When Does Government Debt Crowd Out Investment?

Traum, Nora; Yang, Shu-Chun Susan

doi:10.1002/jae.2356

Cited by 69 publications

(28 citation statements)

References 52 publications

(56 reference statements)

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“…

ζ^{z}

is set at 1.003, implying an increase of 12.75% in transfers in 10 years. As summarised in Table , the calibrations for the shock processes for tax and spending follow Traum and Yang (), among others.…”

Section: Calibration and Solutionmentioning

confidence: 99%

Uncertain Fiscal Consolidations

Leeper

Leith

2013

The Economic Journal

131

108

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This article explores the macroeconomic consequences of fiscal consolidations whose timing and composition -either tax-or spending-based -are uncertain. We find that the composition of the fiscal consolidation, its duration, the monetary policy stance, the level of government debt, and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary or successful in stabilising government debt. We argue that the conditions that could render fiscal consolidation efforts expansionary are unlikely to apply in the current economic environment.The financial crisis of 2007-9 left advanced economies with average levels of gross government debt breaching 100% of gross domestic product (GDP) for the first time since the aftermath of World War II, as IMF (2011) reports. The IMF now expects most governments in those economies, except for Japan and the US, to begin consolidation efforts by 2012. Politicians in some countries, most notably the UK, argue that fiscal consolidations will ultimately enhance growth but they cite the need to avoid rising debt costs as a key motivation in undertaking fiscal consolidations. Over the medium term, the dominant fiscal trend in advanced economies is a return to a position of fiscal sustainability, particularly when prompted to do so under financial market pressure.Textbook Keynesian analysis suggests that fiscal consolidations inevitably contract aggregate demand, reducing output and consumption. Neoclassical and New Keynesian models, grounded in intertemporal consumption smoothing behaviour, also tend to suggest that temporary public expenditure cuts and distortionary tax increases reduce output, although with some crowding in of private sector consumption in the case of spending cuts.1 Giavazzi and Pagano's (1990) analysis of fiscal consolidations in Denmark and Ireland in the 1980s, however, suggests that such fiscal actions could be expansionary, as output growth actually accelerated after these particular fiscal tightenings. Briotti's (2005) survey of empirical work considers a wider set of countries over a wider time period and also finds some evidence that fiscal consolidations can be expansionary. The persistence and composition of the consolidation often matter, with government spending cuts being thought to be pro-growth relative to tax increases.

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“…

ζ^{z}

Section: Calibration and Solutionmentioning

confidence: 99%

Uncertain Fiscal Consolidations

Leeper

Leith

2013

The Economic Journal

131

108

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“…Due to capital scarcity, low-income countries rely on imports to carry out public investment, which does not stimulate output and growth, at least in the short run (Shen, Yang and Zanna, 2018). Therefore, the view that government expenditure can stimulate the short-run demand and long-run growth engine is different in the low-income countries (Traum and Yang, 2015;Abiad, Furceri and Topalova, 2016).…”

Section: Review Of Extant Literaturementioning

confidence: 99%

Post-Financial Crises Puzzle of Economic Growth in Low and Lower-Middle Income Countries: Evidence from Static and Dynamic Panel Estimations

Shafiq¹,

Adeleye²

2020

Preprint

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This paper investigates economic growth in 65 low and lower-middle-income countries from 2010 to 2017. Results from static and dynamic panel data techniques show that foreign direct investment (FDI), capital formation, and labor force significantly increase economic growth while government expenditure decreases growth. Mobile phone subscription reveals no significant impact on growth at aggregate levels. Furthermore, analyses at the income group level reveal substantial differences between the determinants of economic growth in low and lower-middle-income countries. For instance, FDI is a significant predictor of growth in low-income countries, but not in lower-middle-income countries. Similarly, government expenditure and mobile cellular subscriptions are not significant predictors in low-income countries relative to lower-middle-income countries. Interestingly, capital formation and labor force are the two common significant predictors across low and lower-income countries.

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“…We develop a closed-economy New Keynesian model, inspired in Traum and Yang (2015), featuring two stochastic processes: one is a transitory total factor productivity (TFP) shock and the other is a monetary policy perturbation. The economy has a unit-measure continuum of households composed by two types of agents: Credit constrained households, which are a fraction µ of total population, and the remaining fraction (1 − µ) is made up of saver households.…”

Section: The Modelmentioning

confidence: 99%

“…Pricing Decision Intermediary firms are subject to a Calvo (1983) pricing process: each period, a firm has a probability (1 − ω p ) of being allowed to reset its price, independently of the amount of time elapsed since the last readjustment. Following Traum and Yang (2015), a firm that was not sorted to reset its price follows an indexation rule:…”

Section: Production Sector and Pricing Decisionmentioning

confidence: 99%

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Fiscal Multipliers in Bad Times: Does the Nature of a Recession Matter?

Borsoi¹,

Teles²

2020

Brazilian Review of Econometrics

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The literature measuring the magnitude of the fiscal multiplier has a considerable consensus that the stimulative effects of fiscal instruments depends on the current state of economic activity, whether it is expanding or facing a recession. However, none of the previous works studied how the nature of an economic downturn, if the economy is facing an adverse supply/demand shock, affects the effectiveness of fiscal expansions. We introduce in a simple New Keynesian model with a rich description of fiscal policy, the assumption of imperfectly informed policymakers (fiscal and monetary) to approach the question. Our results point out the existence of disparate effects of fiscal policy depending on whether the economy is facing a demand or a supply recession. Yet, we find out that cuts in taxes are an effective tool to counter the effects of adverse shocks on economic activity and aggregate consumption.

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When Does Government Debt Crowd Out Investment?

Cited by 69 publications

References 52 publications

Uncertain Fiscal Consolidations

Uncertain Fiscal Consolidations

Post-Financial Crises Puzzle of Economic Growth in Low and Lower-Middle Income Countries: Evidence from Static and Dynamic Panel Estimations

Fiscal Multipliers in Bad Times: Does the Nature of a Recession Matter?

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