Σάββατο, 24 Απριλίου 2010

Stabilization Economics

Elias Karavolias,

(to be published, in the

- Liberal Democrats Research News

and the academic papers of the

- Institute for Public Policy and Research ,

(London, May 2010)

΄΄New Age Economics’ Stabilization Programs : basic theories and research ΄΄


Basic Academic Research

1. Rethinking Monetary Stabilization in the Presence of an Asset Bubble

Marc D. Hayford ,A. G. (Tassos) Malliaris Loyola University of Chicago - Department of Economics

2. Asymmetric Fiscal Stabilization Policy and the Public Deficit

Karin Mayr ,Johann Scharler. Vienna,Linz

3 .Long-term debt and optimal policy in the fiscal theory of the price level

Cohrane J, University of Chicago


4.Fiscal stabilisation and debt

S. Wren-Lewis, Merton College, Oxford,
C. Leith at Glasgow University ,
T. Kirsanova at Exeter University




Some fiscal policy myths

-“Ricardian Equivalence means fiscal policy does not work”

-Temporary increases in government spending raise demand even if consumers are totally Ricardian

-In an open economy independent fiscal action gets crowded out through an appreciation

-If interest rates are stuck at zero, and the fiscal expansion is temporary, the exchange rate should not appreciate.

-Any increase in government borrowing crowds out private borrowing

-Even if we deny that prices can be sticky, the zero bound is a fact, and it prevents demand adjustment

.


Fiscal expansion without higher debt?

-Inter temporal incentives

-Anticipated VAT increases – fiscal policy as monetary policy
• Tax financed temporary increases in government spending
(Will expand demand if consumers are Ricardian)
• Redistribution from unconstrained to credit constrained consumers
• All redistribute, but so does monetary policy



Outside of the zero bound, is the conventional assignment still right?

-Given lags, precautionary fiscal expansion may on occasion be warranted

-Theory – fusion of two literatures

1) Dynamic optimal taxation theory /Schmitt-Grohe, S. and Uribe, M. (2004) – sticky prices make an important difference
2) Keynesian theory (Woodford – social welfare measure of business cycle costs)

-(Robust?) Result: If monetary policy unconstrained, optimal fiscal demand management is no demand management /Eser, F, Leith, C and Wren-Lewis, S (2008)




Fiscal policy still has a stabilisation role in changing relative prices

• If wages as well as prices are sticky, tax changes can help ‘correct’ the real wage .
• Tax changes can offset cost-push shocks
• Tax measures may be more efficient at pricking asset bubbles in particular markets than general interest rate changes.


Optimal debt policy: the random walk result

• Assume away default risk, and assume infinitely lived Ricardian consumers
• Taxation is distortionary , so any non-negative government debt has social costs
• Despite this, if a demand shock raises government debt, the optimal response is to live with this higher level of debt
• Essentially a tax smoothing result


How best to achieve gradual and erratic debt reduction?

-Targets set by governments are likely to be economically and politically sub-optimal

-Governments have a temptation to be over optimistic in making fiscal projections

-Need Fiscal Councils to

-Independently forecast development of government debt

-Advise on the optimal timing and speed of debt reduction (have the political authority to act as an effective public watchdog )



By Elias Karavolias

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