A Dependent Economy Model of Employment, Real Exchange Rate and Debt Dynamics: Towards an Understanding of Pandemic Crisis

Given the unforeseen and uncertain circumstances during the pandemic, the role of government expenditure becomes extremely relevant in sustaining lives and livelihoods of the masses. This brings forth public sector deficit as a key issue of macroeconomic policy debate. This article aims at investigating the effects of an unanticipated adverse shock like COVID-19, on the real value of public debt, in a small open economy, consisting of traded and non-traded sectors, along with proposed management of such crisis with fiscal and monetary expansion. The results of policy-induced and exogenous shocks depend on the difference in the speeds of adjustments in real exchange rate, interest rate and real value of debt, and the associated multitudes of cross effects. While an unanticipated adverse shock like COVID-19 causes contraction of both traded and non-traded sectors and reduces consumption expenditure, investment expenditure and level of employment and real value of aggregate income in the short run, fiscal expansion causes higher real value of debt and lower real exchange rate. JEL Codes: E12, E62, H63

Deficit Financing’ or ‘Deficit-Reduction Financing?’ Debates in Contemporary Economics: Origins, Confusions and Clarity

The analysis of government deficits and public debt points to a fundamental error in contemporary economic discussions. It is not possible to assess the stance of fiscal policy from estimates of the public sector deficit. John Maynard Keynes’s macroeconomics and the empirical evidence discussed in this paper indicate that expansionary fiscal policy financed by loan issues will lead to growth in economic activity and employment. In an economy with spare capacity and idle resources, high government expenditure generates income, including tax revenues and thereby reduces the government deficit, and cuts public debt. The main purpose of increased loanfinanced government spending at times of private economic weakness is to increase the nation’s income. Keynes argued that any such government spending was not deficit spending, because he understood the spending as the most sensible means to cut the deficit. Deficit-reduction spending might be a more appropriate definition, because as he argued with Josiah Stamp: “You will never balance the budget through measures which reduce national income” (Keynes, 1978, vol. 21, p. 149).

Determinants and implications of the Eurozone enlargement

Aside from the United Kingdom, which is withdrawing from the European Union, only Denmark has the option of staying outside the single European currency area. All other member states which have not adopted euro as their currency have the right and obligations to do so under the Treaty of Accession. The condition to join the Eurozone is to meet all five nominal Maastricht convergence criteria and to ensure compliance of national legislation with acquis communautaire, or the EU legal order. What poses special difficulties to candidate countries is the fiscal criterion relating to the maximum allowed budget deficit. If it’s not met, the European Commission launches the Excessive Deficit Procedure, EDP. Currently, this procedure is in place for France, Spain and the United Kingdom. In 2015, EDP for Poland was lifted, but there is no certainty it won’t be imposed again at the end of the decade due to the risk of exceeding once more the threshold of public sector deficit, which stands at 3 percent GDP. It is to be expected that in the 2020s the European Monetary Union will be joined by all the countries that are still using their national currencies, including Denmark, and that the EU will be extended to include new member states, enlarging the euro area, too. Although the issue is not absolutely certain, it needs to be assumed that euro will overcome the present difficulties and come out stronger, though the economically unjustified euroskepticism of some countries, especially Poland, is not helping.

Long-Term Relationship between Inflation and Public Sector Deficit in the Turkish Economy and its Macroeconomic Implications (1975-2014)

The process of deterioration in the fundamentals, in particular those related to inflation and the public sector deficits, that had started in the 1980's have accelerated in the 1990's. Meanwhile two way causative relations seem to have appeared between the fluctuations of some fundamentals. In this context, this paper examines the long term relationship between inflation and the public sector deficit and provides an analysis of the macro dynamics that derive from this relationship. Following a summary of the theoretical literature on the relationship between inflation and the public sector deficit, the behavior of these two variables in the 1975-2014 periods are delineated and an analysis of their relationship to some selected macro-variables is presented. The most important result of this article is that high and chronic inflation rates are one of the responsible of deterioration which appeared on the main economic variables particularly in the public sector balance. Similarly, in the 2000’s, on the basis of positive developments in the public balance lies in falling inflation rates quickly and permanently.

Factors Affecting the US Current Account: An Historical Decomposition

The US current account deficit was around 6½ per cent of GDP in 2006, having risen by 2 per cent of GDP since 2002 when the dollar reached its peak and started to decline. Between the peak in 2002 and the last quarter of 2006 the dollar fell by 13.4 per cent in effective terms using 2003 trade weights, and it might have been expected that the current account would have improved. However, over the same period the household savings rate fell by more than 4 per cent of personal incomes and private sector investment rose by 0.6 per cent of GDP. At the same time, the public sector deficit improved by around 1 per cent of GDP, but this was not enough to offset the major decline in net savings in the private sector. These domestic imbalances have been partly responsible for the deterioration in the current account, and appear to have more than offset the impacts of the decline in the dollar. In addition, since 2002 the oil price has risen and this has led to a significant deterioration in the US current account.