Topic 4 - Fiscal Policy Flashcards
What does the Keynesian model assume about government spending
presume that mutlipliers are greater than 1 for government spending
what are the multipliers at full employment
multipliers are zero
decrease taxes or increase gov spending do not affect output
what happens to taxes and gov spending at full employment
constrained at full employment
decrease taxes or increase gov spending do not affect output
what is the significance that the IS-LM 2008 financial crisis uses endogenous money
money supply and LM curve are horizontal
multipliers for T and G are the same in the Keynesian cross
what causes the crowding out
increasing money demand
what is the affect of crowding out
output goes up just not the whole way
what can monetary policy authority do to prevent crowding out
Increase the money supply to maintain interest rates at their initial level.
In the two period model was is the prediction of the effect of government spending
The multiplier is essentially zero
change in government spending crowd our private consumption.
what is the effect of government spending in Keynesian Cross model
the multiplier will be above 1 and potential large
except at full employment where the multiplier is zero
what is the multiplier in the IS LM PC model with endogenous money
Same as they Keynesian cross (changes in government spending do not affect interest rates)
what is the multiplier in the IS LM PC model with exogenous money
multiplier is smaller if the real money supply does not accommodate a rise in government spending
The multiplier will be the same as the model with exogenous money, if the real money supply rises to accommodate the rise in government spending
After the 2008 recession why do government implement austerity
Are left with budget deficits and increased level of debt
with recession over Govs want to reduce their deficits and levels of debt
what do governments do following 2008 recession in two period model
can reduce public spending and crowd-in private spending
what do governments do following 2008 recession in IS-LM-PC model with exogenous money
Less government spending can reduce output but also lower interest rates which crowds in private investment
what do governments do following 2008 recession in IS-LM-PC model with endogenous money
less government spending is likely to reduce output quite considerably
What narrative methods have researchers found regarding narrative methods to identify changes in fiscal policy that do not depend on the growth rate of output
Geopolitical events can change government spending and tax plans, and these are unlikely to be dependent on the business cycle.
Other researchers have focused on when changes in tax and spending plans are announced rather than when they come into effect.
Others have looked for creative methods to estimate multipliers (acconcia et al 2014)
Papers which estimate linear multipliers
Barro and Redlick (2011)
Ramey and Shapiro (1998)
why are linear multiplier estimates not necessarily sufficient
when the economy has different states (recessions versus booms) and policy regimes (fixed vs floating exchange rates
What did Ilzetzki find regarding the government spending multiplier
- the multiplier is larger in advanced compared to developing economies
- the multiplier is larger when economies are more closed to trade
- the multiplier is larger when economies have lower average public debt levels
- the multiplier is larger for fixed compared to floating exchange rate regimes
Why is there debate regarding wether the multiplier is larger in recession compared to expansion.
in recession there are spare resources, government spending increases can have greater effects.
what is the issue with uncertainty regarding multipliers
in advanced economies a new crisis that requires changes in spending may be different from any past critics used to estimate multipliers.
in developing economies the structure of the economy may be different to the structure of advanced economies.
may be a lack of data available to implement advanced statistical techniques to estimate multipliers
therefore may be a large degree of uncertainty for policymakers at any given time and in any given economy
Other issues of fiscal policy that can be analysed
what is the optimal size of the state
how do we identify a safe limit on debt to GDP ratios
Is there a link between fiscal policy, growth and innovation
what is the link between fiscal policy and inequality
what role should the public sector play in an economy
