We estimate local government spending multipliers using annual data for 47 Japanese prefectures during the 1990s. Our main findings are as follows: the average local government spending multiplier is positive and significantly different from zero but not larger than one; there are large and significant differences in the output effects of different types of government expenditures: transfers to firms have the highest multiplier, significantly larger than one, while transfers to households have the lowest multiplier, significantly below zero; firms' financial distress has a significant negative effect on the local government spending multiplier, in contrast to economic slack that has a significant positive effect.The effectiveness of government spending during times of financial crisis is an intensely debated issue. Both in academic and policy circles, the views are split on how effective government spending is in resuscitating the economy. Fiscal conservatives warn that large increases in government spending can lead to an unsustainable increase in the stock of public debt and caution therefore about the adverse effects that an expansionary fiscal stance can have on the economy in the long run; see, for example, Auerbach and Gale (2010). Yet even from a short-run, business-cycle perspective there is little consensus among macroeconomists on whether fiscal policy is effective in stimulating the economy; see Hall (2009), andCogan et al. (2010) for an overview of the literature. Most of the academic debate is theoretical in nature and, so far, there is little evidence from rigorous econometric analysis on the size of the government spending multiplier during times of financial crisis.In this article we seek to make an empirical contribution to the debate on whether government expenditures are effective in stimulating economic activity during times of financial crisis by using a rich dataset of regional government expenditures in JapanWe are grateful to the editor and three anonymous referees for very helpful comments and suggestions. We also thank

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper surveys decision-making roles of governing bodies of central banks that have formally adopted inflation targeting as a monetary framework. Governance practices seek to balance institutional independence needed for monetary policy credibility with accountability required to protect democratic values. Central bank laws usually have price stability as the primary monetary policy objective but seldom require an explicit numerical inflation target. Governments are frequently involved in setting targets, but to ensure operational autonomy, legal provisions explicitly limit government influence in internal policy decision-making processes. Internal governance practices differ considerably with regard to the roles and inter-relationships between the policy, supervisory, and management boards of a central bank.

I. Background Recent volatility in international fuel prices has highlighted the fiscal risk inherent in the current approach to fuel pricing in many developing and emerging countries. 1 In these countries, domestic fuel prices are administratively determined and increases in international fuel prices are often not fully passed-through to domestic consumers. This has translated into increased volatility in fuel tax levels and revenues, and substantial fiscal costs over long periods, especially when there is more complete pass-through of international price decreases. For example, median pass-through of changes in international diesel and gasoline prices fluctuated widely between end-2003 and end-2011 with corresponding volatility in average fuel taxes and thus fuel tax revenues (Table 1). The resulting revenue volatility, and in particular large fiscal costs during periods of sustained increases in international prices (Coady and others, 2010; Coady, Flamini, and Antonio, 2012), present difficult challenges for short-term 1 Fuel products include gasoline, diesel, kerosene, fuel oil, and liquefied petroleum gas (or LPG). Many of the issues discussed in this note will, however, also apply to the controlled pricing of other energy prices (such as electricity and natural gas), which is also common in many countries.

Potential output estimation plays a crucial role in conducting fiscal policy based on structural balances. Difficulties in estimating potential output could lead to an erroneous policy stance with a consequent impact on growth. This paper analyzes historical data on revisions of actual and potential growth in the European Union and the implication of these revisions for the measurement of fiscal effort using the cyclically-adjusted primary balance (CAPB). It finds that revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average. Revisions in potential GDP also contributed significantly to revisions in the estimated CAPB, especially during the crisis years. Given these findings and historical correlations, it proposes an indicative rule of thumb for reducing errors in the measurement of fiscal effort by factoring in that about 30 percent of revisions in actual growth capture changes in potential growth. In other words, the standard advice of "letting automatic stabilizers operate fully" in response to a positive/negative growth shocks likely implies a strengthening/weakening of the structural position.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The Czech Republic has embarked on an ambitious tax reform and expenditure package to bring the deficit sustainably below 3 percent, and intends to reduce the deficit to 1 percent of GDP by 2012. To address the long-term fiscal challenge due to population aging, pension reform proposals are also being considered. In this paper we assess the macroeconomic effects of these measures using the Global Fiscal Model. The tax reform package will achieve a more efficient tax system. If implemented successfully with the intended expenditure savings measures, debt is projected to improve markedly while output would expand. Fiscal sustainability will not be restored, however, even if further measures to bring the deficit to 1 percent of GDP by 2012. Instead, raising the retirement age and prefunding future aging costs would be needed to keep debt below 60 percent of GDP through 2050.