Fiscal Policy Discretion, Private Spending, and Crisis Episodes

In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for– in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run – especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability.Fiscal policy discretion, GDP growth, private consumption, private investment, crowding-in, crowding-out.

Fiscal policy discretion, private spending and crises episodes

In this paper, we assess the impact of fiscal policy discretion on economic activity in the short and medium-term. Using a panel of 132 countries from 1960 to 2008, we find that fiscal policy discretion provides a net stimulus to the economy in the short-run and crowding-in effects are amplified once crisis episodes are controlled for\u2013 in particular, banking crises - giving a great scope for fiscal policy stimulus packages. However, crowding-out effects take over in the long-run \u2013 especially, in the case of debt crises -, in line with the concerns about long-term debt sustainability

The impact of weather on COVID-19 pandemic

Rising temperature levels during spring and summer are often argued to enable lifting of strict containment measures even in the absence of herd immunity. Despite broad scholarly interest in the relationship between weather and coronavirus spread, previous studies come to very mixed results. To contribute to this puzzle, the paper examines the impact of weather on the COVID-19 pandemic using a unique granular dataset of over 1.2 million daily observations covering over 3700 counties in nine countries for all seasons of 2020. Our results show that temperature and wind speed have a robust negative effect on virus spread after controlling for a range of potential confounding factors. These effects, however, are substantially larger during mealtimes, as well as in periods of high mobility and low containment, suggesting an important role for social behaviour

Crises, Labor Market Policy, and Unemployment

Using a sample of 97 countries spanning the period 1980?2008, we estimate that financial crises have a large negative impact on unemployment in the short term, but that this effect rapidly disappears in the medium term in countries with flexible labor market institutions, whereas the impact of financial crises is less pronounced but more persistent in countries with more rigid labor market institutions. These effects are even larger for youth unemployment in the short term and long-term unemployment in the medium term. Conversely, large upfront, or gradual but significant, comprehensive labor market policies have a positive impact on unemployment, albeit only in the medium term

The rise in inequality after pandemics: Can fiscal support play a mitigating role?

Major epidemics of the last two decades (SARS, H1N1, MERS, Ebola, and Zika) have been followed by increases in inequality [Furceri et al. (2020), COVID Economics, 12, 138-157]. In this article, we show that the extent of fiscal consolidation in the years following the onset of these pandemics has played an important role in determining the extent of the increase in inequality. Episodes marked by extreme austerity - measured using either the government's fiscal balance, health expenditures, or redistribution - have been associated with an increase in the Gini measure of inequality three times as large as in episodes where fiscal policy has been more supportive. We survey the evidence thus far on the distributional impacts of the COVID-19 pandemic, which suggests that inequality is likely to increase in the absence of strong policy actions. We review the case made by many observers [IMF (2020), Fiscal Monitor; Stiglitz (2020), Finance & Development, Fall 2020; Sandbu (2020b), Financial Times, 26 November 2020)] that fiscal support should not be withdrawn prematurely despite understandable concerns about high public debt-to-GDP ratios

Climate change policies and income inequality

This paper examines the dynamic impact of Climate Change Policies (CCPs) on income inequality, for a sample of 39 developed and developing countries, during the period 1990–2020. The results show that CCPs are associated with a significant and persistent increase in income inequality. The effect is robust across various measures of inequality and sensitivity tests, including an instrumental variable strategy. The effect of CCPs only materializes in the case of market-based CCPs, is stronger in countries characterized by a higher share of low-educated workers and initial level of inequality, while is mitigated in those with comprehensive redistribution policies, and during periods of fiscal expansions and stronger economic growth. These findings have important policy implications, as they emphasize the importance of the timing and design of CCPs, as well as the role of complementary policies

Keeping Public Debt Sustainable in an Equitable Way

The COVID-19 pandemic has claimed over 5 million lives thus far. This grim figure would have been higher still without the strong and timely fiscal support provided by governments around the globe, including support for health sector and the development and deployment of vaccines. The IMF has noted that “in 2020, fiscal policy proved its worth. The increasing public debt in 2020 was fully justified by the need to respond to COVID 19 and its economic, social, and financial consequences” (Gaspar, 2021). How to keep debt sustainable is becoming a policy imperative, made all the more challenging by the lingering effects of the pandemic, particularly on low-income groups. In this article we summarize our recent work on the distributional effects of past major epidemics in this century prior to COVID-19 and the role that fiscal support played in mitigating these effects (Furceri, Loungani, Ostry and Pizzuto, 2021a; 2021b). The policy message is that more inclusive and targeted fiscal policies are needed in coming years if governments wish to achieve public debt sustainability without exacerbating inequality

Fiscal Policy and Crowding Out in Developing Asia

Fiscal stimulus programs have contributed substantially to developing Asia’s faster and stronger than expected recovery from the global financial crisis. This may lead to political pressures for greater use of countercyclical fiscal policy in the postcrisis period. However, the countercyclical effectiveness of fiscal policy depends critically on the extent to which it crowds out private investment and consumption. In the medium term, the use of fiscal policy to promote rebalancing toward domestic demand may require a moderate fiscal expansion. The extent of crowding out will impinge upon the effectiveness of such fiscal expansion in boosting domestic demand. Therefore, crowding out has implications for the effectiveness of fiscal policy as a tool for both short-run macroeconomic stabilization and medium- to long-term structural rebalancing. Overall, our evidence is decidedly mixed, with no clear evidence of either crowding out or crowding in. The evidence fails to provide compelling support for greater use of fiscal policy for countercyclical purposes. In the context of rebalancing, fiscal expansion will not, in and of itself, contribute to a more balanced demand and output structure. That would require using fiscal policy to help remove the structural impediments to private consumption and investment