Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models &...
Transcript of Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models &...
![Page 1: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/1.jpg)
Advanced MacroeconomicsModule 3: Empirical models & methods
Monetary and Fiscal Policy
Alessio Moneta
Institute of EconomicsScuola Superiore Sant’Anna, Pisa
April 2019
LM in EconomicsScuola Superiore Sant’Anna - Universita di Pisa
Macroeconomic fluctuations 1/37
![Page 2: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/2.jpg)
Monetary vs. Fiscal Policy
B Fiscal policy: government actions aimed at influencingmacroeconomic performance through taxes and governmentspending (i.e. purchases of goods and services and transferpayments)
B Monetary policy: government (also central bank) actions aimedat influencing macroeconomic performance though the financialsystem, which comprises markets in which financialinstruments, i.e. records/papers that specify claim to valuablegoods, and money are exchanged.
Although fiscal and monetary policy are indeed of differentnature (e.g. value-laden the former and less involved the latter)and have attracted different emphasis from schools of economicthought, they are quite interrelated.
Macroeconomic fluctuations 2/37
![Page 3: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/3.jpg)
Government’s budget constraint
To see the relationship between fiscal and monetary policy it is usefulto study the government’s budget constraint.
B Let’s start from the Production - expenditure identity:
Y = C + I + G + (EX − IM)
Y: GDP, C: consumption, I: investment, EX: exports, IM: imports.
B Disposable-income identity:
YD = Y − T + TR = C + S
YD: disposable income, T: taxes, TR: transfers, S: saving.
Macroeconomic fluctuations 3/37
![Page 4: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/4.jpg)
Product-Expenditure Identity, U.S. 2009
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 2.6, p. 42.
Macroeconomic fluctuations 4/37
![Page 5: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/5.jpg)
Disposable-Income Identity, U.S. 2009
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 2.6, p. 42.
Macroeconomic fluctuations 5/37
![Page 6: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/6.jpg)
Government’s budget constraint
Thus, from:
Y = C + I + G + (EX − IM) = C + S + T − TR
we get:
[G − T + TR] + [I − S] + [EX − IM] = 0
That is: [government budget deficit] + [private sector deficit] +[foreign sector deficit] = 0
Government’s budget constraint:
G − T + TR = ∆BG + ∆MB
∆BG: changes in stock of public debt held by the private sector, ∆MB: changes in themonetary base
Macroeconomic fluctuations 6/37
![Page 7: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/7.jpg)
Government’s budget constraint
The government’s budget constraint shows that fiscal policy (cfr. lefthand side) and monetary policy (cfr. right hand side) are interrelated.
Pure fiscal policy or pure monetary policy are rare.
Macroeconomic fluctuations 7/37
![Page 8: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/8.jpg)
The channels of monetary policy
How does the monetary policy affect the real economy?
B Interest-rate channel: it acts on the opportunity cost ofinvestment by firms.
B Credit channel: it acts on the willingness of commercial banks tomake loans to firms and consumers.
B International trade channel: it acts on the exchange rate andhence on the foreign sector deficit.
Macroeconomic fluctuations 8/37
![Page 9: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/9.jpg)
Banks Balance Sheet
Central Bank Balance Sheet Commercial bank Balance SheetASSETS LIABILITIES ASSETS LIABILITIES- gov. bonds - banknotes - reserves - deposits- discount loans - reserves - loans - discount loans- coins held by - vault cash - vault cashthe central bank- foreign currency - fixed assets-gold - funds lent -funds borrowed
-net worth -net worth
Macroeconomic fluctuations 9/37
![Page 10: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/10.jpg)
Money creation and money multiplier
B Different types of money: currency, M0, M1, M2, etc.
• Euro area (2011): 9%, 14.2%, 50.8%, 91.2% of GDP (respectively)
• US (2011): 7.1%, 17.5%, 14.7%, 64.6% of GDP
B Reserve requirement:
• US: reserves at least 10% transaction accounts
• Euro area: reserves at least 2% saving accounts
B Discount rate and discount window (mostly discouraged)
Macroeconomic fluctuations 10/37
![Page 11: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/11.jpg)
Interbank market
B Federal funds market (US): market in which commercial banksborrow central-bank reserves from, or lend central-bankreserved to, another bank (loans are mostly overnight)
NB: Low transaction volume (lack of trust) in this market was amajor contributing factor to the spreading out of the financialcrisis, starting from 9th august 2007.
B The interbank market in Europe is regulated by the EONIA(European Over-Night Index Average). Cfr. also the 3 monthsEurepo (european repurchase agreement) and Euribor (eurointer bank rate)
B EONIA and FFR (Federal funds rate): importance for beingtarget rate and also for determining the credits by banks to theprivate sector.
Macroeconomic fluctuations 11/37
![Page 12: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/12.jpg)
Interest rate determination
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 16.2 p. 629.
Macroeconomic fluctuations 12/37
![Page 13: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/13.jpg)
How does the central bank determine reserves?
B Lending
B Open market operations (i.e. purchasing or selling governmentbonds)
B purchasing/selling of foreign currency
Macroeconomic fluctuations 13/37
![Page 14: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/14.jpg)
An Open-Market Operation
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 16.2 p. 631.
Macroeconomic fluctuations 14/37
![Page 15: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/15.jpg)
Bernanke 1986
Bernanke, B. (1986) ”Alternative explanations of the money-incomecorrelation.” Carnegie-Rochester Conference Series on Public Policy.US data 1953:1 - 1984:4
• Y: log real GNP
• P: GNP deflator
• G: government spending (defence)
• B: monetary base
• M: M1
• C: total commercial bank loans (logs)
Macroeconomic fluctuations 15/37
![Page 16: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/16.jpg)
Bernanke 1986 (cont’d)
Identification scheme:
Bt = f (Gt, Mt, Pt, Yt)
Ct = f (Bt, Pt, Yt)
Mt = f (Bt, Pt, Yt)
Pt = f (Yt)
Y = f (Gt, Ct − Pt, Mt − Pt)
Results: credit shock positive effects on output.
Macroeconomic fluctuations 16/37
![Page 17: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/17.jpg)
The conduct of monetary policy
B Goal of central banks: low and stable inflation or fullemployment?
B Different targets of central bank actions: interest rates (cfr. 1950s- 1960s), money growth (1970s-1980s), inflation (1990s)
B Rules vs. discretion
Macroeconomic fluctuations 17/37
![Page 18: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/18.jpg)
Taylor rule
John Taylor (1993) “Discretion versus Policy Rules in Practice”,Carnegie-Rochester Conference Series on Public Policy
B Taylor rule:
it = r∗t + πt + α(πt − π∗t ) + β(yt − y∗t )
where
it: target nominal interest rate (e.g. target federal funds rate);
r∗t : natural rate (or desired rate) of interest
πt: inflation
π∗t : target rate of inflation
yt: log GDP
y∗t log potential output
Taylor’s assumption (for the period 1987-1992): r∗t = π∗t = 0.02, α = β = 0.5
Macroeconomic fluctuations 18/37
![Page 19: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/19.jpg)
Taylor rule
B Taylor (1993): descriptive rule
B Is it an optimal rule?
B Benchmark for policy maker
Macroeconomic fluctuations 19/37
![Page 20: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/20.jpg)
Does the Fed follow a Taylor rule?
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 16.13 p. 659.
Macroeconomic fluctuations 20/37
![Page 21: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/21.jpg)
Fiscal policy
Fiscal policy is the set of actions that determine the levels ofgovernment spending and taxes and that together determine the sizeof the government budget deficit. (cfr. Hoover 2012: Ch. 13.2)
It can be:
• discretionary: chosen to achieve a particular result consideringthe observed specific situation;
• automatic: built in the tax or spending program;
• short run and countercyclical: targeted to get out from recessionsand avoid overheating of the economy during recoveries.
• long run: targeted to growth.
Macroeconomic fluctuations 21/37
![Page 22: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/22.jpg)
The IS curve
The IS curve shows the combinations of output and the interest rate such thatplanned expenditures equals actual expenditures. In a closed economy:
Y = C + I + G = c0 + cy(1 − ty)Y + A − ar + G,
where c0 is autonomous consumption, cy is the marginal propensity toconsume, ty is the portion of income Y that is taxed, A is future profitability,aa constant term, r the real interest rate, and G government purchases. Wehave:
Y =1
1 − cy(1 − ty)[c0 + (A − ar) + G]
The term 11−cy(1−ty)
is called the multiplier.
Macroeconomic fluctuations 22/37
![Page 23: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/23.jpg)
The IS curve
In particular we have: for r = 0, Y = c0+A+G1−cy(1−ty)
(intercept of the IS curve onthe Y-axis).
For Y = 0, r = c0+A+Ga (intercept of the IS curve on the r-axis).
The IS curve as a function of r is
r =c0 + A + G
a−
1 − cy(1 − ty)
aY.
Macroeconomic fluctuations 23/37
![Page 24: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/24.jpg)
IS-LM scheme
i
Y
IS
LM
IS−LM model
Source: Romer (2001) Advanced Macroeconomics.
Macroeconomic fluctuations 24/37
![Page 25: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/25.jpg)
Automatic fiscal policy
Taxes may act as automatic stabilizers attenuating fluctuations.
B Automatic stabilizers are embodied in the shape and position ofthe IS curve.
Cfr. the term ty in the multiplier: 11−cy(1−ty)
Macroeconomic fluctuations 25/37
![Page 26: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/26.jpg)
Discretionary Fiscal Policy
B Discretionary fiscal policy can be done:
• choosing the level of government spending
• setting tax rates (targeting the tax take).
B Discretionary fiscal policy causes changes in position of the IScurve
Macroeconomic fluctuations 26/37
![Page 27: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/27.jpg)
Fiscal Stimulus
Source: Hoover (2012) Intermediate Macroeconomics, Cambridge University Press, Figure 17.1 p. 686.
Macroeconomic fluctuations 27/37
![Page 28: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/28.jpg)
Countercyclical Fiscal Policy
B Reactions to aggregate-demand shocks (affecting aggregateexpenditures) and to aggregate-supply shocks (affectingpotential output).
B Problems of countercyclical fiscal policy:
• Misperception between demand and supply shock
• Fiscal policy may take time to have its positive effects.
• Problems of coordination between national and regional (local)budgets.
Macroeconomic fluctuations 28/37
![Page 29: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/29.jpg)
Demand Shock
Source: Hoover (2012) op.cit., Fig. 17.2 p. 688.
Macroeconomic fluctuations 29/37
![Page 30: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/30.jpg)
Supply Shock
Source: Hoover (2012) op.cit., Fig. 17.3 p. 689.
Macroeconomic fluctuations 30/37
![Page 31: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/31.jpg)
A Mixed Demand-Supply Shock
Source: Hoover (2012) op.cit., Fig. 17.4 p. 690.
Macroeconomic fluctuations 31/37
![Page 32: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/32.jpg)
Fiscal policy in the long run
• Government’s budget constraint:
G − T + TR = ∆BG + ∆MB
∆BG: changes in stock of public debt held by the private sector, ∆MB: changes inthe monetary base
• Monetization of the deficit: fiscal policy resulting in a deficitfinanced through the creation of monetary base.
debasement, inflation tax and seigniorage
risks of hyperinflation
Macroeconomic fluctuations 32/37
![Page 33: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/33.jpg)
Taxes and Spending over time
Source: Hoover (2012) op.cit., Fig. 17.5 p. 698.
Macroeconomic fluctuations 33/37
![Page 34: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/34.jpg)
Debt over time
B Government deficit can be decomposed in:
gov. deficit = G+TR−T = primary deficit (PD)+ interest payments
B Evolution of debt BGt :
BGt = BG
t−1 + rt−1BGt−1 + PDt,
where r is the nominal interest rate. We get:
BGt
BGt−1
− 1 = rt−1 +PDt
BGt−1
.
Denoting with the growth rate:
BGt = rt−1 +
PDt
BGt−1
Macroeconomic fluctuations 34/37
![Page 35: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/35.jpg)
Debt growth over time in U.S.
Source: Hoover (2012) op.cit., Fig. 17.6 p. 700.
Macroeconomic fluctuations 35/37
![Page 36: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/36.jpg)
Functional finance
Abba Lerner (1903-1982) coined the term functional finance toemphasize the view that gov. deficits should be judged according tothe circumstances. Important issues about gov. deficit:
• What is the effect on aggregate demand?
• How does gov. expenditures interact with private expenditure?(crowding out vs. crowding in)
• What is the distribution decision underlying government’sfinancing decisions?
Macroeconomic fluctuations 36/37
![Page 37: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/37.jpg)
Debt to GDP ratio
Recall that:
BGt = rt−1 +
PDt
BGt−1
Let’s call pdt =PDtBG
t−1. The growth rate of the ratio of gov. debt to GDP
can be written as:(BG
tptYt
)= rt−1 + pdt − pt − Yt = (rt−1 − pt) + pdt − Yt
Macroeconomic fluctuations 37/37
![Page 38: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/38.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Eurozone USA Japan
Total spending (% of GDP) 50.5 42.3 40.7Public consumption
as % of GDP 21.6 17.0 20.1as % of private consumption 37.5 24.1 34.2
Budget surplus (% of GDP) -6.0 -0.6 -8.1Gross debt (% of GDP) 92.4 93.6 199.7
General Government Spending and Finances: Eurozone, USA, and Japan, 2010
Table17.1
Source: OECD
![Page 39: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/39.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Table17.2
Sources: European Economy; OECD Economic Outlook
Government Transfers,
Various Countries,
1960 and 2010
![Page 40: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/40.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Table17.3
Source: OECD Economic Outlook
Government Budget Balances as % of GDP
![Page 41: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/41.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Figure 17.1 (a)
Sources: OECD Economic Outlook, IMF
Public Debt, Germany and USA (% of GDP)Germany
USA
![Page 42: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/42.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Figure 17.1 (b)
Sources: OECD Economic Outlook, IMF
Public Debt, France and UK (% of GDP)France
UK
![Page 43: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/43.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Table17.6
Source: OECD Economic Outlook
Gross Public Debt, 1970-2010 (% of GDP)
![Page 44: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/44.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Table 17.7
Net Government Indebtedness and Primary Budget Balances, 2010 (% of GDP)
Source: OECD Economic Outlook
*Assuming a 5% real interest rate and a 2.5% real GDP growth rate.
Net Debt in 2010
Primary Budget Surplus in 2010
Required Primary Surplus*to stabilize
absolute debtto stabilize the debt/GDP ratio
Belgium 80.8 –0.9 4.0 2.0
Germany 50.1 –1.3 2.5 1.3
Ireland 59.9 –30.0 3.0 1.5
Italy 99.1 –0.3 5.0 2.5
Netherlands 34.6 –4.1 1.7 0.9
![Page 45: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/45.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Economic Growth in Southern Europe, 1980-2010
Table 17.8
Source: IMF
1981 -1985
1986-1990
1991-1995
1996-2000
2001-2005
2006-2010
Greece 0.2 1.3 1.3 3.5 4.0 0.8Italy 1.7 3.1 1.3 1.9 0.9 –0.3Portugal 1.5 6.2 1.9 4.2 0.8 0.5Spain 1.3 4.7 1.7 4.1 3.3 0.9Euro Area n.a. n.a. 1.4 2.7 1.5 0.8EU 1.5 3.1 1.5 2.9 2.0 1.0
![Page 46: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/46.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Primary Budget Balances for Selected European Countries, 1995-2010
Table 17.9
Source: OECD
1995 2000 2005 2006 2007 2008 2009 2010
Belgium 3.9 6.2 1.2 3.9 3.3 2.2 −2.6 −1.3
France −2.5 1.1 −0.6 −0.1 −0.4 −0.8 −5.5 −5.5
Germany −6.7 4.0 −1.0 0.8 2.7 2.5 −0.7 −1.1
Greece 4.6 3.6 −0.7 −1.5 −1.9 −4.5 −10.1 −3.2
Ireland 2.5 6.3 2.1 3.2 0.3 −6.9 −13.0 −29.7
Italy 3.3 5.2 0.1 1.1 3.3 2.2 −1.0 −0.3
Portugal −0.4 −0.5 −3.7 −1.5 −0.1 −0.1 −6.6 −4.6
Spain −1.7 2.0 2.5 3.3 3.0 −3.1 −9.9 −7.8
![Page 47: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/47.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Table 17.10
Source: Alesina (1988)
![Page 48: Advanced Macroeconomicsamoneta/m2019_3.pdfAdvanced Macroeconomics Module 3: Empirical models & methods Monetary and Fiscal Policy Alessio Moneta Institute of Economics Scuola Superiore](https://reader030.fdocuments.in/reader030/viewer/2022040109/5e73703e6c5fa30fff31f1c0/html5/thumbnails/48.jpg)
Burda & Wyplosz MACROECONOMICS 6/e
© Oxford University Press, 2012. All rights reserved.
Figure 17.6
Source: OECD
Yields on Different European 10-year Bonds, relative to Germany, 2009-2011 (% per
annum)