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The article reports that in the spring of 2020, the Federal Reserve System, in collaboration with the U.S. Treasury, established for the first time a program under which it offered short-term funding to states, localities, and other municipal entities. In this article, we discuss the basic economics of state and local governments and the ways they use debt.

This study investigates how fiscal policy shocks affect the external sector through markup dynamics in advanced and developing economies. We focus on the role of markup dynamics as a channel through which fiscal policy has a distinct effect on real exchange rates. Using panel data from 32 countries, we employ a local projection to evaluate the impact of expansionary fiscal policy shocks on real exchange rates, markups, and current a ccounts. Our empirical findings show distinct responses to the shocks among advanced and developing countries regarding the real exchange rate, due to different markup d ynamics. Expansionary fiscal measures result in an appreciation of the real exchange rate and an increase in markup for developing countries, whereas advanced economies experience a decrease in markup and a depreciation of the real exchange rate. Markup dynamics vary between advanced and developing economies due to differences in firms' entry and exit conditions in their institutions. In advanced economies, expansionary fiscal policy shocks promote competition and new firm e ntry, r esulting in a reduced m arkup. On the other hand, unfavorable conditions in developing countries maintain or increase existing firms' market p ower. Our research highlights the heterogeneous effects of fiscal policy shocks on the external sector, emphasizing the need for policymakers to consider institutional and entry conditions while designing and implementing fiscal policies. [ABSTRACT FROM AUTHOR]

US fiscal and monetary policies implemented during the COVID-19 pandemic have been likened to those often adopted during wars. This article compares macroeconomic policies of the pandemic period with those of major US wars since the Civil War. Inflation often surges during wars, as it did in the second year of the pandemic, and the wartime experiences can provide insights about the relative scale and persistence of inflation associated with sudden, large increases in government expenditures, such as the fiscal response to the COVID-19 pandemic. The article describes fiscal and monetary policies in each war and postwar period and traces differences in the relationships between the growth in government debt, the money stock, and inflation across the episodes to differences in the prevailing monetary regime and other institutional arrangements. The evidence from US wars suggests that the extent of government spending and the means used to finance that spending can have a significant impact on inflation outcomes. Substantial monetary financing of large increases in government spending was a characteristic of most major wars and a key driver of inflation. Further, the historical record reveals that postwar periods can be disruptive, with sharp fluctuations in economic activity and inflation, and that quick restoration of price stability requires recalibration of fiscal and monetary policy that often has been politically and technically challenging. [ABSTRACT FROM AUTHOR]

Debt crises in emerging markets have been linked to large fiscal deficits, high inflation rates, and large devaluations. This article studies a sovereign default model with domestic fiscal and monetary policies to understand Argentina's experience during the 2000s commodity boom (2005-2017), following the default of 2001. The model suggests that domestic policies played a critical role in Argentina's poor economic performance. Despite exceptionally favorable terms of trade, a rise in government spending led to higher taxation, inflation and currency depreciation, and lower output. Economic performance would have been worse had Argentina followed a strict, rather than accommodative, monetary policy without curbing its expansionary fiscal policy. Finally, limited access to international credit markets during this episode did not appear to play a significant role. [ABSTRACT FROM AUTHOR]

To mitigate the health and economic fallout from the COVID-19 pandemic, governments worldwide engaged in massive fiscal support programs. We show that generous fiscal support is associated with an increase in the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries contributed to high inflation. Our findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do. [ABSTRACT FROM AUTHOR]

This article highlights two approaches to tax policy for the top 1 percent of earners. On the one hand are dynamic general equilibrium models requiring complicated calibration and simulation algorithms and strong structural assumptions. On the other hand is the sufficient statistic approach, which attempts to parsimoniously reach the trinity of empirical, theoretical, and policy relevance. The author illustrates ongoing work highlighting explicit connections between these two approaches. [ABSTRACT FROM AUTHOR]