Evi Pappa, 28 June 2022

Since 1812, the Spanish Christmas lottery has been delivering joy to a few lucky winners every year. But does it have a measurable economic effect on Spain’s economy?

Morteza Ghomi, Isabel Micó-Millán, Evi Pappa, 28 May 2022

Financing the green transition while consolidating fiscal budgets is a challenging task for many European countries. This column argues that the Spanish Christmas Lottery – with its high level of participation, large prizes, and geographic clustering of winners – offers an example of an unconventional fiscal policy tool for increasing aggregate revenues and stimulating local demand without crowding out aggregate activity. Lottery winnings reduce unemployment and increase job creation and CPI prices, especially during recessions. Even households in winning provinces that do not win themselves significantly increase their durable consumption six months after the shock. 

Dimitris Georgarakos, Geoff Kenny, 28 April 2022

The COVID-19 pandemic shock posed an enormous challenge to fiscal policy in supporting household consumption. This column discusses the extent to which the pandemic-related fiscal interventions influenced consumers’ spending behaviour. Using new high-frequency data, the authors find that improving perceptions about the adequacy of fiscal interventions incentivised spending. Importantly, this perceptions channel operated equally strongly for consumers who received government support and for those who did not. Consumers who viewed the adequacy of fiscal packages more favourably also expected higher future incomes and easier access to credit, and did not anticipate an increase in taxes.

Francois de Soyres, Ana Maria Santacreu, Henry Young, 01 March 2022

To mitigate the health and economic fallout from the COVID crisis, governments worldwide engaged in massive fiscal support programmes. This column shows that governments that provided generous fiscal support increased the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries led to high inflation. The findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do.

Michael Kumhof, Nicolaus Tideman, Michael Hudson, Charles Goodhart, 14 January 2022

Land’s share in economies’ nonfinancial assets equals between 40% and 60%, and in the US currently equals over 50%. This constitutes a very large base for a non-distortionary tax. This column suggests that a 5-percentage point or larger increase in the tax rate on the value of US land, excluding buildings and equipment situated on the land, balanced by decreases in the tax rates on incomes from labour and from buildings and equipment (and in the limit by their complete elimination), would increase output by 15% to 25%.

Alan Auerbach, Yuriy Gorodnichenko, Peter B. McCrory, Daniel Murphy, 23 December 2021

The Covid-19 pandemic prompted an unprecedented fiscal stimulus by many governments to counter the economic recession. This column uses high-frequency data on government spending, lockdown restrictions, and economic indicators in the US to assess the effectiveness of fiscal policy. It shows that government spending increased employment, but only in cities not subject to strict stay-at-home restrictions. It also shows that consumer spending shifted strongly toward durable goods during the pandemic. Well-targeted fiscal measures will be crucial in the case of another recessionary outbreak, especially transfers to firms on the brink of exit. 

Rüdiger Bachmann, Benjamin Born, Olga Goldfayn-Frank, Georgi Kocharkov, Ralph Luetticke, Michael Weber, 20 November 2021

Unconventional fiscal policy acts as a potential stimulus because higher expected future prices should incentivise spending today. This column shows that the temporary reduction in Germany’s value added tax in the second half of 2020 led to a 36% increase in durable spending for individuals with a high perceived price pass-through, along with an increase in semi- and non-durable spending. In total, aggregate consumption spending rose by about €34 billion. Unlike unconventional monetary policy, which often relies on consumer sophistication, the stabilisation success of the temporary VAT cut was partly related to its simplicity.

Davide Brignone, Alistair Dieppe, Martino Ricci, 01 November 2021

There are many uncertainties surrounding the inflation outlook in the US, particularly in light of the large fiscal stimulus. Using the ECB-Global model, this column estimates the impact on inflation of the fiscal stimulus to be limited. Three scenarios are undertaken to quantify the upside risks to inflation which could arise from considering a steeper Phillips curve, stronger fiscal multipliers, and rising inflation expectations. The results suggest that the impact on inflation from these sources of risk is likely to be moderate, unless all of the risks materialise simultaneously, and the Fed does not depart from the assumed monetary policy path. 

Robert Gilhooly, Carolina Martinez, Abigail Watt, 13 April 2021

Emerging markets will be shaped by the US and Chinese policy stances in 2021. This column considers how the latest US fiscal package will interact with China’s policy normalisation and concludes that while President Biden’s American Rescue Plan should dominate a less expansionary stance in China, the boost to the global economy will be much more modest than one would typically expect. Specifically, the normalisation of goods consumption in developed markets and less import-intensive Chinese growth will curtail global goods trade, a key determinant of emerging market growth.

Roel Beetsma, Ludger Schuknecht, 25 March 2021

Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci, Elina Ribakova, 29 June 2020

Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation. 

Christian Bredemeier, Falko Juessen, Roland Winkler, 28 June 2020

The COVID-19 crisis has disproportionately affected different occupations in the labour market. Workers in contact-intensive and personal-service oriented sectors bear the brunt of the COVID-19 recession, but blue-collar workers suffer heavy job losses as well. This column uses a multi-sector, multi-occupation macroeconomic model to study how different fiscal stimulus measures can boost aggregate demand and help the economy recover faster. It finds that a cut in taxes on labour income outperforms other stimulus plans in promoting job creation for those who lost their jobs in the COVID-19 downturn.

Daniel Gros, Angela Capolongo, 03 December 2019

The ECB is running out of options for addressing its twin problems of low inflation and negative interest rates, leading some, including outgoing President, Mario Draghi, to call on fiscal policy measures to be used. This column argues that a fiscal expansion would be ineffective in raising interest rates or inflation for any length of time. Not only would the effect be temporary, but the scale of expansion needed to effect any substantial change would be unfeasible. 

Paul De Grauwe, Yuemei Ji, 14 October 2019

With an economic slowdown looming in the euro area, how should fiscal policies respond? This column uses a behavioural macroeconomic framework to investigate the trade-offs between stabilising output and public debt. It proposes that, when the interest rate is lower than the growth rate of the economy, fiscal policy can be used as a tool for output stabilisation while keeping public debt stable. It argues that many EU countries have the fiscal space to stimulate their economies, which could help in preventing a recession.

Christoph Boehm, 07 September 2019

Fiscal stimulus packages typically feature large investment in infrastructure. The column argues that the fiscal multiplier associated with government investment during the Great Recession was near zero. Meanwhile, the government consumption multiplier was around 0.8. Estimates of the multiplier for total government purchases do not distinguish these two effects, which may affect their validity.

Yi Huang, Marco Pagano, Ugo Panizza, 03 November 2016

High levels of public debt are correlated with lower economic growth across countries, but questions remain about whether this relationship is causal. Using Chinese data, this column explores whether increasing public debt crowds out private investment. City-level investment ratios are found to be negatively correlated with local government debt for private manufacturing firms, but not for state-owned or foreign-owned manufacturers. This suggests that as well as the short-term benefits of fiscal stimulus, there might also be negative longer-term effects, such as the crowding out of more efficient firms. 

Jan in 't Veld, 09 September 2016

The spillover effects of a fiscal stimulus in normal times are likely to be small, at best. This column argues, however, that when interest rates are stuck at the zero lower bound and monetary policy does not offset the expansion, public investment in surplus countries could have significant positive GDP spillovers to the rest of the Eurozone. Given current low borrowing costs, the increase in government debt for surplus countries would be modest, while debt ratios in the rest of the Eurozone could be improved.

Alisdair McKay, Ricardo Reis, 14 July 2016

Brexit has raised the possibility of a recession on both sides of the Atlantic. Unable to use traditional remedies like monetary or fiscal policy stimulus, policymakers may consider automatic fiscal stabilisers. This column examines the impact of automatic stabilisers through social insurance on the business cycle, and how its impact can be used to mitigate recession. Unemployment insurance or food stamps would be better than progressive taxes at stimulating aggregate demand. The main economic channels policymakers must consider are those related to risk and precautionary savings. 

Marco Buti, Nicolas Carnot, 24 February 2015

In an uncertain world, fiscal policy must be robust to a range of models. This column introduces a rule of thumb governing fiscal expansion that is consistent for a group of countries, and for each country individually. Applying this rule to the Eurozone recommends overall fiscal neutrality, with moderate consolidation in France and Spain, lower consolidation in Italy, and moderate stimulus in Germany. This policy is optimal for Germany even without taking into account positive spillovers to other members.

Jordi Galí, 03 October 2014

Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation. 



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