Fiscal consolidation strategy : [Version 21 September 2012]

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization

Fiscal consolidation strategy

In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact focussing primarily on a dynamic stochastic general equilibrium model with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. We explore the role of the mix of expenditure cuts and tax reductions as well as gradualism in achieving this policy outcome. Finally, we conduct sensitivity studies regarding the type of model used and its parameterization

New Keynesian versus old Keynesian government spending multipliers

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large

Fiscal consolidation strategy: An update for the budget reform proposal of march 2013

Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth

New Keynesian versus old Keynesian government spending multipliers

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large. JEL Classification: C52, E62fiscal multiplier, Fiscal Stimulus, government spending, Macroeconomic Modeling, New Keynesian Model

What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package

Much of the recent economic debate about the impact of stimulus packages has focused on the size of the crucial government purchases multiplier. But equally crucial is the size of the government purchases multiplicand—the change in government purchases of goods and services that the multiplier actually multiplies. Using new data from the Bureau of Economic Analysis and considering developments at both the federal and the state and local level, we find that the government purchases multiplicand through the 2nd quarter of 2010 has been only 2 percent of the $862 billion American Recovery and Reinvestment Act (ARRA) of 2009. This increase in government purchases has occurred mainly at the federal level. While states and localities received substantial grants under ARRA, state and local governments have not increased their purchases of goods and services. Instead they reduced borrowing and increased transfer payments. These findings explain why, regardless of the size of a government purchases multiplier, changes in government purchases have had no material effect on the growth of GDP since the time ARRA was enacted. The implication is not that ARRA has been too small, but rather that it failed to increase government consumption expenditures and infrastructure spending as many had predicted from such a large package. A consideration of the counterfactual event that there had not been an ARRA supports the hypothesis that state and local government borrowing would have been higher and purchases would have been about the same in the absence of ARRA.

Habitat zonation on coral reefs: Structural complexity, nutritional resources and herbivorous fish distributions

Distinct zonation of community assemblages among habitats is a ubiquitous feature of coral reefs. The distribution of roving herbivorous fishes (parrotfishes, surgeonfishes and rabbitfishes) is a particularly clear example, with the abundance of these fishes generally peaking in shallow-water, high-energy habitats, regardless of the biogeographic realm. Yet, our understanding of the factors which structure this habitat partitioning, especially with regards to different facets of structural complexity and nutritional resource availability, is limited. To address this issue, we used three-dimensional photogrammetry and structure-from-motion technologies to describe five components of structural complexity (rugosity, coral cover, verticality, refuge density and field-of-view) and nutritional resource availability (grazing surface area) among habitats and considered how these factors are related to herbivorous fish distributions. All complexity metrics (including coral cover) were highest on the slope and crest. Nutritional resource availability differed from this general pattern and peaked on the outerflat. Unexpectedly, when compared to the distribution of herbivorous fishes, none of the complexity metrics had a marked influence in the models. However, grazing surface area was a strong predictor of both the abundance and biomass of herbivorous fishes. The strong relationship between grazing surface area and herbivorous fish distributions indicates that nutritional resource availability may be one of the primary factors driving the distribution of roving herbivorous fishes. The lack of a relationship between complexity and herbivorous fishes, and a strong affinity of herbivorous fishes for low-complexity, algal turf-dominated outer-flat habitats, offers some cautious optimism that herbivory may be sustained on future, low-complexity, algal turf-dominated reef configurations

Improving the Quality of European Hard Cheese by controlling interactions between Lactic Acid Bacteria and Propionic Acid Bacteria (LAB/PAB) (Stimulation of Propionic Acid Bacteria by Lactic

End of Project ReportTeagasc acknowledges with gratitude grant aid under the EU Framework Programme (FAIR 96-CT-1024).In the manufacture of Swiss-type cheese two successive fermentations occur. During manufacture, lactic acid bacteria (LAB), particularly Streptococcus thermophilus, Lactobacillus helveticus and Lb. delbrueckii subsp. lactis, convert lactose to lactate while, during ripening, propionic acid bacteria (PAB) convert lactate to propionic acid, acetic acid and carbon dioxide (CO2). CO2 is responsible for eye formation and propionic acid results in the typical nutty flavour of Swiss-type cheese. There have been a few reports of interactions between a small number of LAB and PAB but the compounds involved have not been identified. A better understanding of this phenomenon is necessary to select strains of PAB for cheesemaking and improve the quality of hard cheeses. Cheese cannot be used for such a study because of its complexity and the length of time it is ripened. Hence, a simple whey-based model developed by Piveteau et al (1995) was successfully used to study the interactions between LAB and PAB. In this procedure, the LAB were grown overnight in milk and the whey was collected by centrifugation. After neutralisation and filter-sterilisation, the growth of strains of PAB in this whey and in a control whey produced from the same milk by acidification with lactic acid were compared. The objectives of this study were to refine the model of Piveteau et al (1995) to study the interactions between LAB and PAB and to determine the nature of the stimulant(s) produced by the LAB. * Thirty-two combinations of different commercial strains of PAB and LAB were evaluated in a modified whey model. None showed any inhibition and all showed some degree of stimulation but the extent of the stimulation depended on the particular pair of PAB and LAB used. * An inhibitor of PAB was found in milk, which prevented the growth of PAB from low (105 cfu/ml) but not from high inocula (107 cfu/ml). The inhibitor was heat stable (to autoclaving for 15 min), of low molecular mass and could be removed by pre-growth of some but not all starter LAB in milk. * Growth of P. freudenreichii DPC 3801 in control whey was stimulated by peptone, tryptone, casein hydrolysed by the crude proteinase of Lb. helveticus DPC 4571 and by pre-growth of the lactobacillus in milk, but not by vitamins (riboflavin, thiamine, PABA, Ca panthothenate, biotin and nicotinic acid) or minerals (MgSO4, MnCl2, CoCl2 and CuSO4). * Growth of Lb. helveticus DPC 4571 in milk resulted in significant increases in peptide and amino acid production but the amino acids produced did not stimulate the growth of the PAB. Based on these results it was concluded that the stimulation was due to production of peptides by the LAB from casein. * The whey model developed by Piveteau et al (1995) to study the interactions between PAB and LAB was shown to be reproducible. Adjustment of the pH of the whey to 5.4 rather than 6.0, incubation at 24ºC rather than 30ºC and addition of 1% NaCl, to simulate cheese ripening conditions allowed growth of all the PAB tested. * Several chromatographic procedures, including ion-exchange, gel permeation and reverse-phase, high-pressure liquid chromatography failed to categorically identify the peptide(s) responsible for the stimulation of the PAB. In some of these chromatographic systems,the stimulatory activity was shown to be present in several peaks implying that different peptides were involved.European Unio