Fiscal And Monetary Policies In Small Open Economies
This thesis includes three empirical chapters focusing on fiscal and monetary policies in small open economies.
The first chapter is titled “Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960–2016”. In this chapter, I compare fiscal cyclicality across advanced and developing countries, geographic regions as well as income levels over the 1960–2016 period, then identify factors that explain countries’ government spending and tax-policy cyclicality. Public debt/tax base ratio provides a more robust explanation for government-spending cyclicality than public debt/output ratio but the reverse is true when capital investment is accounted for in government spending. On average, a more indebted (relative to tax base) government spends more in good times and cuts back spending indifferently compared with a low-debt country in bad times. I also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. Finally, the analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space, that is, a 10% increase in public debt/tax base ratio is associated with an upper bound of 5.9% increase in government-spending procyclicality.
The second chapter is titled “Global Commodity-Price Shocks and Inflation Targeting in Emerging and Developing Countries”. This chapter examines if the inflation targeting regime makes a difference in the output and inflation responses when global commodity-price shocks take place. I apply the traditional SVAR with Cholesky decomposition approach for 99 emerging and developing countries over the 1990Q1-2016Q4 period and compute the median impulse responses of GDP growth and inflation for the IT and the non-IT countries. Following symmetric price shocks, I find that only the IT countries display persistent improvements in GDP growth, with cumulative responses remaining significant at least for six quarters after the shocks. The non-IT countries show insignificant responses in GDP growth, however. The analysis of asymmetric shocks also indicates that the IT countries are more resilient to the negative price shocks with long-lasting increases in GDP growth compared to the non-IT countries. In any case, the inflationary responses are transitory, similarly across both groups. In addition, the variance decomposition shows a modest role played by global commodity-price shocks in explaining the variations of output and inflation, with the fuel-price shock having the largest effects than the agriculture-price and metal-price shocks.
The third chapter is titled “The Effect of Monetary Policy on the New Zealand Dollar: a Bayesian SVAR Approach”. This chapter uses the Bayesian SVAR approach introduced by Baumeister and Hamilton (2015) to examine the effect of New Zealand monetary policy shocks on exchange rate over the 1999-2020 period. I bring stock prices to the estimation and employ the co-movements of interest rates and stock prices to untangle the unexpected monetary policy shocks from other shocks that simultaneously affect interest rates and exchange rate. By choosing the priors consistently with the existing studies, this study is explicit about the influence of priors on posterior distributions and impulse response functions. The results show that, following an unexpected New Zealand monetary contraction, the value of New Zealand dollar against the US dollar increases immediately and even remains stronger in the long-run. There is no evidence of “delay overshooting” at least for one year in the estimation.