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Solving Boundary Value Problems in the Fiscal Theory of the Price Level

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Abstract

This paper specifi�es determinacy regions in the parameter space of monetary and �fiscal policy interactions in economies with �finance and tax distortions. It shows that the initial valuation of government debt is the �fixed point of a continuous mapping that takes a closed interval on the real line into itself. It implements the Krasnoselski-Mann-Baily theorem to compute the equilibrium real value of nominal government debt. This computation indicates whether policy interactions are sustainable or lead to a default. The model exhibits nominal determinacy if and only if it exhibits real determinacy. Distorting taxes have dramatic effect on determinacy regions. Admissible monetary-�scal policy interactions vary as the economy approaches the peak of its Laffer curve: the range of active �scal responses to government debt narrows,whereas passive �fiscal stances become inconsistent with equilibrium. Furthermore, policy targets vary when regimes switch from passive fiscal stances to active �fiscal stances. Whereas passive fiscal stances focus entirely on secondary defi�cits, active fi�scal stances should focus mainly on primary de�ficits.

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Bibliographic Info

Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2013/2.

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Length: 74
Date of creation: 03 Jul 2013
Date of revision:
Handle: RePEc:haf:huedwp:wp201302

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Keywords: Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium;

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Cited by:
  1. Gliksberg, Baruch, 2013. "Monetary policy and fiscal limits with no-default," European Economic Review, Elsevier, vol. 64(C), pages 285-304.

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