Revisiting Public Debt and Inflation: Fiscal Implications of an Independent Central Banker

The mainstream literature on monetary policy games under output persistence posits that: a) monetary regimes do not affect real variables in the steady state; b) optimal institutional design should entirely remove the inflation bias. We show that neither result necessarily holds if output persistence originates from debt dynamics and distortionary taxation. First, monetary delegation induces a strategic use of debt policy affecting steady-state distortions. Second, the reduction of such distortions may require monetary institutions that tolerate an inflation rate above the socially optimal level.

Dynamic Seigniorage Models Revisited. Should Fiscal Flexibility and Conservative Central Bankers Go Together?

This paper presents a dynamic seigniorage model where excessive debt levels persist in steady state, causing a permanent inflation bias. Discretionary monetary responses to shocks are too interventionist because they do not take into account the role of debt policy, which spreads part of the adjustment onto future periods. Institutional design should contemplate the appointment of weight-conservative central bankers. The central bank preferences should be more conservative the more the government is willing to delay the adjustment of expenditures following a supply shock. The combination of fiscal intervention and a zero inflation rule describes how members of a monetary union might react to asymmetric shocks. The costs of this regime are negligible if the discount factor is small and seigniorage losses are limited.

Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation

The combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities. Equilibrium determinacy is restored by demand management policies based on simple fiscal rules. In this regard, fiscal control of nominal income growth is particularly effective. In addition the complementarity between the Taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains, limiting both aggregate and intragroup volatilities

Reconsidering The Pros and Cons of Fiscal Policy Coordination in a Monetary Union: Should We Set Public Expenditure Targets?

We reconsider the issues of fiscal policy interdependence in a monetary union, challenging the view that non co-ordination is always preferable. Moreover, we show that an expenditure bias occurs irrespective of the fiscal regime in place. We argue that a contractualist approach à la Walsh should be extended to the conduct of fiscal policy, setting explicit public expenditure targets.EMU, Fiscal Leadership, ECB, Fiscal Co-ordination, Inflation Targets

Money Targeting, Heterogeneous Agents and Dynamic Instability

Christiano et al. (2005) have shown that a standard medium-sized DSGE model can successfully replicate VAR IRFs to a money supply shock. This important result vanishes under limited asset market partic- ipation. Further, even a moderate fraction of constrained consumers is su¢ cient to dampen the real interest rate reaction to inflation, thereby causeing instability. The introduction of a simple fiscal automatic sta- bilizer restores stability and improves the dynamic performance of the model.Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset, Market Participation

Reconsidering The Pros and Cons of Fiscal Policy Co-ordination in a Monetary Union: Should We Set Public Expenditure Targets ?

We reconsider the merits of fiscal policy co-ordination in a monetary union distinguishing between and inflation targeting regime and delegation to a weight conservative central bank. We argue that a contractualist approach a la Walsh should be extended to the conduct of fiscal policy, setting explicit public expenditure targets.EMU, Fiscal Leadership, ECB, Fiscal Co-ordination, Inflation Targets

Institutions, policies and economic development. What are the causes of the shadow economy?

What are the causes of the shadow economy? We provide new answers to this old question. The sharp distinction between theoretical priors on the institutional determinants of the shadow economy and the technique used for its measurement is the first novel contribution of the paper. The second innovation is that, unlike previ- ous contributions, we document a specific role for institutional variables in shaping economic incentives to "go underground", irrespective of the stage of economic de- velopment. The third innovation is that - after controlling for institutional quality and for the level of development - public expenditures have a negative impact on the shadow economy.Institutional quality, shadow economy.

Monetary and fiscal policy, the exchange rate, and foreign wealth

The theory of macroeconomic policy is now in a difficult position. After the demise of the old keynesian orthodoxy, dissatisfaction has grown with monetarist ideas, too. This thesis aims to contribute to the search for a new framework for macroeconomic policy. Throughout the thesis great emphasis is put on two key ideas. The first is that both monetary and fiscal policy should be used in a well designed policy package. Such a policy package should consist of "simple" rules, on the grounds that simple rules, more easy to understand and monitor in the eyes of the private sector, would enhance the credibility of the government's pre-commitment. The second idea is that foreign wealth accumulation, operating through cumulating current account imbalances, plays a key role in the determination of the open economy macroeconomic equilibrium and its stability. Therefore open economy models should include wealth effects and the current account. Furthermore, policy evaluation should take into account, among other things, the Implications of alternative rules on foreign wealth. We shall consider policy design both in a "small" individual country and in the broader context of policy coordination

Risk Premiums, Nominal Rigidities, and Limited Asset Market Participation

Recent developments in the asset pricing literature show that a combination of technology and distributive shocks can rationalize observed risk premia when firm ownership is concentrated in the hands of a few households. We find that distributive shocks are unnecessary when nominal price rigidity is taken into account. Our results are driven by the income redistribution associated with procyclical variations in profit margins when firms' ownership is concentrated, prices are sticky, and technology shocks hit the economy. In this regard, standard DSGE models that allow for firm ownership concentration have the potential to replicate both business cycle facts and the moments of financial variables

Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation?

This paper provides an overview of recent papers which use estimated New Keynesian models to study the extent to which fiscal policy can beused to stabilize the economy. We use a varietyof different New Keynesian models, estimated on data for both theUS and for theEuro area, and highlight the diverse transmission channelst hrough which fiscal policy acts in these models. Although we find that fiscal policy can provide a useful complement to monetary policy, especially in models where consumers have finite horizons, there are import limitations to the value added of fiscal policy