Optimal Fiscal and Monetary Policy, Debt Crisis and Management

Abstract

The initial government debt-to-GDP ratio and the government's commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with "normal shocks", perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds -under commitment -the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.

Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach

“…The second strand of literature focuses on obtaining optimal simple policy rules. These are regarded as simple and implementable in the sense of Schmitt‐Grohé and Uribe (2007), Cristiano et al (2017), Filiani (2021), and Galí and Monacelli (2008). They are also predicated on the assumption of a benevolent government.…”

“…The study also solves for Ramsey optimal policy, which is used as a benchmark policy against the optimal simple policy rules. Existing studies in the field of optimal policy have omitted the possibility of a self‐interested government and assumed the presence of a benevolent government (Bi & Kumhof, 2011; Cristiano et al, 2017; Leeper et al, 2021; Leeper & Zhou, 2021; Philippopoulos et al, 2015; Schmitt‐Grohé & Uribe, 2007). Existing studies are largely situated within the context of developed economies and are less susceptible to inefficient fiscal behavior compared to their counterparts in developing economies.…”

Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach

“…The second strand of literature focuses on obtaining optimal simple policy rules. These are regarded as simple and implementable in the sense of Schmitt‐Grohé and Uribe (2007), Cristiano et al (2017), Filiani (2021), and Galí and Monacelli (2008). They are also predicated on the assumption of a benevolent government.…”

“…The study also solves for Ramsey optimal policy, which is used as a benchmark policy against the optimal simple policy rules. Existing studies in the field of optimal policy have omitted the possibility of a self‐interested government and assumed the presence of a benevolent government (Bi & Kumhof, 2011; Cristiano et al, 2017; Leeper et al, 2021; Leeper & Zhou, 2021; Philippopoulos et al, 2015; Schmitt‐Grohé & Uribe, 2007). Existing studies are largely situated within the context of developed economies and are less susceptible to inefficient fiscal behavior compared to their counterparts in developing economies.…”

Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach

“…The second strand of literature focuses on obtaining optimal simple policy rules. These are regarded as simple and implementable in the sense of Schmitt‐Grohé and Uribe (2007), Cristiano et al (2017), Filiani (2021), and Galí and Monacelli (2008). They are also predicated on the assumption of a benevolent government.…”

“…The study also solves for Ramsey optimal policy, which is used as a benchmark policy against the optimal simple policy rules. Existing studies in the field of optimal policy have omitted the possibility of a self‐interested government and assumed the presence of a benevolent government (Bi & Kumhof, 2011; Cristiano et al, 2017; Leeper et al, 2021; Leeper & Zhou, 2021; Philippopoulos et al, 2015; Schmitt‐Grohé & Uribe, 2007). Existing studies are largely situated within the context of developed economies and are less susceptible to inefficient fiscal behavior compared to their counterparts in developing economies.…”

Rent‐seeking and optimal fiscal‐monetary policy rules in Nigeria: A DSGE approach

“…The second strand of literature focuses on obtaining optimal simple policy rules. These are regarded as simple and implementable in the sense of Schmitt‐Grohé and Uribe (2007), Cristiano et al (2017), Filiani (2021), and Galí and Monacelli (2008). They are also predicated on the assumption of a benevolent government.…”

“…The study also solves for Ramsey optimal policy, which is used as a benchmark policy against the optimal simple policy rules. Existing studies in the field of optimal policy have omitted the possibility of a self‐interested government and assumed the presence of a benevolent government (Bi & Kumhof, 2011; Cristiano et al, 2017; Leeper et al, 2021; Leeper & Zhou, 2021; Philippopoulos et al, 2015; Schmitt‐Grohé & Uribe, 2007). Existing studies are largely situated within the context of developed economies and are less susceptible to inefficient fiscal behavior compared to their counterparts in developing economies.…”