Active monetary policy, passive fiscal policy and the value of public debt: Some further monetarist arithmetic

From the 1980s, mainstream macroeconomic thinking experienced a strongconvergence in methodological assumptions and policy proposals for more than twodecades. This “New Macroeconomics Consensus” was characterized by the role playedby the monetary policy in macroeconomic adjustment. Fiscal policy was set aside; itshould only be concerned with keeping public debt in a stable path in order to ensurethe “economic fundamentals”. However, the need for active and unconventionalpolicy measures during the 2008 global economic crisis brought fiscal policy back tothe mainstream debate. This paper briefly describes this convergence, discussing therole it assigned for fiscal policy before the crisis, and then examines the issues the postcrisis debate concentrated on, showing how it differs from the previous mainstreamconception of fiscal policy. We suggest that mainstream limitations to deal with fiscalpolicy may have opened a window of opportunity for a broader review of its role as apolicy tool.

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Macroeconomic Policy at a Crossroads

World Economy and International Relations ◽

10.20542/0131-2227-2021-65-7-5-15 ◽

2021 ◽

Vol 65 (7) ◽

pp. 5-15

Author(s):

A. Kholopov

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Interest Rates ◽

Public Debt ◽

Financial Stability ◽

Macroeconomic Policy ◽

Bank Lending ◽

Central Banks ◽

Fiscal Stimulus ◽

Negative Interest Rates

The article examines macroeconomic policy options for advanced economies to respond to adverse shocks in the environment of very low interest rates and very high levels of public debt, when the scope for using conventional policy tools is limited. The standard transmission mechanism of monetary policy in the ELB conditions stops working normally, and the economy faces the “liquidity trap” effect. The deployment by central banks of unconventional monetary tools (forward guidance, quantitative easing, and negative interest rates) after global financial crisis was helpful in combatting the downturn, but carries risk of possible side effects. Large-scale purchases of financial assets lead to significant increase in central banks’ balance sheets, and this creates a threat to future financial stability and central bank independence. Negative interest rates can have detrimental effects on bank profitability and be contractionary through bank lending. There is a consensus that today fiscal policy has to play a major role in stabilizing the business cycle. But the effectiveness of conventional tools of discretional fiscal policy is uncertain because of long political lags and small spending multiplier. Existing automatic fiscal stabilizers are focused on social protection goals and not on macroeconomic stabilization. Thus, the newly proposed measures for rules-based fiscal stimulus (asymmetric semiautomatic stabilizers – tax or spending measures triggered by the crossing of some statistical threshold, e.g. a high unemployment rate) and unconventional fiscal policy (the use of consumption taxes to increase inflation expectations) have become the object of active discussion. Here lies the danger in the fusion of monetary and fiscal policy: central banks’ operations are becoming increasingly quasi-fiscal, aimed at financing budget deficit, and functions of monetary policy are proposed to assign to fiscal policy. Besides, the expansion of fiscal stimulus threatens financial stability in the future, as it leads to increase in public debt and narrows a country’s fiscal space.

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Empirical appraisal of fiscal stability: the case of Ghana

Journal of Economic Studies ◽

10.1108/jes-03-2014-0045 ◽

2015 ◽

Vol 42 (5) ◽

pp. 753-779

Author(s):

Nana Kwame Akosah

Keyword(s):

Economic Growth ◽

Monetary Policy ◽

Fiscal Policy ◽

Central Bank ◽

Public Debt ◽

Inflation Targeting ◽

Fiscal Sustainability ◽

Content Type ◽

Quarterly Data ◽

Poor Countries

Purpose – The purpose of this paper is to appraise the stability of Ghana’s fiscal policy by assessing government’s reaction in the past to rising public debt over the last three decades. Design/methodology/approach – Using quarterly data spanning 1990Q1-2013Q2, the study evaluated the mean reverting properties of Ghana’s public debt and also estimate the fiscal policy reaction function. The complementary estimation techniques include Pesaran et al. (2001) bound testing cointegration test, differencing method and also Granger two-step cointegration methods. Findings – Using quarterly data from 1990Q1 to 2013Q2, the study found the fiscal policy to be unstable in the 1990s, necessitating the adoption of Heavily Indebted Poor Countries’ initiative in 2001. The fiscal situation however relatively stabilizes afterwards following the external debt relief in 2001. Nevertheless, the study reveals that the recent fiscal policy (since 2006) seems to be confronted with tremendous fiscal pressures, exacerbated by fiscal excesses during election cycles as well as excessive domestic and external borrowings. In addition, the economic growth-debt link was found to be weak, though debt appears to adversely affect economic growth. Research limitations/implications – The study does not thoroughly explore the possibility of non-linear relationship between public debt and primary balance. Also, the result could be different using different data frequencies. Practical implications – The state of government finance has implications on the monetary policy and economic growth prospects of an economy. As an inflation targeting central bank since 2002, a successful monetary policy implementation that reins in inflation requires fiscal policy that curtails fiscal volatilities originating from imprudent behaviour of government. Therefore, the looming fiscal pressures in recent times would impair the effective implementation of the inflation targeting framework by the central bank, and also retard economic growth as the bulk of these expenditures are usually recurrent in the case of Ghana. Originality/value – This is the first paper to employ complementary econometric techniques to empirically evaluate fiscal sustainability in Ghana.

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Brazil

IMF Staff Country Reports ◽

10.5089/9781513508368.002 ◽

2019 ◽

Vol 19 (242) ◽

Author(s):

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Financial Markets ◽

Public Debt ◽

Economic Recovery ◽

Real Gdp

The economic recovery after the 2015-16 recession has disappointed, with real GDP growing by only 1.1 percent in 2017 and 2018. Inflation is close to target, hovering around 4 percent. Monetary policy is accommodative with policy rates at the historical low of 6.5 percent. Fiscal policy was neutral in 2018 while gross public debt reached 88 percent of GDP. Financial markets have rebounded since the 2018 election.

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Testing the Fiscal Theory of Price Level in Case of Pakistan

The Pakistan Development Review ◽

10.30541/v47i4iipp.763-778 ◽

2008 ◽

Vol 47 (4II) ◽

pp. 763-778

Author(s):

Attiya Y. Javid ◽

Umaima Arif ◽

Abdul Sattar

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Public Debt ◽

Price Level ◽

Equilibrium Path ◽

Budget Deficits ◽

Monetary Policies ◽

The Real ◽

Real Value ◽

Fiscal Solvency

There are two competing views of the interaction between monetary and fiscal policy and their effects on price stability for policy-maker’s point of view. In the classical view, in Ricardian regimes it is the demand for liquidity and its evolution over time that determines prices. In such a regime fiscal policy is passive, which implies that government bonds are not net wealth [Barro (1974)], and monetary policy works through the interest rate or another instrument to determine prices. In the opposite view which is more recent, a non-Ricardian regime will prevail whenever fiscal policy becomes active1 and does not accommodate or adjust primary surpluses to guarantee fiscal solvency. As a result, the Ricardian equivalence do not hold, and the increase in nominal public debt to finance persistent budget deficits is perceived by private agents as an increase in nominal wealth. In fiscal dominant regime the government’s fiscal policy becomes sustainable through debt deflation that is an increase in prices that wash away the real value of public debt and in turn the real value of financial wealth until demand equals supply and a new equilibrium is reached. In this regime prices are determined by fiscal policy, and inflation becomes a fiscal phenomenon. If, on the other hand, primary surpluses follow an arbitrary process, then the equilibrium path of prices is determined by the requirement known as fiscal solvency; that is, the price level has to jump to satisfy a present value budget constraint called non-Ricardian regime. The basic distinction between the two regimes is that in non-Ricardian regime fiscal policy plays the role where as in Ricardian regime monetary policy provides stability in prices. In FTPL, the results of fiscal and monetary policies depend on which policy has dominant characteristics. The consequences of policies differ depending on the active and passive characteristics of the policy and depending on the characteristics of the following policy. If the policy mix is such that monetary policy is active and fiscal policy is passive, fiscal policy accommodates monetary policies; these policies are called dominant monetary policy by Sargent and Wallace (1981) and Ricardian regime by Woodford (1994, 1995).

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Global Financial Crisis and Its Impact on Russia

Voprosy Ekonomiki ◽

10.32609/0042-8736-2009-1-9-27 ◽

2009 ◽

pp. 9-27 ◽

Cited By ~ 9

Author(s):

A. Kudrin

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Financial Crisis ◽

Central Bank ◽

Global Financial Crisis ◽

Developed Countries ◽

Real Economy ◽

Energy Prices ◽

Russian Government ◽

The Real

The article examines the causes of origin and manifestation of the current global financial crisis and the policies adopted in developed countries in 2007—2008 to deal with it. It considers the effects of the financial crisis on Russia’s economy and monetary policy of the Central Bank in the current conditions as well as the main guidelines for the fiscal policy under different energy prices. The measures for fighting the crisis that the Russian government and the Central Bank use to support the real economy are described.

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