Download This PDF is a selection from a published volume from... Bureau of Economic Research Volume Title: NBER International Seminar on Macroeconomics

This PDF is a selection from a published volume from the National
Bureau of Economic Research
Volume Title: NBER International Seminar on Macroeconomics
2011
Volume Author/Editor: Jeffrey Frankel and Christopher Pissarides,
organizers
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-26035-6; 978-0-226-26034-1 (cloth);
978-0-226-26035-8 (paper)
Volume URL: http://www.nber.org/books/fran11-1
Conference Date: June 17-18, 2011
Publication Date: May 2012
Chapter Title: Comment on "The Fiscal Stimulus of 2009-2010:
Trade Openness, Fiscal Space, and Exchange Rate Adjustment"
Chapter Author(s): Francesco Giavazzi
Chapter URL: http://www.nber.org/chapters/c12500
Chapter pages in book: (p. 348 - 350)
Comment
Francesco Giavazzi, Bocconi University, MIT, and NBER
Table 1 (from Favero, Giavazzi, and Perego 2012) illustrates the extent
to which fiscal policy reacts to fluctuations in the (lagged) debt/GDP
ratio. The table reports the estimated coefficients on the debt/GDP ratio
in the fiscal reaction function of eight OECD countries (the data are annual and extend from 1978 to 2009). Debt stabilization plays a role in all
countries, as the difference between the feedback coefficients on taxes
and government spending implies a positive feedback of the primary
surplus to the debt to GDP ratio, with Japan as the only exception. The
style of stabilization is, however, heterogenous across countries: lagged
debt impacts more significantly (with a negative sign) on expenditures
in Canada, the United Kingdom, and in the United States, while it has
instead a borderline significant (positive) coefficient on taxes in France.
Italian fiscal policy reacts to fluctuations in the debt/GDP ratio by adjusting both taxes and spending.
The authors assume that “the costs of changing the tax rates and their
enforcement are high relative to the lower political costs of changing the
public debt/GDP and the fiscal deficit/GDP. The tax base depends on
structural factors that are harder to modify in the short run than adjusting government expenditure.” They thus contend that “the tax revenue
as a share of the GDP provides a more efficient way of normalizing
macro public finance data [because] the public debt/GDP normalized
by the de facto tax base measures the average tax years that it would
take to ‘buy’ the outstanding public debt, and provides a stock measure of public debt overhang.” The results in table 1 show that some
countries—Italy, and to some extent France, in our sample—do instead
adjust taxes. Others use changes in government spending, a variable
that the authors implicitly assume to remain constant.
Thus, while the authors address a very interesting issue—the sources
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Comment
349
Table 1
Coefficients of bt–1
Countries
Belgium
Canada
France
Italy
Japan
Sweden
United Kingdom
United States
Expenditures
gt
Revenues
τt
–.038
(–.27)
–.149
(–2.25)
.036
(.57)
–.110
(–2.12)
.015
(.10)
–.072581
(–.64)
.183
(2.02)
–.292
(–2.23)
1
.030
(.35)
–.072
(.27)
.144
(1.56)
.218
(3.18)
.180
(1.52)
.045513
(.38)
.086
(.47)
.47
(1.62)
Source: Favero et al. (2011).
Notes: t- stats in parentheses. Yearly data: 1978–2009.
of heterogeneity in fiscal policy—by concentrating on one variable,
their definition of fiscal space, they overlook a number of other factors that determine a government’s reaction to exogenous shocks and
to their effect on the debt/GDP ratio. The extent to which a government
will use fiscal policy to cushion the effects of a shock, thus letting the
debt ratio rise, depends in the end on the credibility of its commitment
to satisfy the intertemporal budget constraint
⎛ D⎞
⎜⎝ ⎟⎠ =
Y t
i
i
⎛ Tt−1 Gt−1 ⎞ ⎛ 1 + r ⎞
−
.
Yt−1 ⎟⎠ ⎜⎝ 1 + g ⎟⎠
i=0 ⎝ Yt−1
∞
∑⎜
This does depend on the ability to adjust tax rates, but also spending,
and most importantly, depends on the distance of the cost of debt service from the economy’s growth rate.
Endnote
For acknowledgments, sources of research support, and disclosure of the author’s material financial relationships, if any, please see http: // www.nber.org / chapters / c12500
.ack.
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350
Giavazzi
Reference
Giavazzi, Francesco, Carlo A. Favero, and Jacopo Perego. 2012. “Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy.”
IMF Economic Review, forthcoming.
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