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The Optimal Policy Mix to Achieve Public Debt Consolidation

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  • Roberta, Cardani
  • Lorenzo, Menna
  • Patrizio, Tirelli

Abstract

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.

Suggested Citation

  • Roberta, Cardani & Lorenzo, Menna & Patrizio, Tirelli, 2016. "The Optimal Policy Mix to Achieve Public Debt Consolidation," Working Papers 356, University of Milano-Bicocca, Department of Economics, revised 31 Dec 2016.
  • Handle: RePEc:mib:wpaper:356
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Consolidation; Limited Asset Market Participation; Ramsey Fiscal Policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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