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Redeem or Revalue? Some Public-Debt Calculus

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Abstract

This paper studies the fiscal-monetary response to a sharp increase in the level of the public debt. To that end, we employ a general equilibrium model with distortionary income tax, distortionary financing, and endogenous capital accumulation. The model is calibrated to the US and EU economies. A main result is that in both economies the QE is superior, welfare-wise, to other policy prescriptions to the problem of explosive debt. A major difference between the EU and the US is that a Taylor rule of tight monetary and fiscal policy could reduce the US public debt, but given the fundamental properties of the EU economy, this policy cannot achieve this goal in Europe.

Suggested Citation

  • Gliksberg, Baruch & Bar Ilan, Avner, "undated". "Redeem or Revalue? Some Public-Debt Calculus," Working Papers WP2016/1, University of Haifa, Department of Economics.
    • Handle: RePEc:haf:huedwp:wp201601
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    File URL: http://hevra.haifa.ac.il/econ/wp_files/wp201601.pdf
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    Keywords

    Distorting Taxes; Fiscal Solvency; Laffer curve in a monetary economy; Liquidity ; Rate of self financing of tax cuts; Quantitative Easing;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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