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A Simple “Public Debt-Deflation” Theory: Leeper revisited

  • Rym Aloui


    (EPEE, Université d’Evry-Val-d’Essonne)

  • Michel Guillard


    (EPEE, Université d’Evry-Val-d’Essonne)

In this paper, we study the interaction between monetary and fiscal poli- cies from the perspective of global analysis in a non-Ricardian economy with capital and a zero bound on the nominal interest rate. We demonstrate in this framework the possible coexistence of four steady state equilibria, each having the properties of one of the equilibria described by Leeper (1991). But whereas in Leeper (1991), an equilibrium corresponds to a particular configuration of fiscal and monetary policy -active or passive- , we obtain these four equi- libria for a unique set of the policy parameter space. We show in particular that a liquidity trap -deflationary- equilibrium, which is also characterized by a high public debt-to-GDP ratio, a low capital stock and a low consumption level, owns the usually required properties for local determinacy, as well as the more traditional equilibrium targeted by the monetary and fiscal authorities. The model is calibrated based on European annual data and simulated in order to qualitatively asses the implications of a self-fulfilling expectation shock.

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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 09-11.

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Length: 37 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:eve:wpaper:09-11
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