Active monetary policy, passive fiscal policy and the value of public debt: some further monetarist arithmetic

We consider the properties of two monetary policy rules ("strict inflation targeting", "constant money growth rule") in an intertemporal equilibrium model with flexible prices in which monetary policy is "active", while fiscal policy is "passive". Specifically, we assume that the fiscal agent takes the monetary policy rule as given and restricts itself to a policy which is consistent with a sustainable debt burden and stable steady-state dynamics. The paper shows that dynamic properties of the model economy may differ significantly between the two monetary policy rules if public debt is issued in nominal terms. Under a constant money growth rule which allows for temporary deviations of inflation from target in response to shocks there is scope for revaluations of public debt, acting as automatic stabilizers of government debt dynamics. By contrast, a policy of strict inflation targeting implements the target inflation rate also outside the steady state and precludes thereby such stabilizing revaluations. Owing to this feature, additional fiscal restraint may be needed which is not required under a constant money growth rule. -- Diese Arbeit untersucht die Eigenschaften zwei verschiedener geldpolitischer Regeln (?strikte Inflationssteuerung?, ?konstante Geldmengenzuwachsrate?) in einem intertemporalen Gleichgewichtsmodell mit flexiblen Preisen unter der Annahme einer ?aktiven? Geldpolitik und einer ?passiven? Fiskalpolitik. Insbesondere wird davon ausgegangen, dass der Fiskalagent die geldpolitische Regel als gegeben betrachtet und sich auf eine Politik beschränkt, die mit einer tragfähigen Schuldenbelastung und einer stabilen Steady-State Dynamik vereinbar ist. Die Arbeit zeigt, dass sich für die beiden geldpolitischen Regeln die dynamischen Eigenschaften der Modellökonomie signifikant unterscheiden können, wenn die Staatsschuld nominal begeben wird. Die Regel einer konstanten Geldmengenzuwachsrate läßt außerhalb des Steady-State Gleichgewichtes vorübergehende Abweichungen der Inflationsrate vom Inflationsziel zu und ermöglicht dadurch Umbewertungen der Staatsschuld, die stabilisierend auf die staatliche Schuldendynamik wirken. Demgegenüber implementiert eine Politik einer strikten Inflationssteuerung die Zielinflationsrate auch außerhalb des Steady-State Gleichgewichtes und verhindert dadurch stabilisierende Umbewertungen der Staatsschuld. Diese Eigenschaft führt dazu, dass der Fiskalagent zusätzlichen Beschränkungen unterworfen sein kann, die bei einer Politik einer konstanten Geldmengenzuwachsrate nicht auftreten.Monetary policy,Fiscal regimes,Overlapping generations

Monetary and fiscal policy rules in a model with capital accumulation and potentially non-superneutral money

We consider the properties of two monetary policy rules (monetary targeting, Taylor-type interest rate rule) in an intertemporal equilibrium model with capital accumulation and two outside assets (government bonds, fiat money). The paper shows that the long-run behaviour of the economy depends critically on whether under the monetary-fiscal regime the steady-state real interest rate is independent of inflation. If this is the case, there exists in our model a unique steady state with stable adjustment dynamics under either monetary policy rule. By contrast, if superneutrality fails, dynamics under the interest rate rule may suffer from global indeterminacy arising from multiple steady states which do not necessarily differ in terms of the 'activeness' of the interest rate feedback on inflation. This is ruled out under monetary targeting. -- Diese Arbeit untersucht die Eigenschaften von zwei geldpolitischen Regeln (Geldmengensteuerung, Zinsregel vom Taylor-Typ) in einem intertemporalen Gleichgewichtsmodell mit Kapitalbildung und zwei staatlichen Aktiva (staatlichen Schuldtiteln, Fiatgeld). Es wird gezeigt, dass die langfristigen Eigenschaften der Modellökonomie wesentlich davon abhängen, ob unter dem monetären und fiskalischen Regime der langfristige Realzins unabhängig von der Inflationsrate ist. Wenn dies der Fall ist, besitzt unser Modell ein eindeutiges langfristiges Gleichgewicht mit stabiler Anpassungsdynamik unter beiden geldpolitischen Regeln. Ist jedoch Geld nicht superneutral, besteht bei der Zinsregel die Gefahr, dass die Dynamik des Systems global indeterminiert ist aufgrund multipler langfristiger Gleichgewichte, die sich nicht notwendigerweise in der Stärke des Feedback-Effektes bezüglich der Inflation in der Zinsregel unterscheiden. Eine derartige Konstellation globaler Indeterminiertheit tritt bei der Geldmengensteuerung nicht auf.Monetary Policy,Fiscal regimes,Overlapping generations

Monetary and fiscal policy aspects of indirect tax changes in a monetary union

In recent years a number of European countries have shifted their tax structure more strongly towards indirect taxes, motivated, inter alia, by the intention to foster competitiveness. Against this background, this paper develops a tractable two-country model of a monetary union, characterised by national fiscal and supranational monetary policy, with price-setting firms and endogenously determined terms of trade. The paper discusses a number of monetary and fiscal policy questions which emerge if one of the countries shifts its tax structure more strongly towards indirect taxes. Qualitatively, it is shown that the long-run effects of such a unilateral policy shift on output and consumption within and between the two countries depend sensitively on whether indirect tax revenues are used to lower direct taxes or to finance additional government expenditures. Moreover, short-run dynamics are shown to depend significantly on the speed at which fiscal adjustments take place, on the choice of the inflation index stabilised by the central bank, and on whether the tax shift is anticipated or not. Quantitatively, the calibrated model version indicates that only if the additional indirect tax revenues are used to finance a cut in direct taxes there is some, though limited scope for non-negligible spillovers between countries. JEL Classification: E61, E63, F42Currency union, fiscal regimes, monetary policy

Unemployment, Factor Substitution, and Capital Formation

We incorporate a wage bargaining structure in a dynamic general equilibrium model and show how this feature changes short and long-run properties of equilibria compared with a perfectly competitive setting. We discuss how employment, capital, and income shares respond to wage setting shocks and show that adjustment dynamics depend decisively on the magnitude of the elasticity of substitution between labour and capital. Values of the elasticity below unity add persistence, tend to preserve stability, and lead to empirically plausible adjustment patterns. By contrast, values above unity introduce additional volatility, thereby making steady states potentially unstable.

On policy interactions among nations: when do cooperation and commitment matter?

This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are nontrivial issues. Yet in linear-quadratic models with multiple policymakers, commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is sufficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations.International economic relations ; Game theory

Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers

This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral and requires us to pay equal attention to to monetary and fiscal policy in designing policy rules consistent with determinate dynamics.

Budgetary Policy and Unemployment Dynamics

We consider a dynamic general equilibrium model with collective wage bargaining and investigate how unemployment dynamics are affected by two types of budgetary policies. In line with traditional reasoning, a balanced-budget rule amplifies fluctuations in the short run, whereas an unbalanced-budget policy dampens them. However, the latter policy strengthens unemployment persistence by its adverse impact on growth, and may even destabilize the adjustment path. If this is the case, a future fiscal consolidation is needed which further raises unemployment. These results are consistent with empirical evidence on a positive cross-country relationship between government borrowing and unemployment persistence. -- Wir betrachten ein dynamisches allgemeines Gleichgewichtsmodell mit kollektiven Lohnverhandlungen am Arbeitsmarkt und untersuchen die Entwicklung von Arbeitslosigkeit in Abhängigkeit von zwei verschiedenen staatlichen Budgetpolitiken. In Übereinstimmung mit der traditionellen Literatur werden Schwankungen in der Arbeitslosigkeit kurzfristig durch eine ausgeglichene Budgetpolitik verstärkt, während sie durch eine unausgeglichene Budgetpolitik abgeschwächt werden. Eine Politik unausgeglichener Budgets erhöht jedoch über die Zeit die Persistenz der Arbeitslosigkeit durch adverse Wachstumseffekte und führt eventuell zu instabilen Anpassungsprozessen. In diesem Fall müssen zu einem späteren Zeitpunkt fiskalische Konsolidierungsmaßnahmen ergriffen werden, die wiederum die Arbeitslosigkeit erhöhen. Diese Modellergebnisse stehen in Einklang mit empirischen Ergebnissen, die auf einen positiven Zusammenhang zwischen der Höhe öffentlicher Budgetdefizite und der Persistenz von Arbeitslosigkeit im Ländervergleich hindeuten.Unemployment,Overlapping generations,Public debt

Interest rate effects of demographic changes in a New-Keynesian life-cycle framework

This paper develops a small-scale DSGE model which embeds a demographic structure within a monetary policy framework. We extend the tractable, though non-monetary overlapping-generations model of Gertler (1999) and present a small synthesis model which combines the set-up of Gertler with a New-Keynesian structure, implying that the short-run dynamics related to monetary policy are similar to the paradigm summarized in Woodford (2003). In sum, the model offers a New-Keynesian platform which can be used to investigate in a closed economy set-up the response of macroeconomic variables to demographic shocks, similar to technology, government spending or monetary policy shocks. Empirically, we use a calibrated version of the model to discuss a number of macroeconomic scenarios for the euro area with a horizon of around 20 years. The main finding is that demographic changes, while contributing slowly over time to a decline in the equilibrium interest rate, are not visible enough within the time horizon relevant for monetary policy-making to require monetary policy reactions. JEL Classification: D58, E21, E50, E63Demographic change, DSGE modelling, monetary policy

On policy interactions among nations: when do cooperation and commitment matter?

This paper offers a framework to study commitment and cooperation issues in games with multiple policymakers. To reconcile some puzzles in the recent literature on the nature of policy interactions among nations, we prove that games characterized by different commitment and cooperation schemes can admit the same equilibrium outcome if certain spillover effects vanish at the common solution of these games. We provide a detailed discussion of these spillovers, showing that, in general, commitment and cooperation are non-trivial issues. Yet, in linear-quadratic models with multiple policymakers commitment and cooperation schemes are shown to become irrelevant under certain assumptions. The framework is suficiently general to cover a broad range of results from the recent literature on policy interactions as special cases, both within monetary unions and among fully sovereign nations. JEL Classification: E52, E63fiscal regimes, monetary policy

Unemployment, Factor Substitution, and Capital Formation

We incorporate a wage bargaining structure in a dynamic general equilibrium model and show how this feature changes short and long-run properties of equilibria compared with a perfectly competitive setting. We discuss how employment, capital, and income shares respond to wage setting shocks and show that adjustment dynamics depend decisively on the magnitude of the elasticity of substitution between labour and capital. Values of the elasticity below unity add persistence, tend to preserve stability, and lead to empirically plausible adjustment patterns. By contrast, values above unity introduce additional volatility, thereby making steady states potentially unstable. -- Wir betrachten ein intertemporales Gleichgewichtsmodell mit Lohnverhandlungen am Arbeitsmarkt und diskutieren die Eigenschaften von kurz- und langfristigen Gleichgewichten im Vergleich zu einer vollständig kompetitiven Ökonomie. Wir analysieren die Reaktion von Beschäftigung, Kapital und Einkommensverteilung auf Lohnschocks und diskutieren dabei insbesondere, wie sich Annahmen bezüglich der Substitutionselastizität zwischen Arbeit und Kapital auf die dynamischen Anpassungsprozesse auswirken. Werte der Elastizität, die kleiner als eins sind, erhöhen die Persistenz, wirken stabilisierend und ergeben empirisch plausible Anpassungspfade. Unterstellt man hingegen Werte für die Elastizität, die größer als eins sind, erhöht dies die Volatilität aller Variablen, und langfristige Gleichgewichte werden dadurch potenziell instabil.Wage bargaining,Unemployment,Overlapping generations