Optimal Budget Deficit Rules

This paper discusses the problem of the optimal determination of budget deficit limits in cases where the fiscal authority wishes to keep the budget deficit close to a reference value. It is assumed that the fiscal authority minimizes the expected discounted value of squared deviations from the reference value. Lump-sum and proportional intervention costs are considered. This paper is also an example of integration between stochastic process optimal control methods and the continuous time stochastic models. In fact, the characteristics of the stochastic process that rules the path of the budget deficit are taken from a previously developed continuous time stochastic model (Amador, 1999). Finally, simulation methods are used in order to conduct a comparative dynamics analysis. The paper concludes that, in the case of proportional intervention costs, the optimal ceiling depends positively on the cost parameter and on the variance of the budget deficit. On the contrary, the optimal ceiling depends negatively on the average budget deficit. These results remain valid in the case where there are both lump-sum and proportional intervention costs. Finally, in a stationary equilibrium context, we conclude that economies with higher tax rates and lower public expenditure should set higher budget deficit ceilings. The same is true for economies with a higher variance in technology and public expenditure shocks.

Turkish Twin Effects: An Error Correction Model of Trade Balance

Twin deficit hypothesis mainly states that government budget deficits will cause trade deficits. However, this is not the only theoretically possible relationship between the budget deficit and the trade deficit. On the other extreme if Ricardian equivalence hypothesis holds it is also possible that two deficits are not related at all. In this study these hypotheses between the budget deficit and trade deficit for Turkey between 1987 - 2001 period are examined by using the cointegration methodology and by estimating an error correction model. This enabled us to search the relationship between the internal and external deficits both in the short-run and in the long-run. Our analysis showed that there is a long-run relationship between the two deficits. Also the short-run model yielded that worsening of the budget balance worsens the trade balance. Therefore we have concluded that the twin deficit hypothesis holds, and Ricardian equivalence hypothesis is not valid for Turkey during the study period.Twin deficits, trade deficit, budget deficit, Ricardian equivalence, cointegration, error correction models, unit roots, Turkey

Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalisation: Evidence from Sri Lanka after War: the case of a bridge too far?

This paper examines the long-run and short-run relationships between the current account deficit, budget deficit, savings and investment gap and trade openness in Sri Lanka using the autoregressive distributive lagged (ARDL) approach. The time series properties of the variables, in the presence of endogenous structural breaks, was previously analysed using Perron’s (1997) additive outlier (AO) and innovational outlier (IO) models. The empirical analysis supports the Keynesian view that a link exists between the current account, budget deficit and savings and investment gap. We found that trade openness has a positive effect on the current account deficit, but is statistically insignificant, and offer some strategies to stabilise the budget deficit and current account deficits in Sri Lanka.twin deficit, structural change, unit roots, ARDL

The impact of economic crisis on the fiscal revenues

This paper tries to evaluate the situation of the fiscal revenues in Romania in the context of economic and financial crisis, because the fiscal revenues are the major source of financing the public expenditure. The evolution of the level of fiscal revenue is very important because maintain the budget equilibrium. The article reveals the major trends of the fiscal revenues after EU enlargement and in the actual context of economic crisis and the impact on the budget deficit and the public debt. The state intervention in revive of the economy has to be financed through the budget, and this means a higher budget deficit. The proper solution in this condition for assuring the financial stability of the economy it was an external borrow from IMF.fiscal revenues, budget deficit, public debt

German unification and its impact on net savings

The obsolete capital stock in eastern Germany has to be rebuilt. This will increase the capital demand in Germany for the next few years. In addition to the increased demand for capital, government transfers need to be financed. The macroeconomic accounting identity requires that net savings of the private sector and the government budget balance be equal to the current account. The DM150 billion swing in the current account from a surplus to a deficit between 1989 and 1991 must therefore find its counter expression in either net savings of the private sector or the budget deficit. If a narrow concept of the government budget deficit is used, there would be a government budget deficit of roughly 3-4 percent of GNP in the period 1991-1993, which is not too disturbing. In this case, however, net savings of the private sector, which would amount to 1- 2 percent of GNP, appear to be relatively low because the sums not included in the government budget deficit then show up as negative savings in the business sector. A case in point is the Treuhand's deficit. If a broader concept of the government budget deficit is applied, there would be a budget deficit reaching 7-8 percent of GNP in 1992 and 1993. In that case, savings of the private sector are artificially blown up because capital transfers to firms, for instance, the infusion of new capital into Treuhand firms, are part of savings in the private sector. The need to rebuild the capital stock in eastern Germany produces pressure for a higher longterm interest rate in Germany; this implies that the mark appreciates, which has already occurred. Only if severe policy mistakes are made will a risk premium on the German currency be required, which would imply a depreciation. --

7 Things You Need to Know About the National Debt, Deficits, and the Dollar

This paper covers seven key points about the national debt, budget and trade deficits, and the dollar that the public needs to understand in order to be well-informed and prepared to choose among various policy options.national debt, budget deficit, trade deficit, dollar

Chile Fiscal Policy Management

A budget surplus arises in a country when the total revenue earnings surpass expenditures in a particular financial year. Having a budget surplus is very important in the sense that it brings about a decrease in the net public debt, while the public debt is increased in the event of a budget deficit. Both budget deficits and budget surpluses also exert indirect influences on taxpayers. Normally, it is not essential on the part of the government to maintain a budget surplus, though it needs to be very careful when running a budget deficit to have the proper buffer.Od kilkunastu lat polityka fiskalna Chile jest oparta na koncepcji równowagi budżetowej. W przeciwieństwie do równowagi efektywnej, która pokazuje aktualną sytuację fiskalną, ta pierwsza odzwierciedla średnioterminową perspektywę budżetu. Nadrzędną zasadą systemu jest szacowanie wpływu netto z podatków w określonym średnim okresie. Wydatki muszą być przy tym równe wpływom. W praktyce oznacza to oszczędzanie podczas wzrostu gospodarczego oraz wydawanie uzyskanej nadwyżki w okresie, kiedy wpływy z podatków są mniejsze

The UK public finances: ready for recession?

Summary Neither the current Labour government nor the previous Conservative one can look back over their respective terms of office as periods of great success in fiscal management. Both started by strengthening their underlying budget balances for three years after taking office, but both then allowed them to drift steadily back into the red. This meant that they were already borrowing significant amounts when the onset of recession required them to borrow more. Labour is entering this recession with a similar structural budget deficit to the one that it inherited from the Conservatives, but with a smaller underlying debt. It remains to be seen whether the structural budget deficit will deteriorate as far under Labour as it did under the Conservatives, but debt is very likely to rise above the peak it recorded under the Conservatives (even without the impact of recent bank nationalisations and recapitalisations). Labour recorded a similar structural budget deficit in the year before this recession to that which the Conservatives recorded in the year before the last. However, the structural deficit appears to have deteriorated more sharply in the early phase of the downturn than it did under the Conservatives and as a result is set to be higher in the first year of recession than it was under the Conservatives. This largely reflects the particular impact of the credit crunch and falls in the stock market and housing market, rather than budget decisions. Labour is also going into the recession with a significantly higher level of debt than the Conservatives did. Turning to the international context, we are entering the current recession with one of the largest structural budget deficits in the industrial world and a debt level that may be among the smallest in the G7 but which is larger than that of most industrial countries. We have done less to reduce our structural budget deficit and less to reduce our debt than most other industrial countries since Labour came to office

Fiscal regime changes and the sustainability of fiscal imbalance in South Africa; a smooth transition error-correction approach

In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between fiscal revenue and expenditure, by making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium. The analysis uses quarterly data for South Africa. The paper reveals that government authorities in South Africa are more likely to react fast when the budget is in deficit than when in surplus, and that the stabilisation measures used by government are fairly neutral at low deficit levels; that is, at deficit levels of 4% of GDP and below. We conclude that an attempt to achieve fiscal sustainability via a reduction in expenditure on sectors conducive to economic growth might be prone to create social and political shocks, which could render such fiscal policy unsustainable. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated.smooth transition error correction model; nonlinearity; government intertemporal budget constraint; and fiscal sustainability.