...at- Kobe cost $7.3 billion to build. Yet as skep- tempt to manage aggregate demand. They tics had predicted, it currently carries very may reduce taxes to try to stimulate the little traffic—about 4,000 cars a day. By economy or raise taxes when they believe comparison, America’s longest suspension that aggregate demand is too high. bridge, the Verrazano Bridge that links New In this chapter, we will learn how discre- York City’s Staten Island to the borough of tionary fiscal policy fits into the model of Brooklyn, carries more than 300,000 cars short-run fluctuations we developed in each day. Chapter 10. We’ll see how deliberate In Japan, stories like this are common. During the 1990s the Japanese government What you will learn in this chapter: changes in government spending and tax policy affect real GDP. We’ll also see how ® What fiscal policy is and why it is an important tool in managing economic fluctuations ® Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy ® Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers ® How to measure the government budget balance and how it is affected by economic fluctuations ® Why a large public debt may be a cause for concern ® Why implicit liabilities of the government are also a cause for concern spent around $1.4 trillion on...
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...Budget Deficits, National Saving, and Interest Rates William G. Gale and Peter R. Orszag September 2004 Brookings Institution and Tax Policy Center. This paper was prepared for the Brookings Panel on Economic Activity, September 9-10, 2004. We thank Emil Apostolov, Matt Hall, Brennan Kelly, and Melody Keung for outstanding research assistance; Alan Auerbach, William Brainard, Robert Cumby, Bill Dickens, Doug Elmendorf, Eric Engen, Laurence Kotlikoff, Thomas Laubach, Maria Perozek, George Perry, Frank Russek, Matthew Shapiro, and David Wilcox for helpful discussions; and Eric Engen, Jane Gravelle, and Thomas Laubach for sharing data. ABSTRACT This paper provides new evidence that sustained budget deficits reduce national saving and raise interest rates by economically and statistically significant quantities. Using a series of econometric specifications that nest Ricardian and non-Ricardian models, we obtain evidence of strong non-Ricardian behavior in aggregate consumption. Consistent with several recent studies, we find that projected future deficits affect longterm interest rates, but current deficits do not. Our estimates suggest that each percent-ofGDP in current deficits reduces national saving by 0.5 to 0.8 percent of GDP. Each percent-of-GDP in projected future unified deficits raises forward long-term interest rates by 25 to 35 basis points, and each percent-of-GDP in projected future primary deficits raises interest rates by 40 to 70 basis points...
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...John F. Kennedy School of Government, Harvard University. The views expressed in this paper are those of the authors and are not necessarily shared by any of the institutions with which they are affiliated. We thank Al Davis, Peter Diamond, Edward Gramlich, Peter Orszag, Gene Sperling, and Lawrence Summers for comments on an earlier draft. Elmendorf was formerly Deputy Assistant Secretary of the Treasury in the Office of Economic Policy, and prior to that Senior Economist at the Council of Economic Advisers; Liebman was formerly Special Assistant to the President for Economic Policy at the National Economic Council; and Wilcox was formerly Assistant Secretary of the Treasury for Economic Policy. Table of Contents Page 1. Introduction 2. Budget Outcomes and Projections Improved Budget Picture Sources of Improvement 3. Budget Deficit Reduction: 1990 through 1997 OBRA90 OBRA93 What Did Deficit Reduction Ultimately Accomplish? The Republican-Controlled Congress BBA97 4. Entitlement Reform and Saving Social Security First Entitlement Commissions Social Security Saving Social Security First 5. Social Security Reform Options Using Projected Budget Surpluses as Part of Social Security Reform Investments in Private Financial Assets Potential Compromise Reform Proposals The 1999 State of the Union Social Security Proposal 6. Budget Surpluses: 1998 through 2000 The 1999 State of the Union Budget Framework Balancing the Budget Excluding Social Security Fiscal Policy in 2000 A National Asset...
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...Title: The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account Author: Aart Kraay, Jaume Ventura URL: http://www.nber.org/chapters/c0124 11 The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account Aart Kraay and Jaume Ventura 11.1 Introduction Since the early 1990s, the United States has experienced steadily widening current account deficits, reaching 5.7 percent of gross national product (GNP) in 2004 (see top panel of figure 11.1). These deficits are large relative to the postwar U.S. historical experience. With the exception of a brief period in the mid-1980s where current account deficits reached 3.3 percent of GNP, the U.S. current account has typically registered small surpluses or deficits averaging around 1 percent of GNP. As a consequence of the recent deficits, the U.S. net foreign asset position has declined sharply from –5 percent of GNP in 1995 to about –26 percent by the end of 2004 (see bottom panel of figure 11.5). The goal of this paper is to provide an account of this decline that relates it to other major macroeconomic events and helps us to grasp its implications for welfare and policy. Any attempt to do this must take into consideration a major change in the pattern of asset trade between the United States and the rest of the world (see figure 11.2). During the second half of the 1990s, the United States accumulated foreign assets and liabilities at the rate of $765 billion and $965 billion per year. About two-thirds of this...
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...the euro-zone crisis – causes, the crisis and reformation policies (with special reference to greece) the euro-zone ‘The Eurozone’ is the nickname commonly used to describe the member states that use the EU’s single currency, the Euro. The idea of creating a single currency for the European Community was first mentioned in the 1970 Werner report, which led to the establishing of the European Monetary System (EMS), the forerunner of the Economic and Monetary Union (EMU). The Maastricht Treaty (1992) made EMU a part of EU law and set out a plan to introduce the single currency (the Euro) by 1999. The Maastricht Treaty also established certain budgetary and monetary rules for countries wishing to join the EMU (known as the convergence criteria). In 1998, 11 member states (Germany, France, Italy, Belgium, Luxembourg, the Netherlands, Spain, Portugal, Ireland, Austria and Finland) undertook the final stage of EMU when they adopted a single exchange rate, which was set by the European Central Bank (Britain, Sweden and Denmark negotiated an opt-out from this final states of EMU). The new Euro notes and coins were launched on 1 January 2002. There are currently 16 EU states in the Eurozone. Greece joined the initial 11 members in 2001, Slovenia joined in 2007, Cyprus and Malta in 2008, and Slovakia joined in 2009. Estonia is due to join the Eurozone in 2011. All future members of the EU must adopt the Euro when they fulfil the convergence criteria. Economic and Monetary Union...
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...sovereign debt management and monetary policy under fiscal dominance and financial instability Hans J Blommestein and Philip Turner1 Abstract Serious fiscal vulnerabilities arising from many years of high government/GDP ratios have created new and complex interactions between public debt management and monetary policy. Although their formal mandates have not changed, recent balance sheet policies of many central banks have tended to blur the separation of their policies from fiscal policy. The mandates of debt management offices have usually had a microeconomic focus (viz, minimising longer-term borrowing costs, while limiting refunding risks). Such mandates have usually avoided any explicit macroeconomic policy dimension but some major policy overlaps are latent. What is needed is a policy framework for all official actions that affect the maturity structure of government debt in the hands of the public. This requires more analysis of the macroeconomics of government debt management. A full debate about the allocation of functional responsibilities would have to take account not only of the economics, but also of political and institutional constraints. There are operational advantages in having in place appropriate governance arrangements that serve to forestall short-sighted policies and hold specific institutions accountable for their mandates. Keywords: Monetary policy, central banks, policy design and consistency, policy coordination, debt management, sovereign debt JEL classification:...
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...financial conditions. Now this is playing different functions for boosting the USA economy those are: * Working as a central bank for United States * Address about the financial severe problems * Regulates and instruct the other banking systems * Control monetary policy through manage the money supply in the economy * Provide the financial facilities to other financial institutions, US government to strengthen the economy of US * Provide the major facility of exchange of payments in the different regions. * It also play a role in maximizing employment, stability of price level as well as long term moderate interest rate in the economy. * Open market operations in which selling and purchasing of government securities occurs by the FED. These operations are in the control on the FOMC. So it basically plays a role in providing largest payment system in the world. Every day many transactions occur between the different sellers and purchasers of goods in term of US dollar. It also maintains millions of accounts as well as performing a role in settling and clearing different financial institution payments through intermediaries. FED play a vital role in providing the facility of financial services to depository institutions like distributing currency and coins, transfer funds and securities through clearing house system and collecting checks. FED Role in 2000 on US Economy In 2000 the US federal budget was in surplus that was $236 Billion and...
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...11 1.4 Valuation Changes and the Net International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.5 The Negative-NIIP-Positive-NII Paradox: Dark Matter? 1.5.1 1.5.2 . . 20 Dark Matter . . . . . . . . . . . . . . . . . . . . . . . 22 Return Differentials . . . . . . . . . . . . . . . . . . . 23 1.6 Who Lends and Who Borrows Around the World? . . . . . . 26 1.7 Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 35 2 Current Account Sustainability 2.1 Can a Country Run a Perpetual Trade Balance Deficit? . . . 35 2.2 Can a Country Run a Perpetual Current Account Deficit? . 39 2.3 Savings, Investment, and the Current Account . . . . . . . . 41 iii iv 2.3.1 CONTENTS Current Account Deficits As Declines in the Net International Investment Position . . . . . . . . . . . . . 2.3.2 2.3.3 41 Current Account Deficits As Reflections of Trade Deficits 42 The Current Account As The Gap Between Savings and Investment . . . . . . . . . . . . . . . . . . . . . . 42 2.3.4 The Current Account As the Gap Between National Income and Domestic Absorption . . . . . . . . . . . . 44 2.4...
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...currency. They carried out their plan in two steps, first for business transactions in 1999, and then for all citizens, beginning January 1st, 2002. In broad outline, countries set aside the currencies they each were using previously and instead dealt themselves euros. From then on the so-called eurozone had a single currency, a "unique money". In the 2000's Greece and other countries joined the group. Greece undertook the same operation. It relinquished its drachmas and received an equivalent amount of euros. We explain below technically the issuance of a new currency, but for the time being what's important is the result. Henceforth Greek firms and Greek citizens could buy goods and services anywhere in the eurozone with their euros. Let's see how this lead to the present monetary crisis, and what is likely to happen next. Continued Greek budget and trade deficits, borrowing euros To understand the problem of Greece, we ought to distinguish monetary flows within the country from those across borders. They entail different accounting records, liabilities and problems. And within the country, let's focus on one very special economic agent, the government, the revenues of which normally come from taxes. * Within the country: the Greek government kept its economic policy which consisted in spending more than it received from taxes and minor state entrepreneurial activities, and, in the past, printing drachmas to make up for its budget deficits. It amounts to a fiscal and monetary...
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...The debt crisis of Nigeria and Greece Introduction National debt is a problem that can inflict any country including the developed countries. Almost all countries go into budget deficit one way or the other and end up borrowing money. The most direct effect of the government debt is to place a burden on future generations of taxpayers. When these debts and accumulated interest come due, future taxpayers will face a difficult choice. Inheriting such a large debt cannot help but lower the living standard of future generations. In the 1960s and 1970 some developing countries were encouraged to borrow money to service old debts and also to finance development projects in their country like infrastructure. This has been necessitated by the availability of huge oil earnings deposited by OPEC member countries and were eager to lend at very low rates. Moreover, it is misleading to view the effects of government debt in isolation. Government debt can be divided into two categories namely domestic debt and international debt. The International debt is facilitated by the formation of such institutions like the International Monetary Funds (IMF) the International Bank for Construction and Development (World Bank). Governments borrow money from the private sector and foreign governments if they can't pay for all their spending with taxes and government revenues. A government will issue bonds at bond auctions every so often and market participants will come in and bid for them. Market participants...
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...policy response at the time was limited to liberalizing particular aspects of the control system without changing the system itself in any fundamental way. The reforms initiated in 1991 were different precisely because they recognized the need for a system change, involving liberalization of government controls, a larger role for the private sector, and greater integration with the world economy. The broad outline of the reforms was not very different from the reforms undertaken by many developing countries in the 1980s. Where India's reforms differed was in the much more gradualist pace at which they were implemented. The compulsions of democratic politics in a pluralist society made it necessary to evolve a sufficient consensus across disparate (and often very vocal) interests before policy changes could be implemented and this meant that the pace of reforms was often frustratingly slow. Daniel Yergin (1997) captures the mood of frustration when he wonders whether the Hindu rate of growth has been replaced by the Hindu rate of change! Yet even a gradualist process can achieve significant results over time and India's reforms have now been under way for seven years. This chapter attempts to evaluate what has been achieved by gradualism in this seven year period which has seen three different governments in...
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...over the private sector had become evident, but the policy response at the time was limited to liberalising particular aspects of the control system without changing the system itself in any fundamental way. The reforms initiated in 1991 were different precisely because they recognised the need for a system change, involving liberalisation of government controls, a larger role for the private sector and greater integration with the world economy. The broad outline of the reforms was not very different from the reforms undertaken by many developing countries in the 1980s. Where India’s reforms differed was the much more gradualist pace at which they were implemented. The compulsions of democratic politics in a pluralist society made it necessary to evolve a sufficient consensus across disparate (and often very vocal) interests before policy changes could be implemented and this meant that the pace of reforms was often frustratingly slow. Daniel Yergin (1997) captures the mood of frustration when he wonders whether the Hindu rate of growth has been replaced by the Hindu rate of change! Yet even a gradualist process can achieve significant results over time and India’s reforms have been underway now for seven years. . That a consensus of sorts has evolved is...
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...Study Why have some countries experienced rapid growth in incomes over the past century while others stay mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions. To appreciate the importance of macroeconomics, you need only read the newspaper or listen to the news. Every day you can see headlines such as INCOME GROWTH SLOWS, FED MOVES TO COMBAT INFLATION, or STOCKS FALL AMID RECESSION FEARS. Although these macroeconomic events may seem abstract, they touch all of our lives. Business executives forecasting the demand for their products must guess how fast consumers’ incomes will grow. Senior citizens living on fixed incomes wonder how fast prices will rise. Recent college graduates looking for jobs hope that the economy will boom and that firms will be hiring. Because the state of the economy affects everyone, macroeconomic issues play a central role in political debate.Voters are aware of how the economy is doing, and they know that government policy can affect the economy in powerful ways.As a result, the popularity of the incumbent president rises when the economy is doing well and falls when it is doing...
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...Study Why have some countries experienced rapid growth in incomes over the past century while others stay mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions. To appreciate the importance of macroeconomics, you need only read the newspaper or listen to the news. Every day you can see headlines such as INCOME GROWTH SLOWS, FED MOVES TO COMBAT INFLATION, or STOCKS FALL AMID RECESSION FEARS. Although these macroeconomic events may seem abstract, they touch all of our lives. Business executives forecasting the demand for their products must guess how fast consumers’ incomes will grow. Senior citizens living on fixed incomes wonder how fast prices will rise. Recent college graduates looking for jobs hope that the economy will boom and that firms will be hiring. Because the state of the economy affects everyone, macroeconomic issues play a central role in political debate.Voters are aware of how the economy is doing, and they know that government policy can affect the economy in powerful ways.As a result, the popularity of the incumbent president rises when the economy is doing well and falls when it is doing...
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...(3) achieve sustained but controllable economic growth. In a recession, governments stimulate the economy with deficit spending (expenditure exceeds revenue). During period of expansion, they restrain a fast growing economy with higher taxes and aim for a surplus (revenue exceeds expenditure). Fiscal policies are based on the concepts of the UK economist John Maynard Keynes (1883-1946), and work independent of monetary policy which tries to achieve the same objectives by controlling the money supply. Stances of fiscal policy The three possible stances of fiscal policy are neutral, expansionary, and contractionary. The simplest definitions of these stances are as follows: • A neutral stance of fiscal policy implies a balanced budget where government spending equals tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity; • An expansionary stance of fiscal policy involves government spending exceeding tax revenue; and • A contractionary fiscal policy occurs when government spending is lower than tax revenue. However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit...
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