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Uncertainty, corruption, trust in government and the effectiveness of government spending
| Resumo: | Since the Great Recession (2007 - 2009) and especially during the Coronavirus pandemic (2020 – 2022), there has been a growing interest in the effects of fiscal policy to drive economies towards sustainable growth. In this sense, fiscal policy can provide the instruments to correct market failures and influence the trajectory of economic activity. However, there is no consensus among scholars and policy-makers on the topic or the (in)effectiveness of the instruments. Nevertheless, it is possible to point out some causes for the imprecision of fiscal effects, such as uncertainty and distrust in national institutions. Briefly, two strands of economic thought guide the conduct of fiscal policies. The first strand claims that the economy must be guided by market self-regulation for effective development. On the other hand, the second group advocates that the government must intervene and regulate economic relations. Between the Great Depression (1929 - 1939) and the beginning of World War II (1939 – 1945), the second group stood out on the governments' agenda and the orientation was of fiscal stimulus to boost employment and smoothen the business cycle. This orientation stood out until the mid-1960s with the rise of monetarism, driven by the Chicago School. Thus, criticisms arose about the effectiveness of fiscal instruments, as they would be incapable of producing short-term effects and, therefore, would not compete with the speed of monetary stimulus, owing to long internal lags for fiscal changes and long external lags for implementing government investment. However, at the beginning of the 21st century, some economists argued that the discredited fiscal policy was back. They underline that, in the light of more conventional theory or historical evidence, monetary policy is efficient in containing high inflation, however, it has limitations in scenarios of high uncertainty, recession and low inflation rates. In this context, this thesis focuses on the macroeconomic impact of public spending in uncertainty scenarios, the influence of trust in government, and corruption on economic performance. The thesis addresses four main questions: what is the effect of public spending on economic activity in times of high and low uncertainty? What is the impact of corruption on economic performance? Is this effect smaller in governments with less interference in the economy (small governments)? How does the quality of public expenditure management affect the citizens' trust and economic activity? The second chapter investigates the influence of uncertainty on the effectiveness of government spending for the United States (U.S.) and Brazil. The findings suggest a positive impact of public spending on economic activity, indicating Keynesian effects on consumption and Gross Domestic Product (GDP). In order to assess the effects of uncertainty, two uncertainty proxies are used, i.e., the Economic Policy Uncertainty Index (EPU) and the World Uncertainty Index (WUI). The models indicate that fiscal effects are considerably less intense when uncertainty reaches high levels. Therefore, agents are more cautious when uncertainty obscures the outline of the economic scenario, hindering agents' decisions, reducing consumption, investment and economic activity, in line with the Real Options (R.O.) approach. The third chapter deepens the analysis of the relationship between uncertainty and economic activity. In this sense, another uncertainty index is used: the market expectation of volatility by stock index option prices (Chicago Board Options Exchange Volatility Index - VIX index). This chapter addresses three main issues: First, the chapter assesses the impact of public consumption shocks on the economy. Next, the chapter analyses the interference of uncertainty shocks on economic activity. Lastly, it investigates the extent to which uncertainty shocks attenuate the economic effect of increasing public consumption. To examine these issues, the essay is divided into two parts. Initially, empirical models are used for the U.S., Brazil and a panel with six European countries. The chapter then highlights a dynamic stochastic general equilibrium (DSGE) model. Lastly, the empirical and theoretical simulations are superimposed, and the adherence of the theoretical model to the data is analysed. The findings suggest that when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. After analysing the interaction of uncertainty with public spending and GDP, chapter four evaluates a second transmission channel. The models examine whether the level of corruption associated with countries with high public spending (big governments) affects GDP. Thus, dynamic models and the Generalised Method of Moments (GMM) approach are used for a panel of 48 countries. The findings point to a significant adverse effect of corruption on GDP per capita (level and growth), but big governments benefit less from reducing corruption. Furthermore, developing economies benefit less from reducing corruption regardless of government size. Thus, the government size is not sufficient to explain the influence of corruption on economic activity, although the level of effectiveness of public services is crucial. Lastly, the models suggest that private investment is a potential transmission channel for corruption. Corruption and trust are complex aspects of interpersonal and organisational relationships, greasing the wheels of relationships between agents and public institutions. Thus, chapter five is organised into two main parts. The first one assesses the effects of ineffective government spending on public trust and whether there is evidence of a trust trap. Lastly, the essay analyses how public trust affects economic activity. This essay employs dynamic regression models and the GMM for panel models. The findings point to a significant adverse impact of ineffective government spending (IGS) on trust in government (TIG), confirming theoretical assumptions. The models also highlight a threshold in the relationship between trust and IGS, i.e., a trust trap. Briefly, to a certain extent, it is possible to regain trust by reducing the ineffectiveness of government spending. However, after this threshold, the recovery of trust requires a significant effort from governments. Lastly, the models suggest that increases in TIG foster economic activity. Therefore, this thesis indicates that in highly unpredictable economies or where there is little TIG from citizens, regardless of the increase in government spending, the responses of households and entrepreneurs are compromised and hence there is no stimulus for investments or private consumption. In this context, the findings suggest that fiscal impulses positively influence household consumption and economic performance. Nevertheless, for a more effective impact of fiscal instruments, it is necessary to develop attitudes and coordinated public policies that inhibit the noxious effects of uncertainty and mistrust indicated through the different transmission channels. |
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| Autores principais: | Rodrigues, Eduardo de Sá Fortes Leitão |
| Assunto: | Fiscal Policy Government Size Ineffective Government Spending Corruption Trust Uncertainty Política Orçamental Tamanho do Governo Gastos do Governo Ineficazes Incerteza Corrupção Confiança |
| Ano: | 2023 |
| País: | Portugal |
| Tipo de documento: | tese de doutoramento |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | Universidade de Lisboa |
| Idioma: | inglês |
| Origem: | Repositório da Universidade de Lisboa |
| Resumo: | Since the Great Recession (2007 - 2009) and especially during the Coronavirus pandemic (2020 – 2022), there has been a growing interest in the effects of fiscal policy to drive economies towards sustainable growth. In this sense, fiscal policy can provide the instruments to correct market failures and influence the trajectory of economic activity. However, there is no consensus among scholars and policy-makers on the topic or the (in)effectiveness of the instruments. Nevertheless, it is possible to point out some causes for the imprecision of fiscal effects, such as uncertainty and distrust in national institutions. Briefly, two strands of economic thought guide the conduct of fiscal policies. The first strand claims that the economy must be guided by market self-regulation for effective development. On the other hand, the second group advocates that the government must intervene and regulate economic relations. Between the Great Depression (1929 - 1939) and the beginning of World War II (1939 – 1945), the second group stood out on the governments' agenda and the orientation was of fiscal stimulus to boost employment and smoothen the business cycle. This orientation stood out until the mid-1960s with the rise of monetarism, driven by the Chicago School. Thus, criticisms arose about the effectiveness of fiscal instruments, as they would be incapable of producing short-term effects and, therefore, would not compete with the speed of monetary stimulus, owing to long internal lags for fiscal changes and long external lags for implementing government investment. However, at the beginning of the 21st century, some economists argued that the discredited fiscal policy was back. They underline that, in the light of more conventional theory or historical evidence, monetary policy is efficient in containing high inflation, however, it has limitations in scenarios of high uncertainty, recession and low inflation rates. In this context, this thesis focuses on the macroeconomic impact of public spending in uncertainty scenarios, the influence of trust in government, and corruption on economic performance. The thesis addresses four main questions: what is the effect of public spending on economic activity in times of high and low uncertainty? What is the impact of corruption on economic performance? Is this effect smaller in governments with less interference in the economy (small governments)? How does the quality of public expenditure management affect the citizens' trust and economic activity? The second chapter investigates the influence of uncertainty on the effectiveness of government spending for the United States (U.S.) and Brazil. The findings suggest a positive impact of public spending on economic activity, indicating Keynesian effects on consumption and Gross Domestic Product (GDP). In order to assess the effects of uncertainty, two uncertainty proxies are used, i.e., the Economic Policy Uncertainty Index (EPU) and the World Uncertainty Index (WUI). The models indicate that fiscal effects are considerably less intense when uncertainty reaches high levels. Therefore, agents are more cautious when uncertainty obscures the outline of the economic scenario, hindering agents' decisions, reducing consumption, investment and economic activity, in line with the Real Options (R.O.) approach. The third chapter deepens the analysis of the relationship between uncertainty and economic activity. In this sense, another uncertainty index is used: the market expectation of volatility by stock index option prices (Chicago Board Options Exchange Volatility Index - VIX index). This chapter addresses three main issues: First, the chapter assesses the impact of public consumption shocks on the economy. Next, the chapter analyses the interference of uncertainty shocks on economic activity. Lastly, it investigates the extent to which uncertainty shocks attenuate the economic effect of increasing public consumption. To examine these issues, the essay is divided into two parts. Initially, empirical models are used for the U.S., Brazil and a panel with six European countries. The chapter then highlights a dynamic stochastic general equilibrium (DSGE) model. Lastly, the empirical and theoretical simulations are superimposed, and the adherence of the theoretical model to the data is analysed. The findings suggest that when the economy is hit by a simultaneous shock of uncertainty and public consumption, it obscures the effectiveness of the fiscal stimulus on the economy, corroborating the empirical results. After analysing the interaction of uncertainty with public spending and GDP, chapter four evaluates a second transmission channel. The models examine whether the level of corruption associated with countries with high public spending (big governments) affects GDP. Thus, dynamic models and the Generalised Method of Moments (GMM) approach are used for a panel of 48 countries. The findings point to a significant adverse effect of corruption on GDP per capita (level and growth), but big governments benefit less from reducing corruption. Furthermore, developing economies benefit less from reducing corruption regardless of government size. Thus, the government size is not sufficient to explain the influence of corruption on economic activity, although the level of effectiveness of public services is crucial. Lastly, the models suggest that private investment is a potential transmission channel for corruption. Corruption and trust are complex aspects of interpersonal and organisational relationships, greasing the wheels of relationships between agents and public institutions. Thus, chapter five is organised into two main parts. The first one assesses the effects of ineffective government spending on public trust and whether there is evidence of a trust trap. Lastly, the essay analyses how public trust affects economic activity. This essay employs dynamic regression models and the GMM for panel models. The findings point to a significant adverse impact of ineffective government spending (IGS) on trust in government (TIG), confirming theoretical assumptions. The models also highlight a threshold in the relationship between trust and IGS, i.e., a trust trap. Briefly, to a certain extent, it is possible to regain trust by reducing the ineffectiveness of government spending. However, after this threshold, the recovery of trust requires a significant effort from governments. Lastly, the models suggest that increases in TIG foster economic activity. Therefore, this thesis indicates that in highly unpredictable economies or where there is little TIG from citizens, regardless of the increase in government spending, the responses of households and entrepreneurs are compromised and hence there is no stimulus for investments or private consumption. In this context, the findings suggest that fiscal impulses positively influence household consumption and economic performance. Nevertheless, for a more effective impact of fiscal instruments, it is necessary to develop attitudes and coordinated public policies that inhibit the noxious effects of uncertainty and mistrust indicated through the different transmission channels. |
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