TABLE OF CONTENTS
Acknowledgments
Introduction - Alberto Alesina, Francesco Giavazzi
DOI: 10.7208/chicago/9780226018584.003.0001
[financial crisis, fiscal policy, debt accumulation, deficit reduction]
This introductory chapter presents the main themes covered in this book. Specifically, it discusses key issues arising from the most recent financial crisis, including discretionary countercyclical fiscal policy, long-term accumulation of debt, and deficit reduction. The book sheds some light on these issues, drawing from the best research available. (pages 1 - 18)
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Government Spending and Private Activity - Valerie A. Ramey
DOI: 10.7208/chicago/9780226018584.003.0002
[public finance, public spending, private spending, unemployment, employment, government spending multipliers, fiscal policy]
This chapter examines the effect of government spending on private spending, unemployment, and employment, and shows that an increase in government spending never leads to a significant rise in private spending. In fact, in most cases, it leads to a significant fall. These results imply that the government spending multiplier is more likely below one rather than above one. The chapter also shows that all of the increase in employment after a positive shock to government spending is due to an increase in government employment, not private employment. These results suggest that the employment effects of government spending work through the direct hiring of workers, not stimulating the private sector to hire more workers. A commentary is also included at the end of the chapter. (pages 19 - 55)
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Comment: Roberto Perotti
Fiscal Multipliers in Recession and Expansion - Alan J. Auerbach, Yuriy Gorodnichenko
DOI: 10.7208/chicago/9780226018584.003.0003
[fiscal policy, OECD, structural vector autoregression, multipliers, government purchases, government spending]
This chapter examines the size of fiscal multipliers amidst an economic recession, first estimating multipliers for a large number of Organization for Economic Cooperation and Development (OECD) countries. Second, it adapts the authors' previous methodology to use direct projections rather than the standard structural vector autoregression (SVAR) approach to estimate multipliers, to economize on degrees of freedom, and to relax the assumptions on impulse response functions imposed by the SVAR method. Third, the chapter estimates responses not only of output but also of other macroeconomic aggregates. It is shown that multipliers of government purchases are larger in a recession, and that controlling for real-time predictions of government purchases tends to increase the estimated multipliers of government spending in recession. A commentary is also included at the end of the chapter. (pages 63 - 98)
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Comment: Robert E. Hall
The Household Effects of Government Spending - Francesco Giavazzi, Michael McMahon
DOI: 10.7208/chicago/9780226018584.003.0004
[fiscal policy, public finance, public spending, households, unemployment rate, private consumption]
This chapter examines how households respond to changes in a particular type of government spending: military contracts awarded by the Pentagon. Results show significant differences in the effects of government spending, depending on the state-specific unemployment rate. In states with relatively low unemployment, government spending could have insignificant or even negative effects on private consumption. In contrast, private consumption increases in high- unemployment states, suggesting that in such states, the multiplier is likely to be positive. Fiscal policy can have important distributional effects, since there is significant heterogeneity in households' responses to shifts in government spending. A commentary is also included at the end of the chapter. (pages 103 - 141)
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Comment: Lawrence J. Christiano
The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises - William Easterly
DOI: 10.7208/chicago/9780226018584.003.0005
[economic growth, public finance, public spending, GDP ratios, fiscal policy, developing countries, Eurozone, United States]
This chapter presents the simple arithmetic of the relationship between growth slowdowns and debt. This arithmetic indicates an important role for growth in past debt crises in the developing world (HIPC and Latin America in particular), in the Eurozone, and the United States more recently. It shows that when growth forecasts and fiscal policy do not adjust to growth slowdowns, the result is often large forecast errors and budget deficits. A commentary is also included at the end of the chapter. (pages 151 - 173)
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Comment: Indira Rajaraman
Game Over Simulating Unsustainable Fiscal Policy - Richard W. Evans, Laurence J. Kotlikoff, Kerk L. Phillips
DOI: 10.7208/chicago/9780226018584.003.0006
[fiscal policy, stochastic model, sustainability, default]
This chapter uses a stochastic general equilibrium model to determine how long it takes for unsustainable fiscal policy to produce game over—the point where the policies can no longer be maintained. When the economy reaches game over, the government is forced to default on its promised payment to the contemporaneous elderly. A commentary is also included at the end of the chapter. (pages 176 - 202)
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Comment: Douglas W. Elmendorf
How Do Laffer Curves Differ across Countries? - Mathias Trabandt, Harald Uhlig
DOI: 10.7208/chicago/9780226018584.003.0007
[Laffer curves, EU-14, United States, fiscal policy, government spending, public debt, government debt, taxation, interest rates]
This chapter examines how Laffer curves differ across countries in the United States and the EU-14. It shows that the differences between Laffer curves arise solely due to differences in fiscal policy; that is, the mix of distortionary taxes, government spending, and government debt. Labor income and consumption taxes are important for accounting for most of the cross-country differences. A commentary is also included at the end of the chapter. (pages 211 - 249)
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Comment: Jaume Ventura
Perceptions and Misperceptions of Fiscal Inflation - Eric M. Leeper, Todd B. Walker
DOI: 10.7208/chicago/9780226018584.003.0008
[fiscal policy, inflation, economic recession, fiscal theory, government bonds, central bank]
This chapter examines alternative policy scenarios involving price-level changes induced by the fiscal theory. It is organized as follows. Section 7.2 uses a simple model to illustrate how the price level is determined in the conventional paradigm and in the fiscal theory. The conventional policy mix (Regime M) has monetary policy target inflation and fiscal policy stabilizes the value of debt. An alternative mix (Regime F) is available when governments issue nominal bonds. The chapter then describes how the maturity structure of nominal government bonds can alter the time series properties of inflation and lays out the precise role that monetary policy plays in a fiscal equilibrium. Having established that under Regime F policies monetary policy does not control inflation, Section 7.3 turns to plausible scenarios in which the central bank does not control inflation even in Regime M. Section 7.4 considers the empirical implications of monetary–sfiscal policy interactions. A commentary is also included at the end of the chapter. (pages 254 - 299)
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Comment: Jordi Galí
The “Austerity Myth” - Roberto Perotti
DOI: 10.7208/chicago/9780226018584.003.0009
[fiscal policy, monetary policy, fiscal consolidations, Denmark, Ireland, Finland, Sweden, exchange rates]
This chapter examines four case studies of large fiscal consolidations. Two of these episodes—Denmark 1982 to 1986 and Ireland 1987 to 1990—were exchange-rate-based consolidations; the other two—Finland 1992 to 1998 and Sweden 1993 to 1998—were undertaken in the opposite circumstances, after abandoning a peg. The analysis addresses two main questions. First, is there evidence that large budget consolidations, particularly those which are based mainly on spending cuts, have expansionary effects in the short run? Second, if the answer to the first question is in the affirmative, how useful is the experience of the past as a guide to the present? A commentary is also included at the end of the chapter. (pages 306 - 354)
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Comment: Philip R. Lane
Can Public Sector Wage Bills Be Reduced? - Pierre Cahuc, Stéphane Carcillo
DOI: 10.7208/chicago/9780226018584.003.0010
[public wage bills, public deficits, fiscal policy, fiscal drift, public finance]
This chapter examines the adjustment of public wage bills and public deficits over business and political cycles, and is organized as follows. Section 9.2 presents the relation between public deficits and public wage bills in Organization for Economic Cooperation and Development countries over the last fifteen years, while Section 9.3 describes fiscal drift and fiscal tightening episodes. Section 9.4 analyzes the relations between the occurrence of fiscal drift and fiscal tightening episodes and the economic cycles, the election years, the transparency of governments, the freedom of the press, the union coverage, the political regime, and the electoral rules. A commentary is also included at the end of the chapter. (pages 359 - 402)
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Comment: Paolo Pinotti
Entitlement Reforms in Europe - Axel H. Börsch-Supan
DOI: 10.7208/chicago/9780226018584.003.0011
[pension systems, social security, OECD, pension policy, pension reform]
This chapter examines the state of pension systems in the major Organization for Economic Cooperation and Development (OECD) countries, and links the causes of current problems to the cures required to make the typically pay-as-you-go financed entitlement programs in Continental Europe sustainable above and beyond the financial crisis. It discusses examples that seem to be the most viable and effective options to bring the entitlement system closer to fiscal balance and still achieve their key aims (e.g., preventing old-age poverty). The chapter argues that there is nothing like “the optimal pension reform” since the initial state (in particular the current institutional setup) varies as much as the causes for problems in the future. A commentary is also included at the end of the chapter. (pages 405 - 435)
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Comment: David A. Wise
“Fiscal Devaluation” and Fiscal Consolidation - Ruud de Mooij, Michael Keen
DOI: 10.7208/chicago/9780226018584.003.0012
[fiscal policy, taxation, tax policy, value added tax]
This chapter discusses the tax side of fiscal adjustments. It first explores the idea, prominent in troubled Euro area countries, of a “fiscal devaluation”—that is, shifting from social contributions to the value added tax (VAT) as a way to mimic a nominal devaluation. The chapter then assesses the wider scope for using a VAT to achieve a fiscal consolidation. A commentary is also included at the end of the chapter. (pages 443 - 485)
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Comment: James M. Poterba
Fiscal Rules - Charles Wyplosz
DOI: 10.7208/chicago/9780226018584.003.0013
[fiscal numerical rules, fiscal institutions, fiscal policy, fiscal discipline, budget, public finance]
This chapter examines fiscal numerical rules and fiscal institutions, and is organized as follows. Section 12.2 explains the theoretical foundations for fiscal rules and their empirical relevance, while Section 12.3 presents the theory behind the need to adopt restraints on the budgetary process. Section 12.4 describes the various forms of rules. Section 12.5 considers a number of arrangements and draws policy implications, while Section 12.6 concludes. It is argued that fiscal rules and fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, yet they help. A commentary is also included at the end of the chapter. (pages 495 - 525)
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Comment: Lucio R. Pench
The Electoral Consequences of Large Fiscal Adjustments - Alberto Alesina, Dorian Carloni, Giampaolo Lecce
DOI: 10.7208/chicago/9780226018584.003.0014
[fiscal policy, budget deficit, deficit reduction, public office, electoral loss, elections]
This chapter considers the evidence supporting the conventional wisdom that deficit-reducing policies lead to electoral losses for fiscally conservative governments. It focuses on large fiscal adjustments, which are currently the center of attention in many Organization for Economic Cooperation and Development (OECD) countries, and shows that there is no evidence that governments which reduce budget deficits even decisively are systematically voted out of office. In some cases they are, in some (more often) they are not. A commentary is also included at the end of the chapter. (pages 531 - 570)
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Comment: Thomas Romer
Contributors
Author Index
Subject Index
