Fiscal Policy & Monetary Policy
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Monetary Policy in Economies with Little Or No Money
NBER WORKING PAPER SERIES MONETARY POLICY IN ECONOMIES WITH LITTLE OR NO MONEY Bennett T. McCallum Working Paper 9838 http://www.nber.org/papers/w9838 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2003 This paper was prepared for presentation at the December 16-17, 2002, meeting of the Hong Kong Economic Association. I am indebted to Marvin Goodfriend, Lok Sang Ho, Allan Meltzer, and Edward Nelson for helpful comments and suggestions. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research ©2003 by Bennett T. McCallum. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including © notice, is given to the source. Monetary Policy in Economies with Little or No Money Bennett T. McCallum NBER Working Paper No. 9838 July 2003 JEL No. E3, E4, E5 ABSTRACT The paper's arguments include: (1) Medium-of-exchange money will not disappear in the foreseeable future, although the quantity of base money may continue to decline. (2) In economies with very little money (e.g., no currency but bank settlement balances at the central bank), monetary policy will be conducted much as at present by activist adjustment of overnight interest rates. Operating procedures will be different, however, with payment of interest on reserves likely to become the norm. (3) In economies without any money there can be no monetary policy. The relevant notion of a general price level concerns some index of prices in terms of a medium of account. -
Fiscal Policy in an Unemployment Crisis∗
Fiscal Policy in an Unemployment Crisis∗ Pontus Rendahly University of Cambridge, CEPR, and Centre for Macroeconomics (CFM) April 30, 2014 Abstract This paper shows that large fiscal multipliers arise naturally from equilibrium unemploy- ment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which fiscal policy may be efficacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing inflation. Keywords: Fiscal multiplier, liquidity trap, zero lower bound, unemployment inertia. ∗The first version of this paper can be found as Cambridge Working Papers in Economics No. 1211. yThe author would like to thank Andrea Caggese, Giancarlo Corsetti, Wouter den Haan, Jean-Paul L'Huillier, Giammario Impulitti, Karel Mertens, Emi Nakamura, Kristoffer Nimark, Evi Pappa, Franck Portier, Morten Ravn, Jon Steinsson, Silvana Tenreyro, and Mirko Wiederholt for helpful comments and suggestions. I am grateful to seminar participants at LSE, Royal Economic Society, UCL, European Univer- sity Institute, EIEF, ESSIM 2012, SED 2013, Bonn University, Goethe University, UAB, and in particular to James Costain, and Jonathan Heathcote for helpful discussions and conversations. Financial support is gratefully acknowledge from the Centre for Macroeconomics (CFM) and the Institute for New Economic Thinking (INET). -
The Principles of Budgetary Governance Public Governance
@OECDgov PUBLIC GOVERNANCE AND TERRITORIAL DEVELOPMENT OECD, Paris www.oecd.org/gov DRAFT RECOMMENDATION OF THE OECD COUNCIL ON THE PRINCIPLES OF OECD Paris BUDGETARY GOVERNANCE 2, rue André-Pascal, 75775 Paris Cedex 16 Tel.: +33 (0) 1 45 24 82 00 OECD PRINCIPLES OF BUDGETARY GOVERNANCE OECD Senior Budget Officials July 2014 Introductory note The objective of these Principles is to draw together the lessons of a decade and more of work by the OECD Working Party of Senior Budget Officials (SBO) and its associated Networks, along with the contributions and insights from other areas of the OECD and of the international budgeting community more generally. The Principles provide a concise overview of good practices across the full spectrum of budget activity, taking account in particular of the lessons of the recent economic crisis, and aim to give practical guidance for designing, implementing and improving budget systems to meet the challenges of the future. The overall intention is to provide a useful reference tool for policy-makers and practitioners around the world, and help ensure that public resources are planned, managed and used effectively to make a positive impact on citizens’ lives. For further information, please visit: http://www.oecd.org/governance/budgeting/ OECD PRINCIPLES OF BUDGETARY GOVERNANCE Introduction: The fundamental national role of the budget and the budgeting process The budget is a central policy document of government, showing how it will prioritise and achieve its annual and multi-annual objectives. Apart from financing new and existing programmes, the budget is the primary instrument for implementing fiscal policy, and thereby influencing the economy as a whole. -
FY2022 Proposed Budget Fiscal Policy and Position Control
FY2022 Annual Budget Fiscal and Budgetary Policy Adopted: September 28, 2021 I. PURPOSE The City of Georgetown is committed to financial management through integrity, prudent stewardship, planning, accountability, transparency and communication. The broad purpose of the Fiscal and Budgetary Policies is to enable the City and its related component units, including the Georgetown Transportation Enhancement Corporation (GTEC) and the Georgetown Economic Development Corporation (GEDCO), to achieve and maintain a long-term stable and positive financial condition, and provide guidelines for the day-to-day planning and operations of the City’s financial affairs. Policy scope generally spans areas of accounting, operational and capital budgeting, revenue and expenditure management, financial reporting, internal controls, investment and asset management, debt management and forecasting. This is done in order to: A. Demonstrate to the residents of Georgetown, the investment community, and the bond rating agencies that the City is committed to a strong fiscal operation; B. Provide precedents for future policy-makers and financial managers on common financial goals and strategies; C. Fairly present and fully disclose the financial position of the City in conformity to generally accepted accounting principles (GAAP); and D. Demonstrate compliance with finance-related legal and contractual issues in accordance with the Texas Local Government Code and other legal mandates. These policies will be reviewed and updated annually as part of the budget preparation process. II. FUND STRUCTURE AND BASIS OF BUDGETING The budgeted funds for the City of Georgetown include: Governmental Funds: General Fund which accounts for all financial resources except those required to be accounted for in another fund, and include basic governmental services, such as Street Maintenance, Planning and Development, Police, Fire, Parks, as well as Solid Waste Management. -
An SVAR Analysis of Stabilization Policies in Monetary Union
EUROPEAN UNIVERSITY INSTITUTE DEPARTMENT OF ECONOMICS EUI Working Paper ECO No. 2004 /22 Monetary and Budgetary Policy Interaction: An SVAR Analysis of Stabilization Policies in Monetary Union PETER CLAEYS BADIA FIESOLANA, SAN DOMENICO (FI) All rights reserved. No part of this paper may be reproduced in any form Without permission of the author(s). ©2004 Peter Claeys Published in Italy in June 2004 European University Institute Badia Fiesolana I-50016 San Domenico (FI) Italy Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union Peter Claeys∗ European University Institute† Janurary 31st , 2 004 Abstract This paper examines the interaction between monetary and budgetary policy. A comparison of the dynamic responses in different exchange rate regimes offers an assessment of the monetary union case. The analysis proceeds on an SVAR-common trends model. In its current specifica- tion, we can only infer responses to the budgetary policy shock. Its identification is obtained by imposing a (long term) solvency condition on government accounts, exploiting automatic stabilisation responses of government revenues, and the imposition of the Fisher relationship. Two main conclusions emerge. Budgetary policy shocks indirectly lead to monetary tightening. Such effects are significant in countries with flexible exchange rate regimes only. Second, policy regime shifts are important. 1INTRODUCTION With the creation of EMU, a new macroeconomic regime has been installed. The prime aim of the ECB is to maintain price stability and - only in a second line - to support general economic objectives. A multitude of national budgetary authorities is bound by the Stability and Growth Pact (SGP). The rules of the Pact comprise the use of automatic stabilisers around structurally sound fiscal positions, close to balance or in surplus in the medium term. -
The Interaction Between Monetary and Fiscal Policy: Insights from Two Business Cycles in Israel
The interaction between monetary and fiscal policy: insights from two business cycles in Israel Kobi Braude and Karnit Flug1 Abstract Comparing the two significant recessions Israel experienced over the last decade, we highlight the importance of sustained fiscal discipline and credible monetary policy during normal times for expanding the set of policy options available at a time of need. In the first recession Israel was forced to conduct a contractionary fiscal and monetary policy, whereas in the second one it was able to pursue an expansionary policy. The difference in the effect of the policy response between the two recessions is sizable: it exacerbated the first recession while it helped to moderate the second one. Keywords: Fiscal policy, fiscal discipline, public debt, monetary policy, counter-cyclical policy, business cycles JEL classification: E52, E62, H6 1 Bank of Israel. We thank Stanley Fischer and Alon Binyamini for helpful comments and Noa Heymann for her research assistance. BIS Papers No 67 205 Introduction Over the last decade Israel experienced two significant business cycles. The monetary and fiscal policy response to the recession at the end of the decade was very different from the response to recession of the early 2000s. In the earlier episode, following a steep rise in the budget deficit and a single 2 percentage point interest rate reduction, policy makers were forced to make a sharp reversal and conduct a contractionary policy in the midst of the recession. In the second episode, monetary and fiscal expansion was pursued until recovery was well under way. This note examines the factors behind the difference in the policy response to the two recession episodes. -
Cesifo Working Paper No. 3038 Category 1: Public Finance April 2010
Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility Frederick van der Ploeg CESIFO WORKING PAPER NO. 3038 CATEGORY 1: PUBLIC FINANCE APRIL 2010 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifo-group.org/wpT T CESifo Working Paper No. 3038 Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility Abstract The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non‐oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated. JEL-Code: D81, E62, H63, Q32. Keywords: Hotelling rule, tax smoothing, prudence, vigorous oil extraction, precautionary saving, taxation and under-spending, oil price volatility, uncertain economic prospects and oil reserves. -
Local Economic Protectionism in China's Economic Reform
Local Economic Protectionism in China’s Economic Reform Pak K. Lee* A hallmark of China’s economic reforms since 1979 has been the decentralisation of the use of resources to lower levels of the administrative hierarchy. The central leaders have expected the subnational units, by making greater use of the market, to use the decentralised resources in economically productive areas. Provincial and local authorities are, however, very pragmatic. They miss no opportunity to maximise their control of resources, in order to minimise conflict in their units or localities. In a country with as unfavourable a resource-population ratio as China, local protectionism is not inconceivable, though it is neither inevitable nor desirable. Although it is widely accepted that China’s reforms have achieved notable success in moving towards a market economy, as evidenced in the remarkable reduction in the share of goods allocated through the plan and in the deregulation of price controls (World Bank, 1994: xiii–xiv), progress in the greater integration of the domestic market is less pronounced. Local protectionism or the ‘feudal economy’ principally takes the form of using a restrictive economic blockade by China’s provincial and local governments to prevent the outflow of scarce local raw materials and the sale of non-locally produced goods within their areas. This article addresses the issue of why local economic protectionism has arisen and been sustained in the course of the economic reforms. In the first section of the article, incidents of economic localism in the provinces are presented. The causes of the rise of local economic protectionism will be suggested in section two. -
An Assessment of Modern Monetary Theory
An assessment of modern monetary theory M. Kasongo Kashama * Introduction Modern monetary theory (MMT) is a so-called heterodox economic school of thought which argues that elected governments should raise funds by issuing money to the maximum extent to implement the policies they deem necessary. While the foundations of MMT were laid in the early 1990s (Mosler, 1993), its tenets have been increasingly echoed in the public arena in recent years. The surge in interest was first reflected by high-profile British and American progressive policy-makers, for whom MMT has provided a rationale for their calls for Green New Deals and other large public spending programmes. In doing so, they have been backed up by new research work and publications from non-mainstream economists in the wake of Mosler’s work (see, for example, Tymoigne et al. (2013), Kelton (2017) or Mitchell et al. (2019)). As the COVID-19 crisis has been hitting the global economy since early this year, the most straightforward application of MMT’s macroeconomic policy agenda – that is, money- financed fiscal expansion or helicopter money – has returned to the forefront on a wider scale. Some consider not only that it is “time for helicopters” (Jourdan, 2020) but also that this global crisis must become a trigger to build on MMT precepts, not least in the euro area context (Bofinger, 2020). The MMT resurgence has been accompanied by lively political discussions and a heated economic debate, bringing fierce criticism from top economists including P. Krugman, G. Mankiw, K. Rogoff or L. Summers. This short article aims at clarifying what is at stake from a macroeconomic stabilisation perspective when considering MMT implementation in advanced economies, paying particular attention to the euro area. -
Monetary Policy and the Long Boom
NOVEMBER/DECEMBER1998 John B. Taylor is a professor of economics at Stanford University. The article that follows is a reprint of The Homer Jones Lecture delivered at Southern Illinois University-Edwardsville on April 16, 1998. Kent Koch provided research assistance. this lecture. This month (April 1998) the Monetary Policy United States economy celebrates seven years of economic expansion. By definition and The Long an economic expansion is the period between recessions; that is, a period of con- Boom tinued growth without a recession. The last recession in the United States ended in April 1991, so as of this April we have had seven John B. Taylor years of expansion and we are still going. This current expansion is a record breaker: regret that I never had the opportunity to to be exact it is the second longest peacetime work or study with Homer Jones. But I expansion in American history. Iknow people who worked and studied with But what is more unusual is that this him, and I have enjoyed talking with them and current expansion was preceded by the reading about their recollections of Homer first longest peacetime expansion in Amer- Jones. What is most striking to me, of all that ican history. That expansion began in has been said and written about Homer Jones, November 1982 and continued through is his incessant striving to learn more about August 1990. It lasted seven years and economics and his use of rigorous economic eight months. Although the 1980s expansion research to improve the practical operation of was the first longest peacetime expansion in economic policy. -
A Primer on Modern Monetary Theory
2021 A Primer on Modern Monetary Theory Steven Globerman fraserinstitute.org Contents Executive Summary / i 1. Introducing Modern Monetary Theory / 1 2. Implementing MMT / 4 3. Has Canada Adopted MMT? / 10 4. Proposed Economic and Social Justifications for MMT / 17 5. MMT and Inflation / 23 Concluding Comments / 27 References / 29 About the author / 33 Acknowledgments / 33 Publishing information / 34 Supporting the Fraser Institute / 35 Purpose, funding, and independence / 35 About the Fraser Institute / 36 Editorial Advisory Board / 37 fraserinstitute.org fraserinstitute.org Executive Summary Modern Monetary Theory (MMT) is a policy model for funding govern- ment spending. While MMT is not new, it has recently received wide- spread attention, particularly as government spending has increased dramatically in response to the ongoing COVID-19 crisis and concerns grow about how to pay for this increased spending. The essential message of MMT is that there is no financial constraint on government spending as long as a country is a sovereign issuer of cur- rency and does not tie the value of its currency to another currency. Both Canada and the US are examples of countries that are sovereign issuers of currency. In principle, being a sovereign issuer of currency endows the government with the ability to borrow money from the country’s cen- tral bank. The central bank can effectively credit the government’s bank account at the central bank for an unlimited amount of money without either charging the government interest or, indeed, demanding repayment of the government bonds the central bank has acquired. In 2020, the cen- tral banks in both Canada and the US bought a disproportionately large share of government bonds compared to previous years, which has led some observers to argue that the governments of Canada and the United States are practicing MMT. -
The Effects of Monetary Policy on Unemployment Dynamics Under Model Uncertainty Evidence from the Us and the Euro Area 1
WORKWORKINGING PAPAPER SSERIEERIESS NO 1089 / SEPTEMBER 2009 THE EFFECTS OF MONETARY POLICY ON UNEMPLOYM ENT DYNAMICS UNDER MODEL UNCERTAINTY EVIDENCE FROM THE US AND THE EURO AREA by Carlo Altavilla and Matteo Ciccarelli WORKING PAPER SERIES NO 1089 / SEPTEMBER 2009 THE EFFECTS OF MONETARY POLICY ON UNEMPLOYMENT DYNAMICS UNDER MODEL UNCERTAINTY EVIDENCE FROM THE US AND THE EURO AREA 1 by Carlo Altavilla 2 and Matteo Ciccarelli 3 In 2009 all ECB publications This paper can be downloaded without charge from feature a motif http://www.ecb.europa.eu or from the Social Science Research Network taken from the €200 banknote. electronic library at http://ssrn.com/abstract_id=1467788. 1 We are particularly grateful to Ken West and two anonymous referees for extensive comments which substantially improved content and exposition of the paper. We would also like to thank Efrem Castelnuovo, Mark Giannoni, Gert Peersman, Frank Smets, and the participants at the CESifo Area Conference on Macro, Money, and International Finance, Munich; the 3rd Piero Moncasca Workshop, Rome; and the Italian Congress of Econometrics and Empirical Economics, Ancona, for comments and suggestions. Part of the paper was written while the first author was visiting Columbia Business School, whose hospitality is gratefully acknowledged. This paper should not be reported as representing the views of the European Central Bank, or ECB policy. Remaining errors are our own responsibilities. 2 University of Naples “Parthenope”, Via Medina, 40 - 80133 Naples, Italy; e-mail: [email protected]; Phone: (+)39 0815474733, fax (+)39 0815474750 3 European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany; e-mail: [email protected]; Phone: (+)49 6913448721, fax (+)49 6913446575 © European Central Bank, 2009 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Website http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved.