Can Monetary Policy Create Fiscal Capacity?

Elenev, Vadim; Landvoigt, Tim; Shultz, Patrick; Nieuwerburgh, Stijn Van

doi:10.3386/w29129

Cited by 16 publications

(9 citation statements)

References 40 publications

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“…The high probabilities are hard to reconcile with investor rationality, unless these fiscal corrections occur in high marginal utility states of the world. Elenev et al (2021) pursue such an explanation. In their structural model, the fiscal authority runs counter-cyclical spending and pro-cyclical tax policies as long as the debt-to-GDP ratio remains below a threshold .…”

Section: Fiscal Correctionmentioning

confidence: 99%

“…In this austerity region, the fiscal authority raises labor income taxes to bring the debt back down toward the threshold . 9 In the calibration by Elenev et al (2021), which matches many features of the US economy and generates a substantial GDP risk premium and a highly persistent debt-to-GDP ratio, is around 115% of GDP. 4.3.6.…”

Section: Fiscal Correctionmentioning

confidence: 99%

“…Japan has been at or near the zero lower bound for nominal interest rates for 20 years. One potential resolution, offered by Mian, Straub & Sufi (2021) and Elenev et al (2021), is that at or near the zero lower bound deficits (higher government spending or lower taxes) could stimulate aggregate demand. This, combined with unconventional monetary policy, can create additional fiscal capacity.…”

Section: International Evidence and Us Exceptionalismmentioning

confidence: 99%

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Fiscal Capacity: An Asset Pricing Perspective

Jiang

Lustig

Nieuwerburgh

et al. 2023

Annu. Rev. Financ. Econ.

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This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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Section: Fiscal Correctionmentioning

confidence: 99%

Section: Fiscal Correctionmentioning

confidence: 99%

Section: International Evidence and Us Exceptionalismmentioning

confidence: 99%

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Fiscal Capacity: An Asset Pricing Perspective

Jiang

Lustig

Nieuwerburgh

et al. 2023

Annu. Rev. Financ. Econ.

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“…The coronavirus disease (COVID-19) pandemic has extensively impacted the economy of countries worldwide, leading to prominent government debt problems [1]. According to estimates by the Congressional Budget Office (CBO) of the United States (US), because of the pandemic, the US federal government debt ratio rose to 126% in 2020 and continues to rapidly rise (Date sources: https://www.cbo.gov/publication/57635, Washington, DC, U.S. accessed on: 31 August 2021) [2]. Furthermore, the data released by China's National Bureau of Statistics suggest that China's government debt balance in 2020 was 46.55 trillion yuan, and that the government debt ratio was 45.82%.…”

Section: Introductionmentioning

confidence: 99%

Impact of China’s Provincial Government Debt on Economic Growth and Sustainable Development

et al. 2022

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Macroeconomic stability is the core concept of sustainable development. However, the coronavirus disease (COVID-19) pandemic has caused government debt problems worldwide. In this context, it is of practical significance to study the impact of government debt on economic growth and fluctuations. Based on panel data of 30 provinces in China from 2012 to 2019, we used the Mann–Kendall method and Kernel Density estimation to analyze the temporal and spatial evolution of China’s provincial government debt ratio and adopted a panel model and HP filtering method to study the impact of provincial government debt on economic growth and fluctuation. Our findings indicate that, during the sample period, China’s provincial government debt promoted economic growth and the regression coefficient (0.024) was significant. From different regional perspectives, the promotion effect of the central region (0.027) is higher than that of the eastern (0.020) and western regions (0.023). There is a nonlinear relationship between China’s provincial government debt and economic growth, showing an inverted “U-shaped” curve. Fluctuations in government debt aggravate economic volatility, with a coefficient of 0.009; tax burden fluctuation and population growth rate aggravate economic changes. In contrast, the optimization of the province’s industrial structure and the improvement of the opening level of provinces slow down economic fluctuations.

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“…Our paper is related to prior studies that quantitatively examine risk‐based transmission channels for policy interventions in macroeconomic models featuring sizable risk premia, such as Begenau and Landvoigt (2022), Elenev, Landvoigt, and Van Nieuwerburgh (2021), Elenev et al. (2021), Gourio, Kashyap, and Sim (2018), Jiang et al. (2022a, 2022b), Lenel, Piazzesi, and Schneider (2018), and Lenel (2018).…”

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confidence: 98%

Discount Rates, Debt Maturity, and the Fiscal Theory

CORHAY,

KIND,

KUNG

et al. 2023

The Journal of Finance

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This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory depend directly on the conditional nominal term premium, giving rise to an optimal debt‐maturity policy that is state‐dependent. In a calibrated macrofinance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.

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Can Monetary Policy Create Fiscal Capacity?

Cited by 16 publications

References 40 publications

Fiscal Capacity: An Asset Pricing Perspective

Fiscal Capacity: An Asset Pricing Perspective

Impact of China’s Provincial Government Debt on Economic Growth and Sustainable Development

Discount Rates, Debt Maturity, and the Fiscal Theory

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