How to make discretionary fiscal policy countercyclical

In most countries, discretionary fiscal policy has often been pro-cyclical: instead of dampening the business cycle, actual discretionary policy has mostly magnified it. This paper proposes a mechanism that allows discretionary fiscal policy to be counter-cyclical. This involves the creation of a Budget Agency which carries out expenditures that, in addition to increasing its debt, also raise its saleable assets - and, therefore, do not reduce the net value of its balance-sheet. One example is the construction, during a downswing, of housing and office buildings that will be sold in the subsequent upswing. Besides real estate investment, the Budget Agency may also undertake “balance-sheet neutral” expenditures in two other sectors responsible for the bulk of business cycle fluctuations: business investment and durable consumption.stabilization, discretionary fiscal policy, business cycle.

Trade based on economies of scale under monopolistic competition: a clarification of Krugman's model

Although a major contribution to trade theory, Krugman’s 1979 demonstration that ‘trade can arise and lead to mutual gains even when countries are similar’ fails to make explicit the economic mechanisms that lead up to this result. The current paper attempts to fill this gap by addressing several questions that are implicit in Krugman’s demonstration but which he does not explicitly analyze: - What is the effect of trade upon the demand curve faced by the typical firm in each nation? - How do firms react to the change in the demand curves they face, and what is the short-term outcome of their behaviour? - Why do some firms fail? - What is the role of the failure of firms in the adjustment to the final free trade equilibrium?Krugman, intra-industry trade, economies of scale, monopolistic competition.

THE EFFECT OF LABOUR SHARE ON THE NATURAL RATE OF INTEREST: SOME EMPIRICAL EVIDENCE

Standard estimations of Taylor.s (1993) monetary policy rule assume that the natural real rate of interest can be regarded as constant. By contrast, based on Mankiew (2000) theory of Savers and Spenders, we argue that the natural rate is related to the distribution of income between the two types of agents. We show evidence from the U.S., based on a respecication of the Taylor rule proposed by Clarida et al. (2000), that the natural rate of is positively in.uenced by the long-run movements of the labour share in the national income. As the labour share has been falling since 1980s, our results indicate that the natural real interest rate fell from around 6% to around 2% in the beginnings of our decade.

Is a very high public debt a problem?

This paper has two main objectives. The first is to propose a policy architecture that can prevent a very high public debt from resulting in a high tax burden, a government default, or inflation. The second objective is to show that government deficits do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector necessarily realizes savings, in the form of either government bond purchases or, if a default is feared, 'acquisitions' of new money

How to make discretionary fiscal policy countercyclical

In most countries, discretionary fiscal policy has often been pro-cyclical: instead of dampening the business cycle, actual discretionary policy has mostly magnified it. This paper proposes a mechanism that allows discretionary fiscal policy to be counter-cyclical. This involves the creation of a Budget Agency which carries out expenditures that, in addition to increasing its debt, also raise its saleable assets - and, therefore, do not reduce the net value of its balance-sheet. One example is the construction, during a downswing, of housing and office buildings that will be sold in the subsequent upswing. Besides real estate investment, the Budget Agency may also undertake “balance-sheet neutral” expenditures in two other sectors responsible for the bulk of business cycle fluctuations: business investment and durable consumption.UECE is supported by FCT

Trade based on economies of scale under monopolistic competition: a clarification of Krugman's model

Although a major contribution to trade theory, Krugman's 1979 demonstration that 'trade can arise and lead to mutual gains even when countries are similar' fails to make explicit the economic mechanisms that lead up to this result. The current paper attempts to fill this gap by addressing several questions that are implicit in Krugman's demonstration but which he does not explicitly analyze: - What is the effect of trade upon the demand curve faced by the typical firm in each nation? -How do firms react to the change in the demand curves they face, and what is the short-term outcome of their behaviour? Why do some firms fail? What is the role of the failure of firms in the adjustment to the final free trade equilibrium

The Expenditure Composition Hypothesis: Empirical Evidence and Implications for Monetary Policy.

Leão (2005) has recently proposed a new explanation for the short run variability of the velocity of money based on the changes in the composition of the expenditure that occur along the business cycle. This paper presents further empirical evidence in favour of Leão’s Expenditure Composition Hypothesis, and draws new implications of this hypothesis for monetary policy. We use a VAR model to analyze the determinants of the velocity of both M1 and M3 in the USA. The main conclusion is that increases in the weight of investment and durable consumption in total expenditure raise the velocity of both narrow and broad money. This is in line with the Expenditure Composition Hypothesis. Furthermore, we draw a new implication of this hypothesis for monetary policy. The more a central bank’s decisions on the interest rate respond to money growth, the more volatile economic growth will be. In other words, a monetary policy strategy - like that of the ECB – which puts emphasis on money growth is de-stabilizing.Velocity of money; monetary policy; business cycle.