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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]

We study the relationship between growth and variability in a growth DSGE model with nominal rigidities and learning-by-doing. We show this relationship may be positive or negative depending on the source of fluctuations. A key role is played by labour market features. We find that monetary shocks volatility will generally have a negative effect on growth, while the opposite is true for fiscal and productivity shocks. These findings are consistent with empirical evidence, as data show an ambiguous relationship between output growth and its variance, but a negative relationship between output growth and nominal variability. [ABSTRACT FROM AUTHOR]

The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depend on whether monetary policy is active or passive. In terms of optimal monetary policy, it is demonstrated that the degree of responsiveness of the nominal interest rate to inflation should be related to the stock of foreign debt. Specifically, it is optimal to implement a more passive monetary policy stance in response to larger levels of the outstanding foreign-currency-denominated debt. [ABSTRACT FROM AUTHOR]

This paper analyzes the dynamic properties of the Taylor rule with the zero lower bound on the nominal interest rate in an optimizing monetary model with overlapping generations à la Yaari–Blanchard–Weil. The main result is that the presence of wealth effects is not sufficient to rule out the possibility of infinite equilibrium paths with decelerating inflation. In particular, in the presence of wealth effects, the occurrence of liquidity traps is not avoided when the central bank implements a Taylor-type interest-rate feedback rule. [ABSTRACT FROM AUTHOR]

This paper analyses the issue of price level determinacy in an optimizing general equilibrium model with overlapping generations. It is shown that under a pure interest rate peg wealth effects rule out nominal indeterminacy but give rise to multiple equilibria. [ABSTRACT FROM AUTHOR]