On the Dynamic Effects of Government Stimulus Measures in a Changing Economy.

No abstract available

Spending rises are more effective in expanding the economy by as much as 20 percent compared to tax cuts

Both fiscal and monetary authorities have engaged in ‘unconventional’ policies over the past few years in order to bring the Great Recession under control. But, have these actions been intentionally coordinated, and what has been their economic impact? More fundamentally, has there ever been a systematic or regular coordination between fiscal and monetary policy in the US? Eddie Gerba and Klemens Hauzenberger find sufficient evidence for an implicit coordination of policies, and demonstrate how it has changed over the past three decades. They find that spending and tax stimuli have notably been more efficient in expanding the economy during the Volcker chairmanship (1979-84) and the Great Recession (2008-12). Taking into account that the current interest rate is constrained by the zero lower bound, fiscal authorities have an unprecedented window of opportunity to pursue activist policies aimed at expanding output, if and only if they carefully manage the expectations of private agents

Estimating US fiscal and monetary interactions in a time varying VAR

We contribute to the growing empirical literature on monetary and fiscal interactions by applying a sign restriction identification scheme to a structural TVP-VAR in order to disentangle and evaluate the policy shocks and policy transmissions. This in turn allows us to study the Great Recession in a consistent fashion. Four facts stand out from our findings. We observe significant differences in the endogenous responses to shocks in particular between the Volcker period and the Great Recession, and find that monetary policy reacts more aggressively during Volcker chairmanship and fiscal policy during the Great Recession to stabilize the economy. Second, impulse responses confirm that there is a high degree of interactions between monetary and fiscal policies over time. Third, in the forecast error variance decomposition we find that while government revenues largely influence decisions on government spending, government spending does not influence tax decisions. Fourth and final, our analysis of the fiscal transmission channel reveals that tax cuts, because of their crowding-in effects, are more effective in expanding output than government spending rises, since the tax multiplier is higher and more persistent. In light of the current recession and the zero lower bound of the interest rate, tax cuts can, by providing the right incentives to the private sector, result in high and very persistent growth in output if private agent expectations regarding the length and the financing structure of the fiscal expansion are delicately managed jointly by the two authorities

On the Dynamic Effects of Government Stimulus Measures in a Changing Economy

Defense date: 15 June 2011Examining Board: Prof. Massimiliano Marcellino, EUI, Supervisor Prof. Helmut Lütkepohl, EUI Prof. Simon van Norden, HEC Montréal Prof. Marco Maffezzoli, Università BocconiNo abstract availabl

An Empirical Characterization of Redistribution Shocks and Output Dynamics

What are the economic effects of redistributing one dollar from profits to labour income? We address this question for the post-World War II economies of the United States and Canada within a structural VECM procedure allowing for up to two breaks of unknown timing. In the United States the short-run spending effect on growth, set in motion by higher labour income, is strong enough to make such a redistribution an attractive, maybe provocative, policy alternative. Across the border in Canada, however, the negative medium-run capacity effect, brought about by diminished profits, dominates the picture more or less from the beginning and output slumps considerably, a result actually suggesting a - maybe even more provocative - redistribution towards profits. We discuss several possible explanations such as the formation of expectations and the different exposure to international trade. Methodologically, we provide a novel procedure to estimate cointegrating rank and break dates jointly.redistribution, structural VECM, joint estimation of cointegrating rank and multiple break dates