The cyclical and structural stance of fiscal policy

Jung, Il

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https://hdl.handle.net/2142/101577 Copy

Description

Title

The cyclical and structural stance of fiscal policy

Author(s)

Jung, Il

Issue Date

2018-07-13

Director of Research (if dissertation) or Advisor (if thesis)

Esfahani, Hadi Salehi

Doctoral Committee Chair(s)

Esfahani, Hadi Salehi

Committee Member(s)

• Gahvari, Firouz
• Deltas, George
• Lee, JiHyung

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• cyclical stance
• cyclicality
• tax policy
• tax elasticity
• fiscal policy
• institutions
• public debt
• demographic change

Abstract

This paper examines the cyclical and structural stance of fiscal policy. Firstly, to measure the stance of tax policy more accurately, this paper constructs a new tax-indicator – “discretionary tax policy index”. Secondly, incorporating this new dataset, the short-run cyclical stance of tax policy by institutions and public debt is investigated empirically. Finally, in the long-run (structural) perspective, I examine empirically the fiscal impact of demographic shift, and project its future impact on public finance in an internationally-comparable way. In Chapter 1, I establish a novel measure – “discretionary tax policy index” – that can isolate discretionary tax policy from automatic stabilizer effect, as well as representing the entire tax policy, which overcomes the limitations of other indicators. Especially, this paper newly estimates a vast amount of “time-varying” tax-elasticities, which enables us to better-gauge discretionary tax policy. Based on sizable panel-data for 151 countries over the periods of 1970-2015, this newly developed indicator could expand analytical tool in the context of tax policy. In Chapter 2, I investigate empirically the cyclical stance of tax policy in both advanced and developing countries, as well as the two underlying reasons – institutions and public debt – for their different cyclical stances. Using the new dataset of “discretionary tax policy index” derived from Chapter 1, both IV fixed-effects and system GMM are employed to deal with endogeneity problem. This paper finds that tax policies tend to be mildly countercyclical or acyclical in advanced countries, while being procyclical in developing countries. Moreover, the tendency for procyclicality of tax policy becomes stronger when institutions are weak and public debt is high. In Chapter 3, I examine empirically the fiscal impact of demographic shift, and project its future impact on public spending. For empirical analysis, this paper employs Arellano-Bond’s system GMM, using 161 countries’ panel-data from 1970 to 2016. For simulation, it uses “granular” approach to project future fiscal-burdens, based on the micro-level (age-specific) data from the National Transfer Accounts (NTAs). This paper finds that demographic shift negatively affects fiscal balance, and its impacts on three age-related spending – pension, health and education – are the most important channels. Also, from the simulations for 117 countries, it compares internationally the future fiscal-burdens – augmented by three key spending – that countries would likely face only by demographic shift, which requires structural reforms be done for some countries.

Graduation Semester

2018-08

Type of Resource

text

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http://hdl.handle.net/2142/101577

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Copyright 2018 IL JUNG

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