Solving Boundary Value Problems in the Fiscal Theory of the Price Level
AbstractThis 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 InfoPaper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2013/2.
Date of creation: 03 Jul 2013
Date of revision:
Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium;
Find related papers by JEL classification:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- 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
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
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- 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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