Fiscal Sustainability in a New Keynesian Model - Additional Appendix
AbstractRecent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary policy-making. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government’s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy which allows for different probabilities of reneging on past promises. This on-line Appendix extends the results of this paper.
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 Business School - Economics, University of Glasgow in its series Working Papers with number 2012_13.
Date of creation: Sep 2012
Date of revision:
New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy; Credibility.;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
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.:
- Andrea Tambalotti & Ernst Schaumburg, 2004.
"An Investigation of the Gains from Commitment in Monetary Policy,"
Econometric Society 2004 North American Summer Meetings
282, Econometric Society.
- Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March.
- Ernst Schaumburg & Andrea Tambalotti, 2003. "An investigation of the gains from commitment in monetary policy," Staff Reports 171, Federal Reserve Bank of New York.
- Ernst Schaumburg & Andrea Tambalotti, 2003. "An Investigation of the Gains from Commitment in Monetary Policy," Macroeconomics 0302004, EconWPA.
- Simon Wren-Lewis & Campbell Leith, 2007.
"Fiscal Sustainability in a New Keynesian Model,"
Economics Series Working Papers
310, University of Oxford, Department of Economics.
- Campbell Leith & Simon Wren-lewis, 2006. "Fiscal Sustainability in a New Keynesian Model," WEF Working Papers 0006, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
- Campbell Leith & Simon Wren-Lewis, 2006. "Fiscal Sustainability in a New Keynesian Model," Working Papers 2006_11, Business School - Economics, University of Glasgow, revised Nov 2008.
- Himmels, Christoph & Kirsanova, Tatiana, 2011.
"Expectations Traps and Monetary Policy with Limited Commitment,"
29208, University Library of Munich, Germany.
- Christoph Himmels & Tatiana Kirsanova, 2011. "Expectations Traps and Monetary Policy with Limited Commitment," Discussion Papers 1102, Exeter University, Department of Economics.
- Debortoli, Davide & Nunes, Ricardo, 2010. "Fiscal policy under loose commitment," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1005-1032, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeanette Findlay).
If references are entirely missing, you can add them using this form.