Fiscal Policy & Sustainability
A fiscal balance that is calculated by adjusting government revenues to cyclical factors and other factors
What is a structural fiscal balance?
A country can only pursue two options out of three: fixed exchange rate and allowing free capital movement; but no monetary policy independence, monetary policy independence and free capital movement and floating exchange rate; or fixed exchange rate and independent monetary policy but no free capital movement
What is the impossible trinity?
What is the policy trilemma?
Current account is financed with a sustainable level of capital flows
What is external balance?
Y = A*K^alpha*L^(1-alpha)
What is the Cobb-Douglas production function?
The ability of a government to sustain its current spending, tax and other policies in the long run without threatening government solvency or defaulting on its liabilities
What is fiscal sustainability?
This regime is characterized by lower volatility of both nominal and real exchange rate, provides a clear anchor, especially in a country with high level of dollarization, can be an effective way to stabilize inflation in some cases
What is a fixed exchange rate regime?
A situation of extreme financial sector duress and mounting exchange market pressures, resulting in depreciation, capital flight, NPLs, and bank failures
What is a twin crisis?
A procedure to calculate contributions of growth in capital stock, employment and total factor productivity into economic growth
What is growth accounting?
The ability of the government to repay its debt, that is the initial debt of the government can be covered by the sum of all future primary balance taken at their discounted value. Government will need savings to repay debt
What is solvency in the context of government debt sustainability?
Higher policy rate affects short term market rates, costs of capital rise constraining investment, savings goes up, consumption decreases, demand weakens, prices are dampened
What is the interest rate transmission channel?
These models stress the role of financial sector and balance sheets in causing crises and propagating their effects, focusing on moral hazard and imperfect information, “excessive” booms and busts in international lending and asset price bubbles
What are Third Generation Currency Crisis Models?
Growth is determined by saving, investment and efficiency, based on a production function with diminishing returns to factors of production. In the steady state, per capita growth can be achieved only through technological development
What is the Solow growth model?
Calculate debt to GDP ratio at the end of 2018:
debt ratio at end 2017: 45% of GDP
assumptions for 2018:
* economic growth 4%
* inflation 5%
* nominal interest rate 3%
* primary deficit: 2% of GDP
Debt to GDP ratio will be 44.4% at the end of 2018
Primacy of price stability; medium-term (numerical) inflation objective; allowing for subsidiary objectives, while maintaining the primacy of price stability; clear and effective operational framework; forward looking strategy and effective communication
What are the desirable principles of a modern monetary policy framework?
Assume an economy with an initial external debt of 40% of GDP. What happens to external debt if:
(i) real growth is 5%,
(ii) inflation is 7%;
(iii) exchange rate depreciates by 10%,
(iv) foreign nominal effective interest rate is 3%
(v) primary current account deficit is 5% of GDP? (vi) There are no non-debt creating flows
about 45.3% of GDP
A country's income per worker converges to a country-specific long-run level as determined by the structural (fundamental) characteristics of that country
What is conditional convergence?