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Optimal fiscal and monetary policy, debt crisis and management

Cantore, Cristiano, Levine, Paul, Melina, G and Pearlman, J (2017) Optimal fiscal and monetary policy, debt crisis and management Macroecocomic Dynamics.

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Abstract

The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds – under commitment – the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.

Item Type: Article
Subjects : Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
NameEmailORCID
Cantore, CristianoC.Cantore@surrey.ac.ukUNSPECIFIED
Levine, PaulP.Levine@surrey.ac.ukUNSPECIFIED
Melina, GUNSPECIFIEDUNSPECIFIED
Pearlman, JUNSPECIFIEDUNSPECIFIED
Date : 20 July 2017
Identification Number : 10.1017/S1365100517000207
Copyright Disclaimer : Copyright 2017 Cambridge University Press
Uncontrolled Keywords : Optimal fiscal-monetary policy, Ramsey policy, time-consistent policy, optimised simple rules, debt consolidation, long-term debt, fiscal limits, sovereign default risk.
Related URLs :
Additional Information : IMF working paper No 17/78
Depositing User : Symplectic Elements
Date Deposited : 10 Feb 2017 15:09
Last Modified : 06 Sep 2017 08:42
URI: http://epubs.surrey.ac.uk/id/eprint/813513

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