DOCSLIB.ORG

Euro Area Fiscal Policies and the Crisis

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Euro Area Fiscal Policies and the Crisis OCCASIONAL PAPER SERIES NO 109 / APRIL 2010 EURO AREA FISCAL POLICIES AND THE CRISIS Editor Ad van Riet OCCASIONAL PAPER SERIES NO 109 / APRIL 2010 EURO AREA FISCAL POLICIES AND THE CRISIS Editor Ad van Riet NOTE: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. In 2010 all ECB publications feature a motif taken from the €500 banknote. This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=1325250. © European Central Bank, 2010 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Internet http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors. Information on all of the papers published in the ECB Occasional Paper Series can be found on the ECB’s website, http://www.ecb.europa.eu/pub/scientifi c/ ops/date/html/index.en.html ISSN 1607-1484 (print) ISSN 1725-6534 (online) CONTENTS CONTENTS ECB FISCAL POLICIES TEAM 5 5 THE CRISIS AND THE SUSTAINABILITY OF EURO AREA PUBLIC FINANCES 44 ABSTRACT 6 by Maria Grazia Attinasi, Nadine Leiner-Killinger and Michal Slavik PREFACE 7 5.1 Introduction 44 by Jürgen Stark 5.2 Risks to fi scal sustainability 46 5.3 Government debt scenarios 49 SUMMARY 8 5.4 Conclusions 53 by Ad van Riet 6 EURO AREA FISCAL POLICIES: 1 INTRODUCTION 10 EXIT FROM THE CRISIS MODE 56 by Ad van Riet by Philipp Rother and Vilém Valenta 6.1 Introduction 56 2 EURO AREA FISCAL POLICIES: 6.2 Fiscal exit and RESPONSE TO THE FINANCIAL CRISIS 12 consolidation strategies 56 by Maria Grazia Attinasi 6.3 Crisis-related challenges 2.1 Introduction 12 for the EU fi scal framework 60 2.2 Public interventions to support 6.4 Conclusions 67 the fi nancial sector 13 2.3 The net fi scal costs of bank 7 EARLY LESSONS FROM THE CRISIS 68 support 17 by Ad van Riet 2.4 Conclusions 21 REFERENCES 70 3 EURO AREA FISCAL POLICIES: RESPONSE TO THE ECONOMIC CRISIS 22 EUROPEAN CENTRAL BANK OCCASIONAL by António Afonso, PAPER SERIES SINCE 2008 78 Cristina Checherita, Mathias Trabandt and Thomas Warmedinger LIST OF BOXES: 3.1 Introduction 22 Box 1 The statistical recording 3.2 The fi scal impulse for the euro of public interventions area economy 22 to support the fi nancial sector 16 3.3 Effectiveness of a fi scal impulse 29 by Julia Catz and Henri Maurer 3.4 Conclusions 34 Box 2 The fi scal costs of selected 4 EURO AREA FISCAL POLICIES past banking crises 19 AND THE CRISIS: THE REACTION by Maria Grazia Attinasi OF FINANCIAL MARKETS 35 Box 3 Fiscal developments in past by Maria Grazia Attinasi, systemic fi nancial crises 26 Cristina Checherita and Christiane Nickel by Vilém Valenta 4.1 Introduction 35 Box 4 The determinants of sovereign 4.2 The fi nancial market bond yield spreads in the reaction from July 2007 euro area: an empirical until September 2009 35 investigation 40 4.3 The determinants by Maria Grazia Attinasi, of government bond yield Cristina Checherita and spreads in the euro area 39 Christiane Nickel 4.4 Conclusions 42 ECB Occasional Paper No 109 April 2010 3 Box 5 Measuring fi scal sustainability 45 by Maria Grazia Attinasi, Nadine Leiner-Killinger and Michal Slavik Box 6 Ageing costs and risks to fi scal sustainability 54 by Nadine Leiner-Killinger Box 7 Fiscal consolidation and economic growth 58 by António Afonso Box 8 The fl exibility provisions of the Stability and Growth Pact in times of crisis 63 by Philipp Rother ECB Occasional Paper No 109 4 April 2010 ECB FISCAL POLICIES TEAM ECB FISCAL POLICIES TEAM This Occasional Paper was prepared by an ECB Fiscal Policies Team under the lead management of Ad van Riet, Head of the Fiscal Policies Division of the ECB. The study brings together ECB staff analyses undertaken between September 2008 and December 2009 on the consequences of the crisis for the sustainability of public fi nances in the euro area, including in its member countries. The authors are staff members of the Fiscal Policies Division and the Euro Area & Public Finance Accounts Section of the ECB. Editor Ad van Riet Preface Jürgen Stark Authors António Afonso Maria Grazia Attinasi Julia Catz Cristina Checherita Christiane Nickel Nadine Leiner-Killinger Henri Maurer Philipp Rother Michal Slavik Mathias Trabandt Vilém Valenta Ad van Riet Thomas Warmedinger Research assistance Krzysztof Bankowski Alexandru Isar Management assistance Elizabeth Morton Editing assistance Mike Moss A valuable contribution by Sebastian Hauptmeier, as well as comments and suggestions from Philippe Moutot, Francesco Mongelli, Ludger Schuknecht and an anonymous referee, are gratefully acknowledged. ECB Occasional Paper No 109 April 2010 5 ABSTRACT In mid-September 2008, a global fi nancial crisis erupted which was followed by the most serious worldwide economic recession for decades. As in many other regions of the world, governments in the euro area stepped in with a wide range of emergency measures to stabilise the fi nancial sector and to cushion the negative consequences for their economies. This paper examines how and to what extent these crisis-related interventions, as well as the fall-out from the recession, have had an impact on fi scal positions and endangered the longer- term sustainability of public fi nances in the euro area and its member countries. The paper also discusses the appropriate design of fi scal exit and consolidation strategies in the context of the Stability and Growth Pact to ensure a rapid return to sound and sustainable budget positions. Finally, it reviews some early lessons from the crisis for the future conduct of fi scal policies in the euro area. JEL Classifi cation: E10, E62, G15, H30, H62 Key words: fi scal policies, fi nancial crisis, fi scal stimulus, fi nancial markets, sustainability, Stability and Growth Pact. ECB Occasional Paper No 109 6 April 2010 PREFACE PREFACE rates, for economic growth, for the stability of the euro area and, therefore, not least for the The fi nancial and economic crisis has had a very monetary policy of the European Central Bank. profound impact on public fi nances in the euro area. Projections suggest that the government defi cit in the euro area will climb to almost 7% of Jürgen Stark GDP in 2010 and that all euro area countries will Member of the Executive Board then exceed the 3% of GDP limit. The euro area and the Governing Council of the ECB government debt-to-GDP ratio could increase to 100% in the next years – and in some euro area countries well above that level – if governments do not take strong corrective action. These fi scal developments are all the more worrying in view of the projected ageing-related spending increases, which constitute a medium to long-term fi scal burden. There is no doubt that the exceptional fi scal policy measures and monetary policy reaction to the crisis have helped to stabilise confi dence and the euro area economy. Following the substantial budgetary loosening, however, the fi scal exit from the crisis must be initiated in a timely manner and is to be followed by ambitious multi-year fi scal consolidation. This is necessary to underpin the public’s trust in the sustainability of public fi nances. The Stability and Growth Pact constitutes the mechanism to coordinate fi scal policies in Europe. The necessary fi scal adjustment to return to sound and sustainable fi scal positions is substantial and will take considerable efforts. Without doubt, this situation poses the biggest challenge so far for the rules- based EU fi scal framework. Sound and sustainable public fi nances are a prerequisite for sustainable economic growth and a smooth functioning of Economic and Monetary Union. Therefore, it is important not to miss the right moment to correct the unsustainable defi cit and debt levels. A continuation of high public sector borrowing without the credible prospect of a return to sustainable public fi nances could have severe consequences for long-term interest ECB Occasional Paper No 109 April 2010 7 SUMMARY 1 needs and room for manoeuvre. Governments were asked, in particular, to ensure a timely, In mid-September 2008, a global fi nancial targeted and temporary fi scal stimulus and to crisis erupted which was followed by the most coordinate their actions so as to multiply their serious worldwide economic recession for positive impact. As it turns out, these criteria many decades. As in many other parts of the seem at best to have been only partially met. world, governments in the euro area stepped Moreover, the effectiveness of such fi scal in with emergency measures to stabilise the activism is widely debated. fi nancial sector and to cushion the negative consequences for their economies, in parallel Chapter 4 reviews the reaction of fi nancial with a swift relaxation of monetary policy markets to the concomitant rapid deterioration by the European Central Bank (ECB). This of public fi nances in the euro area countries. Occasional Paper examines to what extent As the crisis intensifi ed, a general “fl ight these crisis-related interventions, as well as to safety” was seen, with investors moving the fall-out from the recession, have had an away from more risky private fi nancial assets impact on the fi scal position of the euro area (in particular equity and lower-rated corporate and its member countries and endangered the bonds) into safer government paper.
Load more

Recommended publications
  • Working Paper
    WP 2020-12 December 2020 Working Paper Charles H. Dyson School of Applied Economics and Management Cornell University, Ithaca, New York 14853-7801 USA Social Externalities and Economic Analysis Marc Fleurbaey, Ravi Kanbur, and Brody Viney It is the Policy of Cornell University actively to support equality of educational and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employmen t on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action prog rams which will assure the continuation of such equality of opportunity. 2 Social Externalities and Economic Analysis Marc Fleurbaey, Ravi Kanbur, Brody Viney ThisThis version: versio Augustn: Aug 6,us 2020t 6, 20201 Abstract This paper considers and assesses the concept of social externalities through human interdependence, in relation to the economic analysis of externalities in the tradition of Pigou and Arrow, including the analysis of the commons. It argues that there are limits to economic analysis. Our proposal is to enlarge the perspective and start thinking about a broader framework in which any pattern of influence of an agent or a group of agents over a third party, which is not mediated by any economic, social, or psychological mechanism guaranteeing the alignment of the marginal net private benefit with marginal net social benefit, can be attached the “externality” label and be scrutinized for the likely negative consequences that result from the divergence .These consequences may be significant given the many interactions between the social and economic realms, and the scope for spillovers and feedback loops to emerge.
    [Show full text]
  • Revisiting Stimulus and the Great Recession
    The Daily Dish Revisiting Stimulus and the Great Recession DOUGLAS HOLTZ-EAKIN | OCTOBER 21, 2020 Eakinomics: Revisiting Stimulus and the Great Recession There has been a steady drumbeat of calls for additional “stimulus” to counter the fallout of the COVID-19 recession. I want to stipulate that I think the case can be made for an appropriately structured fiscal bill, but the case is not being made in a compelling fashion. A key part of the argument has been that stimulus got cut off after the 2008-09 recession and doomed the economy to slow growth. A New York Times article, entitled “ Why the U.S. Risks Repeating 2009’s Economic Stimulus Mistakes,” is typical. “‘The initial response was good, but we need more,’ said Karen Dynan, who was chief economist at the Treasury Department in the Obama administration and now teaches at Harvard. The decision to pull back on spending a decade ago, she said, ‘really prolonged the period of weakness after the great recession.’” (This argument is most often made by former Obama Administration officials.) Maybe. But maybe there is another lesson from that era. The first is that if you are going to do fiscal stimulus, do fiscal stimulus. The American Recovery and Reinvestment Act (ARRA) contained some tax cuts and social safety net transfers of the typical stimulus ilk. But it contained a slew of provisions – e.g., health services information technologies and green investments – that were transformative in nature and core parts of the Obama domestic agenda. Transformation is not stimulus, which is just putting back in place what was previously there.
    [Show full text]
  • Deflation: Economic Significance, Current Risk, and Policy Responses
    Deflation: Economic Significance, Current Risk, and Policy Responses Craig K. Elwell Specialist in Macroeconomic Policy August 30, 2010 Congressional Research Service 7-5700 www.crs.gov R40512 CRS Report for Congress Prepared for Members and Committees of Congress Deflation: Economic Significance, Current Risk, and Policy Responses Summary Despite the severity of the recent financial crisis and recession, the U.S. economy has so far avoided falling into a deflationary spiral. Since mid-2009, the economy has been on a path of economic recovery. However, the pace of economic growth during the recovery has been relatively slow, and major economic weaknesses persist. In this economic environment, the risk of deflation remains significant and could delay sustained economic recovery. Deflation is a persistent decline in the overall level of prices. It is not unusual for prices to fall in a particular sector because of rising productivity, falling costs, or weak demand relative to the wider economy. In contrast, deflation occurs when price declines are so widespread and sustained that they cause a broad-based price index, such as the Consumer Price Index (CPI), to decline for several quarters. Such a continuous decline in the price level is more troublesome, because in a weak or contracting economy it can lead to a damaging self-reinforcing downward spiral of prices and economic activity. However, there are also examples of relatively benign deflations when economic activity expanded despite a falling price level. For instance, from 1880 through 1896, the U.S. price level fell about 30%, but this coincided with a period of strong economic growth.
    [Show full text]
  • Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments Scott R
    Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments Scott R. Baker, R. A. Farrokhnia, Steffen Meyer, Michaela Pagel, and Constantine Yannelis NBER Working Paper No. 27097 May 2020, Revised in September 2020 JEL No. D14,E21,G51 ABSTRACT The 2020 CARES Act directed large cash payments to households. We analyze house-holds’ spending responses using high-frequency transaction data from a Fintech non-profit, exploring heterogeneity by income levels, recent income declines, and liquidity as well as linked survey responses about economic expectations. Households respond rapidly to the re-ceipt of stimulus payments, with spending increasing by $0.25-$0.40 per dollar of stimulus during the first weeks. Households with lower incomes, greater income drops, and lower lev-els of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no significant spending response for households with large checking account balances. Households that expect employment losses and benefit cuts dis-play weaker responses to the stimulus. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see faster effects, smaller increases in durables spending, larger increases in spending on food, and substantial increases in payments like rents, mortgages, and credit cards reflecting a short- term debt overhang. We formally show that these differences can make direct payments less effective in stimulating aggregate consumption. Scott R. Baker Michaela Pagel Kellogg School of Management Columbia Business School Northwestern University 3022 Broadway 2211 Campus Drive Uris Hall Evanston, IL 60208 New York, NY 10027 and NBER and NBER [email protected] [email protected] R.
    [Show full text]
  • Nils Bernstein: the European Debt Crisis – from a Danish Perspective
    Nils Bernstein: The European debt crisis – from a Danish perspective Speech by Mr Nils Bernstein, Governor of the National Bank of Denmark, at the seminar “Europe in the times of crisis – are we looking for solutions or parachutes?”, at Danske Bank, Copenhagen, 14 December 2011. The slides can be found on the website of the National Bank of Denmark. * * * Thank you for inviting me to speak here today. I will touch upon the European debt crisis from a Danish perspective. The world economy has lost momentum since last spring and short-term outlook has worsened. The European economies, especially in the euro area, have seen the strongest slowdown. But there are considerable differences from country to country. Germany and France continued to enjoy solid growth in the 3rd quarter, whereas growth in the most indebted countries, the five GIIPS countries i.e. Greece, Italy, Ireland, Portugal and Spain, has been close to zero or even negative (slide 2 – real GDP). There is a clear division among the EU Member States: countries, with relatively sound public finances and external balances before the crisis, are performing better than countries with internal and external imbalances (slide 3 – General government balance). But over the past couple of months even euro area Member States with sound economies have been affected by rising interest rates. There is considerable volatility, and three groups in the euro area seem to have been formed. The first group with the narrowest spreads to Germany includes Finland, the Netherlands, Austria and France. The second group consists, among others, of Belgium, Spain and Italy and the third group is Ireland, Portugal and Greece.
    [Show full text]
  • Reflation Trade” and Through an Eventual Tightening Policy Environment
    Relative value beyond the “reflation trade” and through an eventual tightening policy environment FEBRUARY 2021 Monetary Policy Drives Asset Inflation But the Fed seems almost defensive about The November announcements by its role in asset price inflation. In his Pfizer/BioNTech and Moderna regarding January 27 press conference, Fed Chair highly encouraging vaccine efficacy data Powell flatly rejected this very suggestion: represented the first true bright spot for “If you look at what’s really been driving the near-term economic outlook since the asset prices in the last couple of months, beginning of the pandemic almost a year it isn’t monetary policy… It’s been ago. Credit and equity markets had already expectations about vaccines, and it’s also been on a virtually uninterrupted charge fiscal policy.” higher since March, buoyed by fiscal and This is true, to be sure. However, with monetary policy and more recently by an the Fed’s new policy of average inflation election result that seemed likely to deliver targeting (allowing inflation to overshoot its more calm, less uncertainty and more long-term 2% goal due to years of lagging) stimulus. The vaccine rollout seemed a and a palpable fear of triggering a repeat justification, if not an outright catalyst, for of the “taper tantrum” in 2013 by another leg higher, as a return to normalcy committing to telegraph an end to asset seemed closer than ever. purchases far in advance, it’s hard not to However, the vaccine rollout has been view the monetary policy environment fraught, new variants continue to emerge as a catalyst for increasingly aggressive and business restrictions come and go.
    [Show full text]
  • Is Fiscal Stimulus an Effective Policy Response to a Recession? Reviewing the Existing Research
    FRASER RESEARCH BULLETIN June 2020 Is Fiscal Stimulus an Effective Policy Response to a Recession? Reviewing the Existing Research by Jake Fuss, Alex Whalen, and Tegan Hill Summary This report examines existing academic Research also shows that the Canadian studies that analyze evidence regarding the government’s stimulus in response to the 2009 effectiveness of fiscal stimulus—additional recession contributed little, if anything, to the government spending and/or tax relief—as a economic turnaround. mechanism to mitigate the impact of a reces­ Harvard University professor Alberto Ale­ sion and speed up economic recovery. The re­ sina finds that increases in government spend­ search raises significant doubts about whether ing are associated with lower growth, while fiscal stimulus can achieve this objective. stimulus based on decreases in personal and Evidence from University of California— business taxes are associated with higher rates San Diego professor Valerie Ramey and Har­ of economic growth. In addition, Alesina’s work vard University professor Robert Barro dem­ suggests that reductions to government spend­ onstrates that the fiscal multiplier created by ing are an important part of reducing fiscal increased government spending is below 1.0, deficits following a recession. indicating that stimulus measures actually Before implementing any fiscal stimulus crowd out economic activity that would other­ packages, Canadian policymakers must con­ wise have occurred. sider the potential implications on both the Empirical research from Stanford Univer­ economy and government balance sheets. Past sity professor John Taylor shows that the US history suggests that stimulus will not improve stimulus package during the 2008-09 recession the Canadian economy and may even be a det­ failed to increase consumption and had little to riment to it.
    [Show full text]
  • Quantitative Easing and Inequality*
    Quantitative Easing and Inequality* Donggyu Lee† University of Maryland March 4, 2021 The latest draft is available here This paper studies how quantitative easing (QE) affects household welfare across the wealth distribution. I build a heterogeneous agent New Keynesian (HANK) model with household portfolio choice, wage and price rigidities, endogenous unemployment, frictional financial intermediation, an effective lower bound (ELB) on the policy rate, forward guidance, and QE. To quantify the contribution of the various channels through which monetary policy affects inequality, I estimate the model using Bayesian methods, explicitly taking into account the oc- casionally binding ELB constraint and the QE operations undertaken by the Federal Reserve during the 2009-2015 period. I find that QE program unambiguously benefited all house- holds by stimulating economic activity. However, it had non-linear distributional effects. On the one hand, it widened the income and consumption gap between the top 10% and the rest of the wealth distribution, by boosting profits and equity prices. On the other hand, QE shrank inequality within the lower 90% of the wealth distribution, primarily by lowering un- employment. On net, it reduced overall wealth and income inequality, as measured by the Gini index. Surprisingly, QE has weaker distributional consequences compared with conven- tional monetary policy. Lastly, forward guidance and an extended period of zero policy rates amplified both the aggregate and the distributional effects of QE. Keywords: unconventional monetary policy, inequality, heterogeneous agent New Keynesian model, quantitative easing, Bayesian estimation, effective lower bound JEL Codes: E12, E30, E52, E58 *I am very grateful to my advisors Boragan˘ Aruoba, Luminita Stevens, Thomas Drechsel and John Shea for their invaluable guidance and support.
    [Show full text]
  • Fiscal Stimulus Programs During the Great Recession
    Fiscal Stimulus Programs During the Great Recession John B. Taylor1 Prepared for the December 7, 2018 Session on “The Recession” “Hoover Workshop Series on the 2008 Financial Crisis: Causes, The Panic, The Recession, Lessons” October 19, November 9, December 7 Five years ago, in October 2013, the Brookings Institution and the Hoover Institution jointly held a conference on the fifth anniversary of financial crisis of 2018. The conference took place simultaneously in Washington, DC and Stanford, California with simulcasting between the two locations for maximum interaction of economists and legal scholars with different research findings as reflected in the title of the conference volume Across the Great Divide: New Perspectives on the Financial Crisis. The purpose was to look for common ground, and while there was some agreement, significant differences of opinion remained about the causes, the panic, the recession and lessons about future role of government. We are now at the tenth anniversary of the crisis and the differences in findings of economic and legal research remain. But the passage of more time, and perhaps more journalistic summaries and the completion of memoirs of policy makers, has led to historical revisions which affect public perceptions of what took place and the lessons learned. This tendency exists is all policy areas, from monetary policy to regulatory policy to international policy, but it is particularly true of fiscal policy. Writing recently in the Wall Street Journal, for 1 Mary and Robert Raymond Professor of Economics, Stanford University and George P. Shultz Senior Fellow in Economics, Hoover Institution, Stanford University. This paper reviews several research papers written jointly with John Cogan.
    [Show full text]
  • Fiscal Stimulus in an Expectation Driven Liquidity Trap
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lustenhouwer, Joep Working Paper Fiscal stimulus in an expectation driven liquidity trap BERG Working Paper Series, No. 138 Provided in Cooperation with: Bamberg Economic Research Group, Bamberg University Suggested Citation: Lustenhouwer, Joep (2018) : Fiscal stimulus in an expectation driven liquidity trap, BERG Working Paper Series, No. 138, ISBN 978-3-943153-59-0, Bamberg University, Bamberg Economic Research Group (BERG), Bamberg This Version is available at: http://hdl.handle.net/10419/184679 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu This research was carried out in the Bamberg Doctoral Research Group on Behavioral Macroeconomics (BaGBeM) supported by the Hans-Böckler Foundation (PK 045) Fiscal Stimulus in an Expectation Driven Liquidity Trap Joep Lustenhouwer Working Paper No.
    [Show full text]
  • Direct Stimulus Payments to Individuals
    Recession Ready: Fiscal Policies to Stabilize the American Economy A new book by The Hamilton Project and Washington Center for Equitable Growth, titledRecession Ready: Fiscal Policies to Stabilize the American Economy, offers detailed proposals from leading economists and policy experts for better fiscal policy responses to recessions. These proposals aim to strengthen our automatic stabilizers: policies that inject money into the economy in a downturn and withdraw stimulus when the economy is strong. Direct Stimulus Payments to Individuals A proposal by Claudia Sahm of the Federal Reserve would boost consumer spending during recessions by: • Creating a system of direct stimulus payments to individuals that would be automatically distributed when the unemployment rate increases rapidly. Issue Overview • Since the mid-1970s, a typical recession has entailed a slowdown in real consumer spending growth of about 2 percentage points, with substantially larger slowdowns in growth in 1973 and 2008. • Direct stimulus payments to individuals are effective at boosting consumer spending in response to a recession. Evidence from recent stimulus programs indicates that large, automatic, and salient payments have the strongest stimulus benefits. • Providing automatic, direct stimulus payments to individuals would help both families and the economy, and establishing a permanent, robust program ahead of the next recession would provide a timely defense early in a recession and a commitment to sustained support in a severe recession. The Challenge During recessions, consumer expenditure in the United States slows markedly—and, in many cases, declines. Consumer spending makes up about 70 percent of aggregate expenditures in the economy, and sharp slowdowns in consumer spending can exacerbate employment losses and reduce production, making a recession even worse.
    [Show full text]
  • The Financial, Economic, Social, and Political Impact of Quantitative Easing in the United States
    The Financial, Economic, Social, and Political Impact of Quantitative Easing in the United States Client: The Markets Room, United States Department of the Treasury Faculty Advisor: Seamus O'Cleireacain James Cashman John Olderman Yiling Pan Maxime Terrieux Audrey Yu David Zhang Shahnoza Zhumanova May 2016 School of International and Public Affairs | SIPA Columbia University in the City of New York 1 ACKNOWLEDGEMENTS This report represents the collective efforts of a team of graduate students at Columbia University's School of International and Public Affairs. Our Capstone assignment—to partner with the Markets Room at The United States Department of the Treasury in an examination of the financial, economic, social and political impacts of quantitative easing—has proved to be an unparalleled learning experience for us. Of course, none of this would have been possible without the Markets Room. We are especially grateful to John Fagan and Albert Lee for designing the terms of reference for this fascinating project and for generously sharing their time, experience and insight with us as we embarked on this unique academic odyssey. Similarly, the resultant research would have been far less rich without the contributions of the many distinguished scholars and industry experts who graciously agreed to be interviewed by the Team for this project, along with the technical expertise of Alexandre Goncalves, PhD candidate, who assisted with our data analysis. Finally, we are indebted to the leadership of Professor Seamus O'Cleireacain, our avuncular faculty advisor. Professor O'Cleireacain served as the ideal moderator for regular team debates on this controversial subject. His profound technical expertise and abundant reservoir of patience were much needed and often tested! In the end, any errors or oversights appearing in the final report belong to the Capstone team and the Capstone team alone.
    [Show full text]