Imf Fiscal Policy for the Crisis

Topics: Monetary policy, Tax, Public finance Pages: 44 (13791 words) Published: February 25, 2013
IMF STAFF POSITION NOTE
December 29, 2008 SPN/08/01

Fiscal Policy for the Crisis

Antonio Spilimbergo, Steve Symansky, Olivier Blanchard, and Carlo Cottarelli

I N T E R N A T I O N A L

M O N E T A R Y

F U N D

INTERNATIONAL MONETARY FUND Fiscal Policy for the Crisis1 Prepared by the Fiscal Affairs and Research Departments (Antonio Spilimbergo, Steve Symansky, Olivier Blanchard, Carlo Cottarelli) December 29, 2008

CONTENTS

PAGE

Executive Summary...................................................................................................................2 I. Introductory Remarks .............................................................................................................2 II. Fiscal Policy in Financial Crises—Lessons From History ...................................................4 III. Composition of a Fiscal Stimulus ........................................................................................4 A. Public Spending on Goods and Services...................................................................5 B. Fiscal Stimulus Aimed at Consumers .......................................................................6 C. Fiscal Stimulus Aimed at Firms ................................................................................7 IV. Sustainability Concerns .......................................................................................................7 A. Some Proposals for Discussion.................................................................................9 V. A Collective International Effort ........................................................................................11 VI. Conclusion .........................................................................................................................12 Appendix I: Spending and Revenue Measures ........................................................................13 Appendix II: Fiscal Multipliers—A Review of the Literature.................................................17 Appendix III: Five Case Studies of Fiscal Policy During Financial Crisis .............................22 A. Great Depression and Fiscal Policy ........................................................................22 B. Japan: Banking Crisis in 1997.................................................................................24 C. Korea: Economic Crisis in 1997 .............................................................................26 D. Savings and Loan (S&L) Crisis in the US (1980s–1990s) .....................................29 E. The Nordic Banking and Economic Crises .............................................................32 1

This note has benefited from contributions by Oya Celasun, Lone Christiansen, Borja Gracia, Anna Ivanova, Daehaeng Kim, Chris Papageorgiou, Martin Schindler, Steve Tokarick, and Thierry Tressel. This note includes three attachments on: (1) specific revenue and spending measures; (2) the size of fiscal multipliers; and (3) historical evidence on fiscal policies during banking crises (Korea, Japan, Nordic countries, Savings and Loans, Great Depression).

2 EXECUTIVE SUMMARY The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy. The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived...

References: Al-Eyd, Ali J. and Ray Barrell, 2005, “Estimating Tax and Benefit Multipliers in Europe,” Economic Modeling, Vol. 22, pp. 759–76. Auebach, Alan, 2008, “How much should we rely on fiscal stimulus” presentation at the Symposium on fiscal stimulus organized by the Federal Reserve. Bernanke, Ben and Martin Parkinson, 1989, Unemployment, Inflation, and Wages in the American Depression: Are There Lessons for Europe?", AEA Papers and Proceedings, Vol. 79, No. 2, pp. 210-214. Blanchard and Perotti, 2002, “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,“ The Quarterly Journal of Economics, Vol. 117, No. 4, pp. 1329–68. Broda, Christian and Jonathan Parter, 2008, “The Impact of the 2008 Tax Rebates on Consumer Spending: Preliminary Evidence,” Mimeo, July 29. Brown, Cary E., 1956, "Fiscal Policy in the 'Thirties: A Reappraisal", The American Economic Review, Vol. 46, No. 5, pp. 857-879. Bryant, Ralph, Dale Henderson, Gerald Holtham, Peter Hooper, and Steven Symansky, 1988, “Empirical Macroeconomics for Interdependent Economies,” Supplemental Volume, The Brookings Institution, Washington, D.C. Coronado, Julia Lynn and Joseph P. Lupton, and Louise M. Shiner, 2005, “The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data,” Finance and Economics Discussion Series, No. 2005-32, Federal Reserve Board, Washington, D.C. Dalsgaard, Thomas, Christophe Andre, and Pete Richardson, 2001, “Standard Shocks in the OECD Interlink Model,” OECD, Economics Department Working Papers No. 306 De Long, J. Bradford and Lawrence H. Summers, 1988, "How Does Macroeconomic Policy Affect Output?", Brookings Papers on Economic Activity, 1988: 2, pp. 433-80. Eggertsson, Gauti B., 2008, "Great Expectations and the End of the Depression", American Economic Review, Vol. 98, No. 4, pp. 1476-1516. Elmendorf, Douglas and Jason Furman, 2008, “If, When, How: A Primer on Fiscal Stimulus,” The Hamilton Project, Strategy Paper, The Brookings Institution, January 2008.
36
Elmendorf, Douglas W. and David L. Reifschneider, 2002, “Short-Run Effects of Fiscal Policy with Forward-Looking Financial Markets,” National Tax Journal, Vol. LV, No. 3, September. Freedman, Charles, Douglas Laxton, and Michael Kumhof, 2008, “Deflation and Countercyclical Fiscal Policy,” Mimeo, December 2. Giavazzi, Francesco and Marco Pagano, 1990, “Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries,” NBER Working Paper No. 3372. Giavazzi, Francesco and Marco Pagano, 1996, “Non-Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience,” Swedish Economic Policy Review, Vol. 3, 1, Spring. Hansen, Alvin, 1941, "Fiscal Policy and Business Cycles". New York. W.W. Norton, 1941. Henry, Jerome, Pablo Hernandez de Cos, and Sandro Momigliano, 2004, “The Short-Term Impact of Government Budgets on Prices. Evidence from Macroeconometric Models,” European Central Bank, Working Paper Series, No. 396. Higgs, Robert, 1992, "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s," The Journal of Economic History, 52 (March 1992), pp. 41-60 HM Treasury, 2003, “Fiscal Stabilization and EMU,” Discussion Paper. International Monetary Fund, 2008, “World Economic Outlook. Financial Stress, Downturns, and Recoveries,” October, Chapter 5. Johnson, David, Jonathan Parker, and Nicholas Souleles, 2006, “Household Expenditure and the Income Tax Rebates of 2001,“ The American Economic Review, Vol. 96, No. 5, pp. 1589–1610. Laeven, Luc and Fabian Valencia, 2008, “Systemic Banking Crises: A New Database”, IMF Working Paper, WP/08/224. Moody’sEconomy.com, 2008, “A Second Quick Boost From Government Could Spark Recovery,” excerpts of testimony by Mark Zandi before the U.S. House Committee on Small Business, July 24. Perotti, Roberto, 2006, “Public investment and the Golden Rule: another (different) look,“ Mimeo.
37
Ramey, Valerie, 2008, “Identifying Government Spending Shocks: It’s All in the Timing,” Mimeo. Rauchway, Eric, 2008, "The Great Depression and the New Deal: A Very Short Introduction", Oxford University Press. Romer, Christina D., 1992, "What Ended the Great Depression?", The Journal of Economic History, Vol. 52, No. 4, pp. 757-784. Romer, Christina and David Romer, 2008, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” University of California, Berkeley, mimeo, November. Smithies, Arthur, 1946, "The American Economy in the Thirties", The American Economic Review, Vol. 36, pp. 11-27. Studenski, Paul and Herman Krooss, 1952, "A Financial History of the United States", NY, McGraw-Hill. Vernon, J.R., 1994, "World War II Fiscal Policies and the End of the Great Depression," The Journal of Economic History, Vol. 54, Issue 4, pp. 850-868.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • FISCAL POLICY Essay
  • Fiscal Policy Essay
  • Essay about Fiscal Policys
  • Fiscal Policy Essay
  • Fiscal policy and fiscal management Research Paper
  • Fiscal Policy Essay
  • Fiscal Policy Essay
  • Fiscal Policy Essay

Become a StudyMode Member

Sign Up - It's Free