engleski

Essays in fiscal policy

Increases in government spending and reduction in taxes can boost private spending of households and firms during economic downturns keeping output and employment at a higher level. Such an idea of fiscal policy as a tool in dampening business cycle downturns dates back to the Great Depression of the 1930s and since then is the cornerstone in the discussions about short- term economic policy. Especially in the 1960s and 1970s these discussion came down to the principal debate about the effectiveness between monetary versus fiscal policy. Although evidence from that period are of limited help for today’s policymakers due to changes in economic environment and methodological deficiencies of that time (Kretzmer, 1992), the monetary versus fiscal policy debate has been enlightening and "various ins and outs of the discussion have served valuably to enhance knowledge and awareness" (McCallum, 1986, p. 24). However, a large portion of controversies in the fiscal policy domain is today still present. Differently from monetary policy, there is no consensus about fiscal policy effects and different theories foretell different outcomes. This fact along with fiscal policy lags have been over the decades the main cons of fiscal policy as a powerful tool in stabilizing the economy. Still, history shows that countries are prone to resort to fiscal policy to stabilize the economy especially in cases of severe economic downturn. The recent 2008- 09/10 crisis reopened (again) the debate on the (in)effectiveness of automatic stabilizers and thus the need for stimuli packages. This doctoral dissertation is a collection of four essays in the field of fiscal policy. The main goal of the dissertation is to extend the existing empirical research on automatic stabilizers and discretionary measures on the case of a small developing (transition) economy such as Croatia and investigate the effects of fiscal policy actions under normal, good and bad economic times. Moreover, this dissertation puts forwards some of the challenging questions regarding the EMU Stability and Growth Pact (SGP) fiscal rule, inspecting its usefulness and appropriateness. After the introduction given in Chapter 1, Chapter 2 investigates the behaviour of the cyclical and structural component of the budget in Croatia using the official European Commission approach. Results show that in the 1995-2009 period the cyclical and cycli- cally adjusted budget balance were both on average in deficit. When considering the size of the cyclical component, under a level of uncertainty, it may be concluded that automatic stabilizers are not so strong in Croatia. This may be due to the fact that they may be constraint by the combination of low tax elasticities and a relatively low share of taxes in GDP. Additionally, the role of expenditure stabilizers may be small because of the weak and insufficient formal unemployment and social security compen- sation schemes. When considering the cyclically adjusted budget balance as a measure of discretionary fiscal policy it may be concluded that substantial discretionarism is ev- idenced in Croatia in the observed period. Often, the actual budget balance deficit was largely due to the structural rather than cyclical component, meaning that the Croatian government lacked fiscal discipline. Moreover, pro-cyclical fiscal policy is evidenced in several periods. Chapter 3 explores the effects of discretionary fiscal policy on a set of macroeconomic variables in Croatia in the 1995-2011 period using the structural vector autoregression model. Results show Keynesian effects of government spending increases or tax cuts on output, being the impact multiplier above 2 in both cases, but of different sign. Moreover, private consumption and private investment also react positively after a government spending shock, but the effect is even more pronounced and significant after a government investment shock. If tax cuts are considered then it is possible to conclude that a positive effect on output and private consumption is mainly due to a tax cut in indirect taxes. Since empirical evidence goes in favor of the fact that discretionary actions are more effective and significant in bad economic times (Auerbach and Gorodnichenko, 2012 ; Batini et al., 2012, among others), Chapter 4 extends the stabilizing effects of fiscal policy in Croatia by distinguish fiscal multipliers during recessionary and expansionary times. In doing so, the smooth transition vector autoregression model is applied within the direct projection method, focussing merely on government spending increases (rather than tax cuts) as fiscal stimuli measures. Results show that multipliers in expansionary times are generally statistically insignificant, while in recessionary times they show to be statistically significant and much larger (than when they are evaluated within a linear framework). When investigating the possible government spending trilemma between spending for purchases of goods and services, for wages or for capital goods, it is possible to note that in times of economic downturn in Croatia the effects after the increase in the first are most advantageous. Given the fact that fiscal rules can dampen the role of automatic stabilizers, Chapter 5 discusses the functionality of the cyclically adjusted budget balance and the SGP fiscal rule. To do so a DSGE model calibrated on the example of a fiscally stable country (Austria) is used. Results show that there is a low correlation between the cyclical com- ponent estimated according to the official European Commission (EC) methodology and the same retrieved from the DSGE model. Moreover, there is a substantial disagreement among official and model-based estimates of the fiscal policy stance as well as timing of violation of the SGP structural deficit rule. Above that, in more than half of the cases when both deficit fiscal rules (Maastricht and SGP) are violated, the official method- ology signals a deterioration in the structural balance, while the model-based measure indicates it is due to the cyclical slump of the economy.

Fiscal policy; automatic stabilizers; discretionary measures; fiscal stimuli packages; stabilization effects; Stability and Growth Pact; cyclically adjusted budget balance; SVAR; STVAR; DSGE.

nije evidentirano