A welfare perspective on the fiscal–monetary policy mix: The role of alternative fiscal instruments

Abstract

The need of fiscal consolidation is likely to dominate the policy agenda in the next decade; starting from statistical evidence on the conduct of fiscal policy in the EMU area over the last decade, this paper addresses the optimality of alternative fiscal consolidation strategies. We explore the welfare properties. In this paper we explore the welfare properties of debt-targeting fiscal policy implemented through, alternatively, distortionary taxation on consumption, labour and capital income or productive and wasteful government expenditure. We build a general equilibrium model with various distortions in order to evaluate the welfare ranking of alternative fiscal policy configurations under different monetary policy regimes. Our results show the welfare superiority of fiscal adjustments based on productive government expenditure, whereas the use of a capital income tax rate as fiscal instruments yields the highest welfare loss. * Marattin: Department of Economics, Università di Bologna; luigi.marattin@unibo.it. Marzo: Department of Economics, Università di Bologna; massimiliano.marzo@unibo.it. Zagaglia: Modelling Unit, Sveriges Riksbank; paolo.zagaglia@riksbank.se. The views expressed herein are those of the authors only and should not be attributed to the members of the Executive Board of Sveriges Riksbank.

The debt trap: A two-compartment train wreck… and how to avoid it

“…Although criticized by some (Solow, 2010;Kocherlakota, 2010;Knibbe, 2013) these models have proved useful and have informed macro-economic debates. They are used by Central Banks and the European Union among others (see Ratto et al (2009), Marattin et al (2011) and Annicchiarico et al (2013) for a recent application to Italy). For example Trachanas and Katrakilidis (2013) warn of unsustainable debt in Greece, Italy, and Spain.…”