Advanced Search
MyIDEAS: Login to save this paper or follow this series

Imperfect Financial Markets, External Debt, and the Cyclicality of Social Transfers

Contents:

Author Info

  • Frömel, Maren
Registered author(s):

    Abstract

    This paper deals with fiscal policy over the business cycle when international financial markets are imperfect. I document evidence that government expenditure tends to be more procyclical the higher is the borrowing cost for a sovereign. Decomposing government expenditure components shows that the cyclical correlations of government social transfers are the most important components driving cross-country differences in the behavior of government spending over the business cycle. I build a simple model of optimal fiscal policy in the presence of income inequality where government spending is financed by costly taxation and by external debt in form of a risk free bond. Government spending consists of a public good which provides direct utility, and of social transfers that can be targeted towards low income agents. When additional frictions are in the form of exogenous borrowing constraints, the government runs a procyclical tax and transfer policy in the neighbourhood of the constraint and a counteryclical policy when asset or debt holdings are not close to the constraint. The need to smooth both aggregate consumption and tax cost over the business cycle deliver the qualitative difference in transfer policy when the government cannot borrow enough. The procyclicality of transfers is stronger the tighter is the borrowing constraint in this model. In contrast, government spending on public goods is always procyclical. The results implied by the theoretical model are qualitatively consistent with the data and emphasize the need to decompose government expenditure to understand fiscal procyclicality. --

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/79820/1/VfS_2013_pid_843.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79820.

    as in new window
    Length:
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:zbw:vfsc13:79820

    Contact details of provider:
    Email:
    Web page: http://www.socialpolitik.org/
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 867-896, October.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 163-185, October.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(552), pages 319-350, 05.
    4. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers, Universidad Torcuato Di Tella 014, Universidad Torcuato Di Tella.
    5. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
    6. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, Elsevier, vol. 69(1), pages 6-36, June.
    7. Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, 2009. "Fiscal policy and default risk in emerging markets," Working Paper, Federal Reserve Bank of Richmond 09-01, Federal Reserve Bank of Richmond.
    8. Carlos A. Vegh & Guillermo Vuletin, 2012. "How is Tax Policy Conducted over the Business Cycle?," NBER Working Papers 17753, National Bureau of Economic Research, Inc.
    9. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc13:79820. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.