Public investment in the United Kingdom has been persistently low compared to both its post-war levels and other OECD countries, and this shortfall has been widely seen as one of the causes of weak UK productivity growth since the global financial crisis. Although the Labour government elected in 2024 prioritised growth via higher public and private investment, its self-imposed fiscal rules have limited public investment, sparking debate and research on the UK fiscal framework. This Special Issue brings together recent research examining fiscal frameworks and includes contributions from academic and policy-oriented researchers and leading experts on this issue.

In this paper, we examine the role of state-owned enterprises (SOEs) in the transmission of fiscal policy shocks in China, combining a structural VAR with macroeconomic data and a panel model with firm-level data. We first identify two types of structural fiscal shocks using a Bayesian SVAR with sign restrictions and informative priors on structural elasticities: (1) stimulus shocks, defined as deviations from a policy rule for the budget deficit, and (2) government size shocks, which reflect changes in taxes not necessarily affecting the deficit. These shocks are then incorporated into a local projections framework using firm-level data. Our analysis reveals that SOEs respond fundamentally differently from non-SOEs to fiscal shocks. The results suggest that SOEs are not in strict competition with non-SOEs for government resources: both types of firms benefit from fiscal stimulus, yet SOEs are the ones predominantly subject to crowding out when the size of the government sector expands. At the same time, SOEs in strategic industries consistently receive government support under both government size shocks and tax-cut-led stimulus shocks. Moreover, in nonstrategic sectors, SOE investment exhibits a leading effect over non-SOE investment under tax-cut-led stimulus—an effect that vanishes under spending-led stimulus.

This study investigates the relationship between consumers’ fiscal and inflation expectations using granular survey data. After applying various methods to reduce endogeneity bias and providing several robustness checks, we show that consumers’ fiscal expectations positively affect their inflation expectations. Moreover, we demonstrate that this link is nonlinear and becomes stronger with the deterioration of the fiscal stance, particularly in response to increases in consumer expectations regarding future fiscal expansions. This novel empirical finding is especially relevant from both fiscal and monetary policy perspectives.

This paper argues that the current UK fiscal framework fails to support growth-enhancing public investment while inadequately restraining debt accumulation. Frequent changes to fiscal rules, their short horizon and incentives that prioritise current spending over long-term investment have undermined economic stability and productivity growth. We propose a reformed framework centred on clear fiscal objectives, enhanced OBR analysis of long-run sustainability and a target for the primary surplus consistent with maintaining stable debt. A supplementary investment rule would ensure adequate public capital formation. Together, these reforms aim to raise productivity, support resilience and improve living standards.

Over the past 5 years, the policy constraint posed by the sovereign bond market has strengthened. Across the G7, governments have been forced into rapid policy reversals, often due to sharp and unexpected rises in bond yields. The fact that the bond market acts as a constraint on policy—particularly on long-term investment—is well known. What has become apparent is that this market constraint has sharpened and now shapes G7 policymaking outside periods of acute crisis. This paper examines the bond market constraint, and how it has evolved in recent years. The past 5 years have seen a striking evolution, with record levels of G7 debt issued. Focusing on the United States and the United Kingdom, we outline two key empirical puzzles: first, for both, bond yields appear higher than justified by benchmark models; second, in the United Kingdom, yields have become highly (and surprisingly) volatile. We then review candidate explanations for these changes. We posit and examine new forces—demographic shocks, news coverage of fiscal watchdogs, the role of hedge funds and stablecoins. Finally, we use a simple econometric framework to provide a first test of whether these forces may explain bond yields. We find indicative evidence that they do. However, much remains unexplained, suggesting the importance of further work to understand the implications of the higher debt costs across the G7. As part of this analysis, we introduce a new dataset of fiscal watchdog media salience and publication patterns, which we make available to support future research.

We explore the effects of fiscal policy shocks on aggregate output and inflation. We use the Bayesian econometric methodology of Baumeister and Hamilton applied to the fiscal structural vector autoregressive model to evaluate key elasticities and fiscal multipliers using U.S. data. In our baseline specification that ends before Covid pandemic, the government spending multiplier is equal to approximately $0.57$ and tax multiplier is approximately $-0.35$ after one year. The short-term output elasticity of government spending is statistically insignificant and the output elasticity of taxes is approximately equal to $2.26$.

We analyse the monetary-fiscal policy mix in post-war Europe, focusing on France and Italy, to trace the historical dynamics of debt and inflation. Using a Markov-switching DSGE model, we identify distinct policy regimes: a Passive Monetary-Active Fiscal (PM/AF) regime before the late 1980s/early 1990s, an Active Monetary-Passive Fiscal (AM/PF) regime associated with central bank independence and EMU convergence, and a third regime marked by the ELB and active fiscal measures aimed at recovery. Simulations reveal that the PM/AF regime in France led to price volatility but stabilised debt, while AM/PF curbed inflation at the cost of rising debt. In contrast, Italy’s procyclical fiscal policy in downturns exacerbated imbalances, aggregate volatility, and low growth. We further assess the implications of policy credibility and uncertainty.

This study utilizes a Bayesian Dynamic Stochastic General Equilibrium model, calibrated with Chinese data, to assess the impact of public investments, which account for about 16.2% of China’s GDP. Despite an expected public capital stock of 256% of GDP, based on a 4.6% depreciation rate and a 0.73 efficiency rate of public investment (emerging-economy estimate), the actual figure stands at 152%. This significant discrepancy underscores the inefficiencies in public investments, with 43% of public investment expenditures enhancing the capital stock. The output elasticity (productivity) of public capital is estimated at just 3%, substantially lower than the previously estimated 8% for emerging economies, and has declined to 2% in the post-2008 period. Simulations based on these efficiency and productivity metrics reveal that the output multiplier of public investment is 0.7. China’s public investments reduce TFP, crowd out private investment, and raise the public debt-to-GDP ratio in the medium term.

Using the Irish experience of public investment and fiscal policy management over the last 25 years, we identify five core lessons. These concern (1) the need for sustained investment effort even when facing tough choices regarding public expenditure, (2) the importance of assessing the adequacy of public capital, (3) counter-cyclicality as an important principle of public investment, (4) crowding-in private investment and (5) the challenge for public investment caused by longer-term challenges such as the necessary climate transition. We also propose two overarching design suggestions for fiscal policy and investment management frameworks.

In this paper, we develop a model economy to study how financial innovations affect financial access and inequality. Financial innovations alter distribution of costs. In this way, the measure of buyers is endogenous regarding the payment method. In studying financial innovations in an economy with limited commitment, it is possible to bridge two existing literatures. When comparing stationary equilibria, we find that the results depend on the scarcity of collateral. Moreover, the expected welfare and inequality are affected by consumers access to the form of payment systems.

The UK fiscal framework, especially the fiscal rules in place, has faced widespread criticism. Since the current system was introduced, the UK’s fiscal arithmetic has worsened. The article examines practices in other countries and, going beyond rules, looks at other dimensions of their fiscal frameworks, then suggests a ‘menu’ of possible changes to improve the UK approach. Scrutiny and a variety of governance features also deserve attention. While not all practices elsewhere can be directly adopted in the UK institutional setting and some would encounter political sensitivities, many can.

This paper investigates the effect of taxation of polluting products and redistribution on pollution, income and welfare inequalities. We consider a two-sector Ramsey model with a green and a polluting good, two types of households and a subsistence level of consumption for the polluting good. The environmental tax is always effective in reducing pollution regardless of the level of subsistence consumption. However, this level, together with the redistribution rate, matters at the individual level as it shapes the impact of the environmental policy on individual consumption and welfare. Looking at the stability properties of the economy, a high subsistence level of polluting consumption leads to instability or indeterminacy of the steady state, while the environmental externality reduces the scope for indeterminacy. Increasing the tax rate and redistributing more to the worker affect the occurrence of indeterminacy and instability. Considering the subsistence level of consumption and the level of redistribution among households are of importance as it determines the effects of environmental tax policy in the long term and the stability of the economy in the short term.

This paper examines the effects of average inflation targeting (AIT) on social welfare and fiscal multipliers under varying averaging windows using a nonlinear New Keynesian model. While the existing literature highlights AIT’s advantages over Inflation Targeting(IT) and longer-window AIT over shorter-window AIT in terms of social welfare, these conclusions often rely on linearized models that fail to capture expectation effects arising from window lengths. By solving the model nonlinearly, we find that social welfare increases with AIT windows up to six years but declines for longer windows. The key driver is the differing expectation effects, where longer windows reduce the likelihood of the zero lower bound (ZLB) binding but may overshoot inflation targets, leading to lower output and welfare. Our results reveal that the optimal averaging window for AIT depends critically on the ZLB probability: higher ZLB risks favor longer windows, while lower risks make shorter windows sufficient. Moreover, we investigate the fiscal multiplier under AIT and show that it differs significantly from IT. In addition, the welfare-maximizing AIT window does not align with the window that maximizes fiscal multipliers, highlighting trade-offs between welfare and fiscal policy effectiveness. This study underscores the importance of nonlinear methods in evaluating AIT and provides practical insights into its calibration for modern monetary policy frameworks.

This paper studies the dynamic relationship between economic growth, pollution, and government intervention. To do so, we develop a model that links pollution to the economy’s productive capacity, thereby capturing the feedback loops between economic activity, environmental degradation, and fiscal policy intervention. The model incorporates a pollution-sensitive damage function, taxes, and government spending while analyzing economic growth under different levels of government intervention. Therefore, the main paper’s contributions reveal that economies can achieve favorable outcomes with low or moderate government intervention, and that our results underscore the vital role of pollution mitigation policy in dynamically balancing economic growth with environmental sustainability.

This study proposes a novel time-varying, endogenous fiscal reaction function, and investigates whether and how the US government responded to the rising debt to assess the sustainability of its debt over 1916 to 2022. The reaction function is estimated via a state space model using Bayesian methods by treating its coefficient as an unobservable stochastic process. Although there is evidence that the government considered long-term projections of the interest rate in its fiscal decisions, the response to debt was largely driven by unobservable non-economic factors and by large and persistent shocks. We find that the government was more proactive about constraining debt increases during the 20th century than previously thought (such as in Bohn, 1998), but it has become less aggressive ever since. The debt-GDP ratio was sustainable for almost the entire sample period, but its steady state value has been rising consistently in recent years. The government’s response to debt contributed 6.0 percentage points to the surplus-GDP ratio in the postwar 20th century, but only 3.6 percentage points afterward.

This paper commemorates the 50th anniversary of the 1973 recession during Salvador Allende’s government by offering a comprehensive analysis of macroeconomic populism. Focusing on the lessons from this historical episode, it is argued that the lax economic policies in 1970 and 1971 triggered the boom of 1971, culminating in a financial crisis in 1972 and an economic recession in 1973. The examination encompasses an evaluation of Chilean macroeconomic populism, delving into the impact of these lax policies on the business cycle. Furthermore, it addresses prevalent misinterpretations of the 1973 recession in the context of recent Latin American events. The paper concludes by extrapolating broader insights from the Chilean experience, offering valuable lessons for shaping effective economic policies in Latin America.

We build a two-country DSGE model of a monetary union to compare systematically the economic impact of a fiscal stimulus according to different features: domestic or European, public investment or public consumption, unfunded (thanks to grants) or debt-funded, on the core or periphery, and in normal or abnormal (post-ZLB) times. We highlight the importance of spillover wealth effects. Grants play a more important role when it comes to funding public consumption rather than investment, in contrast with the actual use of collective EU funds. A side result permits to assess the opportunity cost of accepting loans.

How does the allocation of scarce jobs and production influence their supply? We present the results of a macroeconomics laboratory experiment that investigates the effects of alternative rationing schemes on economic stability. Participants play the role of worker-consumers who interact in labor and output markets. All output, which yields a reward to participants, must be produced through costly labor. Automated firms hire workers to produce output so long as there is sufficient demand for all production. In every period either output or labor hours are rationed. Random queue, equitable, and priority (i.e., property rights) rationing schemes are compared. Production volatility is the lowest under a priority rationing rule and is significantly higher under a scheme that allocates the scarce resource through a random queue. Production converges toward the steady state under a priority rule, but can diverge to significantly lower levels under a random queue or equitable rule where there is the opportunity for and perception of free-riding. At the individual level, rationing in the output market leads consumer-workers to supply less labor in subsequent periods. A model of myopic decision-making is developed to rationalize the results.

We experimentally test a model of public good bargaining due to Bowen et al. (Am Econ Rev 104:2941–2974, 2014) and compare two institutions governing bargaining over public good allocations. The setup involves two parties negotiating the distribution of a fixed endowment between a public good and each party’s individual account. Parties attach either high or low weight to the public good and the difference in these weights reflects the degree of polarization. Under discretionary bargaining rules, the status quo default allocation to the group account (in the event of disagreement) is zero while under the mandatory bargaining rule it is equal to the level last agreed upon. The mandatory rule thus creates a dynamic relationship between current decisions and future payoffs, and our experiment tests the theoretical prediction that the efficient level of public good is provided under the mandatory rule while the level of public good funding is at a sub-optimal level under the discretionary rule. Consistent with the theory, we find that proposers (particularly those attaching high weight to the public good) propose significantly greater allocations to the public good under mandatory rules than under discretionary rules and this result is strengthened with an increase in polarization. Still, public good allocations under mandatory rules fall short of steady state predictions, primarily due to fairness concerns that prevent proposers from exercising full proposer power.

The pandemic caused expenditure shares to vary more than usual, leading to serious ramifications when combined with the fact that the expenditure shares used to calculate CPI inflation are 1-2 years old. This caused a potential bias in the measurement of inflation. We also look at the cost-of-living crisis and found that the lags in updating the expenditure shares for energy and food led to an underestimate of inflation in 2022. Inflation also has a large effect on the measurement of the public sector deficit. With a high debt-GDP ratio and high inflation, there was a substantial inflation tax.