Projects / Programmes
Public spending and fiscal multipliers under various economic policy mixes: A quarterly macroeconometric approach
| Code |
Science |
Field |
Subfield |
| 5.02.01 |
Social sciences |
Economics |
Economy sciences |
| Code |
Science |
Field |
| S180 |
Social sciences |
Economics, econometrics, economic theory, economic systems, economic policy |
| Code |
Science |
Field |
| 5.02 |
Social Sciences |
Economics and Business |
fiscal policy, multipliers, econometric model, simulation, dynamic optimization, macroeconomics
Researchers (14)
Organisations (2)
Abstract
The research project consists of two separate, but closely related objectives: (1) construction of a macroeconometric model for Slovenia and integration of detailed public spending items; and (2) simulations and optimization regarding the growth effects of public spending and taxation.
In the first stage, a macroeconometric model of the Cowles Commission type will be constructed for Slovenia, consisting of a substantial number of behavioural equations and identities. Technical progress will be endogenized in the model by relating it to public spending on research and development, education and health care. In the second stage, the growth effects of different public spending categories in Slovenia will be analysed. Furthermore, against the backdrop of the current need for fiscal consolidation in Slovenia, it will be analysed whether expenditure reductions or tax increases are less harmful to long-term economic growth or even in some instances may enhance growth. Applying an optimization algorithm, optimal strategies of consolidating the public budget will be determined.
The main hypotheses to be explored are: (1) the size of fiscal multipliers is different among expenditure categories; (2) public investment proper and government expenditures enhancing human capital have larger multipliers than transfers and government consumption; (3) budget consolidation measures should concentrate on decreasing transfers and public consumption and on increasing taxes with low effects on labour supply, disposable income and investment; (4) optimal fiscal policies involve trade-offs between macroeconomic stimulation and public debt sustainability; and (5) the design of future budgetary policies for Slovenia (and similar countries) requires shifts of public expenditures from transfers to investment in infrastructure and human capital.
The methodologies used are simulations and optimizations with a medium-sized macroeconometric model of the Slovenian economy. To obtain information about the robustness of conclusions, a large number of sensitivity analyses will be performed. Apart from methodological innovations, the main novelty is a thorough model-based analysis of the possibilities and the optimal choices (under various objective functions) of fiscal policy for a small open economy within the Euro Area, which has managed the transition to a market economy after the breakdown of a socialist economy.
Significance for science
The project contributes to the current academic debate on the size of fiscal multipliers and the impact of fiscal austerity on macroeconomic performance (see, for instance, Coenen et al. 2008, 2012, Cogan et al. 2010, as well as Taylor 2009 versus Romer and Romer 2010). Given the discussion about nonKeynesian effects of fiscal policy (Giavazzi and Pagano 1990), we also examine whether decreases in government expenditure (especially transfers and government consumption) or increases in tax rates (for instance, land taxes) in the context of a budget consolidation programme may even have expansionary effects in the short and/or long run. There has been some empirical work pointing towards this possibility (e.g. Giavazzi et al. 2000, van Aarle and Garretsen 2003) but it has remained largely inconclusive so far. In general, fiscal policy effects are smaller ceteris paribus in small open economies than in larger economies. Therefore, especially for small open economies, an internationally coordinated fiscal action may be more effective than isolated policies. Furthermore, a high level of public debt is likely to undermine the positive effects of fiscal stimuli. Hence, a clear commitment to fiscal consolidation is required after overcoming a crisis (see, e.g., Spilimbergo et al. 2008, IMF 2008). Fiscal multipliers do not only depend on the openness of an economy, but may also vary with the state of the business cycle. Auerbach and Gorodnichenko (2012) conclude that spending multipliers tend to be larger in recessions than in expansions. Moreover, strict fiscal consolidation measures in a recession may contribute to a deepening of the recession (Blanchard and Leigh 2013).
Significance for the country
The impacts of different spending categories and different taxes on macroeconomic performance are not only relevant from an academic point of view, but are also highly relevant for the actual design of fiscal policies. The public debt level rose sharply in Slovenia following the outbreak of the global economic and financial crisis. Hence, budget consolidation is high on its current political agenda. In order to promote the growth potential – which is highly important to generate public revenues – this budget consolidation has to be implemented in a way that is as growth-friendly as possible. The simulations and optimizations that were carried out in the course of the project thus not only add to the academic literature, but also help to design actual fiscal policies in Slovenia. As a small open economy and member of the Euro Area, where fiscal policy is subject to various institutional constraints, Slovenia can be regarded as a prototype for several similar countries. Therefore, insights gained in the course of this project will be useful and interesting for other European countries as well. Moreover, providing scientific foundations for policy advice may contribute towards making more rational and less ideology driven political decisions. The research project also enables access to foreign knowledge in the field of economic modelling and at the same time contributes to the international stock of knowledge. Namely, the scientific findings are very likely to raise significant responses in the academia domestically and internationally. As such, the research project enables the promotion of Slovenian science and the Republic of Slovenia per se.
Most important scientific results
Interim report,
final report
Most important socioeconomically and culturally relevant results
Interim report,
final report
