Debt + fiscal policy

Question 1

Song et al (2012)

Answer 1

EVIDENCE - PARTISAN STRATEGIC DEBT ACCUMULATION

1. Data - OECD panel data (1980-2005)
2. Shift from political left to right associated w/increase in debt/GDP ratio of 0.7% p.a.

Question 2

IMF (2012)

Answer 2

HIGHER MULTIPLIER DURING RECESSION

1. Analyse 28 economies during Great Recession
2. Estimated multipliers of 0.9-1.7 (significantly higher than previous estimates in ‘normal’ economic times)

Question 3

Evidence that fiscal multiplier may be higher during recessions?

Answer 3

IMF (2012)

1. Data - 28 economies during Great Recession
2. Estimated multipliers of 0.9-1.7 (significantly higher than previous estimates in ‘normal’ economic times)

Question 4

Ilzetki et al (2013)

Answer 4

MULTIPLIER EVIDENCE

1. Data - government spending data from 44 countries
2. Multiplier is:
   (i) Larger in closed economies (due to leakage of AD to imports in more open economies)
   (ii) Negative in high-debt countries (due to effects on macro stability, like provoking sovereign debt crisis)

Question 5

Evidence that fiscal multipliers higher in closed economies?

Answer 5

Ilzetki et al (2013)

1. Data - government spending data from 44 countries
2. Multiplier larger in closed economies (due to leakage of AD to imports in more open economies)

Question 6

Evidence on fiscal multipliers in high-debt economies and reason

Answer 6

Ilzetki et al (2013)

MULTIPLIER EVIDENCE

1. Data - government spending data from 44 countries
2. Multiplier is negative in high-debt countries (due to effects on macro stability, like provoking sovereign debt crisis)

Question 7

EVIDENCE - PARTISAN STRATEGIC DEBT ACCUMULATION

1. Data - OECD panel data (1980-2005)
2. Shift from political left to right associated w/increase in debt/GDP ratio of 0.7% p.a.

Answer 7

Song et al (2012)

Question 8

MULTIPLIER EVIDENCE

1. Data - government spending data from 44 countries
2. Multiplier is:
   (i) Larger in closed economies (due to leakage of AD to imports in more open economies)
   (ii) Negative in high-debt countries (due to effects on macro stability, like provoking sovereign debt crisis)

Answer 8

Ilzetki et al (2013)

Question 9

1. Data - 28 economies during Great Recession

2. Estimated multipliers of 0.9-1.7 (significantly higher than previous estimates in ‘normal’ economic times)

Answer 9

IMF (2012)

Question 10

Evidence for partisan strategic debt accumulation deficit bias theory

Answer 10

Song et al (2012)

1. Data - OECD panel data (1980-2005)
2. Shift from political left to right associated w/increase in debt/GDP ratio of 0.7% p.a.

Question 11

Data – OECD countries

From mid ….. to ….., debt/GDP increased from …..% to …..%

Answer 11

Data – OECD countries

From mid 70s-90s, debt/GDP increased from ~40% to ~75%

Question 12

Evidence of rising OECD public debt before financial crisis

Answer 12

Data – OECD countries

From mid 70s-90s, debt/GDP almost doubled from ~40% to ~75%

Question 13

Counter-evidence to strategic debt accumulation theory of deficit bias?

Answer 13

1. Example (UK) – system w/large differences in economic preferences of 2 main parties and in which parties have strong policy control, yet little/no evidence of strategic deficits
2. Instead find large + persistent budget deficits in countries like Belgium/Italy, which have succession of coalition and minority governments

Question 14

Evidence for common-pool theory of deficit bias?

Answer 14

1. Roubini and Sachs (1989) – more fragmented governments tend to have larger budget deficits
2. Evidence of large + persistent budget deficits in countries like Belgium/Italy, which have succession of coalition and minority governments

Question 15

….. and ….. (…..) – more ….. governments tend to have larger budget deficits

Answer 15

Roubini and Sachs (1989) – more fragmented governments tend to have larger budget deficits

Question 16

Roubini and Sachs (1989)

Answer 16

More fragmented governments tend to have larger budget deficits