34 research outputs found
Debt limits and endogenous growth
This paper studies the consequences on growth and welfare of imposing limits to public borrowing. In the model economy, government spending may play two different roles, either as input in the production function, or providing services directly in the utility function. In these setups I study the effects of different fiscal policies with and without debt limits both in the balanced growth path and during the transitional dynamics. In the long run, if there is no limit, the growth effects of raising labor income taxes are negative, regardless of the role of government spending. However, the role public spending is crucial for the growth effects of changes in the ratio of public expenditures to output. In the presence of a limit to debt, higher labor tax rates have a positive effect on growth if government spending is productive. The opposite is true when private capital drives growth. Regarding welfare, raising labor income taxes imply a lower welfare cost of reducing debt than does cutting government spending, when this is productive
Can financial frictions help explain the performance of the us fed?
This paper analyzes the contribution of additional factors, apart from monetary policy, to the stabilization of the economy observed in the US since the 1980s. I estimate a limited participation model with financial frictions, allowing for changes in the interest rate rule, financial frictions, and shock processes. The results confirm the well-known differences in the interest rate rules between subsamples. However, when monitoring costs are considered, these differences are much smaller. A comparison of fit across several specifications finds that a decrease in financial frictions was more important than changed monetary policy or changed shock processes in stabilizing the economy. These results highlight the important differences in the effects of shocks and policies between limited participation and sticky price models
Performance of interest rate rules under credit market imperfections
The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for technology shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to technology shocks
CAN FINANCIAL FRICTIONS HELP EXPLAIN THE PERFORMANCE OF THE US FED?
This paper analyzes the contribution of additional factors, apart from monetary policy, to the stabilization of the economy observed in the US since the 1980s. I estimate a limited participation model with financial frictions, allowing for changes in the interest rate rule, financial frictions, and shock processes. The results confirm the well-known differences in the interest rate rules between subsamples. However, when monitoring costs are considered, these differences are much smaller. A comparison of fit across several specifications finds that a decrease in financial frictions was more important than changed monetary policy or changed shock processes in stabilizing the economy. These results highlight the important differences in the effects of shocks and policies between limited participation and sticky price models.
Debt limits and endogenous growth.
This paper studies the consequences on growth and welfare of imposing limits to public borrowing. In the model economy, government spending may play two different roles, either as input in the production function, or providing services directly in the utility function. In these setups I study the effects of different fiscal policies with and without debt limits both in the balanced growth path and during the transitional dynamics. In the long run, if there is no limit, the growth effects of raising labor income taxes are negative, regardless of the role of government spending. However, the role public spending is crucial for the growth effects of changes in the ratio of public expenditures to output. In the presence of a limit to debt, higher labor tax rates have a positive effect on growth if government spending is productive. The opposite is true when private capital drives growth. Regarding welfare, raising labor income taxes imply a lower welfare cost of reducing debt than does cutting government spending, when this is productive.
PERFORMANCE OF INTEREST RATE RULES UNDER CREDIT MARKET IMPERFECTIONS
The stabilization effects of Taylor rules are analyzed in a limited participation framework with and without credit market imperfections in capital goods production. Financial frictions substantially amplify the impact of shocks, and also reinforce the stabilizing or destabilizing effects of interest rate rules. However, these effects are reversed relative to New Keynesian models: under limited participation, interest rate rules are stabilizing for technology shocks, but imply an output-inflation tradeoff for demand shocks. Moreover, because financial frictions imply excessive fluctuation, stabilization via an interest rate rule can be a welfare-improving response to technology shocks.
Can financial frictions help explain the performance of the us fed?.
This paper analyzes the contribution of additional factors, apart from monetary policy, to the stabilization of the economy observed in the US since the 1980s. I estimate a limited participation model with financial frictions, allowing for changes in the interest rate rule, financial frictions, and shock processes. The results confirm the well-known differences in the interest rate rules between subsamples. However, when monitoring costs are considered, these differences are much smaller. A comparison of fit across several specifications finds that a decrease in financial frictions was more important than changed monetary policy or changed shock processes in stabilizing the economy. These results highlight the important differences in the effects of shocks and policies between limited participation and sticky price models.
The role of fiscal delegation in a monetary union: a survey of the political economy issues
Current proposals to address the European sovereign debt crisis envision some
sort of fiscal union to complement the Economic and Monetary Union, backed by stronger
sanctions against countries that deviate from budget balance. We argue that sanctions are
an indirect approach to balancing budgets, and that member states, and Europe as a whole,
could instead consider delegating effective fiscal instruments with a direct budgetary impact
to an independent authority.
Outside of a fiscal union, a solvent country could establish an independent fiscal authority
at the national level, with a mandate to maintain long-term budget balance. Delegating a
few powerful fiscal instruments to an institution of this type could cut off speculation about
fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union,
delegating one or more fiscal levers of each Eurozone member state to a national or European
fiscal authority could eliminate moral hazard without relying on sanctions per se.
Many fiscal instruments can serve to balance budgets, but in the context of a monetary
union the chosen instrument should ideally be one that increases competitiveness when recession
looms. The instrument should also be one that is quick and simple to adjust, with
a large budgetary impact and minimal redistributional consequences. For consistency with
these criteria, we argue that fiscal adjustments should operate on the spending side, rather
than the revenue side, and that spending adjustments should affect the prices the government
pays, instead of the quantities of goods and services it purchases. We discuss in detail how a
system of this sort could be implemente
LĂmites de deuda y crecimiento endĂłgeno
Este artĂculo estudia las consecuencias sobre el crecimiento y el bienestar de diversas polĂticas fiscales con y sin lĂmites a la deuda pĂşblica. En la economĂa modelo, el gasto pĂşblico puede tener dos papeles diferentes, bien como un factor en la funciĂłn de producciĂłn, o bien suministrando servicios directamente en la funciĂłn de utilidad. Cuando hay lĂmites a la deuda, mayores impuestos sobre la renta laboral tienen un efecto positivo sobre el crecimiento si el gasto pĂşblico es productivo. Lo contrario ocurre cuando es el capital privado el motor del crecimiento. Respecto al bienestar, reducir la deuda recurriendo a mayores impuestos conlleva un menor coste en bienestar que si se hace reduciendo el gasto pĂşblico cuando Ă©ste es productivo