Fiscal policy in times of fiscal stress: Or what to do when r > g

Abstract

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Debt-financed fiscal stimulus in South Africa

“…As a comparison to the benchmark results from Section 2.1 and the fiscal DSGE results in Section 3, we focus on two measures for the response of interest rates to government debt (deficits): the maximum interest rate response to the initial estimated government debt (deficit) shock, and the maximum interest rate response to the maximum debt (deficit) response. Specifically, the sensitivity of the interest rate to more strongly to debt, which is in line with optimal stabilization policies (Havemann and Hollander 2021). There is therefore a clear policy trade-off between debt and output stabilization.…”

The macroeconomics of establishing a basic income grant in South Africa

“…We leverage this feature of the model to show that a universal BIG produces less favourable macro-fiscal outcomes than a commensurate targeted BIG. 7 See Havemann and Hollander (2022) for a discussion of time inconsistency in South African fiscal policy. 8 Ricardian households are forward-looking and have access to financial instruments that allow for smoothing consumption over time.…”

“…A medium‐scale DSGE model is estimated with Bayesian methods on historical South African macroeconomic and fiscal data and used to make quarterly projections based on alternative fiscal policy scenarios. This model is being developed for the National Treasury (‘NT‐DSGE’ hereafter) for fiscal policy analysis (see Havemann & Hollander, 2022; Hollander, 2021; Kemp & Hollander, 2020). The NT‐DSGE model incorporates several distinguishing features in the context of assessing the impact of a BIG: The model is dynamic (it is multi‐period), stochastic (it includes uncertainty) and general equilibrium (it captures the interaction of supply and demand in key markets). The model distinguishes between two types of households (poor and rich) allowing for an analysis of both macroeconomic and redistributive policies, as well as net consumption and labour supply effects. Firm and household behaviour is guided by forward‐looking expectations. The model identifies the relative impacts of different tax policy mixes (VAT, PIT and CIT) and adjustments to the composition of public expenditure (consumption, investment and transfers). The simultaneous reactions of fiscal and monetary policy to economic outcomes. The model includes channels through which the domestic economy is affected by foreign trade and capital markets. …”

“…3 For a review of why South Africa's growth performance is so slow, see Hausmann et al (2022). For the fiscal implications of stagnant growth see an earlier, related study on the optimal fiscal strategy for South Africa by Havemann and Hollander (2022). Hollander et al (2022) summarise these stylized facts on socioeconomic developments and the fiscal framework.…”

Government size and risk premium

“…The increase in government size clearly led to crowding out of private investment and has been accompanied by a decline in the share of investment to GDP ratio and the GDP growth rate. This suggests that the debt-driven fiscal expansion has not been good for the growth rate, and has also increased unemployment in South Africa (Havemann and Hollander 2022).…”