Download Diapositiva 1

SEMINARIO
PERMANENTE
DE LAS IDEAS:
Economía, Población y Desarrollo
Cuerpo Académico Número 41
www.estudiosregionales.mx
1
1
Public Finance and Monetary Policies
as Economic Stabilizer: Unique or
Universal Across Countries?
DRA. ARWIPHAWEE SRITHONGRUNG
Public Finance Center;
Wichita State University,
Ciudad Juárez, Octubre 13 2014
2
OUTLINE
Introduction
 Theoretical background
 Methodology and data
 Results
 Discussion
 Conclusion

3
INTRODUCTION

Motivation of the study
Does monetary policy work better than fiscal policy in
developing countries?
 Lack of systematic test for stabilization policy in developing
countries
 Non-industrialized countries
 Low-to medium-income levels;


Research question


In what circumstances is monetary policy effective in
stabilizing an economy and in what circumstances is fiscal
policy a better tool to do the same?
Theoretical arguments
Asymmetric information in capital markets
 Stabilizing economy at the least social cost

4
THEORETICAL BACKGROUND (1)

Musgrave, R. (1959): public finance functions and
roles

Correct market failures




Redistribute resources from rich to poor




Public infrastructure
Public programs
Tax revenue, public budgeting, government consumption and
investment
Social programs
Income tax structure
Current transfer payment
Stabilize macro-economy


Fiscal policy: tax, spending and deficit finance
Monetary policy: central bank interest rate
5
THEORETICAL BACKGROUND (2)

Basic roles of fiscal and monetary policies

Mundell-Fleming’s (1963) IS/LM Model
Sticky prices in short run
 Fiscal and monetary policies to change output levels




Public spending, taxes and deficit finance: indirectly change
investment and consumption by re-shuffling resources
Open economy with fixed exchange rates


Interest rate: directly change investment and consumption level
Fiscal policy: deficit finance and tax cut  investment/consumption 
change interest rate  foreign investment change
Open economy with floating exchange rates

Monetary policy: interest rate foreign investment - domestic currency
demands/supply export level
6
THEORETICAL BACKGROUND (3)

Relax IS/LM Model by adding public debt
accumulation


Two contrasting views: finite and infinite-horizon
Finite-horizon assumption
Beetsma & Bovenberg, 1995; Durham, 2006; Shabert, 2004;
Piergallini; 2005; Bartolomeo & Gioacchino, 2008
 Fiscal policy: both fixed and floating exchange rates
 Economic agents:



---anticipate central bank’s inflation strategies
---assume life-cycle cost; debt is postponed to the next generations
Government liabilities affect aggregate demand and thus
generate wealth
 Unintentional effect of monetary policy




---agents guess central bank strategy
---cut employment and inputs without necessary reasons
Counter-cyclical fiscal policy
7
THEORETICAL BACKGROUND (4)

Infinite-horizon assumption
Kirsanova, Stehn, Vines, 2005; Clarida, Gali & Gertler, 1999; Romer
& Romer, 1996; Stehn & Vines, 2007
 Monetary policy: both fixed and floating exchange rates
 Economic agents





Taylor rule: set nominal interest rate to target real inflation and
recession



--expect inflation and recession in the future
--do not pass debt service burden to future generation
--do not react to tax and government spending
--bad times: decrease nominal interest rates for several periods, followed
by deficit finance
--good times: increase nominal interest rates for several periods;
followed by tax increase
Unintentional effects of fiscal policies


--tax increase/surplus in early inflation period- dampens investment;
agents expect future recessions
--deficit finance in early recession coupled with high debt accumulation 8
- higher interest rates- force public spending cut  negative impacts
on employment and low-wage workers
THEORETICAL BACKGROUND (5)
OECD Countries





Typically high-income
Complete capital
markets—controllable
cash inflows
Relatively high human
development index
Relatively high
institutional quality
Relatively lower fiscal
burden
Mankiw, Wienzierl, Blanchard,
Eggertsson, 2011; Christiano,
Eichenbaum & Robelo, 2009
Non-OECD Countries





Relatively high public
debts
Relatively low government
accountability
Relatively low government
credibility
Incomplete trading
system, opaque national
account, high level of
government deficits
Imcomplete capital
markets
Hasan & Isgut, 2009; Fielding, 2008;
El-Shagi, 2012
9
THEORETICAL BACKGROUND (6)
Fiscal and monetary policies economic growth
 Warren Smith (1957)


Structurally balanced economy:






Full employment and production is achieved in current year
In the following year, tax burden must be less than investment
The ratio of private investment to GDP is greater than the ratio of
government revenue to total national income
Resource allocation between public and private sectors is
optimal
Business cycles create random shocks but do not interrupt
long-term growth
Rarely occurs; private investment depends on



Current-year investment level and profits
Profit tax
Government consumption
Current year investment over optimal level- inflation
 Current year investment under optimal level -- recession

10
THEORETICAL BACKGROUND (7)
Fiscal and monetary policies economic growth
 David Smith (1960),


Relaxes closed-economy assumption :






Maintaining balance of payments is key
Direct policy tools, e.g., tariff taxes, import controls, periodic
exchange rate devaluation can control balance of payments
Monetary policy enhances growth


Indirectly changes investment levels especially when faced with foreign
growth
Fiscal policy enhances growth


In addition to domestic investment and consumption
Balanced payment in national account due to a country’s levels of
export, import and disposable income
Open economy allows for spillover effects
Tax increases discourage consumption
Cautions: in situations with incomplete capital markets and
fixed tax systems fiscal policy is more effective
11
THEORETICAL BACKGROUND (8)

Hypothesis 1: In OECD countries, fiscal policy
through deficit finance and public spending is
ineffective [due to economic agents’ anticipation;
while monetary policy is effective because interest
rates provide incentives for private investment]
12
THEORETICAL BACKGROUND (9)

Capital markets / institutional quality of
government (El-Shagi, 2012)
Intensity of cash inflow control
 Quality and intention of capital market regulation


Western/industrialized or high-income countries
Capital markets designed to limit exposure to foreign risks
 Capital market transparency
 Inflow and outflow levels are compatible


Non-industrialized or medium-to low-income countries
Capital markets designed to enhance local cash supplies
 Capital market rules and regulation is arbitrary
 Transaction approvals are opaque

13
THEORETICAL BACKGROUND (10)

Quality of government and ability to monetize (Fielding,
2008; Calvo, Leiderman, Reinhart, 1996; Kaminsky, Rinehart &
Vegh, 2004)
 Western/industrialized or high-income countries
Capital inflows rising
 Create domestic currency demands
 Foreign investments increase; generating long term growth


Non-industrialized or medium-to low-income
countries
Capital inflows rising
 Create inflation pressure
 Domestic currency appreciates; dampening export


Consequences for non-industrialized and medium to
low-income economies
Low domestic currency demands, national saving -- inelastic rate 14
 Public debt fails to absorb inflation, unless set extraordinary high

THEORETICAL BACKGROUND (11)

Summary for monetary policy

Mankiw, Wienzierl, Blanchard, Eggertsson, 2011
monetary policy: counter-cyclical;
 interest rate is an effective tool to mitigate inflation and
recession


Kaninsky, Rienhart & Vegh, 2004
fiscal policy tends to be cyclical
 coupled with the incomplete capital market problems


Easterly and Schmidt-Hebbel (1993)

in developing countries, good financial management
through well-planned taxing and spending leads to growth
15
THEORETICAL BACKGROUND (12)
Hypothesis 2: In non-OECD countries, fiscal
policy through public spending is effective in
stabilizing economies, while monetary policy is
ineffective [since current account balance does not
readily adjust to reflect true levels of capital
inflows]
16
METHODOLOGY AND DATA (1)

Fischer (1993):
𝑌 = 𝐴(𝜋, 𝑏, 𝑔, 𝑟, 𝑘)
where;
𝑌 is per capita real Gross Domestic Product (GDP),
𝜋 is inflation rate,
b is balance account payment,
𝑔 is government spending rate,
𝑟 is interest rate and
𝑘 is capital accumulation rate
17
METHODOLOGY AND DATA (2)

Panel Vector Autoregression (PVAR)
Endogenous system of equations
 Reproducing Fischer’s system



Addresses endogeneity
Needs appropriate lag length to reduce errors to
white noise
18
METHODOLOGY AND DATA (3)

Sample Countries
OECD Member Countries (19)
Belgium, Canada, Denmark,
Non-OECD Member Country (17)
Algeria, Barbados, Fiji, Hong Kong,
Finland, France, Greece, Iceland, Jordan, Kuwait, Mauritius,
Ireland, Italy, Japan,
Pakistan, Paraguay, Peru,
Netherlands, New Zealand,
Philippines, South Africa, Sri Lanka,
Norway, Portugal, Spain,
Thailand, Trinidad & Tobacco,
Sweden, Switzerland, United
Uruguay, Venezuela
Kingdom, United States
19
METHODOLOGY AND DATA (3)

Summary Statistics: OECD Countries (with high income)
Variables
Current Account Balance (% to GDP) ( 𝑏𝑖,𝑡 )
Gross Fixed Capital Formation rate (% to GDP)
(𝑘𝑖,𝑡 )
Per Capital Real GDP (Constant $ value) (𝑦𝑖,𝑡 )
Government Spending Rate (% to GDP) (𝑔𝑖,𝑡 )
Central Bank Discount Rate (𝑟𝑖,𝑡 )
Annual Change Central Bank Discount Rate
(∆𝑟𝑖,𝑡1−𝑡 )
Annual Change Per Capita Real GDP (∆𝑦𝑖,𝑡1−𝑡 )
Annual Change Government Spending Rate (% to
GDP) (∆𝑔𝑖,𝑡1−𝑡 )
Annual Change Gross fixed capital Formation
rate (% to GDP) (∆𝑘𝑖,𝑡1−𝑡 )
Annual Change Current Account Balance (% to
GDP) (∆𝑏𝑖,𝑡1−𝑡 )
Mean
Standard
Minimum
Maximum
Deviation
-0.3
5.2
-28.4
16.5
21.3
3.5
12.0
34.5
27,814
7.1
7.5
7,579
1.6
6.0
10,806
3.0
0.0
51,792
11.3
49.0
-0.3
2.7
-25.0
28.0
429
846
-5609
4308
0.0
0.3
-1.4
1.8
-0.2
1.4
-10.5
6.2
0.1
2.2
-12.6
16.8
20
METHODOLOGY AND DATA (3)

Summary Statistics-Non-OECD Countries (with medium- to
low-income
Variables
Mean
Standard
Deviation
Minimum
Maximum
Current Account Balance (% to GDP) ( 𝑏𝑖,𝑡 )
0.41
14.35
-242.19
54.57
Gross Fixed Capital Formation rate (% to GDP) (𝑘𝑖,𝑡 )
21.7
5.81
9.5
43.2
9,617
10,382
1,170
52,502
7.76
3.45
2.82
29.40
21.96
61.03
0.00
866.00
-0.17
47.60
-576.00
718.00
Per Capita Real GDP (Constant $ value) (𝑦𝑖,𝑡 )
Government Spending Rate (% to GDP) (𝑔𝑖,𝑡
Central Bank Discount Rate (𝑟𝑖,𝑡
)
)
Annual Change Central Bank Discount Rate (∆𝑟𝑖,𝑡1−𝑡 )
Annual Change Per Capita Real GDP (∆𝑦𝑖,𝑡1−𝑡 )
Annual Change Government Spending Rate (% to GDP)
(∆𝑔𝑖,𝑡1−𝑡 )
158
1,172
-10,315
9,690
-0.01
1.20
-11.15
11.62
Annual Change Gross fixed capital Formation rate (% to
GDP) (∆𝑘𝑖,𝑡1−𝑡 )
-0.17
3.27
-19.40
21.30
0.06
16.70
-262.53
239.92
Annual Change Current Account Balance (% to GDP) (∆𝑏𝑖,𝑡1−𝑡 )
21
RESULTS: OECD GROUP
Variable
Per Capita GDP
Response Size
Year
t
Year
t+1
Year
t+2
Year
t+3
Year
t+4
Year
t+5
Year
t+6
Cumulative
Effect Across
Time
Lower Bound (95% CI)
665.4
326.4
10.5
13.4
9.6
-38.3
-32.4
Point Estimate
706.6
394.8
106.8
142.2
108.4
65.9
50.6
$ 1,459
Upper Bound (95% CI)
746.6
469.7
218.1
259.8
215.4
175.7
149.7
$ 1,910
Lower Bound (95% CI)
0
-160
-280
-200
-130
-49.7
-49.5
$ (770)
Point Estimate
0
-82.8
-210
-130
-70.8
13.8
5.3
$(494)
Upper Bound (95% CI)
0
-16.2
-130
-70.3
-9.7
76.3
59.1
$(226)
∆𝑔𝑖,𝑡1−𝑡
Lower Bound (95% CI)
0
-47.7
-18.8
17
-25.4
-21.9
-48.8
$0
(.3%)
Point Estimate
0
4.3
41
84.3
45.9
31.4
9.3
$0
Upper Bound (95% CI)
0
54.8
102.1
151.3
111.2
91
66.3
$0
∆𝑘𝑖,𝑡1−𝑡
Lower Bound (95% CI)
0
-32.3
-160
-260
-220
-170
-120
$0
(1.4%)
Point Estimate
0
58.9
-64.3
-160
-130
-110
-50.4
$0
Upper Bound (95% CI)
0
163.5
19.2
-45.4
-45.7
-36.8
11.6
$0
∆𝑏𝑖,𝑡1−𝑡
Lower Bound (95% CI)
0
-210
-120
-58.2
-120
-92.2
-83.5
$0
(2.2%)
Point Estimate
0
-150
-38.5
56.1
-28.7
-7
-17
$0
Upper Bound (95% CI)
0
-85.5
56.5
145.4
48.1
61.3
42.1
$0
∆𝑦𝑖,𝑡1−𝑡
($846)
∆𝑟𝑖,𝑡1−𝑡
(2.7%)
$
1,025
22
RESULTS: OECD IMPULSE RESPONSE
Response of Per Capita Real GDP to Shock in Discount Rate
$100
$50
$0
PER CAPITA REAL GDP ($)
t
t+1
t+2
t+3
t+4
t+5
t+6
-$50
-$100
-$150
-$200
-$250
23
-$300
RESULTS: OECD IMPULSE RESPONSE
Response of Per Capita Real GDP to Shock in Government Spending
$200
PER CAPITA REAL GDP ($)
$150
$100
$50
$0
t
t+1
t+2
t+3
t+4
t+5
t+6
-$50
24
-$100
RESULTS: NON-OECD GROUP
Variable
Per Capita GDP
Response Size
Lower Bound (95% CI)
∆𝑦𝑖,𝑡1−𝑡
($1,172)
∆𝑟𝑖,𝑡1−𝑡
(48%)
∆𝑔𝑖,𝑡1−𝑡
(1.2%)
∆𝑘𝑖,𝑡1−𝑡
(3.3%)
∆𝑏𝑖,𝑡1−𝑡
(16.7%)
Year
t
Year t+1
Year t+2
Year t+3
Year t+4
Year t+5
Cumulative
Effect
Across Time
Year t+6
901
-36.9
172.7
-190
21.3
-74.2
-37.3
$ 1,095
Point Estimate
962.4
209.8
292.8
-9.9
176.5
56.8
44.8
$ 1,432
Upper Bound (95% CI)
1000
439.2
481.2
168.1
341.7
204.6
202.1
$ 1,823
Lower Bound (95% CI)
0
-41.9
-23.6
-77.4
-6
-63.3
-15.8
$
0
Point Estimate
0
-4.5
31
-23.1
38.4
-19
18
$
0
Upper Bound (95% CI)
0
35.7
82.2
25.6
93.8
11.6
48.7
$
0
Lower Bound (95% CI)
0
207.7
87
15.3
5.5
6.4
3
Point Estimate
0
348.3
256.1
141.4
99.3
98.6
82.4
$ 1,026
Upper Bound (95% CI)
0
507.6
453.9
367.6
267.2
269.9
240.7
$ 2,107
Lower Bound (95% CI)
0
-150
-61.9
-390
-88.8
-140
-43.3
$(390)
Point Estimate
0
-10.6
41.4
-230
-27.6
-50.1
8.5
$ (230)
Upper Bound (95% CI)
0
134.3
145.6
-55.3
50.8
13.8
70.5
$ (55)
Lower Bound (95% CI)
0
-200
2
-92.3
-74.4
-62.4
-16.1
$(198)
Point Estimate
0
-110
124.3
-24
-11.3
-13.2
20.6
$ 14
Upper Bound (95% CI)
0
-23.8
249
45.9
42.2
37.9
72
$ 225
$
325
25
RESULTS: NON-OECD IMPULSE RESPONSE
Response of Per Capita Real GDP to Shock in Government Spending
$600
PER CAPITA REAL GDP ($)
$500
$400
$300
$200
$100
$0
t
t+1
t+2
t+3
t+4
t+5
t+6
26
RESULTS: NON-OECD IMPULSE RESPONSE
Response of Per Capita Real GDP to Shock in Discount Rate
$120
$100
$80
PER CAPITA REAL GDP ($)
$60
$40
$20
$0
t
t+1
t+2
t+3
t+4
t+5
t+6
-$20
-$40
-$60
-$80
-$100
27
DISCUSSION (1)

OECD Countries





Central bank discount rate negatively related to economic
growth
For every one standard deviation shock decrease (2.7%), real per
capita GDP increases by about $495 (one standard deviation PC
GDP = $846)
The monetary policy effect is persistent across 4-year period
No effect for monetary policy for the year in which the policy is
introduced
No significant effect of fiscal policy
28
DISCUSSION (2)

Non-OECD Countries





Government spending is positively related to economic
growth
For every one standard deviation of government spending
increase (1.2%), real per capita GDP increases by about
$1,026 ( one standard deviation GDP = $1,172)
The fiscal policy effect on output is persistent across 6-year
period
No effect of fiscal policy in the same year as the policy is
introduced
Monetary policy is not statistically significant
29
CONCLUSION

Three viewpoints
Currency exchange system
 Finite-horizon assumption/Infinite-horizon assumption
 Capital market and institutional quality/openness and foreign
growth and declines


Theoretical contribution


Practical contribution


To choose economic policy, it’s not only about economic agents’
response and exchange rate systems,…………… but also
quality/intention of capital market regulation
For developing, fiscal policy stabilizes output while shifting
wealth among sectors
Limitation
The model lacks exogenous variables
 Fails to explain the path in which fiscal policy stabilizes output

30
SEMINARIO
PERMANENTE
DE LAS IDEAS:
Economía, Población y Desarrollo
Cuerpo Académico Número 41
www.estudiosregionales.mx
31
31