Since the 1990s many OECD countries have adopted fiscal rules. After the adoption of these rules, the ratio of social transfers to government consumption substantially declined, and it recovered following the global economic crisis. Using a sample of 22 OECD countries, we found a negative effect of fiscal rules on the ratio of social transfers to government consumption. This finding implies that fiscal rules are effective, but not necessarily binding. Our examination reveals that the negative effect of fiscal rules on the social transfers to government consumption ratio is particularly evident in countries with relatively weak legal protection to social rights.

This paper shows that a policy maker needs only two types of information to set the optimal income tax rate at the top: a measure of labor supply elasticity and the shape of skills distribution. We find that the asymptotic tax rate is not affected by the degree of inequality aversion as long as the marginal utility of consumption converges to zero. By using empirically plausible estimates for the compensated labor supply elasticity and the shape of skills distribution, we find that the optimal marginal tax rate at the top should be between 33 and 60 percent, which is in line with the existing rates in the real world.

This paper uses the Aguiar and Gopinath (2007) methodology in order to estimate whether “the cycle is the trend” in 23 emerging markets and 22 OECD economies. These estimates are then used to test whether procyclical fiscal policy in emerging countries is due to persistent shocks to per-capita GDP. We find support for this hypothesis. While both developed and emerging countries have a procyclical policy for investment expenditure, procyclicality is evident in emerging countries also for government consumption and transfers. Over the period of increasing globalization after the 1990s, these are signs of a reduction in the extent of procyclical expenditure policy in emerging countries. We also find that, in countries with high levels of foreign direct investment, procyclicality is milder.

This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be countercyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are countercyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not.

This paper studies the role of business cycles in the phenomenon of increasing government-spending/GDP ratios in the OECD countries. An empirical framework that includes both long-run and cyclical considerations in the determination of government spending is applied to panel data covering 1975–1998. The main finding is that the prolonged rise in the spending/GDP ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior: the ratio increases during recessions and is only partially reduced in expansions. The long-run ratcheting effect is estimated as approximately 2% of GDP. Also analyzed are the cyclical changes in the composition of government spending (government consumption, transfers and subsidies, and capital expenditure), as well as a possible link between cyclical ratcheting and government weakness.

This paper estimates the impact of policy variables on the per-capita Business Sector GDP in Israel in the framework of an extended neo-classical model. The methodology assesses the impact of policy variables on the components of the production function: factors of production (capital and labour) and total factor productivity. Using the cointegration approach, both long-run and short-term specifications are tested. It is shown that: i) in the long-run the reduction of taxes, public sector deficit and inflation enhance growth mainly through an increase in total factor productivity; ii) in the short-run transitory changes in taxes do not affect business sector GDP, while persistent changes in taxes do affect it. It is also shown that persistent mass immigration waves to Israel enhanced production through a `scale effect’, since they implied an increase in the market size.

This Note shows that income effects play an important role in determining the optimal shape of income tax structure. First, it shows that the result of rising marginal income tax rates presented by Diamond (1998) is sensitive to the assumed utility of consumption. Replacing linear by logarithmic utility of consumption that implies the presence of income effects, pro- duces an opposite result of declining marginal tax rates at high levels of income in the simulations. Second, it shows that the assumed utility of consumption plays a critical role in Mirrlees' example (1971). The income tax structure is upward (rather than downward) sloping at high levels of income using linear utility of consumption that implies no income effects.

Two well-known results concerning the demand for annuities in an overlapping generations model are: (i) egoistic agents should annuitize all their wealth; and (ii) altruistic agents should segment their savings between riskless bonds (for bequests) and annuities (for own consumption). This paper extends the analysis by considering income uncertainty. It is shown that while the ‘segmentation’ result holds under future generation’s income uncertainty (FGIU), altruistic agents do not segment their savings in the presence of second-period income uncertainty (SPIU); the intuition for this result is that income uncertainty in the second period of life is contingent on being alive, and therefore at the optimum the covariance between one’s offspring’s consumption and life uncertainty is not zero, as in the case of certainty and FGIU. The effects of precautionary savings on the demand for annuities are also analyzed.  1999 Elsevier Science S.A. All rights reserved.

This chapter analyzes the abrupt reduction of government expenditure that allowed reducing the deficit after 1985 – backing the Israeli economy to successfully confront the challenges of the 1990s. We analyze the reasons for the reduction of defense expenditure and we show that this feature was crucial for creating an historical regime shift in Israeli Fiscal Policy.