Expansive fiscal policy
The expansionary fiscal policy is a financial policy measure of the state, which leads either to an increase in government spending or to a reduction in taxes. This causes an increase in the budget deficit .
Changes in taxes and government spending have an impact on the IS curve , thus on equilibrium income and the interest rate. The expansionary fiscal policy is mostly viewed in the context of the expansionary monetary policy , which influences the LM curve , the combination of income and interest rate.
The counterpart to the expansionary fiscal policy is the restrictive fiscal policy .
origin
Founded by John M. Keynes, fiscal policy is the fiscal implementation of his economic theory. It found its legal anchoring in the Federal Republic of Germany in the Stability and Growth Act (StWG) in 1967. Today it is the law to promote the stability and growth of the economy (StabG), which with the help of economic and financial policy measures, e.g. . B. by expansive fiscal policy, and by observing the magic square would like to create the macroeconomic balance. The fiscal instruments available to the state include spending policy, tax policy and debt and reserve policy.
aims
Fiscal policy is geared towards the achievement of stability and economic policy goals, as well as controlling the economy and growth, but above all full employment.
Effect of the expansionary fiscal policy in the model
From the classic point of view in the AS-AD model
When increasing government expenditure ( G ), one can differentiate between a credit-financed and a tax-financed increase. It is assumed that if government spending increases, so too will transformation spending, i.e. H. Output that transforms is effected. It is also assumed that nominal wages are flexible.
Effect of a loan-financed increase in government spending
As the state claims the credit market, interest rates rise ( i ). This leads to a decrease in investment ( I ) and an increase in savings. The private demand for capital goods and consumer goods is falling, but the state demand for these goods increases to the same extent, since the overall economic supply remains the same and is determined by the real wage . Rising government spending would displace non-government investment (if, if not, the key interest rate and lending rate would be driven by need and demand). The theory of displacement in the so-called “credit market” is also known as crowding-out . This concept fails (see also money creation ) because it was erroneously assumed that so-called capital collection centers would lend (limited) cash to borrowers and that credit capital would be limited.
Effect of a tax-financed increase in government spending
This has a direct effect on private demand in that it leads to the increase in taxes ( T ) reducing disposable income ( Y D ). There is a decline in private savings and consumption ( C ). As a result of this decline in household demand, corporate investment also declines. This is where the crowding-out effect sets in, again without any impact on employment.
From a Keynesian point of view in the IS-LM model
Here we assume the rigidity of nominal wages, insufficient demand for goods ( Z ) and underemployment in the labor market. It is questionable whether the investment activity depends on the interest. It is believed that under certain circumstances this has an impact on equilibrium income as well as employment.
Investment trap
In the context of this IS-LM analysis, it is assumed that the investments do not depend on the interest rate. Here the IS curve runs vertically in the model, i. H. if the money supply is increased, real income is not affected. The interest rate falls, but it has no impact on investment activity or real income.
Effect of a loan-financed increase in government spending
The forecast here is that this debt-financed increase in government spending ( G ) will be more effective than tax-financed fiscal policy. In the case of a loan-financed increase in government spending, it has no influence on interest rates in the area of the liquidity trap and in the case of a money market equilibrium. According to the multiplier effect, government expenditures have a full impact on demand and investments do not decline. This leads to a right shift of the IS curve. As aggregate demand increases, production expands and this leads to an increase in employment.
Assuming interest-rate investing now , the whole thing is as follows. The increase in government spending shifts the IS curve to the right, thereby increasing equilibrium income and the interest rate. This has a negative impact on investment demand. It follows that the trade balance is deteriorating. There is thus a trade deficit , i. This means that imports are increasing and exports are decreasing. The result is that the external balance falls and this is also caused by the foreign exchange surplus.
Effect of a tax-financed increase in government spending
It does not work as well as the credit-financed increase in government spending, since the tax-financed increase in expenditure in the case of an investment that is not interest-dependent decreases the demand of private households. The employment effect is therefore lower.
Effect of an increase in taxes
The increase in taxes shifts the IS curve to the left, lowering equilibrium income and the interest rate. It follows that the investment demand increases.
Effects of the expansionary fiscal policy
The expansionary fiscal policy has two effects. On the one hand it causes an increasing equilibrium income and a positive investment demand, or on the other hand it leads to an increasing equilibrium interest rate and a negative investment demand.
Individual evidence
- ↑ cf. Gabler Wirtschafts-Lexikon (2000), Wiesbaden: Gabler Verlag, word: Fiskalpolitik.
- ↑ cf. Gabler Wirtschafts-Lexikon (2000), Wiesbaden: Gabler Verlag, word: Liquiditätsfalle.
literature
- Oliver Blanchard; Gerhard Illing: Macroeconomics . 4th updated edition. Munich, 2006: Pearson Studies - ISBN 3-8273-7209-7 .
- Peter Bofinger: Fundamentals of Economics: An Introduction to the Science of Markets . Munich, 2003: Pearson Studies - ISBN 3-8273-7076-0 .
- Wolfgang Cezanne: General Economics . 5th edition, Munich, 2002: Oldenbourg Verlag - ISBN 3-486-25984-9 .
- Gustav Dieckheuer: Macroeconomics: Theory and Politics . 5th edition, Berlin, 2003: Springer Verlag - ISBN 3-540-00564-1 .
- Rüdiger Dornbusch; Stanley Fischer; Richard Startz: Macroeconomics . 8th edition, Munich, 2003: Oldenbourg Verlag - ISBN 3-486-25713-7 .
- Gabler Wirtschafts-Lexikon , Wiesbaden, 2000: Gabler Verlag - ISBN 3-409-30388-X .
- Norbert Konegen: Economic Policy for Political Scientists: Selected Decision Areas . Münster, 1994: LIT Verlag - ISBN 3-89473-791-3 .
- Gerhard Rübel: Basics of monetary foreign trade . 2nd edition, Munich, 2002: Oldenbourg Verlag - ISBN 3-486-25840-0 .
- Paul JJ Welfens: Fundamentals of Economic Policy: Institutions - Macroeconomics - Political Concepts . 2nd edition, Berlin: Springer Verlag - ISBN 3-540-21212-4 .