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Xiao Kong and Feng Feng
The Chinese economy has achieved great success in both stability and sustained growth since the market economy was established. This paper seeks to explain that success by evaluating China's fiscal policy. It starts by testing two hypotheses derived from Keynesian economics. First, it seeks to determine whether China's economic regulations act against the business cycle. Second, it aims to understand whether China stimulates economic growth through a deficit policy and strong government fixed-asset investment. Based on a Hodrick–Prescott filter technique combined with cross-correlation analysis and a Granger causality test, we suggest that fiscal policy in China is generally counter-cyclical and achieves its desired effects. Further analyses using a co-integration model and the impulse response function confirm that government fixed-asset investment enhances China's economic growth. These empirical findings indicate that China's fiscal policy matches the basic policy orientation of Keynesian economics and is closely associated with its economic success. We also identify some new findings that contradict Keynesian claims: China's economic growth responds positively to taxation, which we attribute to taxation's function in promoting appropriate resource allocation. We believe our study provides empirical support vindicating China's fiscal policy.
Thomas R. Michl and Kayla M. Oliver
Hysteresis, path dependence, and multiple equilibria are characteristic features of post-Keynesian economics. This paper constructs an otherwise conventional three-equation model that includes a hysteresis-generating mechanism and an invariant output target. We use it to explore the implications for monetary policy of an output-targeting policy framework that seeks to reverse the damage caused by hysteresis. We restrict ourselves to negative aggregate demand shocks and positive inflation shocks that in most instances require a disinflationary response from the central bank. One important finding is that as long as inflation expectations are to some degree anchored, the central bank can achieve its output target after an aggregate demand shock by overshooting its inflation target temporarily and running a ‘high-pressure labor market.’ If expectations are unanchored, an aggregate demand shock will not have long-run hysteresis effects because the central bank is obliged to reflate aggressively, replacing on a cumulative basis all the demand that was lost through the shock. However, with unanchored expectations a pure inflation shock will create hysteresis effects since the central bank will need to disinflate and it does not have the option of running a high-pressure labor market. Anchoring gives the central bank this option, making inflation shocks manageable.
Engelbert Stockhammer, Walid Qazizada and Sebastian Gechert
The Great Recession of 2007–2009 has led to controversies about the role of fiscal policy. Academically this has translated into renewed interest in the effects of fiscal policy. Several studies have since suggested that fiscal multipliers are substantially larger in downswings or depressions than in upswings. In terms of economic policy reactions, countries have differed substantially in their fiscal stance. It is an important open question how big the impact of these policies on economic growth has been. The paper uses the regime-dependent multiplier estimates by Qazizada and Stockhammer (2015) and by Gechert and Rannenberg (2014) to calculate the demand effects of fiscal policy for Germany, the USA, the UK, Greece, Ireland, Italy, Portugal and Spain since 2008. This allows us to assess to what extent fiscal policy explains different economic performances across countries. We find expansionary fiscal policy in 2008–2009 in all countries, but since 2010 fiscal policies have differed. While the fiscal effect was roughly neutral in Germany, the UK and the USA, it was large and negative in Greece, Ireland, Italy, Portugal and Spain.
Sébastien Charles, Thomas Dallery and Jonathan Marie
The article shows that budgetary policy in France since the 1970s cannot be characterized as Keynesian. To prove this, two rules of behaviour compatible with Keynesian teaching are proposed and then compared with changes in budgetary balances and with a battery of stylized facts. The article calls for a fiscal stimulus allowing production capacities to be fully used for the first rule, or the return to full employment for the second. The article also points to potential ways of showing that the objective of full employment is not incompatible with the ecological transition and can be more easily reachable with a reduction in work hours.
In (heterodox) economic theory, discussions of dynamic stability contrast negative with positive feedback effects. With more complex relationships, stable and unstable sub-models are set up, the intuition being that stability in an integrated model would be determined by the stronger forces. Accordingly, a combination of two stabilizing mechanisms will normally be expected to reinforce stability. The present paper gives a simple counter-example to this intuition, first in a purely formal reasoning and then illustrating it in a specific economic context. Regarding the latter, two approaches are considered that have recently been put forward in the literature to tame Harrodian instability: one by monetary policy acting through (indirect) interest-rate effects, and the other by an autonomously growing, non-capacity-creating component of aggregate demand, which gives rise to the so-called supermultiplier. While the two mechanisms separately stabilize the steady state if they are sufficiently strong, their interaction will necessarily render it unstable.
The ‘global saving glut’ à la Bernanke is not a serious problem for a large group of high-income countries considered collectively. More importantly, taken together these countries exhibit a tendency for a growing GDP share of private-sector saving and a falling GDP share of private investment. Given prevailing tendencies regarding income distribution and gross capital formation, the private sector of developed countries considered collectively is prone to accumulating ‘saving gluts’ which is reflected in persistent public-sector financial deficits. Fiscal policy may need to support growth with the debt-financed income injections more or less permanently, and not just in response to ‘cyclical’ growth slow-downs or occasional recessions.
A growing empirical literature demonstrates that the size of the expenditure multiplier varies over time, being both larger and consistently greater than one during periods of slow growth and/or recession. This paper contributes to the theory of the time-varying multiplier. It is shown that a combination of Kalecki's dynamic theory of investment and Harrod's ‘satisficing’ approach to the investment decision furnish a theory in which the ‘crowding in’ of investment expenditures following an initial demand stimulus gives rise to an elevated expenditure multiplier during times of pronounced macroeconomic distress.
Gerald A. Epstein
Many observers thought that the financial crisis of 2007–08 would be a watershed moment in global finance. They believed the crisis would demonstrate, once and for all, the instability and inefficiency of this hyper-speculative global financial system, and finally bring an end to the destructive “neoliberal moment” and its “Washington Consensus” dictates in domestic and global economic policy (see, for example, Blanchard, Dell’Ariccia and Mauro, 2010). But, something surprising happened to “neoliberal financialization” on the way to the “dustbin of history”: it escaped. Financial deregulation and “neoliberal” populism in finance are in the ascendant in the United States and elsewhere, and the bankers are laughing, well. . .all the way to the bank.1 To be sure, there are important cracks in the old free market consensus on international financial issues. These cracks are leading to what Ilene Grabel (Chapter 5, in this volume) calls “productive incoherence” in theory and practice, which is leading to important opportunities for policy change in some areas. But, in many other areas, the old theories and practices are being resurrected after near-death experiences in the period following the crisis.