The pandemic caused expenditure shares to vary more than usual, leading to serious ramifications when combined with the fact that the expenditure shares used to calculate CPI inflation are 1-2 years old. This caused a potential bias in the measurement of inflation. We also look at the cost-of-living crisis and found that the lags in updating the expenditure shares for energy and food led to an underestimate of inflation in 2022. Inflation also has a large effect on the measurement of the public sector deficit. With a high debt-GDP ratio and high inflation, there was a substantial inflation tax.

The concept of monetary sovereignty employed by Modern Monetary Theory has been criticised on many fronts. One of the most important criticisms points out that Modern Monetary Theorists (MMTers) ignore or underestimate problems arising from external constraints. Another important (and complementary) criticism is that MMTers focus only on purely macroeconomic aspects and ignore political and geopolitical issues. In this paper, we discuss these important criticisms and we conclude that, although the MMT concept of monetary sovereignty is useful and can be considered an analytical advance, it is incomplete and biased because it minimises macroeconomic problems arising from external constraints and because it does not take into account international political factors.

In this study, we examine how local government debt responds to environmental policies in China. We show that when an environmental policy impacts the economy, local governments are likely to increase debt issuance, with this effect becoming stronger when local officials have greater career incentives within the Chinese bureaucratic system. Over-accumulation of local government debt, which leads to social welfare losses, is closely tied to the urgency local officials feel to secure promotions. Our analysis offers valuable insights for better coordination between fiscal and environmental policies.

This paper examines the effects of heterogeneous biased expectations between the young and old on business cycles and explores its policy implications. Empirical findings reveal that individuals, particularly the young, can have more optimistic or pessimistic views about the future state of the economy compared to the data-generating measure. This study relates these results to the learning-from-experience literature, which suggests that individuals, particularly the young, place greater weight on recent observations when forming their expectations. Incorporating household weighting schemes into a life-cycle learning model, I show that household sensitivity to recent observations amplifies the effects of economic shocks. However, the amplification effects become less extensive as the population ages due to the lower sensitivity of the old. My simulation results indicate that a 10 percentage point increase in the old population ratio leads to a 16 percent decrease in output volatility. Regarding policy implications, this paper suggests that the government spending multiplier declines by approximately 10 percent when the old population ratio rises by 10 percentage points due to weak amplification effects. Moreover, the weakened output effects deteriorate the welfare of the population, particularly that of the young.

Monetary policy in the USA affects borrowing costs for state and local governments, incentivizing municipal borrowing and spending, which in turn affects economic outcomes. Using municipal bond indices and transaction-level data, I find that responses to monetary policy are dampened relative to treasuries and heterogeneous across location and bond characteristics. In my baseline estimate, muni yields move 26 bp after a 100 bp monetary shock. To study implications for local fiscal policy, I model US localities as small open economies in a monetary union with independent fiscal agents. In a calibrated model, monetary transmission is significantly affected by municipal borrowing costs.

Over the past decade, the most salient changes in macroeconomic conditions in developed economies have included rising government debt and population aging, which are strongly correlated with each other. This paper investigates fiscal multipliers by disentangling the effects of population aging from those of government debt. Our analysis, which uses heterogeneous panel data from 24 OECD economies, shows that while fiscal policy is ineffective for economies with high-debt levels, it is effective for economies with low-debt levels. Furthermore, the estimation results reveal that fiscal policy is ineffective for aged economies, regardless of the level of government debt. However, for nonaged economies, while fiscal policy leads to negative effects on output in times of high debt, its positive effects are more pronounced in times of low debt. Our results suggest that, for the effective implementation of fiscal stimulus policies, policy-based stimulation of employment in the labor market is essential.

A key insight from Adam Smith is that economists should base their conclusions about a monetary institution or policy on a careful study of the history of that institution or policy, a study that includes the experiences of other countries. To illustrate Smith’s reliance on financial history we cover five current monetary problems that have close analogies with problems that Smith discussed: (1) inflation, (2) banking panics, (3) public debt, (4) usury laws, (5) central bank digital currencies.

This paper weighs possible medium-term responsible policy choices to the extraordinary expansion of government spending in response to the COVID-19 outbreak. The paper is divided into two parts. In part 1 of the paper, we look at conventional debt sustainability and question whether conventional rules created during a period of high interest rates and high inflation remain relevant. Current and future conditions support a case for government debt/GDP to remain elevated compared to history, conditional upon limited state interference in the economy to allow appropriate allocation of capital and resources. In part 2, we consider the historical experience of the United Kingdom. History shows the country had several examples of rapid, large-scale expansion of government debt relative to the size of the economy. On each occasion, the elevated level of debt-to-GDP was later reduced by a combination of relatively benign factors, including commitment to low inflation and sound monetary system. This supported the financial probity of the UK government and allowed it to continue to borrow unimpeded.

In the 1950s and 1960s unemployment averaged about 2 per cent. The lowest level of unemployment in the last twenty years was double that and long term unemployment, virtually unknown in the 1950s and 1960s, has been a severe problem. In each period there were two major slumps. We examine the progress of each slump and macroeconomic policy responses in each case, in order to search for reasons for this contrast. The priority given to minimising unemployment rather than restraining inflation is the most important difference between the two periods. Other major principles stand out, the most important of which are that in response to a downturn a fiscal policy stimulus is essential and must play the major part of any response; and that implementation must be swift and then followed up by further measures if necessary.

The great recession of 2008/2009 had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of so-called expansionary austerity. However, the reality so far provides proof to the contrary, and the results outlined in this article support the opposing view of a self-defeating austerity. Based on a model of the input–output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of a neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress. The conclusion is that too much consolidation in anyone year makes consolidation more difficult in the following year.

Mainstream economists give the misleading impression that their argument for austerity is purely technical and indeed the most ‘scientific’. The argument developed here is that their reasoning is not, any more than that of their heterodox critics, independent of ideology, power and ethics. The widespread belief in austerity policies as scientifically justified has prevented arguments against austerity gaining more traction; issues of ideology, power and ethics need to be brought to the fore as part of the arguments on both sides. In other words, awareness of the epistemological issues arising from an open-system ontology is critical to understanding the crisis and the policy response, and therefore to challenging that understanding and encouraging a radical policy shift. The critique of austerity policies would therefore be strengthened by a critique of the mainstream’s rhetorical (mis)representation of economic theorising.

For several years leading up to the 2008 financial crisis, Australia registered a public surplus, and this was generally interpreted as the result of responsible fiscal policy. However, since the outbreak of that crisis, no such fiscal balance has again been attained, giving rise to a range of explanations from the political incapacity of governments to the weak economic behaviour characterising the post-crisis era. Noteworthy in any case is that analysts have failed to cite the importance of a factor that was key to reaching pre-crisis surpluses: the vertiginous growth of private debt. This work argues that it was precisely the intense granting of bank loans and consequent increased demand from the private sector that boosted economic activity and led to the generation of public income sufficient to feed the fiscal surpluses of that period. Indeed, according to the proposals of Wynne Godley, this would have been the only way to register a public surplus in a context of current account deficits, typical of the Australian economy. This paper considers whether Australian private debt played a significant role in achieving fiscal surplus by way of a review of the Australian real estate boom and public accounts from the 1990s onward, also estimating an econometric model of autoregressive vectors to explore the link between these two variables. The results obtained appear to corroborate the hypothesis: severe private borrowing contributed to Australia’s fiscal surpluses. This finding has significant implications for budgetary policy.

This study addresses the effectiveness of the fiscal stimulus package announced by the Turkish government in 2009 in terms of its particular gendered outcomes, with a special emphasis on employment policies. Through an analysis of the package’s components and the policies of the Public Employment Agency of Turkey (Iskur), this article demonstrates the public sector’s reluctance to take a leading role in generating employment and the insufficiency of its efforts in addressing the stated goal of increasing women’s employment. Active and passive employment policies in Turkey are instead shown to be accommodating the country’s gender-segregated labour markets and discrimination against women.

In the wake of the global financial crisis, unemployment rates and openness to trade have been the subject of considerable research, especially in developing countries. This study analyses the impacts of trade policy on unemployment rates in Nigeria. Using time series data from 1970 to 2010, it adopts the vector error correction methodology. In order to explore the impact of a range of variables on the relationship between trade openness and national unemployment rates, these variables, in a system of equations, include measures of trade openness, public recurrent spending on education, foreign price shocks and real gross domestic product or alternatively income per capita. The findings reveal that in the long run, real output and income per capita lead to a decline in unemployment, but trade openness policy is associated with an increase in unemployment. Foreign policy shocks, as proxied by commodity prices, also exert a positive effect on unemployment rates and do not contribute subsequently to restoring the system to equilibrium. However, the initial impact of openness and foreign price shocks captured by short-term dynamics are observed to reduce unemployment.

This article proposes an account of how two teachers’ labour federations have been reacting to austerity measures in public education. Current austerity measures have coincided with the renewal of collective agreements, thus allowing the study of how unions link bargaining stances to wider issues of service quality and accessibility. Union responses are the result of at least three influences: the institutional framework for public sector collective bargaining and worker representation, the previous orientation of members and their organisations towards social and work relations, and ongoing innovations for renewal and member engagement. We posit that union responses can contribute to renewal if they are guided by concerns to redefine union purpose, union organisation and building capacities. Under these conditions, unions are able to engage members and push forward an alternative agenda to that of the government. In doing so, they may be able to forge temporary alliances with outside stakeholders, namely parents. Analysis of union responses should consider the dialectic between union renewal effort and the opportunities and constraints of the institutional framework for public sector collective bargaining. The challenge for these two labour federations is in sustaining member engagement and activism beyond the current context of collective bargaining.

This paper critically examines the key empirical evidence used to support the fiscal consolidation argument, complemented by a brief assessment of the limitations of the analytical foundation of the growth promoting benefits of the fiscal consolidation thesis. It also reviews the evidence on the debt-growth relationship at some length. It finds that the negative relationship between debt and GDP growth is influenced by outliers or exceptionally high debt-GDP ratios. It also points out that the composition of public debt matters. Additionally, the debt-GDP relationship appears to be non-linear—positive first and turning to negative, but there is considerable variation in the estimated turning or ‘tipping’ point, which is not helpful as a policy guide. Historical evidence does not lend support to the concerns that the current situation is likely to cause rapid upward spiraling of public indebtedness. Finally, the argument that fiscal consolidation is possible without adversely affecting growth is not based on robust empirical evidence. This conclusion is reinforced by a succinct overview of some country-specific experiences (Denmark, Ireland and United States).

This paper studies the implications of distortions in intertemporal margins for the conduct of climate policy. We do so by introducing a framework that combines a standard two-period overlapping generations (OLG) model with a tractable model of household heterogeneity, in which over-accumulation of capital arises from uninsurable idiosyncratic labor income risk. We illustrate that market-based climate policies must be adjusted when the government cannot provide full insurance to households by taxing only capital and is constrained to transfer resources across generations for risk-sharing. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 35 per cent and a carbon price 7.5 per cent lower than its first best.

We quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

This paper studies the macroeconomic effects of seven key TCJA provisions, including the tax cuts for individuals and businesses, the bonus depreciation of equipment, the amortization of R&D expenses, and the limits on interest deductibility. I use a dynamic general equilibrium model with interest deductibility and accelerated depreciation. I find that, initially, the tax reform had a small positive effect on output and investment. In the medium term, however, the effect on output will diminish, and the effect on investment will turn negative. The tax reform will depress investment in R&D. Government debt will surge.

This paper seeks to understand the link between resource governance and investor expectations in resource-rich countries. We test whether voluntary membership in the Extractive Industries Transparency Initiative (EITI), a public-private partnership that promotes transparency and accountability in the extractives sector, behaves as a credible signalling mechanism to investors that governments in resource-rich countries can manage resource revenue and adhere to sustainable fiscal policies in the medium and long run. Using an interrupted time series analysis coupled with a fixed effects model, we examine whether investor expectations on the price of sovereign debt behave as a credible signalling mechanism in the presence of certain conditions. Results indicate that in some cases there is a significant change in spread on the default price of sovereign debt as a result of announcement of either EITI candidacy or EITI compliance. However, it is clear that EITI membership alone is not a sufficient signal to investors that a country can effectively manage its resource revenues in the long run because the result of EITI implementation is heavily influenced by country-specific conditions.