What Has Financed Government Debt?

Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data. First, we show that small VAR models of fiscal policy may not be invertible and that expanding the information set to include government debt has quantitatively important implications. Then we impose the present-value condition on an identified VAR and characterize the way in which the present-value support of debt varies across types of fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. Debt is supported almost entirely by changes in the present-value of surpluses for some fiscal shocks, but for other fiscal shocks surpluses fail to adjust, leaving a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long---on the order of 50 years or more.fiscal policy, present-value restriction, taxes, government spending

What Has Financed Government Debt?

Dynamic rational expectations models imply that the real value of debt in the hands of the public must be equal to the expected present-value of surpluses. We impose this equilibrium condition on an identified VAR and characterize the way in which the present-value support of debt varies across various types of fiscal policy shocks and between fiscal and non-fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. For some fiscal policy shocks, debt is supported almost entirely by changes in the present-value of surpluses, however, in the case of other fiscal policy shocks, surpluses fail to adjust and instead leave a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long – on the order of fifty years – while present-values calculated up to any finite horizon up to then fluctuate wildly, particularly following government spending and transfer shocks.

Monetary and Fiscal Policy Switching

A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. A computational model illustrates that because agents" decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issuesMonetary-Fiscal Interactions, Regime-Switching

Monetary and Fiscal Policy Switching

Interest rate rules for monetary policy and tax rules for fiscal policy change stochastically between two regimes. In the first regime monetary policy follows the Taylor principle and taxes rise strongly with increases in the real value of government debt; in the second regime the Taylor principle fails to hold and taxes follow an exogenous stochastic process. Because agents? decision rules embed the probability that policies will change qualitatively in the future, monetary and tax shocks always produce wealth effects, breaking down Ricardian Equivalence. The impacts of monetary policy shocks can also be different because their fiscal implications (and wealth effects) are different when regime can change. If monetary policy adjusts the interest rate at all in response to inflation, then i.i.d. policy shocks propagate for many periods. The paper also addresses two empirical issues. First the 'price puzzle' that plagues monetary VARs is a natural outcome of periods when monetary policy fails to obey the Taylor principle and taxes do not respond to the state of government indebtedness. Second, dynamic correlations between fiscal surpluses and government liabilities, which have been interpreted as consistent with Ricardian Equivalence, can be produced by an underlying equilibrium that is non-RicardianMonetary-Fiscal Interactions, Regime-Switching

Have we underestimated the likelihood and severity of zero lower bound events?

Before the recent recession, the consensus among researchers was that the zero lower bound (ZLB) probably would not pose a significant problem for monetary policy as long as a central bank aimed for an inflation rate of about 2 percent; some have even argued that an appreciably lower target inflation rate would pose no problems. This paper reexamines this consensus in the wake of the financial crisis, which has seen policy rates at their effective lower bound for more than two years in the United States and Japan and near zero in many other countries. We conduct our analysis using a set of structural and time series statistical models. We find that the decline in economic activity and interest rates in the United States has generally been well outside forecast confidence bands of many empirical macroeconomic models. In contrast, the decline in inflation has been less surprising. We identify a number of factors that help to account for the degree to which models were surprised by recent events. First, uncertainty about model parameters and latent variables, which were typically ignored in past research, significantly increases the probability of hitting the ZLB. Second, models that are based primarily on the Great Moderation period severely understate the incidence and severity of ZLB events. Third, the propagation mechanisms and shocks embedded in standard DSGE models appear to be insufficient to generate sustained periods of policy being stuck at the ZLB, such as we now observe. We conclude that past estimates of the incidence and effects of the ZLB were too low and suggest a need for a general reexamination of the empirical adequacy of standard models. In addition to this statistical analysis, we show that the ZLB probably had a first-order impact on macroeconomic outcomes in the United States. Finally, we analyze the use of asset purchases as an alternative monetary policy tool when short-term interest rates are constrained by the ZLB, and find that the Federal Reserve's asset purchases have been effective at mitigating the economic costs of the ZLB. In particular, model simulations indicate that the past and projected expansion of the Federal Reserve's securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1-1/2 percentage points by 2012. In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.Inflation (Finance) ; Interest rates ; Macroeconomics - Econometric models

Accommodating Actuator Failures in Flight Control Systems

A technique for the design of flight control systems that can accommodate a set of actuator failures is presented. As employed herein, an actuator failure is defined as any change in the parametric model of the actuator which can adversely affect actuator performance. The technique is based upon the formulation of a fixed feedback topology which ensures at least stability in the presence of the failures in the set. The fixed compensation is obtained from a loop-shaping design procedure similar to Quantitative Feedback Theory and provides stability robustness in the presence of uncertainty in the vehicle dynamics caused by the failures. System adaptation to improve performance after actuator failure(s) occurs through a static gain adjustment in the compensator followed by modification of the system prefilter. Precise identification of the vehicle dynamics is unnecessary. Application to a single-input, single-output design using a simplified model of the longitudinal dynamics of the NASA High Angle of Attack Research Vehicle is discussed. Non-real time simulations of the system including a model of the pilot demonstrate the effectiveness and limitations of the approach

Foveal contour interaction for low contrast acuity targets

Previous investigators reported the impairment of foveal visual acuity by nearby flanking targets (contour interaction) is reduced or eliminated when acuity is measured using low contrast targets. Unlike earlier studies, we compared contour interaction for high and low contrast acuity targets using flankers at fixed angular separations, rather than at specific multiples of the acuity target’s stroke width. Percent correct letter identification was determined in 4 adult observers for computer generated, high and low contrast dark Sloan letters surrounded by 4 equal contrast flanking bars. Two low contrast targets were selected to reduce each observer’s visual acuity by 0.2 and 0.4 logMAR. The crowding functions measured for high and low contrast letters are very similar when percent correct letter identification is plotted against the flanker separation in min arc. These results indicate that contour interaction of foveal acuity targets occurs within a fixed angular zone of a few min arc, regardless of the size or contrast of the acuity target

REDES DE PRODUÇÃO GLOBAIS E A ANÁLISE DO DESENVOLVIMENTO ECONÔMICO

Este artigo descreve um modelo para a análise da integração econômica e sua relação com as assimetrias do desenvolvimento econômico e social. Conscientemente rompendo com formas estado-cêntricas de ciência social, defende uma agenda de pesquisa que seja mais adequada às exigências e consequências da globalização do que tradicionalmente tem sido o caso nos ‘estudos sobre o desenvolvimento’. Baseando-se em tentativas anteriores de analisar as atividades transfronteiriças das firmas, suas configurações espaciais e consequências para o desenvolvimento, este artigo vai além destas ao propor o modelo da ‘rede de produção global’ (RPG). Ele explora os elementos conceituais envolvidos neste modelo com algum pormenor e depois passa a esboçar um exemplo estilizado de uma RPG. O artigo termina com uma breve indicação dos benefícios que poderiam ser obtidos pela pesquisa informada pela análise da RPG. Palavras-chave: Globalização. Desenvolvimento econômico. Redes de negócios. Instituições. Enraizamento.ABSTRACTThis article outlines a framework for the analysis of economic integration and its relation to the asymmetries of economic and social development. Consciously breaking with state-centric forms of social science, it argues for a research agenda that is more adequate to the exigencies and consequences of globalization than has traditionally been the case in ‘development studies’. Drawing on earlier attempts to analyse the cross-border activities of firms, their spatial configurations and developmental consequences, the article moves beyond these by proposing the framework of the ‘global production network’ (GPN). It explores the conceptual elements involved in this framework in some detail and then turns to sketch a stylized example of a GPN. The article concludes with a brief indication of the benefits that could be delivered by research informed by GPN analysis.Keywords: Globalization. Economic development. Business networks. Institutions. Embeddedness