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Fiscal Policy - Definition

Written by Jason Gordon

Updated at December 19th, 2020

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fiscal policy   Academic Research on Fiscal Policy Fiscal policyand economic growth, Easterly, W., & Rebelo, S. (1993). Journal of monetary economics,32(3), 417-458. This paper describes the empirical regularities relating fiscal policy variables, the level of development, and the rate of growth. It employs historical data, recent cross-section data and newly constructed public investment series. A simple model for study of the determination of the price level and the interaction of monetary andfiscal policy, Sims, C. A. (1994). Economic theory,4(3), 381-399. Fiscal policyin general equilibrium, Baxter, M., & King, R. G. (1993). The American Economic Review, 315-334. The paper shows that permanent changes in government purchases can lead to short-run and long-run output multipliers, can induce larger effects than temporary changes, that financing decision is quantitatively more important than the resource cost of changes in government purchasesand that public investment has dramatic effects on private output and investment. Fiscalcrises and aggregate demand: can high public debt reverse the effects offiscal policy?, Sutherland, A. (1997). Journal of public economics,65(2), 147-162. This paper shows how the power of fiscal policy to affect consumption can vary depending on the level of public debt. It shows that at moderate levels of debt fiscal policy has the traditional keynesian effects, but when debt reaches extreme values, current generations of consumers know there is a high probability that they will have to pay extra taxes. What are the effects offiscal policyshocks?, Mountford, A., & Uhlig, H. (2009). Journal of applied econometrics,24(6), 960-992. This paper proposes and applies a new approach for analyzing the effects of fiscal policy using vector autoregressions. Specifically, the study uses sign restrictions to identify a government revenue shock as well as a government spending shock, while controlling for a generic business cycle shock and a monetary policy shock. The study aims to show that deficitfinanced tax cuts work best among these three scenarios to improve GDP. Fiscal policyand growth: evidence from OECD countries, Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Journal of Public Economics,74(2), 171-190. This paper analyses studies that state that the structure of taxation and public expenditure can affect the steady-state growth rate using predictions of endogenous growth models. It also analyses the general ignorance of biases in analying these predictions. In this paper, the authors show these biases to be substantial and, correcting for them, find strong support for the Barro model (1990, Government spending in a simple model of endogenous growth. Large changes infiscal policy: taxes versus spending, Alesina, A., & Ardagna, S. (2010). Tax policy and the economy,24(1), 35-68. This paper examines the evidence on episodes of large stances in fiscal policy, in cases of both fiscal stimuli and fiscal adjustments in OECD countries from 1970 to 2007. The paper shows that fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases. It also shows that adjustments on the spending side rather than on the tax side are less likely to create recessions. These results are confirmed with simple regression analysis. Budget spillovers andfiscal policyinterdependence: Evidence from the states, Case, A. C., Rosen, H. S., & Hines Jr, J. R. (1993). Journal of public economics,52(3), 285-307. This paper formalizes and tests the notion that states' expenditures depend on the spending of similarly situated states. The study finds that even after allowing for fixed state effects, year effects, and common random shocks among neighbors, a state government's level of per capita expenditure is positively and significantly affected by the expenditure levels of its neighbors. The appropriate use of monetary andfiscal policyfor internal and external stability, Mundell, R. A. (1962).Staff Papers,9(1), 70-79. Fiscal policyand aggregate demand, Aschauer, D. A. (1985).The American Economic Review,75(1), 117-127. Fiscal policyand monetary integration in Europe, Gal, J., & Perotti, R. (2003). economic policy,18(37), 533-572. This paper explores argues by economists, policy-makers, and the media that the Maastricht Treaty and the Stability and Growth Pact make it difficult for governments of EMU countries to stabilize their economies with appropriate fiscal policy and to provide adequate public investment. Our empirical analysis offers little support to this view. The paper aims to show that discretionary budget deficits have actually become more counter-cyclical in EMU countries after the Maastricht Treaty, as well as in the other EU and non-EU industrialized countries.

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