Michel Strawczynski

Cyclical Ratcheting in Government Spending: Evidence from the OECD

This paper studies the role of business cycles in the phenomenon of increasing government-spending/GDP ratios in the OECD countries. An empirical framework that includes both long-run and cyclical considerations in the determination of government spending is applied to panel data covering 19751998. The main finding is that the prolonged rise in the spending/GDP ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior: the ratio increases during recessions and is only partially reduced in expansions. The long-run ratcheting effect is estimated as approximately 2 of GDP. Also analyzed are the cyclical changes in the composition of government spending (government consumption, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness.

Cyclicality of Fiscal Policy: Permanent and Transitory Shocks

This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be countercyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are countercyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not.

Income uncertainty and the demand for annuities

Abstract Two well-known results concerning the demand for annuities in an overlapping generations model are: (i) egoistic agents should annuitize all their wealth; and (ii) altruistic agents should segment their savings between riskless bonds (for bequests) and annuities (for own consumption). This paper extends the analysis by considering income uncertainty. It is shown that while the ‘segmentation’ result holds under future generation’s income uncertainty (FGIU), altruistic agents do not segment their savings in the presence of second-period income uncertainty (SPIU); the intuition for this result is that income uncertainty in the second period of life is contingent on being alive, and therefore at the optimum the covariance between one’s offspring’s consumption and life uncertainty is not zero, as in the case of certainty and FGIU. The effects of precautionary savings on the demand for annuities are also analyzed.

Cyclicality of Statutory Tax Rates

Most studies on cyclical fiscal policy ignore statutory taxes due to a lack of data. In this paper I build on singular data on statutory tax rates in Israel, in order to study how they are changed by the government in expansions and recessions. After differentiating between ideological (exogenous) tax changes, to those that react to the cycle (endogenous) using Romer and Romer (2010) technique, I check whether endogenous statutory tax rates are a-cyclical or counter-cyclical, as recommended by theoretical models. I found that while direct taxes are a-cyclical, indirect taxes (and in particular VAT) are changed procyclically. A pseudo-panel analysis based on the different types of taxation and a panel analysis based on indirect taxation, show that the main reason for statutory tax changes is the existence of economic crises; this explanation is stronger than economic considerations like population or expenditure growth, legal considerations like the rigidity for changing statutory taxes, and income distribution considerations like the incidence on the bottom income decile.

Procyclicality of Fiscal Policy in Emerging Countries: The Cycle is the Trend

This paper uses the Aguiar and Gopinath (2007) methodology in order to estimate whether “the cycle is the trend” in 23 emerging markets and 22 OECD economies. These estimates are then used to test whether procyclical fiscal policy in emerging countries is due to persistent shocks to per-capita GDP. We find support for this hypothesis. While both developed and emerging countries have a procyclical policy for investment expenditure, procyclicality is evident in emerging countries also for government consumption and transfers. Over the period of increasing globalization after the 1990s, these are signs of a reduction in the extent of procyclical expenditure policy in emerging countries. We also find that, in countries with high levels of foreign direct investment, procyclicality is milder.

Income uncertainty, bequests and annuities

Abstract Life uncertainty and income uncertainty are modeled simultaneously in order to analyze the influence of perfecting income insurance in the size of bequests and the demand for annuities. The main result shows that government intervention aimed at providing intergenerational risk sharing acts as a bequest substitute, and if annuities are available, reduces the demand for annuities.

Government-Spending Adjustment: The OECD Since the Nineties

This paper investigates the drastic reduction in public spending in OECD countries during the 1990s. Using a panel data set of 18 countries, we find this adjustment to be a general OECD development, beginning in 1994, and that participation in the Maastricht Treaty or in the Stability and Growth Pact does not introduce additional effects. In the long run, this adjustment is estimated to reduce the ratio of primary government spending to output by about 4 percentage points. There is no evidence of differential adjustment in expansions or recessions. We also find that declines in interest payments on public debt are followed by increases in primary expenditures by about the same amount. The econometric framework makes it possible to compute the long-run ratios of government expenditures to GDP in the 18 OECD countries in the sample.

Policy variables and growth: evidence from Israel

This paper estimates the impact of policy variables on the per-capita Business Sector GDP in Israel in the framework of an extended neo-classical model. The methodology assesses the impact of policy variables on the components of the production function: factors of production (capital and labour) and total factor productivity. Using the cointegration approach, both long-run and short term specifications are tested. It is shown that: i) in the long-run the reduction of taxes, public sector deficit and inflation enhance growth mainly through an increase in total factor productivity; ii) in the short-run transitory changes in taxes do not affect business sector GDP, while persistent changes in taxes do affect it. It is also shown that persistent mass immigration waves to Israel enhanced production through a ‘scale effect’, since they implied an increase in the market size.

Cyclicality of taxes and external debt

ABSTRACT In their work, Vegh and Vuletin have shown that statutory tax rates are acyclical in developed economies and procyclical in developing ones. This article extends their analysis by checking the interaction of statutory tax rates with countries’ external public debt. In general, we found that the value added tax rates are changed procyclically in both developed and developing countries (i.e. taxes are raised in bad times and reduced in good times). However, when the external debt is high, in the developing countries the procyclicality increases, while the opposite result holds for developed economies. This pattern occurs mainly in times of recession, when the need for loans is the highest. Although we found that there was a reduction in procyclicality after the 2000s, these findings pose a challenge to policy-makers, who should think of ways of dealing with lack of foreign funds in difficult times.

The Optimal Inheritance Tax in the Presence of Investment in Education

This paper provides an example aimed at calculating the optimal inheritance tax in a model in which inheritances are used to finance investment in education. Two results are obtained: (1) The optimal inheritance tax schedule includes a threshold, estimated between 2.5 and 5.5 times per-capita GDP. This result holds for a Rawlsian social planner that maximizes the welfare of the poorest individual, who does not leave bequests. (2) Contrary to the result of a 100 % tax on pure accidental bequests, the optimal simulated tax rates are between 28 %, for the case of educational bequests, and 57 %, for the case where educational and accidental bequests interact. This range is in line with existing schedules in developed economies.