Early evidence suggests that coronavirus disease 2019 (COVID-19) caused a sharp deterioration in fiscal accounts worldwide. This paper empirically assesses the fiscal impact of…
Abstract
Purpose
Early evidence suggests that coronavirus disease 2019 (COVID-19) caused a sharp deterioration in fiscal accounts worldwide. This paper empirically assesses the fiscal impact of previous pandemics and epidemics.
Design/methodology/approach
Using a large sample of 170 countries from 2000 to 2018, this study relies on Jordà's (2005) local projection method to trace pandemics' short- to medium-term dynamic impact on several fiscal aggregates.
Findings
This paper shows that (qualitatively) similar responses to those observed more recently with COVID-19 have characterized the effects of previous pandemics. While the fiscal effect has been economically and statistically significant and persistent, it varies; pandemics affect government expenditures more strongly than revenues in advanced economies, while the converse applies to developing countries. The author also finds that asymmetric responses depend on whether a country is characterized as a chronic fiscal surplus or deficit type. Another factor that generates an asymmetric fiscal response is the prevailing phase of the business cycle the economy was in when the pandemic shock hits.
Research limitations/implications
This paper's findings provide a lower bound to what the current COVID-19 pandemic will inflict on countries’ fiscal situation. That said, the set of pandemics and epidemics used in this paper are geographically more concentrated and did not affect all countries in such a systemic and synchronized manner as did COVID-19 more recently.
Originality/value
This is the first paper to explore the fiscal side of this type of health-related shocks, as most of the literature has focused on the more traditional macroeconomic effects.
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The purpose of this paper is to assess the responses of different categories of government spending to changes in economic activity. In other words, the authors empirically…
Abstract
Purpose
The purpose of this paper is to assess the responses of different categories of government spending to changes in economic activity. In other words, the authors empirically revisit the validation of the Wagner’s law in a sample of 61 advanced and emerging market economies between 1995 and 2015.
Design/methodology/approach
The authors do so via panel data instrumental variables and time-series SUR approaches.
Findings
Evidence from panel data analyses show that the Wagner’s law seems more prevalent in advanced economies and when countries are growing above potential. However, such result depends on the government spending category under scrutiny and the functional form used. Country-specific analysis revealed relatively more cases satisfying Wagner’s proposition within the emerging markets sample. The authors also found evidence of counter-cyclicality in several spending items. All in all, the Wagner’s regularity seems more the exception than the norm.
Originality/value
While in the literature on the size of the public sector with respect to a country’s level of economic development has received much attention, the authors make several novel contributions: since some economists criticized Wagner’s law because of ambiguity of the measurement of government expenditure (Musgrave, 1969), instead of looking at aggregate public expenditures, the authors go much more granular into the different functions of government (to this end, the authors use the Classification of Functions of the Government nomenclature). The authors check the validity of the Law via an instrumental variable approach in a panel setting; after that, the authors take into account the phase of the business cycle using a new filtering technique to compute potential GDP (output gap); then, the authors cross-check the baseline results by considering alternative functional form specifications of the Law; and finally, the authors look at individual countries one at the time via SUR analysis.
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The purpose of this paper is to empirically examine the relationship between fiscal consolidations and changes in income distribution.
Abstract
Purpose
The purpose of this paper is to empirically examine the relationship between fiscal consolidations and changes in income distribution.
Design/methodology/approach
Looking at a sample of 27 emerging market economies between 1980 and 2014, the authors resort to both static panel techniques as well as dynamic impulse response function analysis using local projection methods to uncover the direct impact of adjustments on inequality.
Findings
The authors find that fiscal consolidations tend to lead to an increase in income inequality and reduce the redistributive role of fiscal policy. Spending-based consolidations are more detrimental to income distribution than tax based ones and fiscal retrenchment during bad times raises inequality. In times of fiscal expansion inequality seems to rise in the medium term and this effect is larger if the economy is booming.
Research limitations/implications
The distributional effects of consolidation, i.e. whether consolidation can confer benefits, must be balanced against the potential longer term benefits. It should be recognized that there is scope for improving the targeting and efficiency of public programs and that fiscal adjustments would not unavoidably run into such an efficiency vs equity trade-off.
Originality/value
The paper, applying a consistent methodology, documents the set of fiscal episodes emerging market economies experienced over time. The authors empirically examine both the static and dynamic links between fiscal consolidation and inequality. Since composition matters, the authors explore how spending and tax-based fiscal consolidations affect income distribution. The authors conduct several robustness checks including the use of alternative income distribution proxies and state-contingent estimations on the phase of the business cycle.
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Joao Tovar Jalles and Martin A. Andresen
The purpose of this paper is to investigate the importance of multiple measures of the economy while investigating the role of the economy with crime, as well as the sensitivity…
Abstract
Purpose
The purpose of this paper is to investigate the importance of multiple measures of the economy while investigating the role of the economy with crime, as well as the sensitivity of those results.
Design/methodology/approach
Provincial-level data, 1981-2009, and a series of statistical specifications.
Findings
The authors find overall support for the Cantor and Land’s (1985) model of unemployment and crime. The authors are also able to show the importance of considering multiple measures of economic activity and multiple statistical methods of analysis for the sensitivity of results.
Originality/value
Previous research has shown the importance of multiple measures of the economy but not multiple statistical methods as a sensitivity analysis. The authors provide such a sensitivity analysis and show that the Cantor and Land’s (1985) model has significant support.
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Zidong An and Joao Tovar Jalles
This paper contributes to shed light on the quality and performance of US fiscal forecasts.
Abstract
Purpose
This paper contributes to shed light on the quality and performance of US fiscal forecasts.
Design/methodology/approach
The first part inspects the causes of official fiscal forecasts revisions by Congressional Budget Office (CBO) between 1984 and 2016 that are due to technical, economic or policy reasons.
Findings
Both individual and cumulative means of forecast errors are relatively close to zero, particularly in the case of expenditures. CBO averages indicate net average downward revenue and expenditure revisions and net average upward deficit revisions. Focusing on the causes of the technical component, the authors uncover that its revisions are quite unpredictable, which cast doubts on inferences about fiscal policy sustainability that rely on point estimates. Comparing official with private-sector (consensus) forecasts, despite the informational advantages CBO might have, one cannot unequivocally say that one or the other is more accurate. Evidence also seems to suggest that CBO forecasts are consistently heavily biased toward optimism while this is less the case for consensus forecasts. Not only is the extent of information rigidity is more prevalent in CBO forecasts but also evidence seems to indicate that consensus forecasts dominate CBO in terms of information content.
Originality/value
The authors provide a detailed analysis on US fiscal forecasts both using revenue and expenditure and decomposing forecast errors into several explanatory components. Moreover, the authors compare official with private-sector (consensus) forecasts and assess which one is better or preferred.
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There has been an increased interest in the role of the financial sector and institutional quality in the development process.
Abstract
Purpose
There has been an increased interest in the role of the financial sector and institutional quality in the development process.
Design/methodology/approach
This paper addresses the relationship between corruption and financial sector development by constructing a Schumpeterian endogenous growth model, allowing for the entry of competitive firms with an explicit role for politics and banking.
Findings
Assuming that technologically advanced firms are located in developed countries and backward firms in developing countries, the model in this study suggests that low corruption are more growth enhancing in the former group of countries. Better institutions stimulate entry by reducing banking screening costs and entry is more growth enhancing in sectors closer to the technological frontier.
Research limitations/implications
The model in this study is a partial equilibrium analysis and one should include a role for labour markets to address the household’s problem and enrich the model’s conclusions. Secondly, the model specification rests on the fact that the degree of corruption is correlated with the level of institutions. Even though this might be subject to some criticism, this is a common practice across the literature and so, it is clearly a matter of taste.
Practical implications
The main policy conclusion is that anti-corruption policy initiatives should prioritize corruption that distorts incentives with respect to productive investment that directly and negatively affects growth.
Originality/value
This paper addresses the relationship between corruption and financial sector development by constructing a Schumpeterian endogenous growth model, allowing for the entry of competitive firms with an explicit role for politics and banking.
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According to the Central Bank of Cape Verde, price stability is an important aspect when conducting its monetary policy. Given the fixed exchange rate regime towards the…
Abstract
Purpose
According to the Central Bank of Cape Verde, price stability is an important aspect when conducting its monetary policy. Given the fixed exchange rate regime towards the Portuguese Escudo/Euro and the high degree of trade inter‐dependence, this paper aims to analyse the “inflation import” phenomenon from Portugal to Cape Verde's economy from 1992 to 2008.
Design/methodology/approach
The paper takes a VECM and Granger causality approach.
Findings
The paper finds evidence in favour of the existence of a propagation mechanism, i.e., inflation transmission from Portugal to Cape Verde. The reverse conclusion is not true though. Another interesting implication from the policy‐making perspective is that Cape Verde's CPI is affected by non‐expected shocks in the short run and it takes, on average, 12 months for an adjustment towards a higher level to take place.
Practical implications
So, Portuguese inflation is an important variable to take into account when doing inflation forecasting exercises to Cape Verde's economy as well as when thinking about setting/defining exchange rate regimes. In this context, diversifying trading partners in Cape Verde is highly recommended as a way to reduce and dilute the Portuguese influence (as well as the role of external shocks) in the overall economy and price levels in Cape Verde.
Originality/value
The paper applies a well‐known economic phenomenon to the relationship between Portugal and one of its former colonies – Cape Verde. The analysis is of use to policy practioneers and to the country's Central Bank.
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Abstract
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Climate investment globally topped USD1tn last year but remains well short of the estimated USD8tn requirement. Most funding goes to developed economies and mitigation projects…
Details
DOI: 10.1108/OXAN-DB284298
ISSN: 2633-304X
Keywords
Geographic
Topical
Predicting recessions.