Piergallini, Alessandro (2012): Non-Linear Fiscal Regimes and Interest Rate Policy.
Download (214kB) | Preview
Much empirical evidence finds that governments react to fiscal imbalances in a non-linear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that non-linear fiscal regimes alter equilibria under active and passive monetary-fiscal policies. The Fisher equation combined with non-linear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state at which fiscal policy is active is locally saddle-path stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state which converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high debt equilibrium along which inflation is uniquely determined.
|Item Type:||MPRA Paper|
|Original Title:||Non-Linear Fiscal Regimes and Interest Rate Policy|
|Keywords:||Non-Linear Fiscal Rules; Interest Rate Policy; Multiple Equilibria; Global Dynamics|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
|Depositing User:||Alessandro Piergallini|
|Date Deposited:||18. Nov 2012 13:50|
|Last Modified:||20. Feb 2013 11:16|
Arestis, P., Cipollini, A. and Fattouh, B. (2004), “Threshold Effects in the U.S. Budget Deficit”, Economic Inquiry 42, 214-222.
Arghyrou, M. G. and Luintel, K. B. (2007), “Government Solvency: Revisiting Some EMU Countries”, Journal of Macroeconomics 29, 387-410.
Arghyrou, M. G. and Fan, J. (2011), “UK Fiscal Policy Sustainability, 1955-2006”, Cardiff Economics Working Papers E2011/9.
Bajo-Rubio, O., Diaz-Roldan, C. and Esteve, V. (2004), “Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case”, Economics Letters 82, 239-243.
Bajo-Rubio, O., Diaz-Roldan, C. and Esteve, V. (2006), “Is the Budget Deficit Sustainable when Fiscal Policy is Non-linear? The Case of Spain”, Journal of Macroeconomics 28, 596-608.
Benhabib, J., Schmitt-Grohé, S. and Uribe, M. (2001), “Monetary Policy and Multiple Equilibria”, American Economic Review 91, 167-186.
Bohn, H. (1998), “The Behavior of U.S. Public Debt and Deficits”, Quarterly Journal of Economics 113, 949-963.
Canzoneri, M. B., Cumby, R. and Diba, B. (2011), “The Interaction of Monetary and Fiscal Policy”, in Friedman, B. and Woodford, M. (Eds.), Handbook of Monetary Economics, Amsterdam and Boston: North-Holland/Elsevier, pp. 935-999.
Chortareas, G., Kapetanios, G. and Uctum, M. (2008), “Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries”, Oxford Bulletin of Economics and Statistics 70, 645-663.
Cipollini, A., Fattouh, B. and Mouratidis, K. (2009), “Fiscal Readjustments in The United States: A Nonlinear Time-Series Analysis”, Economic Inquiry 47, 34-54.
Considine, J. and Gallagher, L. A. (2008), “UK Debt Sustainability: Some Nonlinear Evidence and Theoretical Implications”, Manchester School 76, 320-335.
Leeper, E. M. (1991), “Equilibria under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies”, Journal of Monetary Economics 27, 129-147.
Legrenzi, G. and Milas, C. (2012a), “Nonlinearities and the Sustainability of the Government’s Intertemporal Budget Constraint”, Economic Inquiry 50, pp. 988-999.
Legrenzi, G. and Milas, C. (2012b), “Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS”, Working Paper Series 54-12, The Rimini Centre for Economic Analysis.
Sarno, L. (2001), “The Behavior of US Public Debt: A Nonlinear Perspective”, Economics Letters 74, 119-125.
Taylor, J. B. (1993), “Discretion Versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy 39, 195-214.
Woodford, M. (2003), Interest and Prices, Princeton and Oxford: Princeton University Press.