Academic literature on the topic 'Fiscal policy. Monetary policy. Household balance sheets'

Drastic changes in central bank operations and monetary institutions in recent years have made previously standard approaches to explaining the determination of the price level obsolete. Recent expansions of central bank balance sheets and of the levels of richcountry sovereign debt, as well as the evolving political economy of the European Monetary Union, have made it clear that fiscal policy and monetary policy are intertwined. Our thinking and teaching about inflation, monetary policy, and fiscal policy should be based on models that recognize fiscal-monetary policy interactions. (JEL E31, E52, E58, E62, H63)

The article examines macroeconomic policy options for advanced economies to respond to adverse shocks in the environment of very low interest rates and very high levels of public debt, when the scope for using conventional policy tools is limited. The standard transmission mechanism of monetary policy in the ELB conditions stops working normally, and the economy faces the “liquidity trap” effect. The deployment by central banks of unconventional monetary tools (forward guidance, quantitative easing, and negative interest rates) after global financial crisis was helpful in combatting the downturn, but carries risk of possible side effects. Large-scale purchases of financial assets lead to significant increase in central banks’ balance sheets, and this creates a threat to future financial stability and central bank independence. Negative interest rates can have detrimental effects on bank profitability and be contractionary through bank lending. There is a consensus that today fiscal policy has to play a major role in stabilizing the business cycle. But the effectiveness of conventional tools of discretional fiscal policy is uncertain because of long political lags and small spending multiplier. Existing automatic fiscal stabilizers are focused on social protection goals and not on macroeconomic stabilization. Thus, the newly proposed measures for rules-based fiscal stimulus (asymmetric semiautomatic stabilizers – tax or spending measures triggered by the crossing of some statistical threshold, e.g. a high unemployment rate) and unconventional fiscal policy (the use of consumption taxes to increase inflation expectations) have become the object of active discussion. Here lies the danger in the fusion of monetary and fiscal policy: central banks’ operations are becoming increasingly quasi-fiscal, aimed at financing budget deficit, and functions of monetary policy are proposed to assign to fiscal policy. Besides, the expansion of fiscal stimulus threatens financial stability in the future, as it leads to increase in public debt and narrows a country’s fiscal space.

Abstract Using household survey data for the U.S. and the U.K., we show that the aggregate response of consumption to interest rate changes is driven by households with a mortgage. Outright home-owners do not adjust expenditure at all while renters change their spending but by less than mortgagors. Income rises for all households as interest rate cuts directly affect firm investment and household consumption, boosting aggregate demand. A crucial difference between the housing tenure groups is the composition of their balance sheets: mortgagors hold sizable illiquid assets but little liquid wealth. Our results reveal that general equilibrium effects on household income coupled with balance-sheet-driven heterogeneity in the marginal propensity to consume play a key role in the transmission of monetary policy.

It is often postulated that the reintroduction of credit controls would be neither effective nor politically possible. Major changes have been implemented over the last eight years both in the way that financial markets work (domestically and internationally) and in the conduct of monetary policy. Controls over either the size of the balance sheets of financial institutions or the terms under which customers can obtain loans would seem to run totally counter to these developments. Does this rule them out completely?

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through. (JEL D12, D14, E43, E52, G21, R31)

Purpose This is a theoretical paper in the field of international macroeconomics. The purpose of this paper is to focus on a dynamic interaction between current account imbalance and unemployment in response to some policy-induced shocks for a small open economy under a flexible exchange rate. Design/methodology/approach The paper uses a two-sector framework: one sector is traded and another is the non-traded sector that is subject to an effective demand constraint. The current account imbalance arises due to the discrepancy between production of traded goods, household consumption of traded goods and government purchases of importables. The authors keep the asset structure simple by considering only domestic currency and foreign bonds that are imperfect substitutes. The paper considers a standard methodology of dynamic adjustment process involving change in foreign exchange reserves and exchange rate under perfect foresight. The saddle path properties of the equilibrium are also examined. Findings The results of comparative static exercises depend on a set of structural features of a developing country, which include asset substitutability, wage price rigidity and sectoral asymmetries. The paper shows that expansionary monetary policy, balanced budget fiscal expansion and financial liberalization have an ambiguous effect on the current account balance, foreign exchange reserves, non-traded sector and the level of employment. Originality/value The existence of Keynesian unemployment with fixed prices is the key ingredient of this paper. The paper introduces the problem of effective demand to analyze the dynamics of current account balance and exchange rate, which, in turn, determine the sectoral composition of output and level of employment.

EMU imbalances correction sparked active discussions on choosing the optimal policy for mitigating risks of divergence and restoring competitiveness. Concentration on balance of payments is within the framework of simultaneously solving the problem of external imbalance, capital outflow, restoring growth, and preventing the opposing vectors of trajectory of the real effective exchange rates. However, overcoming the crisis consequences requires a wider approach to how the imbalances correction contributes to the growth recovery. Theoretically, the rate of post-crisis growth recovery should correspond with the variables that constitute imbalances correction. Based on regression analysis, it is clear that such hypothesis is proved only partially. Growth is more likely to recover if there is a more substantial correction of current account and credit market cleaning-up, whereas the correction on real estate market is not as effective. At the same time, real disposable income correction is likely to negatively influence the growth recovery. Nevertheless, this doesn’t mean that internal devaluation shouldn’t be utilized as an option during macroeconomic adjustment. It should occur with credit market cleaning-up. Fiscal space is crucial here, as it determines the credibility of fiscal policy devoted to mitigation of accumulated household sector debt burden. The reaction to the financial cycle is a fundamentally important element of macroeconomic management in the monetary union in regards to the macroeconomic design of integration zone.

Globally, the economy continues to recover. The economic growth in AS increases supported by solid consumption and increase on non-residential investment, as well as the economy of Tiongkok, supported by private investment and better export performance. European economy also better off with stronger consumption and export, and the reduction of geopolitical risk post the presidential election in France. The economy in Japan also increases supported by stronger domestic and export demand. This global trend supports the growth in Indonesia that rises to the level of 5,01% (yoy), with the pillars of exportperformance, better global demand and commodity prices, as well as higher government expenditure – particularly on investment – and the household consumption. Spatially, the national growth was mainly from Java and Kalimantan due to their better export performance. Inflation increases slightly particularly related to price regulation implemented in early 2017. Spatially, inflation occurs in most area except Sumatera who recorded deflation. The balance of payment recorded a surplus arisen from financial and capital surplus of 7.9 milliard dolar AS. However, the current account recorded deficit due to the deficit of oil trade balance and primary income. The reserve increases to 121.8 miliar dolar AS, accompanied with stronger Rupiah with lower volatility relative to peer countries. Following the monetary ease on previous Quarter IV, 2016, the monetary transmission is better yet not optimal due to the prudent practice of the bank on allocating credit. The interest rate decreases reflected on daily PUAB O/N reduction by 7 point to 4.23%. The deposit rate also decreases as well as the lending rate with larger decrease. Lookingforward, the growth in 2017 will be higher than 2016 on the range of 5.0 – 5.4%, while inflation will be around the target of 4 + 1%. We need to anticipate the impact of Fed Fund Rate increase, the lower of FED balance, and the trade and fiscal US policy, as well as the geopolitical dynamics across regions particularly in Korean Bay. Bank Indonesia will keep strengthening his policy mix and macroprudential, and his coordination with the government to ensure the inflation control, greater stimulus for growth, and the implementation of structural reform run on the right track, and hence preserve the sustainable economic development.

AbstractDuring 1980–90, Japan's annual real GDP growth rate was 4.6%, but which declined to 1.2% in the 1990s. While the drop in itself is a problem, at the same time it exacerbated many other problems, namely inequality, budget deficits, and the increasing burden of an aging society.Society is not concerned about income distribution when the economy is growing, but begins to worry about inequality when an economic slump shows no signs of ending. Moreover, prolonged recession magnifies inequality. With the employment situation surrounding young people worsening, there arose an inequality between those finding jobs and those unemployed. And, the prolonged recession led to a huge budget deficit and the accumulation of government debt. Tax revenue shrank, and the government repeatedly increased public investment in the form of economic stimulus measures, but the Japanese economy did not recover in a sustained fashion.Japan's low growth has already continued for 20 years. Incomes of the younger and middle-aged segments of the population have not increased. Additionally, Japan is an aging society. The aged need pensions, and medical treatment and care, costs which must be borne by younger and middle-aged segments of the population, in fact those who have not experienced Japan's prosperous times.This paper discusses issues relating to the Great Recession, inequality, and the budget deficit and burden of an aging population.Japan's Great Recession is basically explained by monetary shocks. Just the bubble and its bursting are not solely responsible for the prolonged slump. There is no empirical evidence for the assertion that certain structural problems lessened the efficiency of the Japanese economy in the 1990s. TFP (total factor productivity) in the 1990s did not decline compared with the early 1980s. Fiscal policy and the diminution of the financial intermediary function can only explain the Great Recession in small part.The absence of any real monetary policy hampered economic growth through the channels of stock prices and improvement in bank balance sheets. Using vector autoregressive models, the exchange rate was not found to be an important channel of monetary policy, but there is some evidence that it significantly affected output.On inequality problems, that among younger generations is important since it will increase inequality in the future. Japan's economy will stagnate for a long time if the young are not employed and cannot garner skills.Another important point is that the way of maintaining social stability and alleviating inequality in Japan is extremely inefficient. To construct useless dams, roads, ports, and airports is extremely costly just to give jobs to the unemployed. It would be much better to give direct assistance to those in need.There is some reason to think that a budget deficit is not so serious a problem as generally believed, and that the important thing is to cut wasteful government expenditure and not raise government revenue. While I admit this argument carries some weight, there is nevertheless good reason to think that it is necessary to reduce the budget deficit.Before the global financial crisis, Japan's budget deficit was controlled, and declining, but subsequently became uncontrollable. Additionally, and more importantly, an aging population demands more social security expenditure, which causes serious budget problems, but Japan does not seem ready to cope with such problems.The selection of these topics is subjective, but I believe that these are reflected in the Japanese concerns now. Japanese academic circles do not necessarily respond to the interests of the society, but I have tried to select papers on these topics to the extent possible.

PurposeThis paper provides a quantitative assessment of the “asset ratio” rule defined in Turkey as part of measures taken to stimulate the economy amid the Covid-19 pandemic. The main objective of the new rule was to boost credit growth in the economy and provide lending for credit-constrained households and firms that are in need. A secondary aim was to shift the denomination structure of the deposits toward domestic currency. Hence, the paper focus particularly on how the policy affected the growth rate of loans and the share of domestic deposits relative to foreign ones among the commercial banks. The policy was also heavily criticized due to the possibility that it will subjugate the banking system to excessive risk. The paper explore this possible impact by measuring how much the policy affected the default risk allowances in the banking system.Design/methodology/approachThe new policy required banks with deposits above a threshold level, i.e. large banks, to maintain a certain asset ratio. Banks with deposits below the threshold, i.e. small banks, were held exempt from it. The paper implement a difference-in difference methodology to assess the quantitative impacts of the asset ratio policy by taking large banks as the treatment group, and small banks as the control group.FindingsDifference-in-difference estimation results suggest that the asset ratio policy resulted in a 9.6% rise in loans and an 8.4% rise in government securities. Deposits also increased, with no significant change in their composition. The policy initially generated a 7% increase in the credit risk allowances of banks in the treatment group, which vanished in the following periods. Based on all these, the paper argue that the policy was successful in providing liquidity to the economy without jeopardizing the financial stability.Research limitations/implicationsThe findings of this study show that asset ratio policy is effective in increasing credit growth in countries with limited policy space such as Turkey. While saying this, the importance of the robust and prudent structure of the banking system in the economy should be underlined. Otherwise, the policy may have an unintended consequence of raising systemic risk. The policy suggestions also apply to advanced countries where the monetary policy has reached a natural limit due to the zero lower bound (ZLB). The ZLB problem encouraged these countries to use quantitative easing schemes in the aftermath of the Covid-19 crisis, just like the global financial crisis. However, it may take a long time to undo the effects of this policy on the balance sheets of central banks. In such cases, asset ratio policy can also be considered as an alternative tool for advanced economies notwithstanding the fact that the banking system should be prudent, well-capitalized and the country should have enough fiscal space. The main objective of the asset ratio policy was to help SMEs that were in urgent need of liquidity at the beginning of the crisis. The bank balance sheet data used in this paper does not contain information about the borrowers of the loans extended during the implementation of the policy. Analysis of this dimension using matched bank-firm level data will better demonstrate the success of the policy in achieving this goal. The paper address this as the main limitation of the paper and leave that analysis for future research.Originality/valueThis paper provides an important contribution to the literature by assessing a new unique policy whose objective is to stimulate loans and mitigate the impact of the Covid-19 crisis on the economy. The policy in question is predicted to have effects on the asset and liability structure and risk exposure of the banking system in Turkey. The quantitative analysis in this study estimates these impacts and discusses the effectiveness of the new policy in providing a relief for firms and households in need. Whether or not the policy caused a disruption in the sound structure of the banking system in Turkey is another question addressed in the paper.

This thesis is composed of three essays on macroeconomic policy, with particular em- phasis on household balance sheets. In the first chapter, I analyze the role of household borrowing conditions for the government spending multiplier. Although the financial position of households is found to be key for individual consumption responses to fiscal shocks, it may also be relevant for aggregate effects. I test this hypothesis for the U.S. using a historical sample, a novel strategy to characterize periods with different borrow- ing conditions, and instrumenting government purchases with two standard spending shocks. I find the spending multiplier above unity only when the economy is character- ized by a larger share of households facing tighter borrowing conditions. This result is primarily driven by consumption and can be explained in connection to a positive effect on labor demand, as signaled by a tighter labor market. The findings hold when chang- ing the shock identification scheme, the model specification, the sample period, and the calibration of the state variable. In the second chapter, Giacomo Rella and I use novel quarterly data on the distribu- tion of U.S. household wealth to document several facts about the distributional conse- quences of expansionary conventional and unconventional monetary policy. After show- ing the large heterogeneity in the composition of household portfolios across the wealth distribution, we use an internal instrument approach in a Bayesian VAR to show that: (i) Despite raising the wealth level of all households, monetary policy shocks shift the distri- bution of wealth towards the top tail. (ii) The consequences of monetary policy shocks on wealth shares are temporary and more pronounced in the case of unconventional mon- etary policy. (iii) The effects of monetary policy shocks across wealth groups are more heterogeneous for right-skewed distributed asset classes, such as equities and liquid as- sets. (iv) Using a counterfactual exercise to capture the portfolio composition channel, we show that both monetary policy shocks affect wealth inequality primarily via the stock market than through the housing market. In the third and final chapter, I study the consequences of fiscal consolidation on the labor market and income inequality. Following the Global Financial Crisis, many economies have embarked on fiscal adjustments. However, as of today, it is not clear whether these policies may have caused significant distortions for the labor market and income inequality. I use a panel of 16 advanced economies over the period 1978-2014 to explore these effects. The findings show that (i) fiscal consolidation has a greater negative impact on the youth, in terms of unemployment and labor force participation rate. (ii) Transfers cuts imply a wealth-effect on labor supply, (iii) tax hikes have a negative impact on employment and unemployment rates, and (iv) spending cuts, targeting public sec- tor wages and employment, adversely impact all labor market indicators analyzed. (v) Lastly, tax hikes and spending cuts have a sizable effect on income inequality, whereas the muted response to transfers cuts can be explained by the positive reaction of hours worked.

The chapter discusses current challenges to world financial stability in light of lessons that have been learned from past financial crises. Although there are parallels between the current situation and some of the previous crises, the current situation differs in several important respects. It comes after a decade of extremely low nominal and real interest rates along with subdued inflation and, due to fiscal and monetary policy measures deployed during the GFC and the COVID-19 pandemic, debt/GDP ratios and central banks (CBs) balance sheets are at historically high levels. The recent upsurge of inflation prompted a worldwide process of increase in policy interest rates and reduction in CB assets. An undesirable side effect of this process is that it may trigger several mechanisms that endanger world financial stability. Recent developments in Fintech and the global economic disruptions caused by the war in Ukraine create novel financial vulnerabilities that differ from previous financial crises. The rapid growth of fintech institutions poses new regulatory challenges at the national and international levels. Although no crisis has materialized to date, those developments have increased the odds of a systemic global crisis. Measures designed to mitigate financial vulnerabilities are briefly discussed in the concluding section.

Asset price bubbles are a unique combination of economic and psychological factors. They occur in different countries with different cultural and economic developments. The study of this issue remains relevant because even increased regulation does not solve the problem of asset price bubbles. In this brief review of two bubbles, it was shown that, using the examples of Japan and Ukraine, it is possible to identify both general and specific factors and characteristics of such price bubbles. It is necessary to distinguish the stages of price bubbles formation, because each stage has its own specifics. At the stage of the bubble formation, common factors for both countries were the lack of regulation and the absence of financial stress over a long period; specific factors for Japan were financial liberalization and the absence of cases of bankruptcy of financial institutions over a long period; for Ukraine were characterized by the following factors, namely lack of financial regulation, lack of experience with financial bubbles, economic recovery after a long period of uncertainty, growth of household incomes and formation of over-positive expectations, increase in bank lending to households combined with its absence in the past. During the bubble inflation phase, the common factors were lack of disclosure, positive expectations, aggressive banking, lower lending standards, and rising profits specific factors for Japan are reducing the balance of payments surplus, providing incentives for the yen appreciation, easing monetary policy, changes in fiscal policy, the need to coordinate U.S., Japanese and European policies to maintain global economic stability, taxation and regulatory specifics, easing monetary policy; For Ukraine, such factors were the growth of the real estate market, the inflow of foreign investment, and access to international capital markets. At the peak of the bubble, the common factors were euphoria, virtually unlimited access to financial resources, and a boom in asset prices. At the stage of the bursting of the bubble, the common characteristics were a sharp fall in prices, a sharp fall in demand, the collapse of the securities market, the use of monetary policy instruments; specific to Japan –«The Lost Decade», particular to Ukraine –the end of real estate mortgage lending, the disappearance of the emerging market for mortgage-backed securities. In turn, understanding the factors and characteristics of asset price bubbles at each stage allows for better policy decisions.