Tax-Rate Rules for Reducing Government Debt

2018 ◽  
Author(s):  
G. C. Lim ◽  
Paul D. McNelis
Keyword(s):  
Public Debt ◽  
Sharp Increase ◽  
Government Debt ◽  
New Keynesian ◽  
Closed Economy ◽  
Fiscal Consolidation ◽  
Tax Rate ◽  
Keynesian Model ◽  
Tax Relief ◽  
Wage Adjustment

This chapter uses an example to demonstrate the steps of specifying, calibrating, solving, and simulating a macroeconomic model in order to evaluate alternative policies for reducing domestic public debt. It extends the simple closed-economy New Keynesian model by incorporating the zero lower bound and asymmetric wage adjustment (in which wages are much more rigid in the downward direction). We examine the dynamics of adjustment, given a sharp increase in government debt due to a once-only big increase in spending. We find that selective tax-rate rules, incorporating a degree of tax relief in a period of fiscal consolidation, are effective instruments for rapidly reducing the overhang of a large stock of public debt.

scholarly journals Public Debt and Changing Inflation Targets

2016 ◽  
Vol 8 (4) ◽  
pp. 142-176 ◽  
Author(s):  
Michael U. Krause ◽  
Stéphane Moyen
Keyword(s):  
Central Bank ◽  
Public Debt ◽  
Pronounced Effect ◽  
New Keynesian ◽  
Moderate Increase ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Keynesian Model ◽  
Maturity Structure ◽  
Inflation Targets

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. (JEL E12, E31, E52, H63)

scholarly journals RAMSEY OPTIMAL POLICY IN THE NEW-KEYNESIAN MODEL WITH PUBLIC DEBT

2021 ◽  
pp. 1-27
Author(s):  
Jean-Bernard Chatelain ◽  
Kirsten Ralf
Keyword(s):  
Public Debt ◽  
Optimal Policy ◽  
Multiple Equilibria ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Simple Rules ◽  
Debt Dynamics ◽  
Level Versus ◽  
The Interest Rate

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy).

scholarly journals DESIGNING MONETARY AND FISCAL POLICY RULES IN A NEW KEYNESIAN MODEL WITH RULE-OF-THUMB CONSUMERS

2012 ◽  
Vol 18 (2) ◽  
pp. 395-417 ◽  
Author(s):  
Raffaele Rossi
Keyword(s):  
Steady State ◽  
Fiscal Policy ◽  
Public Debt ◽  
New Keynesian ◽  
Ricardian Equivalence ◽  
New Keynesian Model ◽  
Policy Rules ◽  
Rule Of Thumb ◽  
Keynesian Model ◽  
Monetary And Fiscal Policy

This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper studied a model in which Ricardian equivalence holds, and he showed that monetary and fiscal policy can be studied independently. In Bilbiie's analysis, rule-of-thumb consumers break the Ricardian equivalence and generate important consequences for the design of monetary policy. In his model, steady-state public debt was equal to zero. We study a model with both rule-of-thumb consumers and positive steady-state public debt. We find that the mix of fiscal and monetary policies that guarantees equilibrium determinacy is sensitive to the exact values of the parameters of the model.

scholarly journals HAS GLOBALIZATION TRANSFORMED U.S. MACROECONOMIC DYNAMICS?

2012 ◽  
Vol 16 (2) ◽  
pp. 204-229 ◽  
Author(s):  
Fabio Milani
Keyword(s):  
Open Economy ◽  
Phillips Curve ◽  
New Keynesian ◽  
Time Varying ◽  
Closed Economy ◽  
Monetary Policy Shocks ◽  
Macroeconomic Dynamics ◽  
Keynesian Model ◽  
Policy Shocks ◽  
Openness To Trade

This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model–such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to “global” output, and so forth–are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed-economy specification still appears to provide a substantially better fit of U.S. data than various open-economy specifications with time-varying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.

Estimation and Inference of Impulse Responses by Local Projections

2005 ◽  
Vol 95 (1) ◽  
pp. 161-182 ◽  
Author(s):  
Òscar Jordà
Keyword(s):  
New Keynesian ◽  
Closed Economy ◽  
Impulse Responses ◽  
Vector Autoregressions ◽  
Central Idea ◽  
Keynesian Model ◽  
Highly Nonlinear ◽  
Regression Techniques ◽  
Local Projections ◽  
Simple Regression

This paper introduces methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system. The central idea consists in estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with vector autoregressions (VAR). The advantages of local projections are numerous: (1) they can be estimated by simple regression techniques with standard regression packages; (2) they are more robust to misspecification; (3) joint or point-wise analytic inference is simple; and (4) they easily accommodate experimentation with highly nonlinear and flexible specifications that may be impractical in a multivariate context. Therefore, these methods are a natural alternative to estimating impulse responses from VARs. Monte Carlo evidence and an application to a simple, closed-economy, new-Keynesian model clarify these numerous advantages.

Fiscal Rules—Anchoring Expectations for Sustainable Public Finances

Policy Papers ◽  
2009 ◽  
Vol 09 ◽  
Author(s):  
Keyword(s):  
Data Base ◽  
Public Debt ◽  
Sharp Increase ◽  
Developing Economies ◽  
Fiscal Rules ◽  
Fiscal Consolidation ◽  
Medium Term ◽  
Fiscal Deficits ◽  
Public Finances ◽  
Design And Implementation

The sharp increase in fiscal deficits and public debt in most advanced and several developing economies has raised concerns about the sustainability of public finances and highlighted the need for a significant adjustment over the medium term. This paper assesses the usefulness of fiscal rules in supporting fiscal consolidation, discusses the design and implementation of rules based on a new data base spanning the whole Fund membership, and explores the fiscal framework that could be adopted as countries emerge from the crisis.

scholarly journals The Negative Mean Output Gap

2019 ◽  
Vol 19 (183) ◽  
Author(s):  
Shekhar Aiyar ◽  
Simon Voigts
Keyword(s):  
Adjustment Costs ◽  
New Keynesian ◽  
Wage Rigidity ◽  
Estimation Methods ◽  
Output Gap ◽  
Nominal Wage ◽  
Systematic Bias ◽  
Keynesian Model ◽  
Wage Adjustment ◽  
Nominal Wage Rigidity

We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions. This is demonstrated in a simple New Keynesian model with asymmetric wage adjustment costs. Using the model's output gap as a benchmark, we further show that common output gap estimation methods exhibit a systematic bias because they assume a zero mean. The bias is especially large in deep recessions when potential output tends to be most severely underestimated.

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