Budgetary Policy is Subject to Constraints

‭Budgetary policy is subject to constraints‬ ‭ )‬‭A questioning of its effectiveness:‬ a ‭The opening of eco weakens the effectiveness of the multiplier:‬ ‭Stagflation of the 70s calls Keynesian theories into question.‬ ‭In a context of economic opening, isolated relaunches come up against external constraints:‬ I‭ncrease G - IS to the right - nv equilibrium point above BP (BP>0) - national currency‬ ‭Increasing openness of the economy makes recovery policy more difficult.‬ ‭OECD: although in open eco, the multiplier effect can lose 40% of its‬ ‭effectiveness.‬ ‭ iberal economists reject the effectiveness of a fiscal stimulus:‬ L ‭For the liberals: public I which revives the eco only replaces private I without modifying the‬ ‭ verall level of the D.‬‭This is because there is a‬‭double eviction effect‬‭:‬ o ‭-‬‭Crowding out effect by Ti‬‭(Friedman)‬‭:To finance public‬‭deficit generated by increased spending,‬ ‭the State borrows on financial‬ ‭markets‬‭and‬‭therefore‬‭captures‬‭part‬‭of‬‭the‬‭S‬‭available‬‭(because‬‭it‬‭is‬‭active‬‭+‬‭therefore‬‭moves‬ ‭S‬‭towards‬‭public‬‭securities).‬‭We‬‭therefore‬‭have‬‭a‬‭scarcity‬‭of‬‭K‬‭on‬‭financial‬‭markets‬‭because‬ ‭S moved to the public market - increase Ti (price of S) - decrease IN private.‬ ‭-This is called an indirect crowding out effect.‬ -‭ ‬‭Tax crowding out effect‬‭:agents anticipate future‬‭increase in taxes (to make up the deficit) -‬ ‭increase S (therefore no C) - no efficiency of the PB. It is‬‭Ricardian equivalence‬‭.‬ ‭This can be illustrated in ISLM: increased deficit following budgetary stimulus leads to IS‬ ‭movement to the right. However, eco agents anticipate increasing taxes intended to repay debt -‬ ‭increasing their S - IS returns to its initial position. Ricardian Equivalence iff:‬‭Massive PB / G‬ ‭deemed unproductive / no credit channel for households and SMEs.‬ ‭ATTENTION‬‭:‭W ‬ e cannot have the effect of eviction through‬‭tax and tax at the same time.‬ ‭ jrd,‬ ‭little‬ ‭evict°‬ ‭effect‬ ‭by‬ ‭Ti‬ ‭because‬ ‭mobility‬ ‭K‬ ‭(diluted‬ ‭effect).‬ ‭And‬ ‭Ricardian‬ ‭effects‬ ‭are‬ ‭all‬ ‭the‬ A ‭stronger as the level of dete is high.‬ ‭ inally, budget deficits lead to increased public debt which can produce a snowball‬‭effect‬‭.‬ F ‭Successive‬ ‭deficits‬ ‭inflate‬ ‭the‬ ‭debt.‬ ‭Borrowing‬ ‭necessary‬ ‭to‬ ‭cope‬ ‭with‬ ‭deficits‬ ‭generates‬ ‭increasingly‬‭heavy‬‭financial‬‭costs‬‭(interest)‬‭which‬‭increase‬‭the‬‭debt‬‭burden.‬‭Sustainable‬‭debt‬ ‭only if real Ti < Rate of - of GDP.‬ ‭ )‬ b ‭Budgetary policy is constrained within the framework of the EU:‬ ‭Budgetary discipline is essential within the framework of an‬ ‭integrated monetary zone:‬‭See Europe course.‬ ‭ he evolution of budgetary discipline within the eurozone:‬ T ‭Maastricht 1992: 3% GDP deficit and 60% debt.‬ ‭PSC 1997: reaffirms Maastricht but imposes sanctions. Non-compliance with the rule by All and Fr‬ ‭has somewhat discredited the PSC.‬ ‭European budgetary compact 2012: golden rule - structural deficit 0.5% GDP. Much more intelligent‬ ‭than the 3% rule which did not take into account the economic situation (that therefore posed a‬ ‭problem, particularly in recession when the auto stabs were in play).‬ ‭See Europe course for this subpart - a lot more detailed.‬ ‭However, we can question the necessary budgetary rigor within the EU.‬ ‭ -‬‭Contemporary theory of PB: the viability of public debt:‬ 2 ‭a)‬ ‭Public debt sustainability = threshold effect‬ ‭As long as debt is deemed sustainable, ok. If critical, S increases (Ricardian effects).‬