Working Paper: CEPR ID: DP2365
Authors: Willem H. Buiter
Abstract: Several recent studies imply that the response of national saving to fiscal policy is non-monotonic. In this paper, we use two data sets to search for the circumstances in which such non-monotonic responses arise: one refers to a sample of OECD countries, as in previous studies, and one to a sample of developing countries, using recent World Bank data. We find that in both samples non-monotonic effects tend to be associated with large and persistent fiscal impulses. In the OECD such responses are stronger for fiscal contractions than for fiscal expansions: during large fiscal contractions an increase in net taxes has no effect on national saving. High or rapidly growing public debt does not appear to be a good predictor of non-monotonic effects. Using the World Bank data, the situations in which the non-monotonic response of national saving to fiscal policy is not limited to large fiscal contractions. They also occur during large fiscal expansions, and in periods in which debt is accumulating rapidly, regardless of its initial level.
Keywords: monetary policy; inflation targeting; new paradigm; stabilization policy
JEL Codes: E31; E32; E50; E52; E58; E61; F31; F41; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MPC should represent regional interests (D71) | MPC as a body of technical experts (E61) |
| Operational independence of the central bank (E58) | Lack of coordination between monetary and fiscal policy (E61) |
| Increased globalization and technological changes (F69) | Transformation of the economy (O14) |
| Structural changes (L16) | Effects on inflation and interest rates (E43) |
| Increased openness and lower global inflation (F69) | Lower nominal interest rates in the UK (E49) |