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Business and Economics > Public Finance

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Cover IMF Working Papers
Public Debt Dynamics and the Impact of Fiscal Policy
Nikhil Patel
and
Adrian Peralta Alva
Public debt-to-GDP ratios have undergone substantial fluctuations over both the short and long term. Most recently, global debt-to-GDP ratios peaked at 100% on average in 2020 due to COVID-19, retracting substantially by 2022. To understand what drives these movements, we propose a structural approach to debt decompositions based on a SVAR identified with narrative sign restrictions. We find that GDP growth shocks and the corresponding comovements of macroeconomic variables are the key drivers of debt to GDP, accounting for 40% of the observed yearly variation in 17 advanced economies since the 1980s. Discretionary fiscal policy changes, in turn, account for less than 20% of the observed changes. The analysis also finds the primary balance multiplier on GDP to be very small. We reconcile our results with the literature, underscoring the importance of accurate shock identification and accounting for cross-country heterogeneity.
Keywords:
Public Debt; Fiscal Consolidation; Structural Vector Autoregression.; GDP growth shock; discretionary fiscal policy change; public debt dynamics; sign restriction; growth shock; Fiscal stance; Vector autoregression; Structural vector autoregression; Global
Cover IMF Working Papers
Identifying News Shocks from Forecasts
Jonathan J. Adams
and
Mr. Philip Barrett
We propose a method to identify the anticipated components of macroeconomic shocks in a structural VAR. We include empirical forecasts about each time series in the VAR. This introduces enough linear restrictions to identify each structural shock and to further decompose each one into “news” and “surprise” shocks. We estimate a VAR on US time series using forecast data from the SPF, CBO, Federal Reserve, and asset prices. Unanticipated fiscal stimulus and interest rate shocks we identify have typical effects that match existing evidence. In our news-surprise decomposition, we find that news drives around one quarter of US business cycle volatility. News explains a larger share of the variance due to fiscal shocks than for monetary policy shocks. Finally, we use the news structure of the shocks to estimate counterfactual policy rules, and compare the ability of fiscal and monetary policy to moderate output and inflation. We find that coordinated fiscal and monetary policy are substantially more effective than either tool is individually.
Keywords:
Identification; Structural shocks; SVAR; News; Fiscal multiplier; Fiscal policy; Monetary policy; Policy counterfactuals; monetary policy shock; coordinated fiscal policy; using forecast data; data from the SPF; impulse response; Inflation; Vector autoregression; Fiscal stimulus; Global
Cover IMF Working Papers
Unpleasant Surprises? Elections and Tax News Shocks
Mr. Antonio David
and
Can Sever
Unanticipated changes in tax policy are likely to have different macroeconomic effects compared to anticipated changes due to several mechanisms, including fiscal foresight and policy uncertainty. It is therefore important to understand what drives such policy surprises. We explore the nature of unanticipated tax policy changes by focusing on a political economy determinant of those events, namely the timing of elections. Using monthly data for 22 advanced economies and emerging markets over the period 1990-2018, we show that implementation lags tend to be significantly longer for tax policy change announcements that are made during the pre-election periods, thereby leading to a lower likelihood of “tax news shocks”. We also find that implementation lags become much shorter for tax policy changes that are announced in the aftermath of elections, generating more frequent tax news shocks. This pattern remains similar for different tax measures or types of taxes. The findings are robust to a number of checks, including alternative definitions of tax news shocks, or to controlling for various economic and institutional factors.
Keywords:
Tax Shocks; Electoral Cycles; Political Economy; news shock; implementation lag; election period; change announcement; tax policy policy change; Probit models; Income tax systems; Consumption taxes; Corporate income tax; Global
Cover IMF Working Papers
When Does Capacity Development Achieve Good Outcomes? Evidence from the IMF Results-Based Management Data
Antonio Bassanetti
Capacity development is one of the IMF’s core activities. Its impact is monitored through a Results-Based Management framework. Using for the first time the resulting dataset, the paper investigates how the likelihood of achieving targeted outcomes correlates with macroeconomic conditions and project-specific characteristics. Results indicate a positive correlation with per capita GDP growth and the involvement of resident advisors and regional centers. Results also confirm lower chances of achieving targeted outcomes for fragile, conflict-affected, and small states as well as in complex projects. These findings inform Fund CD strategy, prioritization and delivery to help member countries achieve better outcomes.
Keywords:
Capacity Development; Evaluation; Results-Based Management; outcome rating; core activity; CD Project design; results chain; management data; IMF CD; Probit models; Central bank operations; Tax administration core functions; Western Hemisphere; Sub-Saharan Africa; Middle East and Central Asia
Cover IMF Working Papers
Avoid a Fall or Fly Again: Turning Points of State Fragility
Olusegun Ayodele Akanbi
,
Nikolay Gueorguiev
,
Mr. Jiro Honda
,
Paulomi Mehta
,
Mr. Kenji Moriyama
,
Keyra Primus
, and
Mouhamadou Sy
High persistence of state fragility (a fragility trap) suggests the presence of substantial benefits from avoiding a fall into fragility and considerable hurdles to successful exit from fragility. This paper empirically examines the factors that affect the turning points of entering and exiting from state fragility by employing three different approaches: an event study, the synthetic control method, and a logit model. We find that avoiding economic contraction is critical to prevent a country on the brink of fragility from falling into fragility (e.g., among near fragile countries, the probability of entering fragility would rise by 40 percentage points should real GDP per capita growth decline from +2.5 percent to -2.5 percent). Also, strengthening government effectiveness together with increasing political inclusion and maintaining robust economic activity should help make exit from fragility more successful and sustainable. In the current environment (the COVID-19 crisis and its aftermath), the findings suggest the importance of providing well-directed fiscal stimulus with sufficient financing, (subject to appropriate governance safeguards and well-designed policies), and protecting critical socio-economic spending to keep vulnerable countries away from being caught in a fragility trap.
Keywords:
State fragility; government effectiveness; A. event study analysis; exit from fragility; effectiveness result; Logit models; Education spending; Health care spending; Income; Sub-Saharan Africa; Global
Cover IMF Working Papers
How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area
Nicoletta Batini
,
Mr. Alessandro Cantelmo
,
Mr. Giovanni Melina
, and
Stefania Villa
This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
Keywords:
WP; Policy shock; policy stance; f DMFCI; shock process; evolution of Dmfcis; condition index; Fiscal stance; Dynamic stochastic general equilibrium models; Global
Cover IMF Working Papers
How Big are Fiscal Multipliers in Latin America?
Jorge Restrepo
This paper uses the strategy and data of Blanchard and Perotti (BP) to identify fiscal shocks and estimate fiscal multipliers for the United States. With these results, it computes the cumulative multiplier of Ramey and Zubairy (2018), now common in the literature. It finds that, contrary to the peak and through multipliers reported by BP, the cumulative tax multiplier is much larger than the cumulative spending one. Hence, the conclusions depend on the definition of multiplier. This methodology is also used to estimate the effects of fiscal shocks on economic activity in eight Latin American countries. The results suggest that the fiscal multipliers vary significantly across countries, and in some cases multipliers are larger than previously estimated.
Keywords:
WP; tax multiplier; SVAR trough multiplier; cumulative multiplier; peak multiplier; cummulative multiplier; Structural vector autoregression; Vector autoregression; Fiscal multipliers; Western Hemisphere; Caribbean; Global; Macroeconomic Policy; Stabilization; Fiscal Policy; Multipliers
Cover IMF Working Papers
A Requiem for the Fiscal Theory of the Price Level
Mr. Roger Farmer
and
Pawel Zabczyk
The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
Keywords:
WP; price level; fiscal policy; monetary policy; fiscal theory of the price level; price level determination; overlapping generations model; dynamic efficiency; accumulation equation; equilibrium debt dynamics; fiscal policy regime; valuation equation; steady-state price level; equilibrium equation; debt valuation equation; excess demand; debt accumulation equation; Real interest rates; Overlapping generations models; Negative interest rates; Global
Cover IMF Working Papers
Multiple Dimensions of Human Development Index and Public Social Spending for Sustainable Development
Iana Paliova
,
Robert McNown
, and
Grant Nülle
Multidimensional assessment of human development is increasingly recognized as playing an important role in assessing well-being. The focus of analysis is on the indicators measuring the three dimensions of Human Development Index (HDI) — standard of living, education and health, and their relationship with public social spending for achieving the 2030 Agenda for Sustainable Development. The study estimates the effects of public social spending on gross national income (GNI) per capita (in PPP in $), expected years of schooling and life expectancy for a sample of 68 countries. The relationship is robust to controlling for a variety of factors and the estimated magnitudes suggest a positive long-run effect of public educational spending on GNI per capita, public educational spending on expected years of schooling, and public health expenditures on life expectancy.
Keywords:
WP; dependent variable; explanatory variable; GNI; spending; Human Development; Well-being; Public Expenditure; effects OLS; lagged dependent variable; total population; public health expenditure; social spending; HDI level; public education expenditure; Health care spending; Logit models; Sub-Saharan Africa; Middle East; Asia and Pacific; North Africa; East Africa
Cover IMF Staff Country Reports
Seychelles: Selected Issues
International Monetary Fund. African Dept.
Selected Issues
Keywords:
ISCR; CR; Correlations Between FCIs; Seychelles; financial condition; constructed FCIs; VAR FCI; factor loading; increasing FCI; VAR approach; FCI of interest; financial conditions in Seychelles; common factor FCI; span 2007Q4-2018Q3; purged FCIs; derived FCI; PCA method; Financial conditions index; Credit gaps; Vector autoregression; Macroprudential policy; Post-clearance customs audit; Global; Europe