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How costly are borrowing costs? An analysis of alternative fiscal policies during crises

Gümüş, İnci (2017) How costly are borrowing costs? An analysis of alternative fiscal policies during crises. Macroeconomic Dynamics, 21 (5). pp. 1141-1157. ISSN 1365-1005 (Print) 1469-8056 (Online)

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Official URL: http://dx.doi.org/10.1017/S1365100515000267

Abstract

Financial crises lead to substantial declines in output and consumption in emerging markets. The fact that fiscal policy is procyclical in these countries shows that the effects of a crisis are exacerbated by spending cuts and tax increases, which are usually attributed to borrowing constraints they face in bad times. This paper quantitatively analyzes the costs of reduced borrowing during crises by studying the effects of expansionary fiscal policies that would have been possible to implement, had the government been able to borrow more. The model shows that a 25% reduction of taxes on labor income, capital income, and consumption during the 1997 Korean crisis would have required an additional borrowing of 4.10% of GDP, while increasing output and consumption by 5.23 and 5.92 percentage points, respectively. When the effects of each tax rate are analyzed separately, labor tax reduction turns out to be more effective than the other policies.

Item Type:Article
Uncontrolled Keywords:Fiscal Policy; Financial Crises; Business Cycle Fluctuations
Subjects:H Social Sciences > HB Economic Theory
ID Code:32951
Deposited By:İnci Gümüş
Deposited On:11 Aug 2017 12:20
Last Modified:11 Aug 2017 12:20

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