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1 – 7 of 7This paper seeks to explore the sensitivity of these parameters and their impact on fiscal policy outcomes. We use the existing literature to establish possible ranges for each…
Abstract
Purpose
This paper seeks to explore the sensitivity of these parameters and their impact on fiscal policy outcomes. We use the existing literature to establish possible ranges for each parameter, and we examine how changes within these ranges can alter the outcomes of fiscal policy. In this way, we aim to highlight the importance of these parameters in the formulation and evaluation of fiscal policy.
Design/methodology/approach
The role of fiscal policy, its effects and multipliers continues to be a subject of intense debate in macroeconomics. Despite adopting a New Keynesian approach within a macroeconomic model, the reactions of macroeconomic variables to fiscal shocks can vary across different contexts and theoretical frameworks. This paper aims to investigate these diverse reactions by conducting a sensitivity analysis of parameters. Specifically, the study examines how key variables respond to fiscal shocks under different parameter settings. By analyzing the behavioral dynamics of these variables, this research contributes to the ongoing discussion on fiscal policy. The findings offer valuable insights to enrich the understanding of the complex relationship between fiscal shocks and macroeconomic outcomes, thus facilitating informed policy debates.
Findings
This paper aims to investigate key elements of New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models. The focus is on the calibration of parameters and their impact on macroeconomic variables, such as output and inflation. The study also examines how different parameter settings affect the response of monetary policy to fiscal measures. In conclusion, this study has relied on theoretical exploration and a comprehensive review of existing literature. The parameters and their relationships have been analyzed within a robust theoretical framework, offering valuable insights for further research on how these factors influence model forecasts and inform policy recommendations derived from New Keynesian DSGE models. Moving forward, it is recommended that future work includes empirical analyses to test the reliability and effectiveness of parameter calibrations in real-world conditions. This will contribute to enhancing the accuracy and relevance of DSGE models for economic policy decision-making.
Originality/value
This study is motivated by the aim to provide a deeper understanding of the roles macroeconomic model parameters play concerning responses to expansionary fiscal policies and the subsequent reactions of monetary authorities. Comprehensive reviews that encompass this breadth of relationships within a single text are rare in the literature, making this work a valuable contribution to stimulating discussions on macroeconomic policies.
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This study aims to elucidate the dynamics of monetary and fiscal policy interactions in Brazil, focusing on the impacts of positive shocks in government consumption and interest…
Abstract
Purpose
This study aims to elucidate the dynamics of monetary and fiscal policy interactions in Brazil, focusing on the impacts of positive shocks in government consumption and interest rates. By comparing rational and behavioral agent responses, it clarifies how these frameworks influence gross domestic product (GDP), inflation, private and government consumption and nominal interest rates.
Design/methodology/approach
The study employs a new Keynesian dynamic stochastic general equilibrium (DSGE) model with Bayesian estimation from 2000Q1 to 2022Q4, capturing rational and behavioral behaviors with adjustments for Brazilian economic idiosyncrasies. Impulse response functions (IRF) assess the dynamic effects of policy shocks, providing a comparative analysis of the two frameworks.
Findings
Behavioral agents show greater initial sensitivity to policy shocks, causing more pronounced fluctuations in GDP, inflation and private consumption compared to rational agents. Over time, the behavioral approach leads to a more robust recovery, while the rational approach results in a quicker return to equilibrium but less pronounced long-term recovery. The study also finds fiscal policy can partially offset the negative impacts of monetary tightening, with a more delayed effect in the behavioral model.
Originality/value
This paper provides insights into the interplay between monetary and fiscal policies under different agent expectations, emphasizing the importance of incorporating behavioral elements into macroeconomic models to better capture policy dynamics in emerging markets.
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Hai Le and Phuong Nguyen
This study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open…
Abstract
Purpose
This study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model encompasses several essential characteristics, including incomplete financial markets, incomplete exchange rate pass-through, deviations from the law of one price and a banking sector. The authors consider generalized Taylor rules, in which policymakers adjust policy rates in response to output, inflation, credit growth and exchange rate fluctuations. The marginal likelihoods are then employed to investigate whether the central bank responds to fluctuations in the exchange rate and credit growth.
Design/methodology/approach
This study constructs a small open economy DSGE model and then estimates the model using Bayesian methods.
Findings
The authors demonstrate that the monetary authority does target exchange rates, whereas there is no evidence in favor of incorporating credit growth into the policy rules. These findings survive various robustness checks. Furthermore, the authors demonstrate that domestic shocks contribute significantly to domestic business cycles. Although the terms of trade shock plays a minor role in business cycles, it explains the most significant proportion of exchange rate fluctuations, followed by the country risk premium shock.
Originality/value
This study is the first attempt at exploring the relevance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand.
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The purpose of this study is to investigate the interplay between fiscal dominance and monetary policy in South Africa from 1960 to 2023.
Abstract
Purpose
The purpose of this study is to investigate the interplay between fiscal dominance and monetary policy in South Africa from 1960 to 2023.
Design/methodology/approach
The study employs a structural vector autoregression (SVAR) medel to analyze the relationship between fiscal dominance and monetary policy. Short-term and long-term shocks of government borrowing and deficits are examined to understand their impact on inflation dynamics.
Findings
Fiscal dominance has a significant effect both in the short and long run. There is evidence that government debt and deficits increase inflation, overriding the effects of monetary policy aimed at maintaining price stability. On the other hand, the study reveals that money supply shocks have a greater effect in reducing fiscal dominance compared to interest rate shocks. The variance movement on inflation is significantly explained by government debt and deficits. This emphasizes the persistence of inflationary pressures associated with fiscal dominance, highlighting the importance of effective policy interventions to mitigate inflationary risks.
Originality/value
This study contributes to the existing literature by providing insights into the dynamics of fiscal dominance in South Africa. Moreover, this study extends the theoretical framework of the fiscal theory of the price level (FTPL) and the government budget constraint. This study contributes valuable insights into the dynamics of fiscal dominance in South Africa and offers guidance for policymakers in formulating strategies to safeguard economic stability.
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Francesco Busato, Maria Ferrara and Monica Varlese
This paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.
Abstract
Purpose
This paper analyzes real and welfare effects of a permanent change in inflation rate, focusing on macroprudential policy’ role and its interaction with monetary policy.
Design/methodology/approach
While investigating disinflation costs, the authors simulate a medium-scale dynamic general equilibrium model with borrowing constraints, credit frictions and macroprudential authority.
Findings
Providing discussions on different policy scenarios in a context where still it is expected high inflation, there are three key contributions. First, when macroprudential authority actively operates to improve financial stability, losses caused by disinflation are limited. Second, a Taylor rule directly responding to financial variables might entail a trade-off between price and financial stability objectives, by increasing disinflation costs. Third, disinflation is welfare improving for savers, while costly for borrowers and banks. Indeed, while savers benefit from policies reducing price stickiness distortion, borrowers are worried about credit frictions, coming from collateral constraint.
Practical implications
The paper suggests threefold policy implications: the macroprudential authority should actively intervene during a disinflation process to minimize costs and financial instability deriving from it; policymakers should implement a disinflationary policy stabilizing also output; the central bank and the macroprudential regulator should pursue financial and price stability goals, separately.
Originality/value
This paper is the first attempt to study effects of a permanent inflation target reduction in focusing on the macroprudential policy’ role.
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This study quantitatively examines the relationship between economic fluctuations and government budget size in the context of China’s fiscal decentralization, drawing inspiration…
Abstract
Purpose
This study quantitatively examines the relationship between economic fluctuations and government budget size in the context of China’s fiscal decentralization, drawing inspiration from theoretical predictions of the Keynesian view and empirical studies on other economies.
Design/methodology/approach
The panel comprises 31 provinces or equivalents in mainland China, spanning from 1994 to 2019. Diverse estimation strategies including two-way fixed effect regression, the generalized method of moments (GMM) and threshold regressions are, utilized.
Findings
The results suggest that under the “tax-assignment system”, neither the central government’s fiscal transfers nor the provincial budgetary revenues or expenditures help reduce economic volatility. Surprisingly, some regression outcomes suggest that government size measures destabilize business cycles.
Originality/value
While the study does not provide supportive evidence for the stabilizing effect of public budgets in Chinese provinces, it promotes a rethinking of the government’s intricate role in macroeconomic stabilization in the context of China’s fiscal decentralization.
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We test the pertinence of the unemployment invariance hypothesis (UIH) for a set of Organisation for Economic Co-operation and Development countries.
Abstract
Purpose
We test the pertinence of the unemployment invariance hypothesis (UIH) for a set of Organisation for Economic Co-operation and Development countries.
Design/methodology/approach
We empirically investigate the nexus between unemployment and labour force participation employing structural vector autoregressive methods for panel data.
Findings
We find that shocks in unemployment produce long-lasting, negative effects on participation, testifying to a discouraged worker effect.
Originality/value
Our results do not support the validity of the UIH in high-income economies. This has relevant implications for policy making and macroeconomic models.
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