The Interaction Between Monetary and Fiscal Policies (Working Paper 30)

One can view the period since 1970 as one in which the authorities struggled to establish appropriate medium-term anchors for both monetary and fiscal policies. During this time, they learned about the appropriate interaction between those two policies in the context of economic stabilization and growth under a flexible exchange rate regime. This lecture deals with four interrelated topics: the appropriate goals for fiscal and monetary policy, building policy credibility, the appropriate stabilization role for the two policies, and policy cooperation. The transparent medium term frameworks that have been established by the authorities will be extremely helpful in meeting the challenges that the future is sure to bring. These frameworks mean that the required adjustments in the economy will take place against a relatively stable background. Thank you for the invitation to give the Gow Lecture for 2002. Donald Gow had a great interest in public administration and in budgetary reform in the federal government (Gow 1973). He was one in a long line of

Monetary and Exchange Rate Policy in Malaysia before the Asian Crisis

This paper provides a case study to characterize the monetary policy regime in Malaysia, from a medium- and long-term perspective. Specifically, we ask how the central bank of Malaysia, Bank Negara Malaysia (BNM), has structured its monetary policy regime, and how it has conducted monetary and exchange rate policy under the regime. By conducting three empirical analyses, we characterize the monetary and exchange rate policy regime in Malaysia by three intermediate solutions on three vectors: the degree of autonomy in monetary policy, the degree of variability of the exchange rate, and the degree of capital mobility.

Monetary theory and fiscal policy.

Mode of access: Internet.

Monetary policy rules and macroeconomic stability: Evidence and some theory

We estimate a forward-looking monetary policy reaction function for thepostwar United States economy, before and after Volcker's appointmentas Fed Chairman in 1979. Our results point to substantial differencesin the estimated rule across periods. In particular, interest ratepolicy in the Volcker-Greenspan period appears to have been much moresensitive to changes in expected inflation than in the pre-Volckerperiod. We then compare some of the implications of the estimated rulesfor the equilibrium properties of inflation and output, using a simplemacroeconomic model, and show that the Volcker-Greenspan rule is stabilizing.

Fiscal decentralisation and economic theory

There is no complete overview or discussion of the literature of the economics of federalism and fiscal decentralization, even though scholarly interest in the topic has been increasing significantly over recent years. This paper provides a general, brief but comprehensive overview of the main insights from the literature on fiscal federalism and decentralization. In doing so, literature on fiscal federalism and decentralization is grouped into two main approaches: “first generation of theories” and “second generation of theories”.

Interactions between fiscal and monetary policy

Mestrado em Economia Monetária e Financeira

The simple macroeconomics of North and South in EMU. Bruegel Working Paper 2012/12, 30 July 2012

The euro area today consists of a competitive, moderately leveraged North and an uncompetitive, over-indebted South. Its main macroeconomic challenge is to carry out the adjustment required to restore the competitiveness of its southern part and eliminate its excessive public and private debt burden. This paper investigates the relationship between fiscal and competitiveness adjustment in a stylised model with two countries in a monetary union, North and South. To restore competitiveness, South implements a more restrictive fiscal policy than North. We consider two scenarios. In the first, monetary policy aims at keeping inflation constant in the North. The South therefore needs to deflate to regain competitiveness, which worsens the debt dynamics. In the second, monetary policy aims at keeping inflation constant in the monetary union as a whole. This results in more monetary stimulus, inflation in the North is higher, and this in turn helps the debt dynamics in the South. Our main findings are: •The differential fiscal stance between North and South is what determines real exchange rate changes. South therefore needs to tighten more. There is no escape from relative austerity. •If monetary policy aims at keeping inflation stable in the North and the initial debt is above a certain threshold, debt dynamics are perverse: fiscal retrenchment is self-defeating; •If monetary policy targets average inflation instead, which implies higher inflation in the North, the initial debt threshold above which the debt dynamics become perverse is higher. Accepting more inflation at home is therefore a way for the North to contribute to restoring debt sustainability in the South. •Structural reforms in the South improve the debt dynamics if the initial debt is not too high. Again, targeting average inflation rather than inflation in the North helps strengthen the favourable effects of structural reforms.

The spenders-hoarders theory of capital accumulations, wealth distribution and fiscal policy

This paper proposes a simple OLG model which is consistent with the essential facts about consumer behavior, capital accumulation and wealth distribution, and yields some new and surprising conclusions about fiscal policy. By considering a society in which individuais are distinguished according to two characteristics, altruism and wealth preference, we show that those who in the long run hold the bulk of private capital are not so rnuch motivated by dynastic altruism as by preference for wealth. Two types of social segmentation can result with different wcalth distribution. To a large extcnt our results seem to fit reality better than those obtained with standard optimal growth models in which dynastic altruism ( or r ate o f impatience) is the only source of heterogeneity: overaccumulation can appear, public debt and unfunded pensions are not neutra!, estate taxation can improve the welfare of the top wealthy.

Theory and practice of industrial policy: evidence from the Latin American experience

Includes bibliography

Electoral opportunism and fiscal policy before and after the EMU

A Masters Thesis, presented as part of the requirements for the award of a Research Masters Degree in Economics from NOVA – School of Business and Economics

Capital, wages and growth: Theory and evidence

Returns to scale to capital and the strength of capital externalities play a key role for the empirical predictions and policy implications of different growth theories. We show that both can be identified with individual wage data and implement our approach at the city-level using US Census data on individuals in 173 cities for 1970, 1980, and 1990. Estimation takes into account fixed effects, endogeneity of capital accumulation, and measurement error. We find no evidence for human or physical capital externalities and decreasing aggregate returns to capital. Returns to scale to physical and human capital are around 80 percent. We also find strong complementarities between human capital and labor and substantial total employment externalities.

Fiscal sustainability and fiscal shocks in a dollarized and oil-exporting country: Ecuador

This paper investigates the fiscal sustainability of an emerging, dollarized, oil-exporting country: Ecuador. A cointegrated VAR approach is adopted in testing, first, if the intertemporal budget constraint is satisfied in Ecuador and, second, in identifying the permanent and transitory shocks that affect a fiscal policy characterized by inertia and a heavy dependence on oil revenues. Following confirmation that the debt-GDP ratio does not place the Ecuadorian budget under any pressure, we reformulate the model and identify two forces that push the fiscal system out of equilibrium, namely, economic activity and oil revenues implemented in the government budget. We argue that Ecuador needs to recover control of its monetary policy and to promote the diversification of its economy in order that non-oil tax revenues can replace oil revenues as a pushing force. Finally, we calculate quarterly elasticities of tax revenues with respect to Ecuador’s GDP and that of eight Eurozone countries. We illustrate graphically how the Eurozone countries with low positive or high negative elasticities’ levels suffer debt problems after the crisis. This finding emphasizes the pressing need for Ecuador to strengthen the connection between its tax revenues and output, and also suggests that the convergence of these elasticities in the Eurozone might contribute to the success of an eventually future fiscal union.