College of Behavioral & Social Sciences

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Subject: search.filters.subject.Fiscal Policy

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    THE MACROECONOMICS OF FISCAL CONSOLIDATIONS
    (2018) Torres, Jose Luis; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    In the past decade, numerous governments had to adjust their fiscal balance, as a result of the Great Recession and most recently due to the fall in commodity prices. In Chapter 1, I construct a novel dataset to estimate the revenue-raising potential and expenditure-cutting space for 129 countries, and decompose their fiscal consolidation capacity into specific tax and spending categories. Then, I compare the estimated fiscal potential with the consolidation required to stabilize the debt ratio. Finally, I show that the estimated fiscal consolidation capacity in 2007 helps to predict (i) the size of fiscal stimulus in response to the crisis, and (ii) the GDP costs associated with the downturn. In Chapter 2, I employ a quantitative general equilibrium model with heterogeneous agents, occupational choice, endogenous labor supply, and growth to study the implications for the US of the higher debt to GDP ratio that would result from delaying the adjustment of its medium term budgetary imbalance. I find that compared to a scenario where the debt ratio is stabilized in 2011, postponing the adjustment for twenty-five years would entail a permanent output loss of 22 percent and a fall in welfare of 13 percent in consumption equivalent terms. Moreover, when the transitional dynamics are considered, I find that once the debt ratio exceeds 100 percent of GDP, the welfare losses from further delays in the adjustment exceed the short run gains.
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    Essays on Optimal Aid and Fiscal Policy in Developing Economies
    (2010) Banerjee, Ryan Niladri; Mendoza, Enrique G; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Essay I: Which countries receive aid as insurance and why? A theory of optimal aid policy Empirical evidence shows that developing countries with opaque institutions receive procyclical Official Development Aid (ODA) while developing countries with transparent institutions receive acyclical or countercyclical ODA. This paper provides a dynamic equilibrium model of optimal aid policy that quantitatively accounts for this fact. In the model, the donor wants to (a) encourage actions by the aid receiving government that increase output and (b) smooth out economic fluctuations. The transparency of institutions in the country affects the donor's ability to distinguish downturns caused by exogenous shocks, from those caused by government actions. The solution to the donor's mechanism design problem is dependent on the transparency of government actions. If the donor has good information about government actions, aid policy is countercyclical and aid acts as insurance. However, if the donor is unable to infer perfectly the cause of the downturn, aid policy is procyclical to encourage unobservable good actions. The model predicts a similar pattern for ODA commitments for the following year which is supported by the data. For countries with opaque institutions procyclical aid is the result of optimal policies given the information constraints of donors. Essay II: New Evidence on the Relationship Between Aid Cyclicality and Institutions This paper documents a new fact: the correlation between official development assistance (ODA) and GDP is negatively related to the quality of institutions in the receipient country. Differences in institutional indicators that measure corruption, rule of law, government effectiveness and government transparency are particularly important. The results are robust to several modifications. The results hold for both pooled and within regressions specifications and for different sources of institutional quality measures. This fact also reconciles conflicting empirical results about the correlation between ODA and GDP in the literature. For instance, Pallage and Robe (2001) find a positive correlation in two thirds of African economies and half of non-African developing economies, but Rand and Tarp (2002) find no correlation in a different set of developing countries. First, once institutions are accounted for, African economies are not treated differently by donors. Second, the sample in Rand and Tarp (2002) comprises developing economies which have relatively good institutions, therefore, those countries receive acyclical or countercyclical aid. \\ Essay II: Optimal Procyclical Fiscal Policy Without Procyclical Government Spending Procyclical fiscal policy can be caused by either procyclical government expenditure, countercyclical taxes or both. The majority of models which try to explain procyclical fiscal policy as the result of optimal policy have procyclical government expenditures. This paper develops a model which optimally generates procyclical fiscal policy while keeping government expenditures acyclical. Instead, taxes are optimally countercyclical. The model uses endogenous sovereign default to generate an environment where interest rates are lower in booms than in recessions. If household's have insufficient access to financial instruments it is optimal for the government to lower taxes and borrow during booms. This enables impatient households to benefit from the lower interest rates in booms by helping the consumer bring consumption forward.
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    Essays on Fiscal Policy in Developing Countries
    (2009) Ilzetzki, Ethan; Drazen, Allan; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    Several empirical studies have found that government expenditures are procyclical in developing countries, unlike the countercyclical expenditures observed in high-income countries. This dissertation attempts to explain this phenomenon and to refine this empirical observation. It contains two essays. The first provides a dynamic political economy theory of the phenomenon of procyclical fiscal policy. In the model, governments provide public insurance to uninsured households, and time-consistent redistributive policies are countercyclical. The introduction of a political friction, in which alternating governments disagree on the desired redistributive policy, can lead to procyclical transfer policies. In numerical simulations, the model successfully captures the cyclicality of government expenditures, tax revenues, and deficits observed in the data for both high-income and developing countries. Simulations also allow a quantitative comparison with other common explanations for fiscal procyclicality. Without the political friction, borrowing constraints and differences in macroeconomic volatility cannot account for the differences in fiscal policy across countries in this setting. The second chapter addresses potential endogeneity problems in the measurement of the fiscal stance. We build a novel quarterly dataset for 49 countries covering the period 1960-2006 and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find that (i) fiscal policy is indeed procyclical in developing countries and (ii) fiscal policy is also expansionary, lending empirical support to the notion that "when it rains, it pours."