IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2015-01-04.html
   My bibliography  Save this article

Economic Crises and the Substitution of Fiscal Policy by Monetary Policy

Author

Listed:
  • Ioannis N. Kallianiotis

    (Economics/Finance Department, The Arthur J. Kania School of Management, University of Scranton, Scranton, PA 18510-4602, USA)

Abstract

The paper discusses the latest economic crisis and the public policies used to mitigate the recession and improve the economic growth. The current target rate (monetary policy) is closed to zero since December 2008 with a new experimental policy ( quantitative easing ) to stimulate investment, growth, and employment. The abandonment of the fiscal policy and the current U.S. tax system, which reduces the disposable income and makes savings negative (dissaving or borrowing) has contributed to this slow growth of output and persistent unemployment. This policy has increased the debt of individuals and the low taxes on businesses have magnified the budget deficits and the national debt. Individuals are borrowing the present value of their uncertain future wealth to satisfy their current consumption and their high debt and low income raise the risk and this high risk premium increases the interest rate on uncollateralized loans, especially on credit cards. The U.S. government has to increase corporate taxes, which will lower the national debt; but at the same time, it has to reduce government expenditures (mostly, military expenditures and national defense), curbing inefficiencies, corruption, and increasing public investment (infrastructures). The public policies must be mixed policies (fiscal and monetary) to improve growth and employment first and then to reduce inflation and interest rates. The current one-sided monetary policy and the tax system need to be changed and become optimal, which are essential to improve social welfare, fairness, equity, justice, and to benefit the neglected middle class (the 90% of the population) in the country. This middle class works and pays just taxes and interest (redistribution of its wealth to government and banks), due to its low disposable income, high unemployment, and unfavorable monetary policy. Impoverishing the middle class will deteriorate the entire state of our socio-economic system and it might threaten the existence of the nation

Suggested Citation

  • Ioannis N. Kallianiotis, 2015. "Economic Crises and the Substitution of Fiscal Policy by Monetary Policy," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 44-68.
    • Handle: RePEc:eco:journ1:2015-01-04
    as

    Download full text from publisher

    File URL: http://www.econjournals.com/index.php/ijefi/article/view/963/pdf
    Download Restriction: no
    File URL: http://www.econjournals.com/index.php/ijefi/article/download/963/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Janet Koech & Jian Wang, 2014. "China's sputtering housing boom poses broad economic challenge," Economic Letter, Federal Reserve Bank of Dallas, vol. 9(9), pages 1-4, August.
    2. Stephen D. Williamson, 2014. "Monetary policy in the United States: a brave new world?," Review, Federal Reserve Bank of St. Louis, vol. 96(2), pages 111-122.
    3. Valerie Grossman & Michael Sposi, 2014. "Deindustrialization redeploys workers to growing service sector," Economic Letter, Federal Reserve Bank of Dallas, vol. 9(11), pages 1-4, September.
    4. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-178, Winter.
    5. Allen, Franklin & Gale, Douglas, 2009. "Understanding Financial Crises," OUP Catalogue, Oxford University Press, number 9780199251421.
    6. Leslie McGranahan & Tom Nohel, 2014. "The Fiscal Cliff and the Dynamics of Income," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Apr.
    7. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    8. Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
    9. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    10. Singh, Ajay Pratap & Nikolaou, Michael, 2014. "Optimal rules for central bank interest rates subject to zero lower bound," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-67.
    11. Marina Azzimonti-Renzo, 2013. "The political economy of balanced budget amendments," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-20.
    12. Philip Pilkington, 2014. "Endogenous Money and the Natural Rate of Interest: The Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets," Economics Working Paper Archive wp_817, Levy Economics Institute.
    13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    14. Gahvari, Firouz, 2007. "The Friedman rule: Old and new," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 581-589, March.
    15. Anton A. Cheremukhin, 2014. "Middle-skill jobs lost in U.S. labor market polarization," Economic Letter, Federal Reserve Bank of Dallas, vol. 9(5), pages 1-4, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ioannis N. Kallianiotis, 2015. "The Optimal Taxation and the Current Tax System," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(3), pages 151-164, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ioannis N. Kallianiotis, 2015. "The Optimal Taxation and the Current Tax System," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(3), pages 151-164, March.
    2. Ioannis N. Kallianiotis, 2014. "The Optimal Interest Rates and the Current Interest Rate System," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(3), pages 1-25.
    3. Donald Bruce & William Fox & Matthew Murray, 2003. "To Tax Or Not To Tax? The Case Of Electronic Commerce," Contemporary Economic Policy, Western Economic Association International, vol. 21(1), pages 25-40, January.
    4. Joong-Ho Kook & Seok Gyu Choi, 2022. "A Comparative Study of Household Consumption Patterns and Optimal Commodity Tax Rates between Korea and Japan," Korean Economic Review, Korean Economic Association, vol. 38, pages 479-507.
    5. Bielecki, Marcin & Stähler, Nikolai, 2022. "Labor Tax Reductions In Europe: The Role Of Property Taxation," Macroeconomic Dynamics, Cambridge University Press, vol. 26(2), pages 419-451, March.
    6. David R. Agrawal & William F. Fox, 2017. "Taxes in an e-commerce generation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 903-926, September.
    7. Goulder, Lawrence H. & Thalmann, Philippe, 1993. "Approaches to efficient capital taxation : Leveling the playing field vs. living by the golden rule," Journal of Public Economics, Elsevier, vol. 50(2), pages 169-196, February.
    8. Homburg, Stefan, 2010. "Allgemeine Steuerlehre: Kapitel 1. Grundbegriffe der Steuerlehre," EconStor Books, ZBW - Leibniz Information Centre for Economics, number 92547, March.
    9. Wei-Bin Zhang, 2020. "Optimal Taxation in the Solow-Uzawa Growth Model with Public Goods," Journal of Social and Development Sciences, AMH International, vol. 10(3), pages 1-11.
    10. Cintra, Marcos, 2009. "Bank transactions: pathway to the single tax ideal A modern tax technology;the Brazilian experience with a bank transactions tax (1993-2007)," MPRA Paper 16710, University Library of Munich, Germany.
    11. Stähler, Nikolai, 2019. "Who benefits from using property taxes to finance a labor tax wedge reduction?," Journal of Housing Economics, Elsevier, vol. 46(C).
    12. Firouz Gahvari, 2012. "The Friedman Rule in a Model with Endogenous Growth and Cash‐in‐Advance Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 787-823, August.
    13. Cosgel, Metin M., 2006. "Taxes, efficiency, and redistribution: Discriminatory taxation of villages in Ottoman Palestine, Southern Syria, and Transjordan in the sixteenth century," Explorations in Economic History, Elsevier, vol. 43(2), pages 332-356, April.
    14. Jorge Martinez-Vazquez & Mark Rider, 1996. "A Revelation Approach To Optimal Taxation," Public Finance Review, , vol. 24(4), pages 439-463, October.
    15. María Angélica Arbeláez Restrepo & Leonard E. Burman & Sandra Consuelo Zuluaga, 2004. "The bank debit tax in Colombia," Informes de Investigación 3565, Fedesarrollo.
    16. Ahlberg, Joakim, 2006. "Optimal Taxation of Intermediate Goods in the Presence of Externalities: A Survey Towards the Transport Sector," Working Papers 2006:3, Swedish National Road & Transport Research Institute (VTI).
    17. Gaetano Lisi, 2023. "Tax Audits, Tax Rewards and Labour Market Outcomes," Economies, MDPI, vol. 11(2), pages 1-12, February.
    18. Alan J. Auerbach, 2006. "The Future of Capital Income Taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 27(4), pages 399-420, December.
    19. Vlieghe, Gertjan W, 2007. "Imperfect credit markets: implications for monetary policy," MPRA Paper 12957, University Library of Munich, Germany.
    20. Börjesson, Maria & Asplund, Disa & Hamilton, Carl, 2021. "Optimal kilometre tax for electric passenger cars," Working Papers 2021:3, Swedish National Road & Transport Research Institute (VTI).

    More about this item

    Keywords

    Estimation; Time-Series Models; Consumption and Saving; Taxation; Government Expenditures; Interest Rates; Monetary Policy; Fiscal Policy;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2015-01-04. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.