Policy rules, information and fiscal effects in a "Ricardian" model
AbstractAccording to conventional wisdom, if deficits are inflationary then current deficits should predict subsequent movements in money growth. This paper USES a general equilibrium model fit to data to: (1) explore the policy behavior underlying this accepted viewpoint; (2) examine alternative equilibrium deficit policies ranging from an exclusive reliance on direct lump-sum taxes to a mix of direct and inflation taxes; and (3) evaluate the empirical trade-offs implied by the various financing schemes. The results suggest that reduced-form analyses of whether "deficits matter" can lead to seriously misleading conclusions by mistakenly attributing fiscal effects to monetary policy. ; I demonstrate that simple monetary and tax policy rules and plausible assumptions about when private agents learn of fiscal actions can produce a classical economy whose nominal equilibrium depends on the process for lumpsum taxes and whose time series contradict the view that monetized deficits predict inflation. I assess the fit of versions of the model to U.S. data and reinterpret existing reduced-form studies in light of the results.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 360.
Date of creation: 1989
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
- Dwyer, Gerald P, Jr, 1982. "Inflation and Government Deficits," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 315-29, July.
- Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July.
- Susan Yang, Shu-Chun, 2005. "Quantifying tax effects under policy foresight," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1557-1568, November.
- Eric M. Leeper, 1990. "The dynamics of interest rate and tax rules in a stochastic model," International Finance Discussion Papers 375, Board of Governors of the Federal Reserve System (U.S.).
- Woodford, Michael, 2001.
"Fiscal Requirements for Price Stability,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 33(3), pages 669-728, August.
- Hess Chung & Eric M. Leeper, 2007.
"What Has Financed Government Debt?,"
NBER Working Papers
13425, National Bureau of Economic Research, Inc.
- Srobona Mitra, 2007. "Is the Quantity of Government Debt a Constraint for Monetary Policy?," IMF Working Papers 07/62, International Monetary Fund.
- Eric Leeper & Todd Walker, 2011.
"Information Flows and News Driven Business Cycles,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
- Eric Leeper & Todd Walker, 2010. "Code and data files for "Information Flows and News Driven Business Cycles"," Computer Codes 09-244, Review of Economic Dynamics.
- Eric M. Leeper, 2003. "Fiscal Policy and Inflation: Pondering the Imponderables," NBER Working Papers 9506, National Bureau of Economic Research, Inc.
- Luca Sala, 2004. "The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence," Working Papers 257, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.