Download Slide 1

Fiscal Policy
with
Credit Constrained
Households
Werner Roeger and Jan in ’t Veld
DG ECFIN - Economic and Financial Affairs
European Commission
June 2009
The views expressed here are those of the author and should not be attributed to the European Commission.
1
Revival of interest in discretionary
fiscal policy
Earlier scepticism on effectiveness of fiscal policy:
•
•
Dominance of supply shocks in the past
Financial liberalisation
Severity of financial crisis
•
•
•
sharp fall in aggregate demand
tightening credit constraints
limits of monetary policy
Policy response:
•
•
•
European Economic Recovery Plan
Fiscal packages announced by EU member states : 1.1% of
GDP in 2009, 0.6% of GDP 2010.
G-20 : 1.8% of GDP in 2009, 1.3% in 2010 ($1.35 trl)
2
Structure of the presentation
1. Literature review of fiscal multipliers
2. Empirical evidence credit constraints
3. QUEST III with credit constrained
households
4. Impulse responses to government
spending and tax shocks (with and
without credit-constrained households)
5. The role of monetary policy
3
Overview of empirical literature
VARs
• Results in the VAR literature differ widely.
• The highest multipliers are obtained for US
data (Blanchard and Perotti (2002)),
• Estimates for European data seem to be less
significant (Perotti (2005), De Castro and
Fernandez de Cos (2006), Afonso and Sousa
(2009))
4
Overview of empirical literature:
DSGE models
Since the result obtained by Blanchard and Perotti is often
regarded as representing a stylised fact, several attempts
have been made to come up with DSGE models which can
generate positive consumption co-movement.
– Ravn et al. (2007) introduce a market structure into the
model which implies a strong decline in the mark up in the
case of a government spending shock in order to generate
a positive consumption effect.
– Monacelli et al. (2008) introduce a utility function which
implies a stronger comovement between hours worked and
consumption in order to generate the same effect.
– Gali et al. (2007) generate a positive effect on private
consumption by introducing substantial capital market
imperfections in the form of liquidity constrained
households.
5
Overview of empirical literature: DSGE
But empirically estimated DSGE models have problems
to obtain such an effect:
– Ratto et al. (2009a) estimate a 1st year multiplier for
gov. cons. shocks of around 0.6 with an estimated
share of liquidity constrained households of about
30% for the euro area, similar for gov. inv. but lower
for transfers. But it is impossible to replicate the Gali
result despite liquidity constrained consumers.
– Also Coenen and Straub (2005) find for a similar
share of non-Ricardian households a decline in
aggregate consumption.
Credit constraints constitute an attractive alternative
hypothesis. Given the uncertainty about income and
wealth developments of borrowers, banks typically
impose collateral constraints.
This paper therefore explores the consequences for fiscal
policy of this credit market friction.
6
Figure 1: Euro area:
Credit standards applied to the approval of loans to households
(net percentages of banks reporting tightening credit standards)
50
40
30
20
10
Ja
nM 03
ay
-0
Se 3
p0
Ja 3
nM 04
ay
-0
Se 4
p0
Ja 4
nM 05
ay
-0
Se 5
p0
Ja 5
nM 06
ay
-0
Se 6
p0
Ja 6
nM 07
ay
-0
Se 7
p0
Ja 7
nM 08
ay
-0
Se 8
p0
Ja 8
n09
0
-10
-20
loans for house purchases
consumer credit and other loans
7
Figure 2: US:
Credit standards applied to the approval of loans to households
(net percentages of banks reporting tightening credit standards)
Net Percentage of Domestic Respondents Tightening Standards for Mortgage
Loans
100
80
60
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-20
All
Prime
Nontraditional
Subprime
8
Determinants size fiscal multipliers
1. Degree credit constraints (higher mpc)
2. Monetary policy accommodation
( if Δ i = 0 => r < 0 )
3. Composition (spending > revenue)
4. Duration (temporary > permanent)
Current financial crisis:
• Increase credit-constrained households
• Monetary policy more likely to be
accommodative
 Higher fiscal multipliers
9
QUEST III housing model
Extension of the QUEST III model with a housing
sector and credit-constrained consumers along
the lines of the financial accelerator literature.
(Kiyotaki and Moore (1997), Iacoviello (2005), Iacoviello and Neri (2008),
Monacelli (2007), Calza, Monacelli and Stracca (2007))
Disaggregation of the household sector into
borrowers and lenders.
Credit-constrained households: intertemporal
optimising over consumption, leisure, housing
subject to borrowing constraint (collateral
constraint – endogenously linked to nominal
value of asset (housing)
 Positive co-movement consumption and residential
investment
10
Households
Ricardian/lenders: intertemporal optimising (utility
separable in consumption, leisure and housing
services)
• Full access to financial markets
Credit-constrained / borrowers: optimising utility
• Borrow from Ricardian households
• Face collateral constraint on borrowing
Liquidity-constrained (hand-to-mouth):
• Consume their current disposable income
11
Households 1: Ricardian households - lenders
Period utility function separable in C, leisure and housing services H
Ricardian hh hold government bonds and bonds issued by domestic
and foreign hh, real capital of T and NT sector

MaxV 0 r U(Ctr,1Lrt,Htr)
r
0
t
t0
,r
(1tc)pCCr pK,j (1itc)I j pH(1tc)IH,r pH(1tt )IHLC
(BtG,r Btr)


t
t
t
t
t t
t
t
t
t
c t
j


F,r
G,r
r
F
F,r
rer

(1rt1)(Bt1 Bt1)(1rt1)(
1risk
(.))
rer
tB
t
tB
t1


t
2
0 trr 
W W

k K, j
k, j
K, j
j
W
r
t
t0

((
1

t
)
i

t

)
p
K

(
1

t
)
w
L



t
t

1
t
t

1
t

1
t
t
t
 j

2 W
t1




H
H LC
,r
L Land
j
H
LS
,r
1tk)itH
Pr
((

1  )pt H
t1 pt Jt
t Pr
t T
t
j1



t

0 trr tj (Ktj Jtj (1K,j )Ktj1)
t0
j



,r
0 trtrr Htr JtH,r (1H)HtH
1
t
t0



,r
,r
0 trtrr HtLC,r JtHLC
(1H)HtLC
1
t
t0




Land
0 trtrr Land
(1gtL)Land
t Jt
t1
t0
t
Households 2:
Credit-constrained households - borrowers
Intertemporally optimising (as Ricardians) (i.e. not hand-tomouth) but:
1. higher rate of time preference βc<βr and
2. they face a collateral constraint on their borrowing : They
borrow Bc from domestic Ricardian households
c
c c
Max
V


U
(
C
1

L
H
t,
t,
t)
c
0
t
c

0
t

0
2
 c Cc H HH



W
,
c
c
c
W c W t
LS
,
c




(
1

t
p
p
1

t
I
B
(
1

r
)
B

(
1

t
w

T
t)
tC
t
t(
t)
t 
t
t

1
t)
t)
tL
t
t


2
W
t

1



t
cc

0 t
t

0


c
H
,
c
H c


H

J

(
1


)
H
t
t
t

1

t
cc c

0 t t
t

0


Hc



B

(
1


)
p
tH
t

t c
c
c

0 t t
t
t

0
Consumption:
Ric:
CC:
r

(
C

hC
r
t t

1
t)


(
1

r
t)
r
C

hC
t
t

1
c

C

hC
1

r
t(
t

1
t) c(
t)


c
(
1


C
hC
t)
t
t

1
Housing investment:
Shadow price of housing capital ςt = PDV of ratio of the marginal
utility of housing services H and consumption C
Ric:









 



 1

(
C

hC
)(
1

t
)
p





(
1

)

p
(
1

t
) H
(
1

t
)
p
(
1

r




t
)
p
(
1

t
)


r
r
c
C
r
r
t
t t

1
t
t
t

1 H
t
H
c
rc
H
GDP
H
c
h
c
t t
t t
t
tt

1
t

1
t

1
t

1
t

1
CC:
c

(
C

hC
)(
1

t
)
p (
1

)
t
t

1 H




(
1

)


(
1

)
t
GDP
H
c
H
c

p
(
1

t
)H
(
1

t
)
p
(
1

r




t
)
p
(
1

t
)
t
t

1
t

1
t

1
t

1
t

1


c
c
c
C
c
t
t t

1
t
t
t
H
c
c
c
H
t t
tt
t
Note: Lagrange multiplier of the collateral constraint ψ - acts like premium
on interest rate (fluctuates positively with tightness of constraint)
Households 3: Liquidity-constrained households
“Hand-to-mouth”: Consume entire disposable income (no
intertemporal optimisation)
(23)
(1  t tc ) Pt c Ctl  (1  t tw )Wt Llt t  TRtl  Tt LS ,l
Wage setting
Trade union maximises a joint utility function
(distributed equally – population weigths si )
Wage rule :
(24)
s cU 1c L,t  s rU 1r L,t  s lU 1l L,t
s cU cc,t  s rU cr,t  s lU cl ,t
(1  t tW ) Wt W


C
C t
(1  t t ) Pt
Wage mark up:
(25)

tW  1 1/    W /   ( tW1  (1  sfw) t )  ( tW  (1  sfw) t 1 )

0  sfw  1
15
Aggregation:
(26a) Ct  s r Ctr  s c Ctc  s l Ctl
(26b)
Lt  s r Lrt  s c Lct  s l Llt with Lrt  Lct  Llt .
Liquidity constrained households do not own financial assets:
Btl  Btl
F
 K tl  0
Credit constrained households only engage in debt
contracts with Ricardian households:
(27)
sr r
B  c Bt .
s
c
t
16
Household decision rules in a special case:
H 
IH
 t tc1  0
Consumption/savings decision
(20)
 t (Ctc1  hCt )
(1  rt )
 c
c
(1   t )
Ct  hCt 1
Housing investment decision
(22')
H 
c
t
(Ctc  hCt 1 )
1
c
(it  
H
t 1

H
ptH
 t  ) C
pt
A tightening of the credit constraint (   0 ) leads to
1) A decline in the housing investment to consumption ratio
2) A reduction in current consumption
t
17
Figure 3: Response of consumption to changes in current income
(absolute deviations)
1.2
1
0.8
0.6
0.4
0.2
0
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
-0.2
Y
CCC
CRIC
18
Figure 4: Response of consumption to changes in interest rates
(% deviations)
30
25
20
15
10
5
0
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
-5
-10
R
CCC
CRIC
19
Credit-constrained hh.:
Implications for fiscal policy:
• Introduction of credit-constraints raises
marginal propensity to consume out of
current income
• Credit-constrained households react
stronger to fall in real interest rates
(raises multiplier when monetary policy is
accommodative)
20
Fiscal policy
GBC:
Bt  (1  it ) Bt 1  Pt C  Pt I  INVSUBt
C
G
t
C
 TRt  b Wt ( POPt  POPt
U
W
G
t
NPART
 Lt )  TRCC t
 t Wt Lt  t Pt C t  t i Pt K t 1  Tt
w
t
c
t
c
K K
t t
I
LS
t
Tax rule:
Bt 1
T
DEF  Bt
t   (
 b )   
Yt 1 Pt 1
 Yt Pt
w
t
B



21
EU
US
5.5
4.5
5
4.5
13
1/5
0.33
10
1/3
0.20
20
75
20
75
0.4
0.3 (CC)
0 (RIC)
0.3 (CC)
0.6 (RIC)
0.25
0.7
0.4
0.3 (CC)
0 (RIC)
0.3 (CC)
0.6 (RIC)
0.25
0.7
Monetary policy:
Lagged interest rate
Consumer price inflation
Output gap
0.85
1.5
0.05
0.85
1.5
0.05
National accounts decomposition:
Consumption
Investment tradedables
Investment non-tradables
Investment residential
Government consumption
Government investment
Exports
Imports
Transfers to households
0.59
0.06
0.07
0.06
0.18
0.04
0.18
0.18
0.16
0.64
0.05
0.06
0.06
0.15
0.04
0.15
0.15
0.13
Nom. Rigidities:
Avg. duration between price adjustments (Quarters)
Avg. wage contract length (Quarters)
Real Rigidities:
Labour adjustment cost (% of total add. wage costs)
Labour supply elasticity (1/  )
Semi-wage elasticity w.r.t. employment rate (  /  w )
Capital adjustment cost
Investment adjustment cost
Consumption:
Share of liquidity-constrained consumers slc
Share of credit-constrained consumers (1-slc)(1-snlc)
Share of non-constrained consumers (1-slc)snlc
Downpayment rate χ
Habit persistence h
22
Impulse responses to gov. spending
and tax shocks
RIC_
CC_
Household shares:
────── - - - - - - Ricardian households (NLC)
0.6
0.3
Models:
Credit constrained hh (CC)
Liquidity constrained hh (LC)
-
0.3
0.4
0.4
• Two region version of model: EU and RoW
• Standardised fiscal shocks: 1% of GDP (1 year )
• Global shocks
23
Figure 1 Temporary increase government consumption:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh - - - - - GDP
1.0
Consumption
0.04
0.02
0.8
0.00
0.6
-0.02
0.4
-0.04
0.2
-0.06
0.0
-0.08
-0.2
-0.10
0
1
2
3
4
5
6
RIC_GDPR
7
8
9
10
1
2
CC_GDPR
3
4
5
6
RIC_CTOT
Consumption: liquidity-constrained hh.
0.4
0
0.05
0.2
-0.00
0.1
-0.05
0.0
-0.10
-0.1
-0.15
-0.2
8
9
10
9
10
CC_CTOT
Consumption: Non-constrained and credit constrained hh.
0.10
0.3
7
-0.20
0
1
2
3
4
RIC_CLC
5
6
7
CC_CLC
8
9
10
0
1
2
RIC_CNLC
3
4
5
6
CC_CNLC
7
8
CC_CCC
24
Figure 1 Temporary increase government consumption:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh - - - - - Corporate investment
0.05
Housing investment: Non-constrained and credit constrained hh
0.15
-0.00
0.10
-0.05
-0.10
0.05
-0.15
0.00
-0.20
-0.05
-0.25
-0.10
-0.30
-0.35
-0.15
0
1
2
3
4
5
RIC_ITOT
6
7
8
9
10
1
2
3
4
RIC_IHOUSENLC
Employment
1.0
0
CC_ITOT
5
6
7
CC_IHOUSENLC
8
9
10
CC_IHOUSECC
Real wages
0.30
0.25
0.8
0.20
0.6
0.15
0.4
0.10
0.2
0.05
0.0
0.00
-0.2
-0.05
0
1
2
3
4
5
RIC_L
6
7
8
9
10
1
2
3
CC_L
4
5
RIC_WR
Real interest rate
0.14
0
0.20
0.10
0.15
0.08
7
8
9
10
7
8
9
10
CC_WR
Inflation
0.25
0.12
6
0.10
0.06
0.05
0.04
0.02
0.00
0.00
-0.05
-0.02
-0.10
0
1
2
3
4
RIC_R
5
6
CC_R
7
8
9
10
0
1
2
3
4
RIC_INF
5
6
CC_INF
25
Figure 1b Temp. increase gov. cons. + mon. accommodation:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
-----GDP
1.4
Consumption
0.6
1.2
0.5
1.0
0.4
0.8
0.3
0.6
0.2
0.4
0.1
0.2
0.0
0.0
0
1
2
3
4
5
6
RIC_GDPR
7
8
9
10
1
2
CC_GDPR
3
4
5
6
RIC_CTOT
Consumption: liquidity-constrained hh.
0.6
0
7
8
9
10
9
10
CC_CTOT
Consumption: Non-constrained and credit constrained hh.
1.2
1.0
0.5
0.8
0.4
0.6
0.3
0.4
0.2
0.2
0.1
0.0
0.0
-0.2
0
1
2
3
4
RIC_CLC
5
6
7
CC_CLC
8
9
10
0
1
2
RIC_CNLC
3
4
5
6
CC_CNLC
7
8
CC_CCC
26
Figure 1b Temp. increase gov. cons. + mon. accommodation:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
----Corporate investment
0.5
0.4
0.8
0.3
0.6
0.2
0.4
0.1
0.2
0.0
0.0
-0.1
-0.2
0
1
2
3
4
5
RIC_ITOT
6
7
8
9
10
0.8
0.6
0.4
0.2
0.0
-0.2
2
3
4
5
RIC_L
3
4
6
7
8
9
10
5
6
7
CC_IHOUSENLC
8
9
10
CC_IHOUSECC
Real wages
0
1
2
3
CC_L
4
5
RIC_WR
Real interest rate
0.1
2
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
1.0
1
1
RIC_IHOUSENLC
1.2
0
0
CC_ITOT
Employment
1.4
Housing investment: Non-constrained and credit constrained hh
1.0
6
7
8
9
10
7
8
9
10
CC_WR
Inflation
0.6
0.5
-0.0
0.4
-0.1
0.3
-0.2
0.2
-0.3
0.1
-0.4
0.0
0
1
2
3
4
RIC_R
5
6
CC_R
7
8
9
10
0
1
2
3
4
RIC_INF
5
6
CC_INF
27
Figure 2 Temporary reduction labour taxes (1):
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
GDP
0.6
-----Consumption
1.0
0.5
0.8
0.4
0.6
0.3
0.4
0.2
0.2
0.1
0.0
0.0
-0.1
-0.2
0
1
2
3
4
5
6
RIC_GDPR
7
8
9
10
1
2
CC_GDPR
3
4
5
6
RIC_CTOT
Consumption: liquidity-constrained hh.
2.00
0
1.75
1.50
1.50
1.25
1.25
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
0.00
0.00
-0.25
8
9
10
9
10
CC_CTOT
Consumption: Non-constrained and credit constrained hh.
2.00
1.75
7
-0.25
0
1
2
3
4
RIC_CLC
5
6
7
CC_CLC
8
9
10
0
1
2
RIC_CNLC
3
4
5
6
CC_CNLC
7
8
CC_CCC
28
Figure 2 Temporary reduction labour taxes (1):
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
Corporate investment
0.04
-----Housing investment: Non-constrained and credit constrained hh
0.6
0.02
0.5
0.00
0.4
-0.02
0.3
-0.04
0.2
-0.06
0.1
-0.08
-0.10
0.0
-0.12
-0.1
0
1
2
3
4
5
RIC_ITOT
6
7
8
9
10
1
2
3
4
5
RIC_IHOUSENLC
Employment
0.5
0
CC_ITOT
6
7
CC_IHOUSENLC
8
9
10
CC_IHOUSECC
Real wages
0.02
0.00
0.4
-0.02
0.3
-0.04
0.2
-0.06
-0.08
0.1
-0.10
0.0
-0.12
-0.1
-0.14
0
1
2
3
4
5
RIC_L
6
7
8
9
10
1
2
3
CC_L
4
5
RIC_WR
Real interest rate
0.10
0
7
8
9
10
7
8
9
10
CC_WR
Inflation
0.075
0.08
6
0.050
0.06
0.025
0.04
0.000
0.02
-0.025
0.00
-0.02
-0.050
0
1
2
3
4
RIC_R
5
6
CC_R
7
8
9
10
0
1
2
3
4
RIC_INF
5
6
CC_INF
29
Figure 2b Temp. reduction lab. Taxes + mon. accommodation:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
-----GDP
0.7
Consumption
1.2
0.6
1.0
0.5
0.8
0.4
0.6
0.3
0.4
0.2
0.2
0.1
0.0
0.0
-0.1
-0.2
0
1
2
3
4
5
6
RIC_GDPR
7
8
9
10
1
2
CC_GDPR
3
4
5
6
RIC_CTOT
Consumption: liquidity-constrained hh.
2.00
0
8
9
10
9
10
CC_CTOT
Consumption: Non-constrained and credit constrained hh.
2.5
1.75
7
2.0
1.50
1.25
1.5
1.00
1.0
0.75
0.50
0.5
0.25
0.0
0.00
-0.25
-0.5
0
1
2
3
4
RIC_CLC
5
6
7
CC_CLC
8
9
10
0
1
2
RIC_CNLC
3
4
5
6
CC_CNLC
7
8
CC_CCC
30
Figure 2b Temp. reduction lab. Taxes + mon. accommodation:
RIC_ : without credit-constrained hh ─────
CC_ : with credit-constrained hh
-----Corporate investment
0.175
Housing investment: Non-constrained and credit constrained hh
1.0
0.150
0.8
0.125
0.100
0.6
0.075
0.4
0.050
0.2
0.025
0.0
0.000
-0.025
-0.2
0
1
2
3
4
5
RIC_ITOT
6
7
8
9
10
1
CC_ITOT
2
3
4
5
RIC_IHOUSENLC
Employment
0.7
0
0.15
0.5
0.10
0.4
7
CC_IHOUSENLC
8
9
10
CC_IHOUSECC
Real wages
0.20
0.6
6
0.05
0.3
0.00
0.2
0.1
-0.05
0.0
-0.10
-0.1
-0.15
0
1
2
3
4
5
RIC_L
6
7
8
9
10
1
2
3
CC_L
4
5
RIC_WR
Real interest rate
0.02
0
7
8
9
10
7
8
9
10
CC_WR
Inflation
0.25
0.00
6
0.20
-0.02
0.15
-0.04
0.10
-0.06
0.05
-0.08
0.00
-0.10
-0.12
-0.05
0
1
2
3
4
RIC_R
5
6
CC_R
7
8
9
10
0
1
2
3
4
RIC_INF
5
6
CC_INF
31
Fiscal multipliers in model with credit-constraints
Table 1 First year GDP effects of fiscal shocks of 1% of GDP
fiscal measures:
Investment subsidy
Government investment
Government consumption
Consumption tax
Government transfers
Labour tax
Corporate profit tax
Permanent
stimulus
0.46
0.84
0.36
0.37
0.22
0.48
0.32
Temporary
stimulus
(one year)
1.37
1.07
0.99
0.67
0.55
0.53
0.03
Temporary with
monetary
accommodation (1)
2.19
1.4
1.4
0.99
0.78
0.68
0.05
Note: GDP percentage difference from baseline for global shocks of 1% of (baseline) GDP, assuming long run
financing through labour tax increases.
(1) unchanged nominal interest rates for 1 year.
32
Spill-overs
Table 2 First year GDP effects of fiscal shocks:
EU
Fiscal stimulus in:
RoW
Global
Government consumption
EU GDP
RoW GDP
0.74
0.09
0.26
0.96
0.99
1.04
Government investment
EU GDP
RoW GDP
0.84
0.08
0.24
1.04
1.07
1.12
Government transfers
EU GDP
RoW GDP
0.40
0.05
0.15
0.53
0.55
0.58
Labour tax
EU GDP
RoW GDP
0.41
0.04
0.12
0.52
0.53
0.56
Consumption tax
EU GDP
RoW GDP
0.49
0.06
0.18
0.64
0.67
0.70
Note: GDP difference from baseline in first year of simulation, for resp. EU acting alone, RoW acting alone and
global coordinated expansions. All shocks are credibly temporary for one year and of equal size, 1% of baseline
GDP.
33
Fiscal Policy in the current crisis
Temporary fiscal policy measures can be effective
to support growth in the current crisis due to
• increase in credit constraints and
• monetary policy more likely to be
accommodative
Global expansion leads to positive spillovers
(coordination needed to avoid countries taking
a free ride)
Design (composition) matters.
Need for credible temporary policies (guarantees
that expansion does not become permanent):
avoid adverse financial market reaction
34
35
Credibility of temporary fiscal expansions:
Effects of permanent changes in spending and taxes are
much smaller, and generally become negative in the
long run (agents anticipate future increases in taxes and
reduce their consumption and save more)
 Smaller multipliers if stimulus is not perceived as
temporary but permanent.
Risk premia: unsustainable fiscal strategies may give rise
to increase in risk premia (sovereign bonds, (corporate
bonds))
 Smaller multipliers if stimulus leads to higher borrowing
costs for government (and private sector)
Need credible medium-term strategies to deal with
increase in debt
36
Figure 4 Credibly temporary vs. permanent shocks:
increase government consumption and increase in risk premia
2
GDP (% diff. from base)
1.5
1
0.5
0
0
1
2
3
4
5
6
7
8
9
10
-0.5
-1
-1.5
-2
year
temp+mon.acc
Temp.+mon.acc
Temp.
Perm.
Perm.+sov.rp
Perm.+rp
temp.
perm.
perm+sov.rp
perm.+rp
: 1 year increase gov. cons (1% of GDP) with nominal interest rates unchanged
: 1 year increase government consumption (1% of GDP)
: permanent increase gov. consumption (financed by tax increases)
: permanent increase plus sovereign bond risk premium 100 bp.
: permanent increase plus sov. bond risk premium 100bp plus risk premium 25bp
37
Higher fiscal multipliers in financial crisis:
Effect of credit-constraints and monetary policy
Gov.cons.
Labour tax
1.6
0.7
1.4
0.6
1.2
0.5
1
0.4
0.8
0.3
0.6
0.2
0.4
0.1
0.2
0
0
2008Q4
2009Q4
2010Q4
2011Q4
2012Q4
-0.2
2008Q4
2013Q4
2009Q4
2010Q4
2011Q4
2012Q4
-0.1
GC_40
GC_60
GC_60M
TAUL_40
TAUL_60
______ : 40% credit-constrained
_ _ _ _ : 60% credit-constrained
_._._._ : 60% credit-constrained plus monetary accommodation
TAUL_60M
2013Q4