Fiscal Monitor, April 2011: Shifting Gears - Tackling Challenges on the Road to Fiscal Adjustment
Sustained fiscal policy may be necessary because the global economic climate is showing symptoms of persistently inadequate demand dragging on growth and inflation. It can play a critical role not only in demand but also in expanding productivity and aggregate supply going forward.
Furthermore, fiscal spending creates future fiscal space through increasing government revenue and reducing the debt-to-GDP ratio, as shown in Figures 4a and 4b. Figure 4b Effect of permanent increase in government investment on government debt-to-GDP ratio. In a world characterised by inadequate demand and low interest rates, shocks to demand can spill more swiftly and strongly across borders Eggertsson et al. Normally, a demand contraction in one country will spill into others through shrinking imports. The demand shock affects the other countries, but it need not directly affect output.
If monetary easing is possible, those countries can offset the reduction in demand, which among other things shifts exchange rates and tempers the movements of the current account. However, at the effective lower bound, monetary policy cannot offset policies in foreign countries that create large current account surpluses.
The New View of fiscal policy and its application | VOX, CEPR Policy Portal
Thus, a fiscal contraction abroad spills directly into GDP. Note, the demand shock from fiscal consolidation has likely been significant in the Eurozone, where the Single Market makes these spillovers more direct and members cannot rely on the mitigating effects of exchange rates and monetary policy. Fiscal expansions can have large positive spillovers, especially when they are internationally coordinated.
A fiscal expansion can increase demand in both the domestic economy and the economies of its trade partners. To the extent that business investment has been held back by low GDP growth, a coordinated expansion could also lift investment, further buoying the world economy.
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However, when stimulus is coordinated, additional growth rose in each region, cumulating to 2. Economic opinion, including among both researchers and policy-oriented bodies, is increasingly shifting towards this New View of fiscal policy. At the beginning of the financial crisis, the US acted in to institute discretionary countercyclical fiscal policy. From to , the US passed over a dozen expansionary fiscal measures.
- Fiscal Monitor, April Shifting Gears - Tackling Challenges On The Road To Fiscal Adjustment.
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In contrast, Europe has strong automatic stabilisers, with taxes and social transfers softening the effect of the recession on both growth and income inequality — at least to the degree that policymakers allow them to function OECD It is the European institutional structure —which reflects the Old View of fiscal policy — that seems to amplify shocks rather than dampen them Shambaugh Indeed, the ECB has the sole responsibility of managing macroeconomic policy at the Eurozone level.
Thus, monetary policy is the only tool to address shocks that affect the currency union or have important spillovers. Furthermore, the Stability and Growth Pact can compel deficit reduction, but not fiscal expansion.
This resulted in budget policies interacting with domestic financial rescues during the sovereign debt crisis, such that countries in financial crisis were required to make fiscal cuts which weakened banks and hence the budget even more. Euro-wide countercyclical fiscal policy — such as unemployment insurance — would respond optimally to the large spillovers of country-level fiscal policy, reflect the greater fiscal space of the European Union, and provide a mutual insurance system against shocks that disproportionately affect certain areas.
Good policy is dependent on the country and the circumstances, but the thinking among economists and research by international institutions is moving towards more discretionary fiscal policy, while policymakers are still too often biased towards less. A better understanding can help remedy some of that gap, but it is no substitute for the institutional changes needed to underpin such a change. Kopcke, Geoffrey M. Tootell and Robert K. Triest, eds. The Hamilton Project Policy Proposal Cantellano, head of the Mexican Treasury.
Colombia was selected as the venue for the next seminar. The policy paper Macro-Fiscal Implications of Health Care Reform in Advanced and Emerging Economies analyzes developments in public health spending over the past 40 years and provides projections for 50 advanced and emerging countries over — The paper discusses the effects of specific health reforms on public health spending in advanced economies and examines the challenges facing emerging economies as they seek to expand coverage of health care in a fiscally sustainable manner. Soto, B. Clements, and F. This note, discussed in the iMFdirect Blog , argues that traditional deficit and debt indicators reflect the health of public finances today but fail to capture the future fiscal impact of pension reforms.
Maturity structure of domestic central government debt in emerging market economies
Thus, they could create incentives to delay or even reverse pension reforms. Nakayama is addressed to tax policy departments in emerging and developing economies that are expanding their tax treaty network. Bornhorst, G. Dobrescu, A. Fedelino, J. Gottschalk, and T. Nakata discusses the adjustment of fiscal balances to take account of a broad range of factors such as asset and commodity prices and output composition effects.
It also provides software codes for this purpose.
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Statistics BIS statistics on the international financial system shed light on issues related to global financial stability.
Read more about our statistics. Banking services The BIS offers a wide range of financial services to central banks and other official monetary authorities. Read more about our banking services. Visit the media centre. In this section:. Maturity structure of domestic central government debt in emerging market economies. Top Share this page.