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Fiscal and Monetary Policy

Fiscal and Monetary Policy. Fiscal and Monetary Policy. The Nature of Fiscal Policy. THE NATURE OF FISCAL POLICY. The purpose of fiscal policy correcting a fundamental disequilibrium fine tuning Government finances budget deficits and surpluses financing a deficit the PSNCR.

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Fiscal and Monetary Policy

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  1. Fiscal and Monetary Policy

  2. Fiscal and Monetary Policy The Nature of Fiscal Policy

  3. THE NATURE OF FISCAL POLICY • The purpose of fiscal policy • correcting a fundamental disequilibrium • fine tuning • Government finances • budget deficits and surpluses • financing a deficit • the PSNCR

  4. UK public-sector deficits/surpluses: 1979–2001

  5. UK public-sector deficits/surpluses: 1979–2001

  6. UK public-sector deficits/surpluses: 1979–2001

  7. UK public-sector deficits/surpluses: 1979–2001

  8. UK general government expenditure as % of GDP Annual growth rate (%)

  9. UK general government expenditure as % of GDP Annual growth rate (%)

  10. UK general government expenditure by function (%) H General public services 4.4% I Housing, etc 3.6% J Recreation, etc 1.7% K Environment 0.9% H General public services 5.1% I Housing, etc 1.5% J Recreation, etc 1.0% K Environment 0.7% 1999 1991

  11. UK general government expenditure by function (%) H General public services 4.4% I Housing, etc 3.6% J Recreation, etc 1.7% K Environment 0.9% H General public services 5.1% I Housing, etc 1.5% J Recreation, etc 1.0% K Environment 0.7% 1999 1991

  12. General government deficits/surpluses and debt as % of GDP

  13. General government deficits/surpluses and debt as % of GDP

  14. THE NATURE OF FISCAL POLICY • The purpose of fiscal policy • correcting a fundamental disequilibrium • fine tuning • Government finances • budget deficits and surpluses • financing a deficit • the PSNCR • the national debt and public-sector debt

  15. Getting budget deficits down?

  16. Getting budget deficits down? France

  17. Getting budget deficits down? Germany France

  18. Getting budget deficits down? Italy Germany France

  19. Getting budget deficits down? Italy Spain Germany France

  20. Getting budget deficits down? Belgium Italy Spain Germany France

  21. Getting budget deficits down? Belgium Italy Spain Germany France Netherlands

  22. National Debt National Debt (as % of GDP)

  23. National Debt National Debt (as % of GDP) UK

  24. National Debt National Debt (as % of GDP) USA UK

  25. National Debt National Debt (as % of GDP) Euro area USA UK

  26. THE NATURE OF FISCAL POLICY • Public-sector deficits or surpluses and the government’s fiscal stance • fiscal stance and the state of the economy • the structural balance • Automatic fiscal stabilisers • tax stabilisers • benefits stabilisers

  27. Tax revenue Gov. expenditure (incl. benefits) Y1 National income and the size of the public-sector deficit or surplus G, T SURPLUS DEFICIT O Y

  28. THE NATURE OF FISCAL POLICY • Public-sector deficits or surpluses and the government’s fiscal stance • fiscal stance and the state of the economy • the structural balance • Automatic fiscal stabilisers • tax stabilisers • benefits stabilisers • Discretionary fiscal policy

  29. THE NATURE OF FISCAL POLICY • Public-sector deficits or surpluses and the government’s fiscal stance • fiscal stance and the state of the economy • the structural balance • Automatic fiscal stabilisers • tax stabilisers • benefits stabilisers • Discretionary fiscal policy • changing government expenditure

  30. THE NATURE OF FISCAL POLICY • Public-sector deficits or surpluses and the government’s fiscal stance • fiscal stance and the state of the economy • the structural balance • Automatic fiscal stabilisers • tax stabilisers • benefits stabilisers • Discretionary fiscal policy • changing government expenditure • changing taxes

  31. A cut in taxes: (a) lump-sum taxes W, J W1 O Y

  32. A cut in taxes: (a) lump-sum taxes W, J W1 W2 O Y

  33. A cut in taxes: (a) lump-sum taxes W, J W1 W2 DT x mpcd O Y

  34. A cut in taxes: (b) cut in tax rates W, J W1 O Y

  35. A cut in taxes: (b) cut in tax rates W, J W1 W2 O Y

  36. A cut in taxes: (b) cut in tax rates W, J W1 W2 DT x mpcd O Y

  37. Fiscal and Monetary Policy The Effectiveness of Fiscal Policy

  38. EFFECTIVENESS OF FISCAL POLICY • Effectiveness of automatic stabilisers • adverse supply-side effects • the problem of fiscal drag • Discretionary policy: problems of forecasting the magnitude of the effect • effects on other injections and withdrawals • crowding out

  39. The monetary effects of fiscal policy W, J W J1 O Y1 Y (a) The goods market

  40. The monetary effects of fiscal policy Rate of interest W, J MS r1 W L1 J1 O Y1 O Y Money (a) The goods market (b) The money market

  41. The monetary effects of fiscal policy Rate of interest W, J MS An expansionary fiscal policy r1 W J2 L1 J1 O Y2 Y1 O Y Money (a) The goods market (b) The money market

  42. The monetary effects of fiscal policy Rate of interest W, J MS An expansionary fiscal policy Effect on the demand for money r2 r1 W J2 L2 L1 J1 O Y2 Y1 O Y Money (a) The goods market (b) The money market

  43. Accommodating increase in the money supply The monetary effects of fiscal policy Rate of interest W, J MS MS2 An expansionary fiscal policy r2 r1 W J2 L2 L1 J1 O Y2 Y1 O Y Money (a) The goods market (b) The money market

  44. EFFECTIVENESS OF FISCAL POLICY • Effectiveness of automatic stabilisers • adverse supply-side effects • the problem of fiscal drag • Discretionary policy: problems of forecasting the magnitude of the effect • effects on other injections and withdrawals • crowding out • size of the multiplier and accelerator effects

  45. EFFECTIVENESS OF FISCAL POLICY • Discretionary fiscal policy: problems of timing and time lags • various time lags • policy may be destabilising

  46. Path (a): no intervention Fiscal policy: stabilising or destabilising? 3 4 Real national income 3 2 4 2 1 1 O Time

  47. Path (b): policy stabilises Fiscal policy: stabilising or destabilising? Path (a): no intervention 3 4 Real national income 3 2 4 2 1 1 O Time

  48. Path (c): policy destabilises Fiscal policy: stabilising or destabilising? Path (a): no intervention Path (b): policy stabilises 3 4 Real national income 3 2 4 2 1 1 O Time

  49. EFFECTIVENESS OF FISCAL POLICY • Discretionary fiscal policy: problems of timing and time lags • various time lags • policy may be destabilising • Side-effects of discretionary fiscal policy

  50. EFFECTIVENESS OF FISCAL POLICY • Discretionary fiscal policy: problems of timing and time lags • various time lags • policy may be destabilising • Side-effects of discretionary fiscal policy • Changing government expenditure versus changing taxes

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