"Fiscal Policy". Anti Essays. 6 Nov. 2017

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New research from Deborah Lucas examines the fiscal effects of the over 150 Credit policy as fiscal policy. Facebook; Return to Brookings Papers on Economic.

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Fiscal Policy and Unemployment Marco Battaglini and Stephen Coate NBER Working Paper No. November 2011 JEL No. E6, E62, H3, H63 ABSTRACT This paper explores the.

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As the regional economic crisis continued into 1998, fiscal policy turned expansionary to support economic activity. The fiscal measures ncluded a selective increase in infrastructure spending, establishment of funds to support small and medium-sized enterprises, a higher allocation for social sector development and a reduction in taxes. Special funds were also established or expanded to provide credit to priority sectors at concessionary rates. The fiscal stimulus package was MYR 7 billion or 2. % of GDP, of which MYR 1 billion was allocated for social safety net measures to mitigate the impact of the crisis on the poor. As a result of these measures, a fiscal deficit of 1. 8% of GDP emerged after five years of surpluses. As global economic uncertainties continued to persist, the 1999-2003 budgets maintained an expansionary stance, with the authorities’ conscious of the need to maintain debt sustainability. The countercyclical fiscal policy, implemented largely through discretionary measures, was effective in supporting economic recovery and sustaining domestic demand.

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We can explain the data using the Ricardian view of budget deficits.

As we know, there are two approaches for the effect of a budget deficit, the standard model and the Ricardian Model.

The standard model approach says that "desired private saving rises by less than the tax cut, so that desired national saving declines. It follows for a closed economy that the expected real interest rate would have to rise to restore equality between desired national saving and investment demand. The higher real interest rate crowds out investment, which shows up in the long run as a smaller stock of productive capital." (Barro, 1989).

In the Ricardian approach we have that the desired national saving does not change and the real interest rate does not have to rise in a closed economy to maintain balance between desired national saving and investment demand. Hence, there is no effect on investment (Barro, 1989).

Ricardian view is the most successful approach for the effects of budget deficits in the economy.

As Barro(1989) says: "Overall, the empirical results on interest rates support the Ricardian view. Given these findings it is remarkable that most macroeconomists remain confident that budget deficits raise interest rates."

He reaches this conclusion using the empirical evidences for the US economy. Thus, "Charles Plosser (1982, p. 339) finds for quarterly U.S. data from 1954 to 1978 that unexpected movements in privately-held federal debt do not raise the nominal yield on government securities of various maturities" (Barro, 1989). Also, the evidences in the Alan Reynolds' paper agree with this view.

The fiscalists are wrong because the people in US act as described in the Ricardian Approach.

Alan Reynolds is a supply side economist. This means that he supports the idea that the Government should intervene only in the microeconomic aspect.

What does it mean to intervene in the microeconomic aspect?

The Government should lower the taxes to stimulate the supply of firms. One other aspect is the intervention in the case of Natural Monopolies. The Government should use subsidies in order to increase the production and lower the price. Fiscal Policy effects on inflation are minimal. Public debt should not be much considered by the Central Bank policy.


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These are important results. They prove, first, that the short term fiscal policy reaction function is sufficient to ensure long term debt sustainability. No need for simplifying ad hoc assumptions, long-term forecasts of all future net liabilities, intergenerational accounting, etc. Long term sustainable fiscal policy is always made in the here-now. Second, sustainability requires fiscal policy to adjust to changes in the timevarying economic environment. If the growth-adjusted real interest rate increases, higher primary surpluses are necessary to meet the minimal constraints and fiscal policy may have to tighten unless the reaction function coefficient α is already larger than the minimum. This could create a pro-cyclical bias when the growth slow-down is caused by a negative demand shock. But if there is a significant safety margin by which α exceeds min α , the year-by-year fiscal policy can accommodate shocks without having to sacrifice sustainability. Third, it matters what interest rate we use. Because the government collects taxes from bond holders, one should use the after-tax interest rate. Because tax rate data are notoriously unreliable and only with difficulty comparable, I have mostly used pre-tax interest rates in the empirical part of this paper, although I have also calculated an after-tax growth adjusted real interest rate, based on average tax rates over the last 5 years. This gives a conservative bias to our assessment of sustainability. However, with respect to after-tax rates it is also apparent that fiscal consolidation is more efficient for sustainability if it is tax-driven. An increase in the tax rate will simultaneously increase revenue and lower the post-tax interest rate, while a cut in government spending will only affect the primary surplus.

Fiscal Policy in Malaysia Essay Examples - New York essay

The Great Recession had serious effects in the global economy. Different governments applied different methods to stabilize the economy in their countries. There are two tools that governments use in regulating the economic activities during times of economic instability. The government can either use fiscal policy and monetary policy. In using the fiscal policy the government regulates the economy and expenditure through the taxes. The monetary policy is used through regulating the money supply, by influencing the interest rates. Both the fiscal and monetary have short term and long term effects. This paper will discuss the policies that were implemented by the USA Government and the effects the policies had both in the long term and short term.