The Optimal Policy Mix to Achieve Public Debt Consolidation

Cardani, Roberta; Menna, Lorenzo; Tirelli, Patrizio

doi:10.1017/s1365100518000433

Cited by 8 publications

(8 citation statements)

References 31 publications

(30 reference statements)

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“…is increasing and strictly concave in all its arguments where we use the same functional form for preferences and the same normalized time unit as above. 13 The within period budget constraint of each Poor household is given by:…”

Section: Poor Householdsmentioning

confidence: 99%

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Public Debt Consolidation and its Distributional Effects

Sakkas

Varthalitis

2019

The Manchester School

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We build a dynamic general equilibrium model with heterogeneous households, namely Rich and Poor, and capitalskill complementarity structure in the production function, to study aggregate and distributional implications of fiscal consolidation policies when the government uses a rich set of spending and tax instruments. Fiscal policy is conducted through constrained optimized fiscal rules. Our results show that, in the long run, fiscal consolidation enhances both aggregate efficiency and equity; however, it may hurt Rich households depending on which fiscal instrument takes advantage of the fiscal space created. Along the transition, wage inequality significantly increases due to the capital skill complementarity structure of the production function. Specifically, this happens because debt consolidation crowds in capital and this favours Rich (skilled) households. On the other hand, the reduction in interest rates and government bonds lead to a decrease in Rich households income coming from capital and government bonds which eventually decrease income inequality. Finally, a rather novel finding is that the combination of asset and skill heterogeneity amplifies the increase in wage inequality in the early phase of fiscal consolidation.

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Section: Poor Householdsmentioning

confidence: 99%

“…In this section we focus on the structural parameter that governs the capital-skill complementarity (CSC), i.e. v < 1, in equation (13) in section 2.5. This parameter governs the elasticity of substitution between physical capital and skilled labor, 1 1 v .…”

Section: Capital-skill Complementaritymentioning

confidence: 99%

Public Debt Consolidation and its Distributional Effects

Sakkas

Varthalitis

2019

The Manchester School

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“…Ramsey optimal policy can also take into account monetary and …scal policy (Cardani et al (2018), Gomis-Porqueras and Zhang (2019), Chatelain and Ralf (2019d, 2019e)). Further research may test these models, following Chatelain and Ralf (2017) tests and estimations in the case where the transmission mechanism is only the New-Keynesian Phillips curve.…”

Section: Resultsmentioning

confidence: 99%

Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy

Chatelain

Ralf

2017

SSRN Journal

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This paper shows that a shift from Ramsey optimal policy under short term commitment (based on a negative-feedback mechanism) to a Taylor rule (based on positive-feedback mechanism) in the new-Keynesian model is in fact a Hopf bifurcation, with opposite policy advice. The number of stable eigenvalues corresponds to the number of predetermined variables including the interest rate and its lag as policy instruments for Ramsey optimal policy. With a new-Keynesian Taylor rule, however, these policy instruments are arbitrarily assumed to be forward-looking variables when policy targets (inflation and output gap) are forward-looking variables. For new-Keynesian Taylor rule, this Hopf bifurcation implies a lack of robustness and multiple equilibria if public debt is not set to zero for all observation

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“…As shown in Coenen et al (2008), tax-based consolidations could reduce the volatility of output, inflation, and the terms of trade. Also according to Cardani et al (2018) the optimal policy for public debt consolidations, in contrast with empirical literature, calls for increases in taxes and inflation.…”

Section: Fiscal Policy Coordinationmentioning

confidence: 99%

One Emu Fiscal Policy for the Euro

2019

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We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

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The Optimal Policy Mix to Achieve Public Debt Consolidation

Cited by 8 publications

References 31 publications

Public Debt Consolidation and its Distributional Effects

Public Debt Consolidation and its Distributional Effects

Hopf Bifurcation from New-Keynesian Taylor Rule to Ramsey Optimal Policy

One Emu Fiscal Policy for the Euro

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