Pierre-Yves Hénin

Balancing budget through tax increases or expenditure cuts: is it neutral?

Abstract Fiscal adjustment currently ranks at the top in the economic policy agenda of many OECD countries, and not only those European countries aiming to meet the Maastricht convergence criteria. Recently, Alesina and Perotti argued that successful cases of fiscal adjustment resulted from cutting expenditures, while those focusing on tax increases were unsuccessful. The paper, using a bivariate VECM representation for the joint government revenue–government expenditure dynamics for five of the main OECD countries, provides two contributions to this issue. First, it proposes and performs a neutrality test of the alternative adjustment strategies (through revenue or expenditures), second it characterizes the departure from neutrality in the three countries where the neutrality hypothesis is rejected. The conclusion, prevailing for these three countries, is that adjustment through taxes not only is inefficient, but even results in a perverse effect with induced extra expenditures which more than offset the increase in government revenue.

Harrodian and neoclassical paths in a constrained growth model

Abstract We provide a reformulation of disequilibrium growth theory, using the inverse optimum approach under rigidities. The long-run solutions are either Harrodian paths of warranted growth, with increasing unemployment, or inflationary long-run equilibria, with full employment.

Output stabilization versus deficit sustainability: is it a trade-off?

The adoption of tighter budget rules, including institutional restraints on the deficit that the government will be allowed to run, involves a cost by precluding automatic stabilization through the procyclical component of budget balance. This paper attempts to assess qualitatively the importance of this effect, by looking at the experience of main OECD countries over the last three decades. Our empirical approach is twofold. We first retain the cyclical sensitivity of the budget balance as a measure of automatic stabilizers and examine to which extent the strenght of this effect co-varies through time with a measure of sustainability. A second exercice considers the joint dynamics of GNP and budget balance, and attempts to evaluate the changes in GNP volatility involved by tighter budget adjustment rules. We generally find that the costs in terms of income stabilization of more sustainable budget rules are not important.

An IS-LM Representation of Macroeconomic Equilibria with Rationing

The historical and pedagogical importance of the IS-LM scheme for the development of moderm macroeconomics suggests that we should consider it as a reference model which may be used to assess new instruments of macroeconomic analysis. A. D’Autume (1980) has shown rigorously that the IS-LM approach remains valid when applied to the analysis of Keynesian unemployment under conditions of equilibrium with rationing. J. P. Danthine and M. Peytrignet (1981) proposed an extension of the IS-LM framework to different disequilibrium configurations, but in fact their work is exclusively concerned with a reformulation of the general model of supply and demand. J. P. Benassy (1982) demonstrates the importance of certain flexibility hypotheses for a study of this kind, but his work does not explicitly consider different regimes for the formulation of IS and LM curves. H. Snessens (1981) appeals to an IS-LM representation, but considers IS as an inequality rather than an equilibrium condition. It seems possible to proceed along the path suggested by these investigators to show how an appropriate generalisation of the IS and LM curves produces a real reformulation of the concept of macroeconomic equilibrium with rationing.