San Jacinto College Effect of Fiscal Policy on US Economic Stability Thesis What are the effects of fiscal policy on economic stability in the United State

San Jacinto College Effect of Fiscal Policy on US Economic Stability Thesis What are the effects of fiscal policy on economic stability in the United States? I have wrote a thesis statement but I don’t think its good. I also have attached an annotated bibliography with a few sources please feel free to use these sources and others if you like. I saved the sources as pdf and I attached them. ECON 2301 Signature Assignment
Objective:
Students will apply and analyze macroeconomic theories and models using a national or
global event. This event may be current, historical, political, or social. Students must
find and research at least five academic articles to conduct their analysis. Students will
use articles to write a paper making and defending a claim or argument regarding the
event. This is NOT a paper about what happened, but about why it happened, how it
happened, or what will happen as a result.
Part I. Introduction
Students should present their thesis in the introduction. Students should state the event
and its significance (why research this topic?), and the macroeconomic theories and or
models used to analyze and posit the student’s perspective.
Part II. Research
Students must use macroeconomic language and provable microeconomic statements.
Students must use data from appropriate and relevant websites to validate the thesis.
Students must include some visual element (chart, graph, etc.) to present evidence and
support thesis.
Part III. Conclusion
How did the macroeconomic analysis and research change your perspective? What did
you learn from your research?
Part IV.
Bibliography and Work Cited pages
Requirements:
1” margin all around.
Double-spaced
7 pages minimum, not including the title and work cited pages.
Milestones:
1. Topic Proposal
2. Annotated Bibliography
3. Rough Draft
4. Final Draft
Some questions to consider while working on paper:
Topic: Is topic too broad? Is it too narrow? Can you find information on it?
Sources: Are your sources academic/official? Are they informative or opinionated? Are
they varied or from the same place? Do they present different perspectives of the event?
Thesis: Is your thesis clear, logical, and defendable? Is it relevant and significant to
your topic? Is it NOT obvious or trivial?
Variables: Have you identified all of the important factors/variables related to your
topic? What are they? Which ones are the most important?
Language: Are you using economics language properly? Are all definitions and
relationships correct?
Appropriate flow: Does your paper flow smoothly from one section to the next? Do all
paragraphs and arguments defend or relate back to your thesis?
Challenge or reinforce: Did your research challenge your previously held beliefs or
reinforce them? Why? What did you learn?
Charts, graphs, formulas: Are your charts, graphs, and formulas accurate? Are they
relevant to your thesis or just distracting? Do they support or refute your thesis?
Different perspectives: Does your paper consider this topic from different perspectives?
Would in different places or different circumstances see the topic differently? How so?
Did you analyze the cost and benefits of any proposed policy? What your analysis be
different if looking at the short run or the long run?
WP/17/198
© 2017 International Monetary Fund
IMF Working Paper
Research Department
Fiscal Stabilization and Growth: Evidence from Industry-level Data for Advanced and
Developing Economies1
Prepared by Sangyup Choi2, Davide Furceri3, and João Tovar Jalles4
Authorized for distribution by Chris Papageorgiou
September 2017
IMF Working Papers describe research in progress by the author(s) and are published to
elicit comments and to encourage debate. The views expressed in IMF Working Papers are
those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board,
or IMF management.
Abstract
Medium-term growth can be enhanced by fiscal stabilization. However, to date, no systematic effort
has been made to study the specific channels through which fiscal stabilization affects growth. This
paper examines the effect of fiscal stabilization on industrial growth and how this effect depends on
different technological characteristics. It does so by applying a difference-in-difference approach to an
unbalanced panel of 22 manufacturing industries for 55 advanced and developing economies over the
period 1970-2014. The results suggest that fiscal stabilization fosters growth in industries with: i) higher
external financial dependence and lower asset fixity; ii) higher degree of labor intensity; iii) higher
investment lumpiness and relationship-specific input usage. These effects tend to be larger during
economic recessions. The results are robust to different measures of fiscal stabilization and the
inclusion of various interactions between a broad set of macroeconomic variables and production
technologies.
JEL Classification Numbers: E62, H50, H60.
Keywords: industry-level data, fiscal stabilization, time varying coefficients, growth, technologies of
production.
Author’s E-Mail Address: schoi2@imf.org, dfurceri@imf.org, jjalles@imf.org
1
The authors are grateful to Gee Hee Hong, Jun Il Kim, Grace Bin Li, Jesper Linde, Andrew Swiston, Aaron Tornell, Elif
Ture, and Ling Zhu for useful suggestions. Authors also acknowledge general comments made by participants of KIET-KAEA
Joint Conference in Sejong (Korea) and IMF Development Economics Seminar This paper was supported in part through a
research project on macroeconomic policy in low-income countries with the UK’s Department for International Development.
The views expressed in this paper are those of the authors and should not be reported as representing the views of the IMF or
DFID. The usual disclaimer applies and any remaining errors are the authors’ sole responsibility.
2 International Monetary Fund. Middle East and Central Asia Department, 700 19th street NW, 20431 Washington DC.
Email address: schoi2@imf.org.
3 International Monetary Fund. Research Department, 700 19th street NW, 20431 Washington DC. Email address:
dfurceri@imf.org.
4 International Monetary Fund, Fiscal Affairs Department, 700 19th street NW, 20431 Washington DC. Email address:
jjalles@imf.org.
©International Monetary Fund. Not for Redistribution
2
Contents
I. Introduction ………………………………………………………………………………………………………..3
II. Fiscal Stabilization and Growth: Channels …………………………………………………………….6
III. Data ………………………………………………………………………………………………………………..11
A. Fiscal Stabilization ………………………………………………………………………………………11
B. UNIDO data ……………………………………………………………………………………………….14
C. Industry-level characteristics ………………………………………………………………………..14
IV. Methodology ……………………………………………………………………………………………………15
V. Results ……………………………………………………………………………………………………………..17
A. Baseline results …………………………………………………………………………………………..17
B. Robustness checks ………………………………………………………………………………………19
C. Decomposition of industry growth ………………………………………………………………..23
D. Recessions vs. expansions ……………………………………………………………………………24
E. Robust channels ………………………………………………………………………………………….25
VI. Conclusion ………………………………………………………………………………………………………25
References ……………………………………………………………………………………………………………27
List of Figures
Figure 1: Fiscal stabilization over time, all countries, 1994-2016 …………………………………31
Figure 2: Fiscal stabilization over time, within sample inter-quartile ranges ………………….32
Figure 3: Fiscal stabilization and output volatility: Evidence across countries ……………….33
Figure 4: Fiscal stabilization and output volatility: Evidence over time ………………………..33
List of Tables
Table 1: Industry-specific characteristics ………………………………………………………………….34
Table 2: Correlation matrix of industry-specific characteristics……………………………………35
Table 3: Country coverage ………………………………………………………………………………………36
Table 4: The effect of fiscal stabilization on industry growth: Value added …………………..37
Table 5: The effect of fiscal stabilization on industry growth: Theories vs. findings ………38
Table 6: The effect of fiscal stabilization on industry growth: Value added (lagged
specification) …………………………………………………………………………………………………………39
Table 7: The effect of fiscal stabilization on industry growth: Gross output ………………….40
Table 8: The effect of fiscal stabilization on industry growth: WLS …………………………….41
Table 9: The effect of fiscal stabilization on industry growth: Alternative measures of fiscal
stabilization …………………………………………………………………………………………………………..42
Table 10: The effect of fiscal stabilization on industry growth: Omitted variable bias ……43
Table 11: The effect of fiscal stabilization on industry growth: Labor, capital. productivity
…………………………………………………………………………………………………………………………….44
Table 12: The effect of fiscal stabilization on industry growth: Recession vs. expansions…
…………………………………………………………………………………………………………………………….45
Table 13: The effect of fiscal stabilization on industry growth: Horse race ……………………46
Appendix ……………………………………………………………………………………………………………..47
©International Monetary Fund. Not for Redistribution
3
I. INTRODUCTION
Since the Global Financial Crisis medium-term growth has been declining in both advanced
and developing economies (IMF, 2017). At the same time, fiscal policy has become
increasingly constrained due to high debt-to-GDP ratios. Against this background, there has
been a renewed interest in examining how fiscal stabilization policies can spur medium-term
growth. In principle, fiscal stabilization can enhance medium-term growth by reducing the
volatility of the aggregate economy.5 This is not surprising given that most empirical evidence
has suggested a negative relationship between volatility and growth (see e.g. Ramey and
Ramey, 1995; Martin and Rogers, 2000).
As far as a specific mechanism is concerned, Aghion et al. (2010) propose a channel of
credit constraints through which fiscal policy counter-cyclicality affects medium-term growth.
In their theoretical framework, firms can invest either in short-term projects facing an
aggregate productivity shock or in productivity-enhancing long-term projects that are subject
to a liquidity risk. If credit constraints bind only during periods of contractions, reducing the
volatility of aggregate shocks increases the likelihood that long-term projects survive liquidity
shocks in bad states without affecting what happens in good states (when credit constraints are
not binding). Thus, the higher the fraction of credit constrained firms, the larger the positive
effect of reducing aggregate volatility. This mechanism suggests that a countercyclical fiscal
policy that reduces aggregate volatility would have larger effects on high-productive
investment in more credit-constrained industries, particularly in bad times—when financing
constraints are more likely to bind.
Aghion et al. (2014) and Furceri and Jalles (2017) test these predictions using the Rajan
and Zingales’ (1998) difference-in-difference methodology and find that fiscal stabilization
increases growth and productivity-enhancing investment in industries that are more credit
5
Throughout our baseline analysis, we do not differentiate discretionary fiscal policy from automatic stabilizers,
as our benchmark measure of fiscal stabilization encompasses both. For robustness checks, however, we also
construct a measure of fiscal stabilization based on cyclically-adjusted fiscal balance, which controls for the
influence of automatic stabilizers. For example, see Eichenbaum (1997) and Taylor (2009) for further discussions
on this issue.
©International Monetary Fund. Not for Redistribution
4
constrained. Choi et al. (2017) further confirm these results by showing that an increase in
aggregate uncertainty reduces total factor productivity growth more in industries that depend
heavily on external finance.
This paper builds on such stream of work, but it extends the literature in several
important ways. First, it considers additional channels through which fiscal stabilization can
affect industrial growth. As discussed by Samaniego and Sun (2016), if industries’
technological characteristics interact systematically with output volatility, then fiscal
stabilization can have differential growth effects across industries depending on the differences
in production technologies. Second, compared to Aghion et al. (2014), our measure of fiscal
stabilization varies over time for each country in our sample. In previous studies, the cyclicality
of fiscal policy has typically been captured by a unique time-invariant parameter, making
difficult to discern the effects of fiscal stabilization from unobserved cross-country
heterogeneity. In contrast, our empirical framework allows us to consider a three-dimensional
(country-sector-year) panel. Third, compared to Aghion and Marinescu (2008), our alternative
measure of fiscal stabilization based on the cyclically-adjusted fiscal balance isolates the
component of discretionary fiscal policy from automatic stabilizers. This decomposition
allows for more meaningful evaluation of the growth effect of fiscal policy. Fourth, it extends
the analysis to developing economies. Given that fiscal policy in many developing economies
has escaped from the procyclicality trap and became countercyclical recently (Frankel et al.,
2013), a study of these economies provides yet an extra opportunity to learn about the causal
link between fiscal stabilization and growth. Fifth, it examines the mechanisms through which
fiscal stabilization affects industrial growth by further investigating the effects on labor, capital
and productivity growth.
Specifically, this paper applies Rajan and Zingales’ (1998) difference-in-difference
methodology to an unbalanced panel of 22 manufacturing industries for 55 advanced and
developing economies over the period 1970-2014. 6 The advantages of having a threedimensional (i industries, c countries and t time periods) dataset are twofold:
6
Industry-level data from most developing economies are only available from 1990.
©International Monetary Fund. Not for Redistribution
5
•
First, it allows to control for aggregate and country-sector shocks by including countrytime (c, t), industry-country (i, c) and industry-time (i, t) fixed effects. The inclusion of
the country-time (c, t) fixed effect is particularly important as it allows to control for
any unobserved cross-country heterogeneity in the macroeconomic shocks that affect
countries’ growth. In a pure cross-country analysis, this control would not be possible,
leaving open the possibility that the impact attributed to fiscal stabilization would be
due to other unobserved macro shocks.
•
Second, it mitigates concerns about reverse causality. While it is typically difficult to
identify causal effects using aggregate data, it is much more likely that fiscal
stabilization affects industry-level outcomes than the other way around. It is because
when controlling for country-time fixed effects—and therefore aggregate growth—
reverse causality implies that differences in growth across sectors influence fiscal
stabilization at the aggregate level. Moreover, our main independent variable is the
interaction
between
fiscal
stabilization
and
industry-specific
technological
characteristics obtained from the U.S. firm-level data; it makes it even less plausible
that causality runs from industry-level growth to this composite variable.
The main findings of our paper are that fiscal stabilization fosters industrial growth
through several channels, including i) external financial dependence and asset fixity; ii) labor
intensity; iii) investment lumpiness and relationship-specific input usage. In other words,
industries that are dependent more on external finance or have less tangible assets as collateral
(or a higher labor share) benefit more from fiscal stabilization. This finding is consistent with
the cross-country evidence from Aghion et al. (2014). Similarly, industries that are dependent
more on a specific type of investment grow faster under fiscal stabilization, suggesting the role
of fiscal stabilization in reducing firms’ adjustment costs. Among them, the most robust
channels are asset fixity and labor intensity. The effects of fiscal stabilization are typically
larger in developing economies, but more precisely estimated in advanced economies—
possibly due to better data quality and longer data availability in the latter. The differential
effect of fiscal stabilization tends to be larger during recessions—this is particularly the case
for those in industries with higher credit constraints Finally, our results are robust to different
©International Monetary Fund. Not for Redistribution
6
measures of industrial growth and fiscal stabilization and the inclusion of various interactions
between macroeconomic variables and industrial characteristics.
The remainder of the paper is organized as follows. Section II outlines the channels
through which fiscal stabilization can affect growth. Section III describes the underlying data
used in the empirical analysis. Section IV develops the econometric methodology. Section V
presents the main results and a battery of robustness exercises. The last section concludes and
provides some policy implications.
II. FISCAL STABILIZATION AND GROWTH: CHANNELS
What are the channels through which fiscal stabilization affects industry growth?
Aghion et al. (2014) argue that stabilizing fiscal policy has a positive effect on industry growth
and it is likely to operate through a credit constraint channel. However, the credit constraint
(or external financial dependence) channel is not the only mechanism through which fiscal
stabilization can affect growth. To the extent to which a certain industry-level technological
characteristic interacts with uncertainty or volatility, fiscal stabilization can affect growth via
the same channel. 7 For example, Samaniego and Sun (2016) run a horse race of several
mechanisms suggested in the theoretical literature through which uncertainty affects growth
and find the mixed results depending on the types of uncertainty shocks. To have implications
for the conduct of fiscal policy, however, we should find a robust and consistent channel
through which fiscal stabilization affects growth given that uncertainty can not only hamper
but also enhance growth. Therefore, we pay special attention to the internal consistency among
the proposed channels when we present our empirical results.
Volatility can enhance growth via growth options (Kraft et al., 2013) or Oi-HartmanAbel effect. Both…
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