presentation 12

Page 1

• Global Edition of Principles of Economic

  • Author: Marcel Novák, PhD

  • Institution: Národohospodárska fakulta

  • Email: marcel.novak@euba.sk

Page 2

Fiscal Policy

• Aims and instruments of fiscal policy outlined.

• Definition and structure of the state budget.

• Stabilization policy: how it works to stabilize the economy.

• Effects within the Aggregate Demand/Aggregate Supply (AD/AS) model.

Monetary Policy

• Objectives and instruments of monetary policy discussed.

• Transmission mechanism of monetary policy.

• Role of the central bank in economic management.

• Distinction between short-run and long-run effects of monetary policy in the AD/AS model.

• Overview of non-standard monetary instruments utilized.

Page 3

Budget Overview

• Definition: An annual statement detailing government outlays and receipts.

• Two main purposes:

  • Financing government programs and activities.

  • Achieving macroeconomic objectives:

    • Full employment

    • Sustained economic growth

    • Price stability

• John Maynard Keynes's fiscal policy philosophy emphasized the use of budgets for macroeconomic goals.

• The process of budget creation involves:

  • The Prime Minister and Ministry of Finance proposing budgets.

  • Parliament making decisions regarding spending and taxes.

• Budget outcomes are subject to the economic conditions throughout the fiscal year.

Page 4

Budget Components

• Receipts: Examples include tax revenues:

  • Personal income taxes

  • Social Security taxes

  • Corporate income taxes

  • Indirect taxes (e.g., gasoline, alcohol, tobacco)

• Outlays: Government payments including:

  • Transfer payments (social security, unemployment benefits)

  • Expenditures on goods and services (defense, infrastructure)

  • Debt interest payments

Page 5

Budget Balance

• Calculation: Budget balance = Receipts - Outlays.

• Outcomes of the budget balance:

  • Surplus: Receipts exceed outlays.

  • Deficit: Outlays exceed receipts.

  • Balanced budget: Receipts equal outlays.

• Comparison of budget figures over time is enhanced by expressing as a percentage of GDP.

Page 6

Debt & Deficit in the EU (2022)

• Overview of government deficit/surplus across EU Member States expressed in % of GDP.

Page 7

Government Debt Management

• Budget deficits lead to borrowing; surpluses allow for loan repayments.

• Definition of government debt: Total amount borrowed by the government (past deficits minus surpluses).

• Impact of taxes on personal and corporate income on real GDP and employment:

  • Discussed supply-side effects of fiscal policies.

  • Tax wedge created between before-tax and after-tax wages leads to reduced labor supply.

Page 8

Supply-Side Effects of Fiscal Policy

• Income tax implications illustrated:

  • Before-tax wage: $30/hour;

  • After-tax wage declines to $20/hour due to increased taxation.

• Resulting decrease in employed labor hours and potential GDP.

Page 9

Tax Revenues and the Laffer Curve

• Concept of the Laffer curve: Relationship between tax rates and tax revenue collected.

• Inference: Higher tax rates do not guarantee more tax revenue; tax cuts may stimulate employment but potentially worsen budget deficits.

Page 10

Fiscal Stimulus Overview

• Definition: Using fiscal policy to boost production and employment.

  • Types of fiscal policy:

    • Automatic: Triggered by economic conditions.

    • Discretionary: Initiated through legislative action.

• Changes in real GDP impact tax revenues and needs-tested spending variables.

Page 11

Cyclical & Structural Budget Balances

• Distinguishing between structural surplus/deficit (at full employment) and cyclical surplus/deficit (actual surplus minus structural).

• Balanced budget condition when real GDP equals potential GDP.

Page 12

Discretionary Fiscal Stimulus and Aggregate Demand

• Examination of how discretionary fiscal stimulus affects aggregate demand directly.

• Government expenditure multiplier effect on real GDP.

• Interaction between spending, income, and increased borrowing costs potentially reducing investments.

Page 13

Tax Cuts vs. Government Expenditure

• Tax multiplier effects on real GDP are typically smaller than government expenditure impacts.

Page 14

Supply-Side Effects of Fiscal Stimulus

• Tax impacts: Labor income and capital income taxation hinder employment and savings.

• Implications for overall economic growth and the efficiency of fiscal policies.

• Recognized time lags affecting discretionary fiscal stimulus.

Page 15

Overview of Monetary Policy Objectives

• Goals of monetary policy include:

  • Price stability: Essential for savings and investment.

  • Controlling inflation and stabilization of economic growth.

  • Central bank's trade-offs between inflation and interest rates in the short run.

Page 16

Conduct of Monetary Policy

• Framework: European Central Bank (ECB) & National Central Banks.

• Instruments: Interest rate targeting, monetary base adjustments, etc.

Page 17

Standard Tools of Monetary Policy

• Standing Facilities for banks (e.g., Marginal Lending Facility).

• Types of open market operations aimed at stabilizing liquidity.

Page 18

Minimum Reserve Requirements

• ECB mandates minimum reserves for credit institutions for effective monetary control.

• Definition of forward guidance in relation to monetary policy intentions.

Page 19

Monetary Policy Transmission

• Visual representation of how monetary policy impacts aggregate demand and GDP through interactions.

Page 20

ECB Actions Against Recession

• Strategies to restore full employment during low inflation scenarios.

Page 21

ECB Actions Against Inflation

• Response mechanisms for high inflation rates and the need for price stability restoration.

Page 22

Financial and Banking Crisis Components

• Breakdown of elements leading to banking crises, including liquidity events and solvency issues.

Page 23

Monetary Policy Strategies

• Two suggested approaches: Inflation rate targeting and Taylor rule for interest rate settings to manage inflation expectations.

Page 24

Non-Standard Tools of Monetary Policy

• Overview of non-standard instruments introduced post-2007 financial crisis, including negative interest rates and targeted refinancing operations.

Page 25

Contact Information

• Národohospodárska fakulta

• Economic University of Bratislava

• Address: Dolnozemská cesta 1, 852 35 Bratislava, Slovenská republika

• Contact: +421 2 6729 1541, marcel.novak@euba.sk, www.nhf.euba.sk