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Erschienen in:
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2017 | OriginalPaper | Buchkapitel

38. Fiscal Policy Shocks and the Current Account

verfasst von : Nombulelo Gumata, Eliphas Ndou

Erschienen in: Labour Market and Fiscal Policy Adjustments to Shocks

Verlag: Springer International Publishing

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Abstract

  • This chapter examines the effects of expansionary fiscal policy shocks on the current account. We find that the current account deteriorates in response to an expansionary fiscal policy shock which increases the budget deficit. This evidence is consistent with the twin deficits hypothesis. Loose monetary policy also leads to current account deficits. But expansionary fiscal policy shocks tend to dominate loose monetary policy shock effects at the peak deterioration of the current account. However, we fail to find evidence that fiscal innovation shocks that raise government spending today are followed by a period of below trend spending at some point in the future. Hence, we conclude that evidence in this chapter rejects the spending reversals hypothesis.
     Furthermore, evidence shows that fiscal innovations crowd-in private consumption and investment and the REER appreciates. We find that expansionary government consumption shock contributed to the REER appreciation between 2009Q3 and 2010. This implies that part of the massive REER appreciation during the recession was due to the positive fiscal innovation shocks. Thus, we conclude that policy discussions that mostly focus on monetary policy as the main driver of the current account and therefore advocate for the use of monetary policy tools to deal with current account dynamics are omitting an important driver of the current account dynamics. Policy discussion should also include the influence of fiscal policy in driving the external imbalances. The effects of the policy rate to influence short-term demand can be neutralized by expansionary fiscal policy innovations, such that tightened monetary policy may achieve little in dampening aggregate demand and improving the current account. Hence there is a need for the coordination of the policy tools.

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Vorheriges Kapitel How Does a Positive Borrowing Costs Shock Impact Price Stability?
Nächstes Kapitel The Impact of Six Per cent Inflation on M3 and Credit on GDP
Fußnoten
1
By embarking on a fiscal consolidation path and measures to reduce the budget deficit, government will stabilize public debt; this also means that government will play its part in moderating the wide deficit on the current account and correcting our external imbalance (MTBPS 2014). The Rand is expected to remain susceptible to sudden shifts in sentiment associated with, amongst other factors, the persistently slow adjustment of the current account deficit and concerns about its financing (MPC` statement, November 2014).
 
2
However, it has become more evident that the balance sheet mismatches of leveraged institutions are probably the most direct indicators of potential instability relative to global imbalances.
 
3
Along similar lines, Belkar et al. (2007) argue that the current account balance need not, and cannot, be an objective for macroeconomic policies. Nor can it be seen by itself as a reliable indicator of vulnerabilities.
 
4
According to Kim and Roubini (2008), government saving can be divided into government net interest receipts and the government primary budget balance, or the negative of the government primary budget deficit.
 
5
This proposition assumes that economic agents are rational and are knowledgeable that the reduction in taxes is transitory. These forward-looking economic agents will save the extra money to offset payments for future higher taxes leaving the national savings unaffected.
 
6
This is consistent with economic theory, if this is not matched with an equivalent rise in revenue collected.
 
7
National government gross loan debt rose from 26.1 per cent of GDP at the end of March 2008 to 43.9 per cent as at 31 March 2014. Of this ratio domestic debt contributed 21.9 per cent, rising to 39.9 per cent between the two, respective dates.
 
8
We differ from these authors because we look at three government shocks and use the real interest rates. The real interest rates include inflation and nominal interest rates.
 
9
Defined as the actual nominal interest rate less the actual inflation rate over the same period. This differs to the ex-ante real interest rate, which uses forward-looking variables.
 
10
The thrust of the argument is that multiyear averages and cyclically adjusted fiscal data are not fully purged of the effects of other developments that affect investment, imports, and the current account balance.
 
11
They further argue that the standard approach to testing the twin deficit hypothesis is affected by reverse causality as governments sometimes deliberately tighten fiscal policy in response cyclical factors such, as accelerating domestic demand growth and a rising current account deficit. These issues may attenuate estimates of the twin-deficits link.
 
12
See Rafiq and Mallick (2008), Granville and Mallick (2010), Dedola and Neri (2006).
 
13
See, Peersman and Straub (2009) and Liu and Theodoridis (2010), Pappa (2009), Mountford and Uhlig (2009), Enders et al. (2011) and Iwata (2016), amongst others.
 
14
This trade-off is summed in literature stating that, ‘theorists in essence want to know whether a class of models is more appropriate than another in explaining some phenomena or whether the introduction of an additional feature improves the match of a model to the data. On the other hand, policymakers need to make sure that a model sufficiently approximates the data. This enhances the appeal and applicability of model and it becomes useful for policy purposes. See Del Negro and Schorfheide (2004), Sims (2008), Liu and Theodoridis (2012) amongst others.
 
15
The model is robust to the definition of government debt as a percentage of GDP and the separation of real interest rates into its constituents, namely, the nominal interest rate and the inflation rate; and the inclusion of growth in stock prices.
 
16
Despite wider confidence bands for the government employment responses, which reflect uncertainty on its responses after ten quarters.
 
17
As the government spending variables first rise persistently and do not turn negative before spending reaches its pre-shock level.
 
18
For example, the dynamic general equilibrium model predicts crowding-out of consumption to increases in government spending contrary to the IS–LM models, which predict a positive consumption response.
 
19
Corsetti and Müller (2006) find that if goods are not homogenous, government spending will be directed mostly towards domestically produced goods, thereby raising their prices relative to foreign-produced goods. In this context, the return to domestic investment increases with the increase in domestic goods, so that rates of return counteract the crowding-out effects of fiscal policy on investment.
 
20
See Gai et al. (2007), Mountford and Uhlig (2002) and Perotti (2002, 2007), amongst others.
 
21
See Monacelli and Perotti (2010), Ravn et al. (2012) and Enders et al. (2011), amongst others.
 
22
see Bussière et al. (2005), Kollman (1998) and Mann (2002) for example.
 
23
Bluedorn and Leigh (2011) use US contemporaneous policy documents to identify changes in fiscal policy mainly motivated by the desire to reduce the budget deficit as opposed to a response to the current account dynamics.
 
24
The impulse responses and the confidence bands are available upon request.
 
25
This is due to the private sector questioning the sustainability of government finances, as the debt : GDP ratio rises. If the debt : GDP ratio is low, the private sector does not place much weight on the effects associated with future fiscal adjustment and fiscal shocks are expected to act in an expansionary manner. An increase in government debt, if anticipated to be followed by consolidative fiscal actions in the future, lowers lifetime disposable income, hence curbing spending today as saving increase. While a decisive and permanent deficit reduction now decreases the need for large and disruptive fiscal adjustment in the future and may generate a positive wealth effect. Government spending may exert nonlinear effects as a function of the level of government debt, and the model predicts that expenditure shocks have Keynesian effects at low levels of debt and non-Keynesian effects when the debt ratio is very high Nickel and Tudyka (2014).
 
26
‘…the budget framework we table today is focused on restoring balance to the nation’s finances, bolstering investment, and achieving better value for money in public expenditure. We want to improve our export performance and shift away from consumption-led, debt-reliant expansion…’, MTBPS October 2014.
 
27
Bartolini and Lahiri (2006) arrive at similar findings regarding the stability of Japan’s current account surplus during the 1990s, despite the country’s sharply declining fiscal condition. They fail to evidence to support the twin-deficit hypothesis. They are argue that Japan’s experience in the 1990s provides evidence that changes in private saving can offset changes in fiscal policy, leaving a country’s current account balance largely unaffected.
 
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Metadaten
Titel
Fiscal Policy Shocks and the Current Account
verfasst von
Nombulelo Gumata
Eliphas Ndou
Copyright-Jahr
2017
Buch
Labour Market and Fiscal Policy Adjustments to Shocks

Print ISBN: 978-3-319-66519-1

Electronic ISBN: 978-3-319-66520-7

Copyright-Jahr: 2017

DOI
https://doi.org/10.1007/978-3-319-66520-7_38