Download
1 / 14
140 likes | 240 Views
Comments on Antonio Fat ás Luis Servén The World Bank Workshop on fiscal policy IMF, June 2009. Automatic stabilizers. Three components of fiscal policy: Automatic Systematic discretionary Purely discretionary (i.e., unsystematic)
E N D
Comments on Antonio Fatás Luis Servén The World Bank Workshop on fiscal policy IMF, June 2009
Automatic stabilizers Three components of fiscal policy: • Automatic • Systematic discretionary • Purely discretionary (i.e., unsystematic) • and (2) hard to separate: formal explicit rules vs implicit ones -- routine responses to economic conditions. Most research has focused on identifying the effects of (3). But it likely accounts for a relatively small fraction of the overall variation in fiscal variables – as implied by high R2 from projecting them on cyclical and other factors. Nice to see (1) get some attention too.
Automatic stabilizers: measurement • Typical ingredients: • Direct taxes (+ SS contributions) • Indirect taxes • Unemployment benefits • Measurement • Using tax codes, unemployment rules etc (hard) • Regression of fiscal outcomes on cycle (easier) • Reverse causality – with no obvious instruments • Mixes up all systematic policies – not only automatic
Automatic stabilizers: measurement Different in poor countries: smaller government, conventional stabilizers weak on the revenue side, and virtually absent on the expenditure side. Source: WDI
Automatic stabilizers: measurement Latin America vs industrial countries Source: Suescún 2007
Automatic stabilizers: measurement Regressions of fiscal aggregates on cyclical indicators. • Lump together all systematic policy (automatic + dicretionary) • Hard to interpret due to reverse causality (Rigobón 2004) • Typical finding is (more) pro-cyclical policy in poor countries, acyclical / counter-cyclical in rich ones – survives a variety of robustness checks (Ilzetzki and Végh 2008) • Why? • Financial frictions: procyclical access to borrowing (Gavin-Perotti 1997; Kaminsky-Reinhart-Végh 2004) • Institutional failures (Tornell-Lane 1999, Talvi-Végh 2005, Alesina-Tabellini 2005, Ilzetzki 2007…) Some empirical support for both explanations – although based on crude measures of institutional quality and access to finance.
Calderón & Schmidt-Hebbel 2008: most of the action seems to come from institutional differences. Automatic stabilizers: measurement Dependent variable: public consumption growth IV estimates, 121 countries, annual data (WDI dataset) A closer look at LDC fiscal institutions could be illuminating.
Automatic stabilizers: measurement But also: shocks in developing countries may be different. Aguiar-Gopinath 2007: • Industrial countries: transitory shocks and stable trend • Developing countries: trend shocks (“the trend is the cycle”): a current shock signals an even bigger future change in the same direction If optimal policy is forward-looking, its response to current output changes (the focus of conventional regressions) may well be different in industrial and developing countries.
Automatic stabilizers: effectiveness Effectiveness usually stated in terms of output stability – but consumption stability at least as important. Methodologically, assessing effectiveness of automatic stabilizers is different from evaluating unsystematic policies: it involves evaluating rules – Lucas critique. In principle one would need structural models with policy-invariant behavioral relations (like McCallum 1999 on systematic monetary policy). Not many such exercises (Andrés, Doménech & Fatás 2008 is one) Instead, reduced-form regressions of aggregate volatility on measures of cyclical response of budget – or even government size.
Automatic stabilizers: effectiveness The relation between volatility and government size is different outside rich countries Source: Perry, Servén and Suescún 2007
Automatic stabilizers: effectiveness • Why does government size work differently in developing countries? -- Nonlinearities: poor countries are below a “minimum government size” for the stabilizing effect to occur (the reverse of Buti et al 2003 for rich countries) -- Composition effect: automatic stabilization is overwhelmed by procyclical discretionary policy -- Shocks are different (as before) Worth a closer look.
Automatic stabilizers: effectiveness Automatic stabilizers vs discretionary policy Some hints that the latter may be partly replacing the former since the 1990s (e.g., Debrun et al 2008, Auerbach 2009) – is that a good idea? Not so clear that “automatic stabilizers are more effective” – what is the metric and evidence? They do offer the advantages of speed, predictability and reversibility – especially valuable when fiscal institutions are weak Aside from efficiency issues, the political economy of automatic stabilizers can be hard too: income taxation, tax enforcement etc – still big hurdles for many developing countries.
