Fiscal Policy Rules in an Overlapping Generations Model with Endogenous Labour Supply

A fiscal policy rule in which taxation is a function of existing government debt (a "wealth-tax") is usually believed to be effective in providing stability. Using a dicrete-time version of Blanchard's overlapping generations model, extended to include money and an endogenous labour supply we show that, contrary to the intuition, a wealth tax might not be enough to ensure the existence of a unique, well defined, saddle-path equilibrium. We suggest that a government willing to run a positive and sustainable level of debt could use an alternative financing rule, imposing an additional tax component, that is a function of the difference between the real interest rate and the tax rate on wealth.

Public Spending Management and Macroeconomic Interdependence

This paper studies the international macroeconomic effects of microeconomic measures, aimed at improving the efficiency of public spending management by increasing the price-elasticity of public consumption. In order to do this, we develop a New Open Economy Macroeconomics (NOEM) model in which the elastiity of substitution between differentiated goods in public consumption is different from the one in private consumption and the optimal mark-up is endogenous. This allows us to disentangle the international effects of structural reforms that improve the efficiency of spending in the public sector. We find that such policies can significantly affect the macroeconomic interdependence pattern that follows asymmetric fiscal shoocks. In welfare terms, we find that the countries with a larger government sector have an incentive to promote global "public competition policies".

International Transmission of Environmental Policy: A New Keynesian Perspective

In this paper we examine the international transmission of environmental policy using a New Keynesian model of the global economy. We first consider the case in which the quality of the environment affects utility, but not productivity. This allows us to look at the trade-off between environmental quality and output. We then consider the case in which the quality of the environment increases productivity but does not affect utility. Our main results show that in both cases a unilateral implementation of a more stringent environmental policy by the domestic country raises foreign welfare under a benchmark parameterization. However, since this policy can have a negative impact on domestic utility but a positive one on world utility, an international coordination problem can arise in the implementation of environmental policy: no country will have an incentive to implement environmental reforms if there is a possibility that its trading partners will do so.Environmental Economics, Environmental Policy, International Policy Coordination, Open Economy Macroeconomics

Public infrastructures, public consumption and welfare in a new open economy macro model

This paper focuses on the trade-off faced by governments in deciding the allocation of public expenditures between productivity-enhancing public infrastructures and utility-enhancing public consumption in a two-country model. The results show that a permanent increase in the domestic stock of public capital financed by a reduction in public consumption raises domestic welfare if the productivity of public capital is high and the weight of public consumption in private utility is low compared with private consumption. The effect on foreign welfare is negative in the short run, but positive in the long run. This implies that, if foreign authorities care not only about the present discounted value of welfare but also about welfare dynamics, a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.public spending composition; welfare; imperfect competition; nominal rigidities

The New Open Economy Macroeconomics of Government Debt

In this paper we introduce an overlapping generations structure of the Blanchard (1985) type in a New Open Economy Macroeconomics model. This allows us to study a wider range of fiscal shocks compared to the traditional Mundell-Fleming and to the baseline Redux (Obstfeld and Rogoff 1995, 1996) models. One important policy implication of our model is that the tax cut implemented in the US in 2001 might have contributed to the appreciation of the Dollar vis-a-vis the Euro. In contrast, the imposition of fiscal constraints such as the ``Golden Rule'' proposed by the UK government can have opposite exchange rate effects.Overlapping generations, new open economy macroeconomics, debt, tax cut

The New Open Economy Macroeconomics of Government Debt

In this paper we introduce an overlapping generations structure of the Blanchard type in a New Open Economy macroeconomics model. This allows us to study a wider range of fiscal shocks compared to the traditional Mundell-Fleming and to the baseline Redux models. One important policy implication of our model is that the tax cut implemented in the US in 2001 might have contributed to the appreciation of hte Dollar vis-a-vis the Euro. In contrast, the imposition of fiscal constraint such as the "Golden Rule" proposed by the UK government can have opposite exchange rate effects.

Public infrastructures, public consumption and welfare in a new open economy macro model

This paper focuses on the trade-off faced by governments in deciding the allocation of public expenditures between productivity-enhancing public infrastructures and utility-enhancing public consumption in a two-country model. The results show that a permanent increase in the domestic stock of public capital financed by a reduction in public consumption raises domestic welfare if the productivity of public capital is high and the weight of public consumption in private utility is low compared with private consumption. The effect on foreign welfare is negative in the short run, but positive in the long run. This implies that, if foreign authorities care not only about the present discounted value of welfare but also about welfare dynamics, a permanent domestic reallocation of public spending might result in a virtuous global technological cycle

International Transmission of Environmental Policy : A New-Keynesian Perspective

Peer reviewe

Welfare Multiplier of Public Investment

We analyze the welfare multipliers of public spending-the consumption equivalent change in welfare for a one dollar change in public spending-in a DSGE model. The welfare multiplier of public investment depends crucially not only on the productivity (output elasticity) of public capital, as shown by earlier studies, but also on the depreciation rate of public capital and the efficiency of public investment defined as a fraction of public investment spending that translates into the public capital stock. When the key parameter values are set based on the empirical estimates for advanced economies and the output multipliers are consistent with the empirical estimates, the welfare multiplier is positive and sizable. The welfare multiplier is roughly zero when the key parameter values are set to match the features of developing economies. A public infrastructure push in advanced economies makes sense, but developing economies should enhance the efficiency and productivity of public investment.Peer reviewe