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Solving Boundary Value Problems in the Fiscal Theory of the Price Level

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Abstract

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.

Suggested Citation

  • Gliksberg, Baruch, "undated". "Solving Boundary Value Problems in the Fiscal Theory of the Price Level," Working Papers WP2013/2, University of Haifa, Department of Economics.
  • Handle: RePEc:haf:huedwp:wp201302
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    File URL: http://hevra.haifa.ac.il/econ/wp_files/wp201302.pdf
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    References listed on IDEAS

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    1. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "The Perils of Taylor Rules," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 40-69, January.
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    4. Davig, Troy & Leeper, Eric M. & Walker, Todd B., 2010. ""Unfunded liabilities" and uncertain fiscal financing," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 600-619, July.
    5. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
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    7. Bi, Huixin, 2012. "Sovereign default risk premia, fiscal limits, and fiscal policy," European Economic Review, Elsevier, vol. 56(3), pages 389-410.
    8. Cochrane, John H, 2001. "Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 69(1), pages 69-116, January.
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    Cited by:

    1. Gliksberg, Baruch, 2013. "Monetary policy and fiscal limits with no-default," European Economic Review, Elsevier, vol. 64(C), pages 285-304.

    More about this item

    Keywords

    Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium;

    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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