Essays on Fiscal Policy

Abstract

In this dissertation I study the impacts of fiscal policies in different monetary settings. In the first chapter, I empirically analyze the impact of fiscal policies on pairwise co-movements of business cycles in the European Monetary Union between the years of 1999 and 2016. In the second chapter, I develop a theoretical model which let me examine the impact of future fiscal consolidation around the zero lower bound interest rate. I explore welfare implications of the timing of future fiscal consolidation. In the first chapter, I empirically examine the impact of national fiscal policies on the bilateral synchronization of business cycles among the euro zone countries and discuss how this impact changes over time between 1999 and 2016. I find that divergences in fiscal balances significantly decrease the synchronization among EZ countries on average. However, this relation is not linear in time. In fact, in the last period when the fiscal austerity measures are adopted, bilateral BCS increases with an increase in differences in fiscal balance. I also discover that the impact of an expansionary fiscal policy (decreasing the surplus or increasing the deficit) on the BCS is greater if the country is running a surplus rather than a deficit. On the other hand, I observe that between 2013 and 2016 if a country with budget deficit performs an expansionary fiscal policy, this increases the BCS which implies that the expansionary fiscal policies in that period are likely countercyclical in nature to neutralize the impacts of asymmetric shocks in the EZ area. In the second chapter, I analyze the effects of different timing of fiscal consolidations under different fiscal policy rules in a New Keynesian framework with endogenously binding zero lower bound. I find that the anticipated future government spending cuts have amplifying effects on the current fiscal stimulus only if the cuts are enacted in a timely manner and government spending does not respond endogenously to the economy. Spending reversals in the very short-run are very costly, while consolidation in the medium-run reduces welfare costs. However, the precise optimal timing of consolidation varies with different fiscal policy rules. If the labor income tax rate is used to stabilize the economy in addition to spending adjustment, the economy is stimulated more compared to a lump-sum taxation rule and no fiscal rule cases. When the government spending responds to output and debt endogenously, the fiscal consolidation occurs endogenously. In this case, additional spending cuts depress the economy and the welfare gain of the cuts at the optimal timing is negligible.