The goal of this project is to evaluate and to analyze the macroeconomic effects of fiscal policies. For most countries, the last recession has been the toughest one since the great depression. Fiscal policy has played an unprecedented role among stabilization policies, because the 0 lower bound has strongly constrained monetary policy.
Quantifying the effects of fiscal policies is crucial in this context. However, the results of existing empirical studies vary tremendously, and it is currently hard to conclude with any confidence that fiscal policy does stimulate activity (or that it does not).
The research proposal focuses on i) careful empirical evaluation of the effects of fiscal policies, using state-of-the-art econometrics techniques on disaggregated fiscal data, as well as ii) developing frontier theoretic models describing these effects. This research will eventually address questions like the following. What is the proper composition, in terms of tax reductions and increased spending of a successful stimulation plan? What should be the size of such a plan? How long does it take before we observe its first and complete effects on economic activity? How does fiscal policy affect current account, foreign debt and competitivity?
On the empirical side, evaluating the effects of fiscal policy faces a fundamental difficulty: identifying exogenous changes in spending and taxes which cause variations in economic activity, as opposed to endogenous changes in spending and taxes caused by variations in economic activity. This research project aims to deliver a robust and flexible method to estimate the effects of anticipated shocks as well as non-anticipated shocks, and to describe their propagation mechanism.
On the theoretical side, our project is to improve the modeling of exogenous impulses and propagation mechanisms. We will first study the effects of anticipated changes in fiscal policy, as opposed to fiscal policy surprises. Second, we will focus on international effects of fiscal policies, through the current account and the real exchange rate.
Eventually, this project will help inform policymakers and guide them in the design of fiscal stabilization policies.
Project date: 01/09/2013 – 31/08/2017
Contact in TSE: Patrick FEVE & Franck PORTIER