Cookies?
Library Header Image
LSE Research Online LSE Library Services

Time-consistent fiscal policy in a debt crisis

Balke, Neele L. and Ravn, Morten O. (2016) Time-consistent fiscal policy in a debt crisis. CFM discussion paper series (CFM-DP2016-38). Centre For Macroeconomics, London, UK.

[img]
Preview
Text - Published Version
Download (997kB) | Preview

Abstract

We analyze time-consistent fiscal policy in a sovereign debt model. We consider a production economy that incorporates feedback from policy to output through employment, features inequality though unemployment, and in which the government lacks a commitment technology. The government’s optimal policies play off wedges due to the lack of lumpsum taxes and the distortions that taxes and transfers introduce on employment. Lack of commitment matters during a debt crises – episodes where the price of debt reacts elastically to the issuance of new debt. In normal times, the government sets procyclical taxes, transfers and public goods provision but in crisis times it is optimal to implement austerity policies which minimize the distortions deriving from default premia. Could a third party provide a commitment technology, austerity is no longer optimal.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2016 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E20 - General
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 12 Dec 2017 11:42
Last Modified: 20 Feb 2019 04:00
URI: http://eprints.lse.ac.uk/id/eprint/86174

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics