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

International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement

This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as cross-country output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the cross-country correlation of output.international business cycles; distribution costs; financial frictions; flexible prices

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.

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.