Dissecting fiscal multipliers under the fiscal theory of the price level

Beck-Friis, Peder; Willems, Tim

doi:10.1016/j.euroecorev.2017.03.006

Cited by 17 publications

(10 citation statements)

References 21 publications

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“…This implies that when ρ g = 0, and ρ → 0, we have GSM y M (0) → 1 + ϕ π κσΓ 1 + ϕ π κσ , GSM y M (j) = 0, ∀j ≥ 1. This is the same result as in Woodford (2011) andBeck-Friis andWillems (2017).…”

Section: For Online Publication Appendixsupporting

confidence: 84%

“…Thus, the government spending multiplier under the fiscal regime is greater than that under the monetary regime. This result can be obtained under the standard Taylor rule without consideration of AIT (Beck-Friis and Willems, 2017).…”

Section: Introductionmentioning

confidence: 68%

“…As ρ → 0, Proposition 2 is reduced to the result for the standard inflation targeting rule inWoodford (2003) andBeck-Friis and Willems (2017).…”

mentioning

confidence: 96%

See 2 more Smart Citations

Fiscal Stimulus Under Average Inflation Targeting

Liu¹,

Miao²,

Su³

2022

ERWP

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The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multiplies due to intertemporal substitution. In a zero-lower-bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a nonlinear effect on fiscal multipliers because of the absence of inflation makeup and the presence of a nominal wealth effect.

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Section: For Online Publication Appendixsupporting

confidence: 84%

Section: Introductionmentioning

confidence: 68%

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Fiscal Stimulus Under Average Inflation Targeting

Liu¹,

Miao²,

Su³

2022

ERWP

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“…Hence, variations in inflation rate are largely based on the actions of the fiscal authorities in an economy. The FTPL, as embedded in the non-Ricardian policy, seems to have particular relevance for developing economies because they issue domestic currency debt and often lack the fiscal capacity to mobilise the necessary real tax revenues, giving rise to an "active" fiscal authority, while the concerns for capital flows imply that monetary policy tends to be "passive" (Beck-Friis and Willems, 2017). More so because these economies are characterised by large public debt in the funding of fiscal deficits, Blanchard (2004) and Favero and Giavazzi (2004) suggest that an increase in interest rate in an economy with large public debt aimed at controlling inflation within the target range may increase the cost of debt service, debt level, default probability and country premium, which may trigger capital outflows and exchange rate depreciation that would affect inflation expectations and in the end inflation itself.…”

Section: Theoretical Literature Reviewmentioning

confidence: 99%

Public debt and inflation nexus in Nigeria: An ARDL bounds test approach

Aimola

Odhiambo

2021

Cogent Economics & Finance

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Inflationary tendencies of public debt have been the cause of an unsettling debate among policymakers in Nigeria. Using the autoregressive distributed lag (ARDL) framework, this study attempts to investigate the impact of total public debt on inflation in Nigeria for the period 1983-2018. The cointegrating regression results reveal evidence of a stable long-run relationship among inflation, total public debt, money supply, interest rate, economic growth, trade openness, and private investment in the presence of structural breaks. Empirical results show that the impact of public debt on inflation is statistically insignificant, irrespective of whether the regression was in the short or the long run. Hence, the study concludes that inflation in Nigeria could be driven by other factors other than public debt.

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“…Beck-Friis and Willems (2017) analytically show that in regime F with lump-sum taxes, government spending financed by nominal debt is equivalent to money-financed spending.3 We chooseRotemberg's (1982) mechanism instead ofCalvo's (1983) to reduce the number of state variables required in solving the model nonlinearly.4Traum and Yang (2011) show that when only a short-term debt is included, regime F requires an unusually high degree of price stickiness to reconcile inflation dynamics in data and in an NK model.7©International Monetary Fund. Not for Redistribution…”

mentioning

confidence: 99%

Government Spending Effects in a Policy Constrained Environment

Mao

Yang

2020

IMF Working Papers

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The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

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Dissecting fiscal multipliers under the fiscal theory of the price level

Cited by 17 publications

References 21 publications

Fiscal Stimulus Under Average Inflation Targeting

Fiscal Stimulus Under Average Inflation Targeting

Public debt and inflation nexus in Nigeria: An ARDL bounds test approach

Government Spending Effects in a Policy Constrained Environment

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