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School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series

Permanent URI for this collectionhttps://ir.wgtn.ac.nz/handle/123456789/21216

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Browsing School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series by Author "Aizenman, Joshua"

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    Fiscal space and government-spending & tax-rate cyclicality patterns: A cross-country comparison, 1960-2016
    (Te Herenga Waka—Victoria University of Wellington, 2018) Aizenman, Joshua; Jinjarak, Yothin; Nguyen, Hien Thi Kim; Park, Donghyun
    The upward trajectory of OECD policy interest rates may impose growing fiscal challenges, thus testing the fiscal space of countries and their resilience. Against this background, we compare fiscal cyclicality across Asia, Latin America, OECD, and other regions from 1960-2016, then identify factors that explain countries’ government spending and tax-policy cyclicality. Our study reveals a mixed fiscal scenery, where more than half of the countries are recently characterized by limited fiscal space, and fiscal policy is either acyclical or procyclical (though not as high the level of 1980s), notably post-GFC becoming even more procyclical in government spending when accounting for net acquisition of nonfinancial assets and capital expenditure (spending components do matter). The cyclicality is asymmetric: on average, a more indebted (relative to tax base) government spent more in good times (positive growth) and cut back the spending even more in bad times (weak economy). Added to the public debt/GDP data, we construct the ‘limited-fiscal-capacity’ statistic, measured by the size of public debt/[average tax revenue] and its volatility, which is found positively associated with the fiscal pro-cyclicality. Further, we also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. The analysis depicts a significant economic impact of an enduring interest rate rise on fiscal space: a 10% increase of public debt/tax base is associated with an upper bound of 6.1% increase in government-spending procyclicality. For both government-spending cyclicality and tax-rate cyclicality, we find no one-size-fit-all explanation for all (OECD/developing) countries at all (good/bad) times. Fiscal space, trade and financial openness, the share of natural resource/manufacturing exports, inflation, and institutional risks are associated with the cross-country patterns of fiscal cyclicality, suggesting the measured cyclicality is context specific and the fiscal-monetary-political economy interactions are at work. We rank the explanatory factors across countries and regions, and discuss policies to increase the fiscal capacity for countercyclical policy.
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    Macroeconomic adjustment and the history of crises in open economies
    (Te Herenga Waka—Victoria University of Wellington, 2012) Aizenman, Joshua; Noy, Ilan
    This paper investigates the impact of the history of crises on macroeconomic performance. We first study the impact of past banking crises on the probability of a future banking crisis. Applying data for 1980-2010 for all countries for which the required information is available, controlling for conventional macro variables and the history of banking crises occurring after 1970, we do not detect a learning process from past banking crises. Countries that have already experienced one banking crisis generally have a higher likelihood of experiencing another crisis; and the depth of the present crisis does not appear to be affected by the previous historical experience with crisis events. Evidence also suggests that, in middle-income countries, higher de jure capital account openness is associated with lower likelihood of a banking crisis, a lower ratio of non-performing loans during the crisis, and higher levels of forgone output in the crisis’ aftermath. In contrast, we find that past crisis experience has a significant impact on savings. When facing considerable political risk, the past does seem to matter -- countries with more people who were exposed, over their lifetime, to larger disasters will tend to save more. This association, however, does not hold for countries with more stable political systems. We interpret these results as consistent with a differential sectoral adjustment to a crises hypothesis. The private sector, by virtue of its harder budget constraints, adjusts faster, whereas the government adjusts at a slower pace following a crisis. The financial sector may find itself in between the two. The “too big to fail” doctrine associated with large banks provides them with a softer budget constraint, delaying the day of adjustment; for some, delaying bankruptcy. Occasionally, the separation between banks and the public sector is murky, further delaying necessary adjustments of the financial sector.
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    Precautionary strategies and household savings
    (Te Herenga Waka—Victoria University of Wellington, 2015) Aizenman, Joshua; Cavallo, Eduardo; Noy, Ilan
    Why do people save? A strand of the literature has emphasized the role of ‘precautionary’ motives; i.e., private agents save in order to mitigate unexpected future income shocks. An implication is that in countries faced with more macroeconomic volatility and risk, private saving should be higher. From the observable data, however, we find a negative correlation between risk and private saving in cross-country comparisons, particularly in developing countries. We provide a plausible explanation for the disconnect between precautionary-saving theory and the empirical evidence that is based on a model with a richer account for the various modes of ‘precautionary’ behavior by private agents, in cases where institutions are weaker and labor informality is prevalent. In such environments, household saving decisions are intertwined with firms’ investment decisions. As a result, the interaction between saving behavior, broadly construed, and aggregate risk and uncertainty, may be more complex than is frequently assumed.
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    Public and private saving and the long shadow of macroeconomic shocks
    (Te Herenga Waka—Victoria University of Wellington, 2013) Aizenman, Joshua; Noy, Ilan
    The global crisis of 2008-9 and the ongoing Euro crisis raise many questions regarding the long-term response to crises. We know that households that lost access to credit, for example, were forced to adjust and increase saving. But, will households remain bigger savers than they would have been had the global financial crisis not occurred? And for how long will this increased saving persist? We also ask similar questions about the public sector’s saving decisions. We study the degree to which past income crises increase the saving rates of affected households and the public sector. We find evidence consistent with history-dependent dynamics: more experience of past crises tends to increase savings among households, but lead to decreased public sector saving. This decrease in public saving, however, is about 1/3 in magnitude than the corresponding increase in private/household saving. We follow up on these findings with an investigation of the importance of historical exposure for current account dynamics, but find no strong indication that our measure of past exposure is important to the current account’s determination. We conclude by examining the likely impact of the 2008-9 GFC on future saving.