The Output and Welfare Effects of Government Spending Shocks Over the Business Cycle

Sims, Eric R.; Wolff, Jonathan

doi:10.1111/iere.12308

Cited by 54 publications

(3 citation statements)

References 81 publications

(143 reference statements)

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“…It would be premature to suggest strong and precise recommendations for the current macroeconomic situation of the Bosnian or the Federation’s economy based on just one model specification. It should be noted, however, that in a recent study with a New Keynesian DSGE model, Sims and Wolff ( 2018 ) show that countercyclical fiscal policies are more successful when using productive public investment instead of public consumption. Since due to lack of data our model does not incorporate potential GDP, we cannot explore these effects in our model.…”

Section: Discussionmentioning

confidence: 96%

Fiscal policies in the Federation of Bosnia and Herzegovina: are spending or revenue measures more effective?

Weyerstraß

Kovac

2023

Empirica

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We examine the effectiveness of different fiscal policies in the Federation of Bosnia and Herzegovina (FBiH). For this purpose, we use a structural macroeconomic model for the FBiH. In this model, GDP in the Federation is influenced by world demand and by domestic demand in the Federation. Domestic demand comprises consumption of private households, public consumption, and gross fixed capital formation. Employment depends positively on GDP and negatively on the tax wedge, i.e., the net wage plus social security contribution rates (including the unemployment insurance), and the personal income tax rate in the Federation. The latter allows the analysis of the impact of changes in social security contribution rates or in the income tax rate in the Federation of Bosnia and Herzegovina. The following Federation-specific policy instruments are implemented in the model for the FBiH: Pension funds contribution rate in FBiH; contribution rate for health insurance in FBiH; contribution rate for the unemployment insurance in FBiH; benefits from social security; direct tax rates (income tax rate, corporate tax rate); public consumption in FBiH. Our results show that policy measures that reduce the tax wedge on labour income are highly effective in stimulating employment. Due to the large elasticity of imports with respect to demand, pure demand-side measures have little impact on real variables, indicating that a small open economy like the Federation of Bosnia and Herzegovina has only little scope for influencing macroeconomic developments with pure demand management policies. Our results confirm earlier theoretical and empirical studies showing that the labour market can best be influenced positively by reducing the tax wedge. The multipliers of income tax reductions are larger and oscillate more than the effects of the other fiscal policy measures.

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Section: Discussionmentioning

confidence: 96%

Fiscal policies in the Federation of Bosnia and Herzegovina: are spending or revenue measures more effective?

Weyerstraß

Kovac

2023

Empirica

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“…( 34) that the optimal government expenditure to output ratio degenerates to zero. Second, if government spending provides households with utility and enters additively in the utility function (rather than the production function) as in Sims and Wolff (2018) and Boehm (2020), the optimal ratio of government expenditure is solely positively related to the extent of utility-generating government spending. The detailed proof is available from the author upon request.…”

Section: Optimal Fiscal Policymentioning

confidence: 99%

Optimal fiscal policy under monopolistic competition with firm heterogeneity

Chang

2023

Scottish J Political Eco

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Government spending is a policy instrument used to sustain economic development and improve social welfare. Empirical observations, however, reveal a significant decrease in the government spending to GDP ratio for the United States. In addition, the United States has been observed to exhibit a rise in firm heterogeneity in productivity in recent decades. This paper shows that the optimal size of government expenditure will decrease as firm heterogeneity increases. We thus indicate that the rise in firm heterogeneity in productivity may serve as a plausible vehicle to explain the decline in the share of government spending in GDP for the United States.

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“…Several studies found that the results could be sensitive to changes in specifications or estimation methods. Model-based studies find different results, includingCanzoneri, Collard, Dellas, and Diba (2016) that show higher but relatively short-lived multipliers during recessions; andSims and Wolff (2018) that highlight that multiplier can be mildly procyclical 3. For instance, recent empirical findings highlighted evidence of higher multipliers, ranging from 1.5 to 2.5 at the zero lower bound for Japan(Miyamoto, Nguyen, and Sergeyev, 2018) and around 1.5 for in the United States(Ramey and Zubairy, 2018).©International Monetary Fund.…”

mentioning

confidence: 99%

Fiscal Multipliers During Pandemics

Kinda¹,

Lengyel²,

Chahande³

2022

IMF Working Papers

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Many countries have deployed substantial fiscal packages to cushion the economic fallout from the COVID-19 pandemic. A historical look at past pandemics and epidemics highlights concomitant public sector support in response to health crises. This paper assesses how fiscal multipliers could vary during health crises, particularly how factors such as social distancing and uncertainty could lower contemporaneous (T) multipliers and increase near-term (T+1 and T+2) multipliers as economies re-open, including due to pent-up demand. Based on Jorda's (2005) local projection methodology, the paper shows that cumulative fiscal multipliers one year after a health crisis is about twice larger than during normal times, particularly in advanced economies. These results suggest that large-scale fiscal support deployed at the onset of the COVID-19 pandemic could have larger than usual lingering impacts on economic activity, which need to be accounted for when calibrating policies.

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The Output and Welfare Effects of Government Spending Shocks Over the Business Cycle

Cited by 54 publications

References 81 publications

Fiscal policies in the Federation of Bosnia and Herzegovina: are spending or revenue measures more effective?

Fiscal policies in the Federation of Bosnia and Herzegovina: are spending or revenue measures more effective?

Optimal fiscal policy under monopolistic competition with firm heterogeneity

Fiscal Multipliers During Pandemics

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