Fiscal consolidation is back at the top of the policy agenda. This column provides historical context by examining 91 episodes of fiscal consolidation in advanced and developing economies between 1945 and 2012. By focusing on cases in which the adjustment was necessary and desired in order to stabilise the debt-to-GDP ratio, the authors find larger average fiscal adjustments than previous studies. Most consolidation episodes resulted in stabilisation of the debt-to-GDP ratio, but at a new, higher level.
There is no consensus among economists on the forces that drove the historical rise of US house prices and household debt that preceded the Global Crisis. In this column, the authors argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit. This rise was brought about by the diffusion of securitisation and shadow banking, and by a surge in foreign capital inflows. The finding is based on a straightforward interpretation of four key macroeconomic developments between 2000 and 2006, provided by a simple general equilibrium model of housing and credit.
The literature on fiscal multipliers has expanded greatly since the outbreak of the Global Crisis. This column reports on a meta-regression analysis of ﬁscal multipliers collected from a broad set of empirical reduced form models. Multiplier estimates are signiﬁcantly higher during economic downturns. Spending multipliers exceed tax multipliers, especially during recessions. The authors estimate that the Eurozone’s fiscal consolidation – most significantly transfer cuts – reduced GDP by 4.3% relative to the no-consolidation baseline in 2011, increasing to 7.7% in 2013.
A minor adverse shock to financial markets can be propagated by liquidity strains, leading to a major crisis. This column suggests a novel measure to address systemic liquidity risk – a Macroprudential Liquidity Buffer, which would require financial institutions to hold systemically liquid assets in proportion to their liabilities less regulatory capital. This proportion varies positively with growth in system-wide funding needs, so the liquidity buffer increases when non-equity funding is growing.
Discrimination can be costly for both victims and perpetrators. This column uses the variation of historical Jewish persecution across German counties to proxy for localised distrust in financial markets. Persecution reduces the average stock market participation rate of households by 7.5%–12%. This striking effect is stable over time, across cohorts, and across education levels. The effect survives when comparing only geographically close counties. It suggests that the persecution of minorities may negatively affect societal wealth even far into the future through the channel of intergenerationally transmitted investment norms.
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