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.
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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 |
| Date Deposited: | 12 Dec 2017 11:42 |
| Last Modified: | 15 Sep 2023 23:40 |
| URI: | http://eprints.lse.ac.uk/id/eprint/86174 |
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