three types of distortionary taxation (on consumption, labour and capital income). Our analysis also distinguishes between monetary policy based on interest rate or money growth rules. The perspective we adopt is rather widespread in policy analysis. The role played by fiscal and monetary policy mix has been analyzed by Lossani, Natale, and Tirelli (2003), who explore how alternative monetary arrangements perform when the fiscal authority pursues a long-term debt reduction strategy, but yet retain fiscal flexibility to counteract supply shocks. In an open-economy setting, Tirelli (1992) evaluates coordination in the form of simple rules, finding support for monetary policy to be concerned with inflation control and fiscal policy to be assigned a foreign wealth target. In line with our focus on the EU area, Annichiarico (2007) investigates the inflationary effects of fiscal policy in a DSGE model calibrated with quarterly EU data, finding that government deficits, high debt levels and slow fiscal adjustments adversely affect price stability when monetary policy adopt a monetary target regime. We obtain a number of results. We find that fiscal consolidation based on productive government expenditure (defined broadly as public spending enhancing the marginal product of capital and labour in the production function) is welfare-superior to other specifications. On the other hand, fiscal adjustment based on capital-income taxation generally bring about the highest welfare losses. These ‘corners’ of targeting instruments’welfare ranking seem robust to a various specifications of the interest-rate rule, and even to an alternative specifications of monetary policy based on money growth. These results are not significantly reversed even if we assign a ‘useful’ role to government consumption, by inserting it additively into the utility function (e.g., see Linnemann and Schabert, 2004). Another relevant result concerns the ranking of (unconditional) welfare losses according to the degree of distortions in the economy. For any given fiscal instrument, the departure from perfect competition and the presence of money yields greater welfare losses than the introduction of price rigidity within a monopolistic competition framework. We believe our result concerning the welfare-superiority of a government spending rule as fiscal instrument to be particularly relevant for daily policy-making. Recent experiences (primary UK, but also Italy although to a lesser extent) attempted to peg government spending dynamics to the evolution of macroeconomic targets. Our framework can contribute to a better understanding of the relative desiderability of such an option. This paper is organized as follows. Section 2 presents some statistical evidence which is useful to pave the way for the normative analysis. Section 3 describes the theoretical model. Section 4 outlines the computational strategy for the solution of the model. Section 5 discusses the calibration of the model. Section 6 outlines the quantitative results. Section 7 presents some concluding remarks.

In times of pressing need of fiscal consolidation, the relative desiderability of different fiscal policy instruments deserves particular attention. We provided statistical evidence that in its first decade fiscal policy in the Euro Area has followed a debt-stabilizing approach, reducing primary deficit after a debt shock. However, whether this stance is welfare maximizing – and, most of all, which side the adjustment should be implemented on – is still an open question. In this paper we built a large-scale DSGE model with a considerable number of imperfections and attempted to provide a welfare comparison of alternative fiscal policy tools according to different monetary policy stances. Consistently with theoretical literature and the real world policy environment, fiscal policy targets the accumulation of public debt, by increasing (decreasing) tax rates (government spending) in response to fiscal imbalances. Our results show that employing productive government expenditure as fiscal instrument in the feedback rule on debt is actually Pareto-improving under active interest-rate- based monetary policy in a cashless economy. Other instruments – particularly capital income taxation – lead instead to more consistent welfare losses. Modification of the economic environment such as non-zero money demand in the cashless economy or money supply-based monetary rules still preserve the qualitative properties of our welfare ranking, pointing towards a relative desirability of productive expenditure-based fiscal adjustments rather than the active utilization of distortionary tax instruments. The general validity of such a conclusion might certainly be questioned by a more accurate analysis, capable of including key aspect that we were forced to leave out here, such a deeper consideration of the interactions between spending and revenue components of fiscal policy or a more precise investigation of non-Keynesian effects. A possible further step might incorporate some of the above suggestions so to be able to tackle into a DSGE framework more complex issues such as non-linearities in fiscal policy effects of the size of government spending multipliers (Figs. Fig. 8, Fig. 9 and Fig. 10).