Non-Linear Fiscal Regimes and Interest Rate Policy
AbstractMuch empirical evidence finds that governments react to fiscal imbalances in a non-linear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that non-linear fiscal regimes alter equilibria under active and passive monetary-fiscal policies. The Fisher equation combined with non-linear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state at which fiscal policy is active is locally saddle-path stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state which converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high debt equilibrium along which inflation is uniquely determined.
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 University Library of Munich, Germany in its series MPRA Paper with number 42671.
Date of creation: 14 Oct 2012
Date of revision:
Non-Linear Fiscal Rules; Interest Rate Policy; Multiple Equilibria; Global Dynamics;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary 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:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-MAC-2012-12-06 (Macroeconomics)
- NEP-PBE-2012-12-06 (Public Economics)
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.:
- Gabriella Legrenzi & Costas Milas, 2012. "Nonlinearities And The Sustainability Of The Government'S Intertemporal Budget Constraint," Economic Inquiry, Western Economic Association International, vol. 50(4), pages 988-999, October.
- Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2006.
"Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain,"
Journal of Macroeconomics,
Elsevier, vol. 28(3), pages 596-608, September.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Is the Budget Deficit Sustainable when Fiscal Policy is nonlinear? The Case of Spain, 1961-2001," Economic Working Papers at Centro de Estudios Andaluces E2003/32, Centro de Estudios Andaluces.
- Andrea Cipollini & Bassam Fattouh & Kostas Mouratidis, 2009. "Fiscal Readjustments In The United States: A Nonlinear Time-Series Analysis," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 34-54, 01.
- Gabriella Legrenzi & Costas Milas, 2012.
"Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS,"
Working Paper Series
54_12, The Rimini Centre for Economic Analysis.
- Gabriella Deborah Legrenzi & Costas Milas, 2012. "Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS," CESifo Working Paper Series 4001, CESifo Group Munich.
- Arghyrou, Michael G. & Luintel, Kul B., 2007.
"Government solvency: Revisiting some EMU countries,"
Journal of Macroeconomics,
Elsevier, vol. 29(2), pages 387-410, June.
- Michael G. Arghyrou & Kul B Luintel, 2002. "Government Solvency: Revisiting some EMU Countries," Economics and Finance Discussion Papers 02-24, Economics and Finance Section, School of Social Sciences, Brunel University.
- Michael G. Arghyrou & Kul B Luintel, 2002. "Government Solvency: Revisiting some EMU Countries," Public Policy Discussion Papers 02-24, Economics and Finance Section, School of Social Sciences, Brunel University.
- Arghyrou, Michael G & Kul B Luintel, 2003. "Government Solvency: Revisiting some EMU Countries," Royal Economic Society Annual Conference 2003 8, Royal Economic Society.
- Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1999.
"Monetary Policy and Multiple Equilibria,"
Departmental Working Papers
199914, Rutgers University, Department of Economics.
- Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "Monetary policy and multiple equilibria," Finance and Economics Discussion Series 1998-29, Board of Governors of the Federal Reserve System (U.S.).
- Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "Monetary Policy and Multiple Equilibria," CEPR Discussion Papers 2316, C.E.P.R. Discussion Papers.
- Fan, Jingwen & Arghyrou, Michael G, 2011.
"UK Fiscal Policy Sustainability, 1955-2006,"
Cardiff Economics Working Papers
E2011/9, Cardiff University, Cardiff Business School, Economics Section.
- Georgios Chortareas & George Kapetanios & Merih Uctum, 2008. "Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(5), pages 645-663, October.
- Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 949-963, August.
- John Considine & Liam A. Gallagher, 2008.
"Uk Debt Sustainability: Some Nonlinear Evidence And Theoretical Implications,"
University of Manchester, vol. 76(3), pages 320-335, 06.
- John Considine & Liam A. Gallagher, 2004. "UK Debt Sustainability: Some Nonlinear Evidence and Theoretical Implications," Money Macro and Finance (MMF) Research Group Conference 2004 59, Money Macro and Finance Research Group.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003.
"Searching for Threshold Effects in the Evolution of Budget Deficits: An Application to the Spanish Case,"
Economic Working Papers at Centro de Estudios Andaluces
E2003/29, Centro de Estudios Andaluces.
- Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2004. "Searching for threshold effects in the evolution of budget deficits: an application to the Spanish case," Economics Letters, Elsevier, vol. 82(2), pages 239-243, February.
- Sarno, Lucio, 2001. "The behavior of US public debt: a nonlinear perspective," Economics Letters, Elsevier, vol. 74(1), pages 119-125, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.