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This paper derives the optimal response of the primary budget balance to changes in the public debt as a share of gross domestic product (GDP) in a stochastic model of debt. Under the optimal solution, the surplus reactivity to the debt‐GDP ratio is independent of the debt ratio itself, but its size depends on the degree of uncertainty surrounding the impact of fiscal policies. We characterize the properties of the optimal control policy by proposing different metrics that may be used to assess fiscal soundness and as early warning indicators of fiscal imbalances. [ABSTRACT FROM AUTHOR]

The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale‐less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where research and development productivity is decreasing in the size of the economy. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital for reasonable parametrizations of the model. [ABSTRACT FROM AUTHOR]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpolmod.2006.04.003 Byline: Barbara Annicchiarico Keywords: Price stability; Fiscal policy; Government debt; Stability and Growth Pact (SGP) Abstract: In the context of the current policy debate on the reform of European fiscal rules, there is wide consensus on the need to place more attention on debt-GDP ratios. Proposals have been made to alleviate fiscal pressure on Member States with relatively low public debts. The present paper gives support to this view. Economies with high public debt-GDP ratios are shown to experience larger price deviations after a fiscal expansion. These results are derived in a model, calibrated to euro area quarterly data, with capital accumulation, flexible prices and wealth effects in the presence of an independent monetary authority. Author Affiliation: Department of Economics, University of Rome 'Tor Vergata', Via Columbia 2, 00133 Roma, Italy Article History: Received 13 October 2005; Revised 8 March 2006; Accepted 22 April 2006 Article Note: (footnote) [star] A previous version has been published as ECB Working Paper no. 285. A detailed Technical Appendix is available from the author upon request.

This paper examines how innovation-led growth affects optimal monetary policy. We consider the Ramsey policy in a New Keynesian model where R&D leads to an expanding variety of intermediate goods and compare the results with those obtained when the expansion occurs exogenously. Positive trend inflation is found to be optimal under both assumptions, but much higher with profit-seeking innovation. Optimal monetary policy must be counter-cyclical in response to both technology and public spending shocks, yet the intensity of the reaction crucially depends on the presence of an R&D sector. However, the small amount of short-run deviations of prices from the non-zero trend inflation observed in response to shocks suggests inflation targeting as a robust policy recommendation. [ABSTRACT FROM AUTHOR]