Fiscal policy, debt constraint and expectations-driven volatility
TL;DR: In this paper, the authors show that the intertemporal budget constraint of the government can be a fundamental source of indeterminacy, and therefore, of expectations-driven fluctuations, and that this is promoted by a larger ratio of debt over GDP.
About: This article is published in Journal of Mathematical Economics.The article was published on 2015-12-01. It has received 17 citations till now. The article focuses on the topics: Internal debt & Debt ratio.
Citations
More filters
Posted Content•
TL;DR: It is found that distortions in the capital market, per se, do not play a major role and it is shown that, for empirically plausible values of elasticity of substitution between inputs, indeterminacy requires a minimal degree of distortions.
Abstract: We provide a methodology to study the role of market distortions on the emergence of indeterminacy and bifurcations. Most of the specific market imperfections considered in the related literature are particular cases of our framework. Comparing them we obtain several equivalence results in terms of local dynamic properties, highlighting the main chanels and classes of distortions responsible for indeterminacy. Our methodolgy consists in introducing general specifications for the elasticities of the crucial functions defining the aggregate equilibrium dynamics of the model. This allows us to study how market distortions influence the range of values for the elasticity of inputs substitution under which local indeterminacy and bifurcations occur. Applying this methodology to the Woodford (1986) framework we find that distortions in the capital market, per se, do not play a major role. We further show that, for empirically plausible values of elasticity of substitution between inputs, indeterminacy requires a minimal degree of distortions. This degree seems to be high under output market distortions, while with labor market distortions the required degree is empirically plausible.
12 citations
Posted Content•
TL;DR: In this article, the interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and private debt.
Abstract: The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents’ expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.
11 citations
TL;DR: In this article, a multistep monotone map approach is developed to characterize minimal state-space recursive equilibrium for a broad class of infinite horizon dynamic general equilibrium models with positive externalities, dynamic complementarities, public policy, equilibrium indeterminacy, and sunspots.
Abstract: We develop a new multistep monotone map approach to characterize minimal state-space recursive equilibrium for a broad class of infinite horizon dynamic general equilibrium models with positive externalities, dynamic complementarities, public policy, equilibrium indeterminacy, and sunspots. This new approach is global, defined in the equilibrium version of the household’s Euler equation, applies to economies for which there are no known existence results, and existing methods are inapplicable. Our methods are able to distinguish different structural properties of recursive equilibria. In stark contrast to the extensive body of existing work on these models, our methods make no appeal to the theory of smooth dynamical systems that are commonly applied in the literature. Actually, sufficient smoothness to apply such methods cannot be established relative to the set of recursive equilibria. Our partial ordering methods also provide a qualitative theory of equilibrium comparative statics in the presence of multiple equilibrium. These robust equilibrium comparison results are shown to be computable via successive approximations from subsolutions and supersolutions in sets of candidate equilibrium function spaces. We provide applications to an extensive literature on local indeterminacy of dynamic equilibrium.
10 citations
TL;DR: In this paper, the authors developed a theory to explain economic development in a neoclassical growth model under the assumption of gross substitutability between consumption and leisure, where the initial condition of a macroeconomy (history) and expectation-driven coordination failures (indeterminacy) become alternative explanations of long-term demoeconomic outcomes of nations.
8 citations
TL;DR: In this paper, the interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and private debt.
Abstract: The interplay between growth and public debt is addressed considering a Barro-type [1] endogenous growth model where public spending is financed through taxes on income and public debt. Debt is assumed to be a fixed proportion of GDP which is used as a policy parameter by the government. We first show that when debt is a large enough proportion of GDP, two distinct BGPs may co-exist, one being indeterminate. Therefore, local and global indeterminacy may arise and self-fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations. We then exhibit two types of important trade-off associated with self-fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the ratio of debt/GDP while the highest one is increasing. As a result, depending on the BGP selected by agents’ expectations, the relationship between debt and growth is not always negative. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, depending on the expectations of agents, when debt is increasing, large fluctuations associated to self-fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady-state. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.
6 citations
References
More filters
TL;DR: JSTOR transmission may be copied, downloaded,stored, further transmitted, transferred, distributed, altered, or otherwise used, in any form or by any means, except: (1) one stored electronic and one paper copy of any article solely for personal, non-commercial use, or (2) with prior written permission of JSTOR and the publisher of the article or other text.
Abstract: Youruse of the JSTOR database indicates your acceptance of JSTOR’s Termsand Conditions of Use. A copy of JSTOR’s Terms and Conditions of Useis available at http://www.jstor.ac.uk/about/terms.html, by contacting JSTORatjstor@midas.ac.uk, or by calling JSTOR at 0161 275 7919 or (FAX) 0161 275 6040. Nopart ofaSTOR transmission may be copied, downloaded,stored, further transmitted, transferred, distributed, altered, or otherwise used, in any form or by any means, except: (1) one stored electronic and one paper copy ofanyarticle solely for your personal, non-commercial use, or (2) with prior written permission of JSTOR andthe publisher of the article or other text.
5,069 citations
Journal Article•
TL;DR: The first volume of the Handbook of Labor Economics as mentioned in this paper has been published in 1989 and has a notable representation of authors -and topics of importance -from throughout the world, as well as topics of interest.
Abstract: From book description:
Modern labor economics has continued to grow and develop since the first volumes of this Handbook were published. The subject matter of labor economics continues to have at its core an attempt to systematically find empirical analyses that are consistent with a systematic and parsimonious theoretical understanding of the diverse phenomenon that make up the labor market. As before, many of these analyses are provocative and controversial because they are so directly relevant to both public policy and private decision making. In many ways the modern development in the field of labor economics continues to set the standards for the best work in applied economics. This volume of the Handbook has a notable representation of authors - and topics of importance - from throughout the world.
1,040 citations
Book•
24 Oct 2002TL;DR: In this article, the authors provide an in-depth treatment of the overlapping generations model in economics incorporating production, and analyze the optimality of allocations in this framework, using both the value function and marginal approaches.
Abstract: Provides an in-depth treatment of the overlapping generations model in economics incorporating production. Chapter 1 investigates competitive equilibria and corresponding dynamics: existence and uniqueness of equilibrium, global dynamics of capital (including poverty traps), and various extensions of the model. Chapter 2 analyzes the optimality of allocations in this framework, using both the value function and marginal approaches. Optimality with unbounded growth is also analyzed. Policy issues including the Second Welfare Theorem, pensions, government spending, and optimal taxation, are discussed in chapter 3. The notion of public debt is introduced in chapter 4 and the sustainability of policies with budget deficits/surpluses is examined. The last chapter presents extensions of the model including altruism, education/human capital, and habit formation. Methodological emphasis is put on using general preferences and technologies, on the global study of dynamic aspects of the model, and on furnishing adequate tools to analyze policies involving inter-generational transfers.
427 citations
TL;DR: In this paper, the authors show that a balanced budget rule can make expectations of higher tax rates self-fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances.
Abstract: A traditional argument against a balanced‐budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction This paper suggests an additional source of instability that may arise from this type of fiscal policy rule It shows that, within the standard neoclassical growth model, a balanced‐budget rule can make expectations of higher tax rates self‐fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short‐run fiscal imbalances Calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the US economy and other Group of Seven countries
318 citations
TL;DR: In this paper, the authors build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work.
278 citations