Economic Models - Convex Optimization

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The Advantages of Fiscal Leadership in an Economy 79 imply a Stackelberg follower role or independence for monetary policy, easing the competition (externalities) among policy instruments. The ECB results look quite different. Once fiscal effects are included, the concentration on inflation control is much reduced and the forecast horizon shrinks to six months. Moreover, a feedback element, to correct the past mistakes, comes in. At the same time, output stabilization becomes less important, which implies that the symmetric targeting goes out. Instead, monetary policy now appears to react to fiscal policy, but with the “wrong” sign: the larger the primary deficit, the looser will be the monetary policy. In this case, therefore, the policies are acting as complements — circumstances, which call for a primary deficit will also call for a relaxation of the monetary policy. Thus, we have an evidence of monetary leadership, where fiscal policy is used as an additional policy instrument. 4.4. Fiscal Reaction Functions in the UK and Eurozone Many analysts have hypothesized that fiscal policy responses can best be modeled by means of a “fiscal Taylor rule”: d t = a t + γgap t + sd γ > 0 (2) where sd = structural deficit ratio, d t is the actual deficit ratio (d >0 denotes a surplus), 11 and a t represents all the other factors such as the influence of monetary policy, existing or anticipated inflation, the debt burden, or discretionary fiscal interventions. The coefficient γ then gives a measure of an economy’s automatic stabilizers. The European Commission (2002), for example, estimates γ ≈ 1/2 for Europe — a little more in countries with an extensive social security system, a little less elsewhere. And a similar relationship is thought to underlie UK’s fiscal policy (see HMT, 2003: Boxes 5.2 and 6.2). The expected signs of any remaining factors are not so clear. The debt burden should increase current deficits, unless there is a systematic debt reduction program underway. Inflation should have a positive impact on the deficit ratio if fiscal policy is used for stabilization purposes, but it had no effect otherwise. Finally, the output gap should also have a positive impact on the deficit ratio, if the latter is being used for stabilization purposes — in which case interest rates should be negatively correlated with the size 11 See Taylor (2000), Gali and Perotti (2003), Canzoneri (2004), and Turrini and in ‘t Veld (2004) for similar formulations. The European Commission (2002) uses a similar rule, but defines d>0 to be a deficit. They therefore expect γ to be negative.
80 Andrew Hughes Hallet Table 2. Fiscal policy reaction functions. For the United Kingdom, sample period 1997q3–2004q2 d t =−0.444 + 0.845debt t + 0.0685r t + 1.076gap t (0.37) (7.64) (0.30) (1.72) For the Eurozone, sample period 1999q1–2004q2 d t = 3.36 + 1.477d t−1 − 0.740π (2.96) +9,21 e − 0.207r t − 0.337gap t (9.66) (2.21) (1.16) (2.18) R 2 = 0.78, F 3,24 = 33.23 R 2 = 0.95, F 4,11 = 54.55 Key: d t = gross deficit/GDP (%), where d
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ECONOMIC MODELS Methods, Theory and
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ECONOMIC MODELS Methods, Theory and
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This Volume is Dedicated to the Mem
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Contents Tom Oskar Martin Kronsjo:
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Tom Oskar Martin Kronsjo: A Profile
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Tom Oskar Martin Kronsjo students t
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About the Editor Prof. Dipak Basu i
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Contributors Athanasios Athanasenas
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Contributors Victoria Miroshnik, is
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xx Introduction type of model is ve
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4 Olav Bjerkholt Among these was al
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6 Olav Bjerkholt method, searching
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8 Olav Bjerkholt context, but one o
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10 Olav Bjerkholt be modified in th
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12 Olav Bjerkholt through a number
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14 Olav Bjerkholt memoranda. These
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16 Olav Bjerkholt hopelessly ineffe
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18 Olav Bjerkholt References Arrow,
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24 Alexis Lazaridis A straightforwa
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26 Alexis Lazaridis where ⎛ ⎞ j
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138 Victoria Miroshnik 2. Corporate
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140 Victoria Miroshnik Japanese NC
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142 Victoria Miroshnik process shou
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146 Victoria Miroshnik A1 A2 A3 D1
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148 Victoria Miroshnik Fujino, T (1
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152 Anna-Maria Mouza of salaries of
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154 Anna-Maria Mouza Table 2. final
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156 Anna-Maria Mouza Table 4. Worki
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158 Anna-Maria Mouza 3.2.2. Personn
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160 Anna-Maria Mouza where X 43 , a
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162 Anna-Maria Mouza Thus, the tota
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164 Anna-Maria Mouza 6. Some Altern
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166 Anna-Maria Mouza increase for e
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168 Anna-Maria Mouza The solution o
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174 Fabrizio Iacone and Renzo Orsi
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202 Athanasios Athanasenas 2. The C
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210 Athanasios Athanasenas Table 1.
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212 Athanasios Athanasenas vector:
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224 Index fiscal expansions, 91, 92
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Economic Models - Convex Optimization

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