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Cristina D. Checherita-Westphal
Bruce A. Blonigen and Thomas J. Prusa
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.