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The Korean authorities having taken decisive and proactive fiscal measures to help stem the fallout from the current global economic and financial crisis, with the size of the fiscal stimulus well-above the average response of other G20 economies. In this context, a key question is how effective fiscal policy is as a stabilization tool, especially considering the high openness of Korea's economy. Results based on a macroeconomic model calibrated for Korea provide a strong case for using counter-cyclical fiscal policy, especially if measures appropriately focus on spending with a direct demand impact such as investment and targeted transfers. It also demonstrates the importance a complementary monetary response and the benefits to an open economy such as Korea's of global coordination of fiscal stimulus.
Fiscal policy is an important instrument for maintaining and improving living standards. Such living standards can be viewed as an outcome of the interaction between the opportunities offered by society and the readiness and ability of each person to exploit them. Under certain circumstances, public finance can make an important contribution to the creation of opportunities within a given society by raising resources from the private sector through taxation or borrowing (domestic and external) and allocating those resources effectively and equitably in the form of public spending, including through public goods and transfers. The first chapters in this volume sketch out a framework that policy makers can use in adopting a more cohesive or integrated approach to the short- and long-term dimensions of fiscal policy. Here the traditional threefold rationale for fiscal policy proposed by Musgrave-stabilization, resource allocation, and distribution-continues to be useful. Other chapters in this volume take up some of the critical institutional challenges in implementing fiscal policy for longer-term growth and development. These chapters also look at the tools and approaches being developed to address these challenges. Improving the quality of public investment management is a particular priority in view of the recent evidence that as little as half of all public investment expenditure translates into productive capital stock. The last chapter in this volume is a case study of fiscal responses to the great recession in low-income Sub-Saharan Africa, looking at stabilization and the longer-run growth, as well as distributional aspects of such responses. The growing depth of domestic financial markets in many African countries rather unexpectedly is turning out to be a critical source of financing for fiscal policy responses.
This paper quantifies the fiscal implications of the crisis, assesses the status of fiscal balances after the shock, and discusses the strategy to ensure fiscal solvency. The focus is primarily on advanced and emerging economies, complementing the Board paper on the effect of the crisis on low-income countries. While, for practical purposes, some of the empirical evidence presented refers only to the G-20, information is provided also for other countries, and the analysis also applies to them. A Companion Paper provides supporting material. As a general caveat, the estimates presented are subject to a significant degree of uncertainty, and developments should be closely monitored as new information becomes available.
Across a sample of thirty four emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for countercyclical policy increases with the availability of international reserves as it enhances credibility and mitigates concerns about the effect of expansionary fiscal policy on the cost of borrowing and debt service. The paper also examines the effectiveness of the fiscal policy in emerging countries in the short- and long-run and its underlying conditions, which does not appear to be uniform. In some cases, contractionary fiscal policy could stimulate growth in the short-run, if fiscal tightness lowers the cost of borrowing and debt service, and mitigates concerns about debt sustainability. However, an increase in international reserves is evident to mitigate these concerns. On the other hand, high inflation increases concerns about the impact of fiscal spending on inflationary expectations and the cost of borrowing, countering the effectiveness of the fiscal stimulus on output growth in the short-run. Where the debt burden is high, fiscal expansion has a longlasting negative effect on real growth.
How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.
We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fisscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.
This paper uses the IMF's Global Integrated Monetary and Fiscal Model to compute shortrun multipliers of fiscal stimulus measures and long-run crowding-out effects of higher debt. Multipliers of two-year stimulus range from 0.2 to 2.2 depending on the fiscal instrument, the extent of monetary accommodation and the presence of a financial accelerator mechanism. A permanent 0.5 percentage point increase in the U.S. deficit to GDP ratio raises the U.S. tax burden and world real interest rates in the long run, thereby reducing U.S. and rest of the world output by 0.3-0.6 and 0.2 percent, respectively.