<scp>Taxing Deficits to Restrain Government Spending</scp>

Stähler, Nikolai

doi:10.1111/j.1467-9779.2008.01400.x

Cited by 4 publications

(4 citation statements)

References 19 publications

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“…While in the 1970s, there seemed to be confidence in active discretionary fiscal policy actions to do the job, further developments have shown that rule-based actions may be necessary because of reasons revealed in the political economic literature (see e.g. Velasco, 1999, von Hagen, 1992, Harden and von Hagen, 1994, Woo, 2005, or Stähler, 2009.…”

Section: Introductionmentioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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Abstract:In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.Keywords: fiscal policy, debt brake, welfare, dsge.JEL classification: E 32, G 61, E 62. Non-technical summaryThe possibilities and limits of fiscal policy regarding economic stabilization have moved center stage lately, certainly also prompted by the current economic downturn. In this context, it is continuously stressed that it is necessary to assure sustainability of public finances and the confidence therein. This can be achieved not least by reliable consolidation after the crisis, and -at least in normal times -by rule-based budget requirements. For example, the International Monetary Fund recently identified a possible positive role for rule-based fiscal policy emphasizing that is must be sustainable and reliable if countercyclical fiscal policy is to unfold its desired effects. While in the 1970s, there seemed to be confidence in somewhat active discretionary fiscal policy, further developments have shown that rule-based actions are needed because of reasons revealed in the political economic literature. This insight is also the basis for the fiscal framework of the European (monetary) union.The focus of the present paper is on the analysis of a rule-based fiscal policy, in particular, the "debt brake", which is expected to be introduced in Germany soon and has already been implemented in Switzerland. The discussion about the introduction of the debt brake has to be seen in the context of European fiscal rules, namely the European Stability and Growth Pact (SGP). As a rule, the SGP demands roughly balanced budgets in structural terms, while letting the automatic stabilizers take effect. The corrective arm of the pact is called on particularly if the 3% deficit ceiling is violated. The 60% debt ceiling also plays a role. As German national budgetary rules have not been consistent with the European framework, and they were largely assessed as being inappropriate with a view to limiting the increase in public debt, this was the hour of birth of the "Förderalismuskommission II" (federalism reform commission), which recently agreed on a proposal for the DB.Similar to the SGP, the debt brake demands (almost) structurally balanced budgets and, thus, ties cyclically adjusted government spending (including interest on outstanding debt) to cyclically adjusted trend revenues raised by the government and, therefore, acts as an automatic stabilizer since the government finances some of its expenditures from deficits in "bad times" while accumulating surpluses...

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Section: Introductionmentioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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“…Lower government spending and the resulting reduced deficit bias release resources available in the private sector and augment capital accumulation. As is shown by Ihori and Itaya (2004) and Stähler (2007), deficit taxation generates a spending reluctance. We may show that this deficit taxation reduces the deficit bias as it internalizes the externality different lobby groups impose on others.…”

Section: Policy Options For Fiscal Reformsmentioning

confidence: 90%

Fiscal Structural Reform and Economic Activity: Public Spending and Private Effort*

Ihori

2010

Japanese Economic Review

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This paper explores governments' and private agents' incentives to implement or postpone fiscal structural reform attempts. Both fiscal consolidation and fiscal reorganization often create spillover effects and thereby induce free-riding problems. It is thus important to cope with the free-riding behaviour of interest groups. It is often argued that in order to attain successful outcomes, a good macroeconomic situation is needed, since we expect positive income effects. In this paper, we first explain the dynamic aspects of insufficient fiscal consolidation due to free-riding problems in the framework of private provision of public goods. Then, using a static model between central and local governments, we examine the sign of income effects for reform attempts to pursue fiscal reorganization. It is shown that good economic circumstances do not necessarily enhance reform of reorganizing fiscal expenditures, although it could enhance fiscal reconstruction.j ere_524 1..24 JEL Classification Numbers: D72, F20, H41, H71.

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“…In conventional politico‐economic (usually one country) models, long‐term equilibrium is established by corresponding changes on the capital market (e.g. risk premiums and a corresponding decline in private investment) and in fiscal policy, in some cases, rule bound, which thus bring spending into line with potential revenue (see Woo, ; Stähler, ). The exclusion of Ponzi games generally results in a mechanism that prevents bankruptcy.…”

Section: Integrating Quantitative Models Of Sovereign Default Into Thmentioning

confidence: 99%

Recent Developments in Quantitative Models of Sovereign Default

Stähler

2012

Journal of Economic Surveys

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Abstract:The current crisis and discussions, in the euro area in particular, show that sovereign debt crises/defaults are no longer restricted to developing economies.After crises in many Latin American countries, the literature on quantitative dynamic macro-models of sovereign default has been advancing. Current debate should take notice of the findings from this literature -an extensive overview of which has been provided in this paper. This paper also discusses the difficulties involved in, but also possibilities of, integrating this type of model in standard business cycle models (RBC and DSGE models). This is likely to be particularly helpful when using models to analyse upcoming issues in the euro area, such as a suitable (sovereign) insolvency law or the assumption of joint liability. Keywords Non-technical summaryThe current crisis and discussions, in the euro area in particular, show that sovereign debt crises/defaults are no longer restricted to developing economies.After crises in many Latin American countries, the literature on quantitative dynamic macro-models of sovereign default has been advancing. Current debate should take notice of the findings from this literature -an extensive overview of which has been provided in this paper.The literature on quantitative dynamic macro-models of sovereign default shows that (1) despite the absence of international insolvency legislation, sovereigns have an interest in repaying debt owing to reputational damage and negative output effects; (2) in the event of transitory shocks, debt level is the key factor determining the probability of default; in the event of trend shocks, the output level also plays a decisive role; (3) the political stability of a country reduces its probability of default; (4) bailouts or the possibility of borrowing from international financial institutions such as, for example, the IMF (can) increase the probability of default; (5) fiscal policy acts procyclically if it takes the probability of default and the impact on interest rates into account; (6) taking private sector debt into account does not change the above-mentioned qualitative statements but can increase a government's propensity to borrow (in relative terms); (7) endogenising negotiations about debt recovery rates tends to increase the interest rates on sovereign debt but a government's propensity to borrow can still rise; (8) it can be efficient for borrowers and creditors to delay negotiations over restructuring sovereign debt, although this is heavily dependent on the assumed bargaining game; (9) long-term bonds usually have a higher rate of interest than short-term ones; (10) contagion effects owing to risk-averse investors as well as information shocks affecting investors that impact on the interest rate can even cause fundamentally sound governments to default; and (11) the formal method of solving these models also plays a role in quantitative terms. All of these aspects and the relevant effects that lead to these conclusions are explained in detail in this paper. ...

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Taxing Deficits to Restrain Government Spending

Cited by 4 publications

References 19 publications

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Fiscal Structural Reform and Economic Activity: Public Spending and Private Effort*

Recent Developments in Quantitative Models of Sovereign Default

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