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Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero.

To analyse the interdependence between monetary and fiscal policy during a financial crisis, we develop an open-economy DSGE model with monetary and fiscal policy as well as financial markets in a continuous-time framework based on stochastic differential equations. Monetary policy is modelled using both a standard and a modified Taylor rule and fiscal policy is modelled as either expansionary or austere. In addition, we differentiate between open economies and monetary union members. We find evidence that the modified Taylor rule notably reduces the likelihood that the financial market crisis affects the real economy. But if we assume that households are averse with respect to outstanding government debt, we find that a combination of expansionary monetary policy and austere fiscal policy provides better stabilisation of both domestic and foreign economies in terms of both output and inflation. In the case of a monetary union, we find that stabilisation of output in the country where the financial shock originates is no longer as easy and, in terms of prices, there is now deflation in the country where the crisis originated and a positive inflation rate in the other country.

Prices of primary energy commodities display marked fluctuations over time. Market-based climate policy instruments (e.g., emissions pricing) create incentives to reduce energy consumption by increasing the user cost of fossil energy. This raises the question of whether climate policy should respond to fluctuations in fossil energy prices? We study this question within an environmental dynamic stochastic general equilibrium (E-DSGE) model calibrated on the German economy. Our results indicate that the welfare implications of dynamic emissions pricing crucially depend on how the revenues are used. When revenues are fully absorbed, a reduction in emissions prices stabilizes the economy in response to energy price shocks. However, when revenues are at least partially recycled, a stable emissions price improves overall welfare. This result is robust to different modeling assumptions., CEPA Discussion Papers; 51

In light of climate change mitigation efforts, revenues from climate policies are growing, with no consensus yet on how they should be used. Potential efficiency gains from reducing distortionary taxes and the distributional implications of different revenue recycling schemes are currently debated. To account for households heterogeneity and dynamic trade-offs, we study the macroeconomic and welfare performance of different revenue recycling schemes using an Environmental Two-Agent New-Keynesian model, calibrated on the German economy. We find that, in the long run, welfare gains are higher when revenues are used to reduce distortionary taxes on capital, but this comes at the cost of higher inequality: while all households prefer labor income tax reductions to lump-sum transfers, only financially unconstrained households are better off when reducing taxes on capital income. Interestingly, we find that over the transition period relevant to meet short-medium run climate targets, labor income tax cuts are the most efficient and equitable instrument.

We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.

This paper studies optimal monetary and fiscal policies in an economy à la Lucas and Stokey (1983) and Lagos and Wright (2005) with multiple cash and credit goods. We show that optimal policies are in general time inconsistent due to insufficient number of instruments to influence future government decisions. There are two important cases where time consistency can be restored. First, if taxes in the decentralized anonymous markets are not available, the multipliers on the decentralization constraints can be utilized as additional instruments to ensure time consistency. Second, if taxes in decentralized markets are available, time consistency arises when the different cash goods satisfy the conditions necessary for optimal uniform taxation.

Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.

In the United States structure and equipment capital are effectively taxed at different rates. Recently, President Obama joined the group of policy makers and economists who propose to eliminate these differentials. This paper analyzes the consequences of such a reform using an incomplete markets model with equipment-skill complementarity. We find that the reform increases average welfare by approximately 0.1 %. Importantly, we find that the reform does not involve the usual efficiency vs. equality trade-off: it improves both.

We evaluate the ability of generational accounting to assess the potential welfare implications of policy reforms. In an intergenerational context policy reforms usually have redistributive, efficiency, and general equilibrium implications. Our analysis shows that when the policy reform implies changes in economic efficiency, generational accounts can be misleading not only about the magnitude of welfare changes, but also about the identity of who wins and who losses. In contrast, the generational accounts correctly identify welfare changes when the policy reform has only a pure intergenerational redistribution component. We illustrate and quantify this issue in the context of widely considered policy reforms (substitution of consumption for labor taxation, and the increase of retirement age) and in a more general context of optimal policy.

The authors examine the effectiveness of labor cost reductions as a means to stimulate economic activity and assesses the differences which may occur with the prevailing exchange rate regime. They develop a medium-scale three-region DSGE model and show that the impact of a cut in the employers’ social security contributions rate does not vary significantly under different exchange rate regimes. They find that both the interest rate and the exchange rate channel matters. Furthermore, the measure appears to be effective even if it comes along with a consumption tax increase to preserve long-term fiscal sustainability. Finally, they assess whether obtained theoretical results hold up empirically by applying the local projection method. Regression results suggest that changes in employers’ social security contributions rates have statistically significant real effects – a one percentage point reduction leads to an average cumulative rise in output of around 1.3 percent in the medium term. Moreover, the outcome does not differ significantly across the different exchange rate regimes.

We identify US defense news shocks as shocks that best explain future moviments in defense spending over a five-year horizon and are orthogonal to current defense spending. Our identified shocks are strongly correlated with the Ramey (2011) news shocks, but explain a larger share of macroeconomic fluctuations and have significant demand effects. Fiscal news induces significant and persistent increases in output, consumption, investment, hours and the interest rate. Standard DSGE models fail to produce such a pattern. We propose a sticky price model with variable capital utilization, capital adjustment costs, and rule-of-thumb consumers that replicates the empirical findings and allows us to test the validity of our methodology for extracting anticipated fiscal shocks from the data.

We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The authors show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.

Low domestic saving rates in South Africa may perpetuate a low-growth trap. The decline in government saving, a major reason for the overall decline in saving, is now being reversed. However, personal saving rates have fallen since 1993, and corporate rates since 1995, and both may decline further with lower real interest rates. It is important to understand both personal and corporate saving behaviour in order to formulate policies to raise the domestic saving rate in line with the needs of economic growth. This article summarizes our previous work on the household sector, emphasizing the role of financial liberalization, assets, and income expectations, and it explains sectoral links and policy implications. Further, it analyses South Africa's corporate saving rate in detail. Models are developed both for the share of profits in national income, including the roles of the terms of trade, tax effects, and the price to unit labour cost margin, and for the share of corporate saving in profits, which is found to depend on inflation, the real interest rate, dividend taxation, and financial liberalization. Corporate saving is remarkably underresearched, given its importance in many economies. This research thus puts the saving and growth concerns of Kaldor into a modern empirical context.

As nations struggle to restart their economy after COVID-19 lockdowns, calls to include green investments in a pandemic-related stimulus are growing. Yet little research provides evidence of the effectiveness of a green stimulus. We begin by summarizing recent research on the effectiveness of the green portion of the 2009 American Recovery and Reinvestment Act on employment growth. Green investments are most effective in communities whose workers have the appropriate "green" skills. We then provide new evidence on the skills requirements of both green and brown occupations, as well as from occupations at risk of job losses due to COVID-19, to illustrate which workers are most likely to benefit from a pandemic-related green stimulus. We find similarities between some energy sector workers and green jobs, but a poor match between green jobs and occupations at risk due to COVID-19. Finally, we provide suggestive evidence on the potential for job training programs to help ease the transition to a green economy.

This paper examines the distributional implications of monetary policy, either standard, non-standard or both, on income inequality in 10 Euro Area countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. The identification of monetary shocks follows a one-step procedure and relies only on country-specific determinants of income distribution. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in countries with a high level of market inequalities, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality. Results are robust to alternative data sources either for income distribution or for non-standard monetary policies.

Numerical simulations of fiscal space in the euro area, based on 12 different situations, point to the large uncertainty surrounding the capacity of Member States to pay back their public debts. Debt sustainability appears to depend crucially on long-term nominal interest rate being lower than nominal growth for a long period. Only in this case do major European countries experience some additional fiscal space. Although the analytics behind this exercise is common knowledge among macroeconomists, it gives an order of the magnitude of fiscal space in the euro area and it confirms that interactions between the ECB and governments are key to escape the public finances consequences of an exogenous global shock like Covid-19.

A tractable incomplete-market model with unemployment, sticky prices, and a fiscal side is used to quantify the macroeconomic effects of lockdown policies and the miti-gating effects of raising government spending and implementing UI benefit extensions. We find that the effects of lockdown policies, although we are relatively conservative about the size of the lockdown, are huge: unemployment doubles on impact and al-most triples even for relatively short lockdown durations. Output falls dramatically and debt-output ratios increase by several tens of percentage points. In addition, the surge in unemployment risk triggers a rise in precautionary savings that make such shocks Keynesian supply shocks: aggregate demand falls by more than aggregate supply, and lockdown policies are deflationary. Unfortunately, we find that raising public spending and extending UI benefits stimulate aggregate demand or improve risk-sharing but has little effects on output and unemployment, although they do alleviate the welfare losses of lockdown policies for the households.

This paper presents empirical evidence of asymmetric fiscal policy along the business cycle, using a real-time panel data on 19 OECD countries. We estimate various specifications of fiscal policy rules, in which ex ante fiscal policy has two major objectives: macroeconomic stabilization and fiscal consolidation. First, we find that a symmetric fiscal policy rule may not be an accurate representation of real-time fiscal policy. We find evidence in favor of asymmetric fiscal policy, in particular regarding the response to output gap. Second, fiscal policy appears to be generally procyclical in downturns and a-cyclical in upturns, typically in the Euro Area and during the crisis. Third, we do not find significant evidence of a procyclical fiscal consolidation in the OECD and the Euro Area, although surplus-debt feedback coefficients are generally larger in downturns. Our results are robust to an alternative measure of business cycle and to country exclusion.

We evaluate the employment effect of the green part of the largest fiscal stimulus in recent history, the American Recovery and Reinvestment Act (ARRA). Each $1 million of green ARRA created 15 new jobs that emerged especially in the post-ARRA period (2013-2017). We find little evidence of significant short-run employment gains. Green ARRA creates more jobs in commuting zones with a greater prevalence of pre-existing green skills. Nearly half of the jobs created by green ARRA investments were in construction or waste management. Nearly all new jobs created are manual labor positions. Nonetheless, manual labor wages did not increase.

We study the efficacy of releases from the U.S. Strategic Petroleum Reserve (SPR) within the context of fully specified models of the global oil market that explicitly allow for storage demand as well as unanticipated changes in the SPR. Using novel identifying strategies and evaluation methods, we examine seven questions. First, how much have exogenous shocks to the SPR contributed to the variability in the real price of oil? Second, how much would a one-time exogenous reduction in the SPR lower the real price of oil? Third, are exogenous SPR releases partially or fully offset by increases in private sector oil inventories and how does this response affect the transmission of SPR policy shocks? Fourth, how effective were actual SPR policy interventions, consisting of sequences of exogenous changes in the SPR, at lowering the real price of oil? Fifth, are there differences in the effectiveness of SPR emergency drawdowns and SPR exchanges? Sixth, how much did the creation and expansion of the SPR contribute to higher real oil prices? Finally, how much would selling half of the oil in the SPR, as recently proposed by the White House, lower the global price of oil (and hence the U.S. price of motor gasoline) and how much fiscal revenue would it generate.

This thesis presents three essays in the field of empirical and quantitative macroeconomics. The essays focus on the macroeconomic consequences of credit-market imperfections. The first chapter is about the dynamics of the sovereign credit, while the rest two chapters are on the corporate/business credit. In terms of methodologies, panel-data approaches are applied in both Chapter 1 and Chapter 2. Structural quantitative methods, on the other hand, are used in Chapter 1 and Chapter 3.In Chapter 1, which is joint work with Almuth Scholl, we study the dynamic interaction between sovereign default risk, taxation, and the underground economy. The study is motivated by the observation that in the wake of sovereign debt crises, many countries have adopted fiscal consolidation policies in order to reduce public debt and to restore creditworthiness. However, particularly in crisis-prone countries, substantial underground activities undermine tax enforcement. We first conduct an empirical analysis. For a large sample of countries, we find that the size of the underground economy is positively correlated with sovereign debt and interest spreads. We rationalize these empirical regularities within a quantitative model of sovereign default that explicitly accounts for underground activities. We study optimal fiscal policy in the presence of limited tax enforcement and default risk using the concept of Markov-perfect equilibria, in which the government moves first and the households form expectations about future public policies. In a quantitative exercise, we analyze the properties of optimal public policies and the private sector's responses and study the dynamics of a default event with particular focus on the underground sector. Our simulation results reveal that the theoretical framework replicates the empirical regularities very well. In particular, our model predicts that the size of the underground economy is positively correlated with sovereign debt and interest spreads. We show that during a debt crises, the dynamic interaction between sovereign default risk and the underground economy creates a vicious circle: Higher sovereign risk premia tighten the endogenous borrowing constraint and force the government to raise taxes. Tax hikes, however, induce the private sector to invest less and to evade taxes by producing in the underground sector. In turn, falling tax revenues force the government to either implement further tax hikes or to default. Eventually, rasing taxes becomes too costly and the government finds it optimal to default Our quantitative findings suggest that the underground economy fosters sovereign default risk and deepens debt crises.In the second chapter, we ask the following question: Has the financial sector become more efficient over time? It is natural to believe that the financial efficiency has improved, at least in an advanced economy such as the United States. However, some authors, such as Philippon (2015) and Bazot (2018), show that it might not be the case. This chapter revisits the estimation of financial efficiency. In this chapter, we propose a regression method to assess the time trend in the firm's intermediation cost of external credit. We define the intermediation cost as the part of the unit cost of the external credit finance that is unrelated to the risk premium. We find that the intermediation cost has decreased significantly over the period of 1983Q1-2007Q4, which has substantially reduced firm's borrowing cost. On average, the fall in the intermediation cost leads to a reduction by 0.57-0.71 percentage point in the ratio of interest expense over revenue, and a decrease by 0.78-0.79 percentage point in the ratio of interest expense over book value of debt. The estimation results are robust against different sample components and against alternative measures of the risk-free rate and inflation. The reduction in the intermediation cost implies that the financial efficiency has improved in the US corporate credit market. We also assess the cross-sectional average risk premium and unit cost over the same period of time, but find mixed results.Chapter 3 is motivated by the empirical evidence in Chapter 2, and explores the macroeconomic implications of such decrease in the intermediation cost. The chapter is motivated by the fact that over the past decades, there has been a dramatic credit boom in the United States, coupled with decreasing asset returns and rising inequality. It analyzes whether the decreasing intermediation cost of borrowing is an explanation for these developments. We first construct a simple two-period model, followed by a fully dynamic model based on Angeletos (2007), which we apply to the United States in a quantitative exercise. We find that the macroeconomic effects of the fall in intermediation costs are amplified by two feedback loops: one is between the capital market and the credit market, and another is between the capital-credit market and the wealth distribution. We show that, due to lower intermediation costs, the credit market experiences a "simultaneous" expansion of credit demand and credit supply. As a result, the real risk-free interest rate barely changes. The capital market also expands, leading to a decrease in the returns on capital. The feedback loops exaggerate the capital-income risk and increase the average returns on investment among leveraged investors, driving up the overall wealth and income inequality. In a quantitative exercise, we find that much of the rise in the top-end wealth inequality during 1980-2007 could be explained by the reduction in the intermediation costs. In terms of welfare, we find that the welfare decreases for the households in the bottom-90% wealth group, while it improves for households in other groups. published

A tractable incomplete-market model with endogenous unemployment risk, sticky prices, real wage rigidity and a fiscal side is calibrated to Euro Area countries and used to analyze the macroeconomic effects of lockdown policies. Modeling them as a shock to the extensive margin of labor adjustment – a rise in separations – produces large and persistent negative effects on output, unemployment and welfare, raises precautionary savings and lowers inflation, in line with early evidence about inflation dynamics. Modeling lockdowns as a shock to the intensive margin – a fall in labor utilization – produces small and short-lived macroeconomic and welfare effects, and implies a counterfactual rise in inflation. Conditional on a lockdown (separation) shock, raising public spending or extending UI benefits by large amounts is much more effective in stimulating the economy than during normal times. Quantitatively however, the ability of such policies to flatten the output and unemployment curves remains limited, even though these policies can alleviate a reasonable share of the aggregate welfare losses from the lockdown., Highlights • We propose a model with uninsured unemployment risk to analyze lockdown shocks and policy responses. • Lockdowns have very different implications whether they affect the intensive or the extensive margin of labor. • When affecting the extensive margin, lockdowns are Keynesian supply shocks. • Government policies stimulate the economy more during lockdowns than during normal times.

We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies - forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus - in ameliorating the adverse consequences stemming from the effective lower bound on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB's New Area-Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.

We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk. We show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components. One reason is the convexity of the welfare gain in total risk. The other reason is a direct risk interaction which amplifies the utility losses from consumption risk. We proceed with a quantitative evaluation of social security’s welfare effects. We find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation, even net of the welfare losses from crowding out. About 60% of the welfare gains would be missing when simply summing up the isolated benefits.

Approximately 1-in-7 people and 1-in-4 children received benefits from the US Supplemental Nutrition Assistance Program (SNAP) in July 2011, both all-time highs. We analyze changes in SNAP take-up over the past two decades. From 1994 to 2001, coincident with welfare reform, take-up fell from 75% to 54% of eligible people. The take-up rate then rebounded, and, following several policy changes to improve program access, stabilized at 69% in 2007. Finally, take-up and enrollment rose dramatically in the Great Recession, with take-up reaching 87% in 2011. We find that changes in local unemployment can explain at least two-thirds of the increase in enrollment from 2007 to 2011. Increased state adoption of relaxed income and asset thresholds and temporary changes in program rules for childless adults explain 18% of the increase. Total SNAP spending today is 6% higher than it would be without these increases in eligibility. The recession-era increase in benefit levels is also likely to have increased enrollment.

This paper provides an empirical framework for computing a flow measure of public debt called the debt-to-duration ratio. A ratio of this measure to GDP (DD-to-GDP) is a unit-free measure of debt burden interpreted as the percentage of income for debt service or repayment. Using monthly US Treasury data (1997–2018), we compare this measure to the debt-to-GDP ratio. The DD-to-GDP ratio is an alternative for use in discussions about sustainability of current levels of debt. An empirical test of the relationship between rising debt ratios and growth shows that duration has an important counteracting relationship with higher debt lowering growth but longer duration being associated with higher growth in the medium term.

Donadores internacionales estan confundidos debido a la inhabilidad de sus ayudas de reforzar el crecimiento economico en muchos paises subdesarrollados. En este trabajo se analizan diversos temas relacionados con la relacion ayuda-crecimiento, tomando como referencia el caso de Nepal debido a sus caracteristicas particulares. Una conclusion general es que los donadores internacionales deben conducir una mejor y mayor investigacion acerca de los problemas y atributos especificos del pais receptor, antes de desembolsar cualquier tipo de ayuda. En el caso de Nepal, el pais estaria mejor si los donadores asumieran control exclusivo sobre los proyectos y trabajaran directamente con los cuerpos locales como las ONGs o grupos consultivos, mas que con el gobierno.

Latin America experienced a decline in household income inequality in the 2000s, in sharp contrast to growing inequality in other regions of the world. This has been attributed to macroeconomic policy, social spending, and increased returns to education. This paper explores this issue from a gender perspective by econometrically evaluating how changes in economic structure and policy have impacted gendered employment and unemployment rates, as well as gender inequality in these variables, using country-level panel data for a set of 18 Latin American countries between 1990 and 2010. Three variables stand out as having consistent gender-equalizing effects in the labor market: social spending, minimum wages, and public investment. Less important or consistent were the effects of external factors (such as terms of trade), economic structure, and GDP growth.

This paper analyzes fiscal policy under fiscal rules in a New Keynesian model with search and matching frictions and distortionary taxation. The model is estimated with US data including detailed information on fiscal instruments. Several findings stand out. First, fiscal rules enhance the positive effects of discretionary fiscal policy on output and unemployment if they influence the expected future path of interest rates. However, effects are smaller as suggested in the existing literature. Second, spending and consumption tax cuts have the largest multipliers. Third, multipliers for labor tax cuts are small. These results originate from the labor market friction and persist in an economy where the friction is more severe. Demand side disturbances explain the majority of labor market dynamics.

Lifetime occupational exposure accounts for 42% of differences in disability risk across individuals. Incorporating this feature into a general equilibrium model, we study how social disability insurance (SDI) affects welfare through (i) the classic channel of risk-sharing and (ii) a new channel of occupational reallocation. Both channels can increase welfare, but at the optimal SDI they are at odds. Welfare gains from additional risk-sharing are reduced by overly incentivizing workers to choose risky occupations. In a calibrated economy resembling the United States, SDI increases welfare by 2.6% (consumption) relative to actuarially fair insurance. The current US system captures 92% of these gains.

Political economy theory expects that changes in macroeconomic governance are often catalyzed by institutional factors, such as partisanship, elections, or International Monetary Fund (IMF) conditionality. I challenge and contextualize this view by incorporating the role of technocratic advisors into a domestic policy-making framework. I contend that presidents from countries with crisis legacies are more likely to appoint mainstream economists that pursue budget discipline. Employing an originally constructed dataset, the Index of Economic Advisors, I conduct an econometric test of sixteen Latin American countries from 1961 to 2011. I find that politicians are most likely to appoint mainstream economists who embrace fiscal rectitude in countries with inflation-crisis legacies. Furthermore, these crisis legacies are enduring given the severity of inflationary trauma relative to other types of domestic economic volatility in Latin America. In fact, these effects hold when controlling for both historical and contemporaneous shocks to unemployment. Resumen Las teorias de la economia politica esperan que los cambios en la gobernanza macroeconomica sean frecuentemente catalizados por factores institucionales, como la afiliacion partidaria, las elecciones o la condicionalidad del Fondo Monetario Internacional (FMI). Aqui desafio y contextualizo este punto de vista incorporando el papel de los asesores tecnocraticos en el analisis de la elaboracion de politicas nacionales. Sostengo que los presidentes de paises con experiencia en crisis son mas propensos a nombrar a economistas convencionales que buscan imponer disciplina presupuestaria. Usando una base de datos original, el Indice de Asesores Economicos, realizo un analisis econometrico de dieciseis paises latinoamericanos de 1961 a 2011. Encuentro que los politicos son mas propensos a designar economistas convencionales que adopten posiciones fiscales ortodoxas en paises con experiencia de crisis inflacionarias. Ademas, estas experiencias de trauma inflacionario tienen efectos mas duraderos porque son mas graves en comparacion con otros tipos de volatilidad economica interna en America Latina. Estos efectos se mantienen cuando se controla tambien por shocks de desempleo historicos y contemporaneos.

The presence of the lagged shadow policy rate in the interest rate feedback rule reduces the government spending multiplier nontrivially when the policy rate is constrained at the zero lower bound (ZLB). In the economy with policy inertia, increased inflation and output due to higher government spending during a recession speed up the return of the policy rate to the steady state after the recession ends. This in turn dampens the expansionary effects of the government spending during the recession via expectations. In our baseline calibration, the output multiplier at the ZLB is 2.5 when the weight on the lagged shadow rate is zero, and 1.1 when the weight is 0.9.

We estimate the effect of government purchases on unemployment in 20 OECD countries, for the period 1980–2007. An increase in government purchases equal to one percent of GDP is found to reduce unemployment by about 0.3 percentage points in the same year. The effect is greater and more persistent under less ”employment-friendly” labour market institutions, and greater and more persistent under a fixed exchange rate regime than under a floating regime. The effect is also greater in downturns than in booms. The effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment to population rate. This article is protected by copyright. All rights reserved

Government spending plays an important role in determining economic performances in China. Its macroeconomic effects are analyzed in this paper. We show that government spending in China (i) Granger-causes output, consumption and investment booms as well as inflation and (ii) has a multiplier larger than 1. The large multiplier effects are found not only in aggregate time-series data but also in panel data at the provincial level. We also provide a theoretical model and Monte Carlo analysis to rationalize our empirical findings. Our theoretical and Monte Carlo analyses support the large multiplier found in China but also suggests that government spending is not necessarily a free lunch in spite of the large multiplier effects.

Similar countries often choose very different policies and specialize in very distinct industries. This paper proposes a mechanism to explain policy diversity among similar countries from an open economy perspective. I study optimal policies in a two country model when policies affect determinants of trade patterns. I show that welfare gains from trade can provide sufficient incentive for asymmetric equilibrium policies, even if the two countries have identical economic fundamentals. Any asymmetric equilibrium exhibits greater production specialization than the autarky optimum; this is the source of welfare gains. For this same reason, a more asymmetric Nash equilibrium Pareto dominates a less asymmetric one. All equilibria are asymmetric if aggregate income is sufficiently convex in policy, under suitable restrictions on technology and preferences. As an application, I consider a model where skill distribution is the determinant of trade patterns and the policy in question is education policy. When heterogeneous agents choose their skill level optimally, optimal skill function is convex in government policy. In this application, symmetry-breaking in optimal education policy requires that the education cost of agents is relatively inelastic with respect to skill.

This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income agents. A model incorporating capital-skill complementarity in pro- duction and differential access to capital and labour markets is de- veloped to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We fi nd that the tax rate for high income agents is opti- mally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be the most volatile and counter-cyclical. We further fi nd that the optimal response to output-enhancing capi- tal equipment technology and spending cuts is to increase the progres- sivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.

We construct an endogenous growth model that includes productive public capital and government debt. We assume that the government debt-to-GDP ratio is gradually adjusted to a target level, reflecting the permanent commitment rules in the Stability and Growth Pact or the Maastricht Treaty in the European Union (i.e., the well-known 60% rule). These rules affect government borrowing and public investment. Here, we examine the welfare implications of the permanent commitment rules. We find that fiscal consolidation based on the rules improves social welfare. Moreover, the improvement in welfare accelerates as fiscal consolidation progresses more rapidly. Last, we also discuss and derive the optimal long-run debt-to-GDP ratio.

This paper develops a stochastic dynamic politico-economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover. Two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt. Electoral outcomes are characterized by the economic benefits from the incumbent's policies and stochastic idiosyncratic ideological aspects. Quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties. Prior to a debt crisis, the incumbent government accumulates external debt to foster the probability of remaining in power. The dynamic interaction of electoral outcomes, external debt, and sovereign default supports arguments for imposing institutional constraints on incumbent governments.

This paper analyses the political economics of the composition of taxes. Taxes may be levied on income, or on expenditure, with the median voter pivotal in the theoretical framework analysed. As in Meltzer and Richard (J Polit Econ 89:914–927, 1981), income taxes increase with inequality. Conversely, expenditure taxes first increase and then decrease with increasing inequality. The extent to which taxes are levied on income relative to expenditure unambiguously rises with inequality. In contrast to government size evidence, cross-country data exhibit a robust positive correlation between the extent to which taxes are levied on income relative to expenditure and inequality. Consistent with the theory, this relationship holds most significantly in stronger democracies.

We quantify government spending multipliers in US data using Bayesian prior and posterior analysis of a monetary model with fiscal details and two distinct monetary-fiscal policy regimes. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Short-run output multipliers are comparable across regimes—posterior means around 1.3 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—90 percent credible sets of [1.5, 1.9] versus [0.1, 0.4] in present value, when estimated from 1955 to 2016. (JEL E52, E62, E63, H50)

This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables, we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy and that the shadow economy positively affects fiscal illusion. Concealing the real tax burden, we find that an increase in taxation increases both shadow economic activities and fiscal illusion.

In this article, we argue that supply-side adjustments (i.e. the reallocation of productive resources between the traded and non-traded sectors) can be an important determinant of the output costs of current account adjustment. The argument relies on the fact that tax evasion is more prevalent in the non-traded sector, which is dominated by services and the self-employed. Heavy reliance on tax-based fiscal consolidations induces a reallocation of economic activity towards the non-traded sector, thus requiring a larger decline in domestic absorption (and output) per unit of improvement in the current account balance. Using International Monetary Fund data for the period 1980–2011, we find that budget consolidations that relied more on tax increases than on spending decreases were associated with larger output costs per unit of current account improvement.

This paper analyzes the implications of distortionary taxation and debt financing for optimal government spending policy in a sticky-price economy where the nominal interest rate is subject to the zero lower bound constraint. Regardless of the type of tax available and the initial debt level, optimal government spending policy in a recession is characterized by an initial increase followed by a reduction below, and an eventual return to, the steady state. The magnitude of variations in the government spending as well as their welfare implications depend importantly on the available tax instrument and the initial debt level.

This paper considers a simple model in which government spending is productive and has a complementary relationship with private consumption to study the response of the latter to government spending. We discuss how these two characteristics can yield empirical observations that indicate a positive response of private consumption to government spending. By assuming some plausible parameter settings, we use empirical evidence to demonstrate that these dual aspects of government spending, which are normally treated separately in the literature, are inseparably linked. Moreover, our findings reveal that in addition to the presence of complementarity, productivity---even if minimal---increases the likelihood of generating a positive consumption response. These results suggest that policymakers need to recognize the importance of quality of government spending rather than quantity when stimulating an economy without a decline in consumption.

Trabajo presentado en el 8th Shanghai Macroeconomics Workshop, celebrado en Shanghai (China), del 17 al 19 de junio de 2017.--Trabajo presentado en el Government Debt: Constraints and Choices, organizado por la Universidad de Chicago durante los días 21 y 22 de abril de 2017.--This version: October 2018 (November 2014), Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue ( r/r ) new ones. These features of DM are inconsistent with US data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this paper is introducing a novel computational method to find global solutions., Faraglia gratefully acknowledges support from the Cambridge Endowment of Research in Finance (CERF), Marcet from Plan Nacional (Spanish Ministry of Science), Monfispol, AGAUR (Generalitat de Catalunya), the Axa Foundation, the Excellence Program of Banco de Espa˜na, European Research Council under the EU 7th Framework Programme (FP/2007-2013) Advanced ERC Grant Agreement n. 324048 - APMPAL and the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563) and Scott from the ESRCs World Economy and Finance program.

This paper highlights the anomalous characteristics of the Euro Area ‘twin crises’ by contrasting the aggregate macroecosnomic dynamics in the period 2009–2013 with the business cycle fluctuations of the previous decades. We report three novel stylised facts. First, the contraction in output was marked by an anomalous downfall in private investment and an increase in households’ savings, while consumption and unemployment followed their historical relation with GDP. Second, households’ and financial corporations’ debts, and house prices deviated from their pre-crisis trends, while non-financial corporations’ debt followed historical regularities. Third, the jumps in the public deficit-GDP and debt-GDP ratios in 2008–2009 were unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the ‘anomalous’ increase in public debt is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a keyinteraction between the fiscal and the financial sectors.

This paper examines the distributional effects of monetary policy, either standard, nonstandard or both, on income inequality in 10 EA countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in peripheral countries, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality.terms of impact on income inequality.

This paper highlights the anomalous characteristics of the Euro Area ‘twin crises’ by contrasting the aggregate macroeconomic dynamics in the period 2009-2013 with the business cycle fluctuations of the previous decades. We report three novel stylised facts. First, the contraction in output was marked by an anomalous downfall in private investment and an increase in households’ savings, while consumption and unemployment followed their historical relation with GDP. Second, households’ and financial corporations’ debts, and house prices deviated from their precrisis trends, while non-financial corporations’ debt followed historical regularities. Third, the jumps in the public deficit GDP and debt-GDP ratios in 2008-2009 were unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the ‘anomalous’ increase in public debt is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a key interaction between the fiscal and the financial sectors.

We build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually observed in the data, we reach three main results. First, the increase in government consumption after 2008, albeit small in present value terms, was close to optimal. Second, frontloading the same stimulus would have been welfare-improving. Third, larger welfare effects occur in our model for parameter values implying either large welfare costs of modest recessions (e.g., high consumption curvature), or outright large recessions. (JEL E12, E32, E43, E62, H50)