Solving Boundary Value Problems in the Fiscal Theory of the Price Level
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.
|Date of creation:||03 Jul 2013|
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