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The Optimal Policy Mix to Achieve Public Debt Consolidation

Listed author(s):
  • Roberta, Cardani
  • Lorenzo, Menna
  • Patrizio, Tirelli

In this paper we adopt a Ramsey-optimal approach to identify the combination of income taxes, public expenditure and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper356.pdf
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 356.

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Length: 19
Date of creation: 31 Dec 2016
Date of revision: 31 Dec 2016
Handle: RePEc:mib:wpaper:356
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  1. Falilou Fall & Jean-Marc Fournier, 2015. "Macroeconomic uncertainties, prudent debt targets and fiscal rules," OECD Economics Department Working Papers 1230, OECD Publishing.
  2. Forni, L. & Gerali, A. & Pisani, M., 2010. "Macroeconomic Effects Of Greater Competition In The Service Sector: The Case Of Italy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(05), pages 677-708, November.
  3. Isabel Correia, 2010. "Consumption Taxes and Redistribution," American Economic Review, American Economic Association, vol. 100(4), pages 1673-1694, September.
  4. Coenen, Günter & Mohr, Matthias & Straub, Roland, 2008. "Fiscal consolidation in the euro area: Long-run benefits and short-run costs," Economic Modelling, Elsevier, vol. 25(5), pages 912-932, September.
  5. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: A General Approach," Levine's Bibliography 666156000000000246, UCLA Department of Economics.
  6. Saez, Emmanuel & Zucman, Gabriel, 2014. "Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data," CEPR Discussion Papers 10227, C.E.P.R. Discussion Papers.
  7. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
  8. Andrea Colciago, 2011. "Rule‐of‐Thumb Consumers Meet Sticky Wages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 325-353, 03.
  9. Giorgio Motta & Patrizio Tirelli, 2012. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1351-1374, October.
  10. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  11. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
  12. Guerron-Quintana, Pablo A., 2009. "Money demand heterogeneity and the great moderation," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 255-266, March.
  13. James K. Galbraith & Olivier Giovannoni & Ann J. Russo, 2007. "The Fed's Real Reaction Function: Monetary Policy, Inflation, Unemployment, Inequality-and Presidential Politics," Economics Working Paper Archive wp_511, Levy Economics Institute.
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