Template-Type: ReDIF-Article 1.0

Author-Name: Gábor P. Kiss
Author-Workplace-Name: Magyar Nemzeti Bank
Author-Email: kissg@mnb.hu
Author-Person: ppk1

Title: Aggregate Fiscal Stabilisation Policy: Panacea or Scapegoat?

Abstract: In many cases, analyses of fiscal stabilisation are characterised by errors and
omissions. This study addresses these issues. In addition to the operation of
automatic stabilisers and the stabilising effect of the EU budget, we examine
whether or not a stabilisation policy based on a significant change in the budget
deficit can be sustainable and successful. While the economic growth rate is affected
by the impulse from the changes in the deficit, the level of economic performance is
affected by the deficit. However, the accumulated debt resulting from the persistent
deficit is growing faster than the impact on GDP, and thus the debt ratio could
start rising sharply in the foreseeable future. We show that a continuous increase
in demand may be self-financing only in the unlikely event that the value of the
medium-term fiscal multiplier closely approximated 3, i.e. the impact in real terms
of a nominal impulse would permanently triple. A lasting, sizeable general demand
increase is therefore not a panacea; however, the literature suggests that its
alternatives, i.e. structural reform and targeted measures, are more appropriate and
less costly for achieving higher trends of GDP growth. Similar results were obtained
also in simulations based on the Hungarian experience of targeted measures.

Classification-JEL: E32, E61, E62, H62, H63
Keywords: fiscal policy, general demand increase, fiscal multiplier, economic policy coordination
Pages: 55-87
Volume: 19
Issue: 2
Year: 2020
File-URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-19-2-st3-kiss.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:19:y:2020:i:2:p:55-87