This paper investigates the disinflation experiences of three countries, Australia, Canada and New Zealand. Unlike previous approaches which have sought to use institutional data to pre-determine the causes, speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis. The res...

The Expansionary Fiscal Contraction (EFC) hypothesis predicts that a major fiscal consolidation leads to an economic expansion under certain circumstances. We test this hypothesis, and the implied non–linear responses of the economy to large and small changes in fiscal policy, using data from the 1983 Danish fiscal reform. We use a structural VAR/event study methodology following Blanchard and ...

How should fiscal policy be conducted in the presence of default risk? We address this question using a sovereign default model with nominal rigidities. An increase in government spending during a recession stimulates economic activity and reduces unemployment. Because the government lacks commitment to future debt repayments, expansionary fiscal policy increases sovereign spreads, making the f...

The countercyclical monetary policy is a policy that economists recommend to adopt in order to slow down the economic fluctuations. The aim of this study is to address the question that, in the presence of fiscal dominance and considering institutional quality (IQL), what the optimal monetary policy should be during the business cycles? To find the appropriate answer, first, in the framework of...

Fiscal policy has been of significant size in Japan since the early 1990s, propelling Japan to the forefront of fiscally-challenged nations. However, the effect of fiscal policy has been disappointing. This paper discusses the various explanations provided by the literature (the argument that fiscal policy was effective; the argument that it was not effective, because of interest rate-based cro...

As economics has developed, a number of different fiscal principles have been suggested. Perhaps the oldest principle was that the Government should balance its books. This principle was adopted by the 1979 Conservative Government but they delivered a budget in balance or in surplus only in 1988/89 and 1989/90. The same principle has been adopted in the Stability and Growth Pact, albeit with an...

Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price l...

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the publi...

In this section, we briefly explore some issues surrounding the interactions between monetary policy and fiscal policy. In developed countries, monetary-policy-setting is effectively “independent” from fiscal-policy-setting, in the sense that separate authorities control the two types of policy-making. For example, Federal Reserve policy-makers are not the same as Congressional policy-makers. E...

Fiscal policy measures are a key means by which governments can influence distribution and poverty, but in fact the relationships between fiscal policy and poverty are not well understood. The most commonly used technique for assessing the distributional impact, benefit incidence analysis, is straightforward, but applied by itself it suffers from a number of serious limitations. Assessment of t...