Macroeconomics Fiscal and Monetary Policy Interdependence

Size: px

Start display at page:

Download "Macroeconomics Fiscal and Monetary Policy Interdependence"

Kellie Clark
5 years ago
Views:

1 acoeconomic Fical and oneay olicy Inedependence Nicola Viegi Sepembe 207 oneay Economic Lecue 0

2 Inoducion Fical olicy back a he cene of policy dicuion Theoy of Fical olicy no well developed Ricadian Equivalence (fical policy ielevan) vey peen in cuen debae Old Keyneian (Saic uliplie) do no conide poenial effec of expeced fical and moneay policy epone o fuue fical imbalance (eoi Fical olicy in ood and Bad Time) oden maco emphaize Ine-empoal Relaionhip oneay and Fical olicy ae no independen a long a one effec expecaion abou he ohe oneay Economic Lecue 0 Ocobe 20 2/25

3 Inoducion Thi Lecue Sagen Wallace Unpleaan oneai Aihmeic (fi example of udying ineempoal elaionhip beween policy inumen) New Fical Theoy of ice Deeminaion - The govenmen budge conain i no a conain bu an equilibium elaionhip oneay Economic Lecue 0 Ocobe 20 3/25

4 Sagen Wallace Unpleaan oneai Aihmeic The main objecive of he pape wa o how ha, even in a pue moneai famewok, unbounded fical policy poduce negaive pillove effec on moneay policy, and ulimaely i can undemine he abiliy of moneay policy o conol inflaion. Thi concluion lagely baed on he aumpion ha pemanen budge defici mu be moneized. No upiingly, wih an exogenou eam of budge defici, hee i only one inegal of money ceaion ha i conien wih long un equilibium, and he only choice in he hand of he moneay auhoiy i he ime pofile of money ceaion. Vey Simple odel Togehe wih a Cagan ype model of inflaion can explain a lo of Hypeinflaion expeience (and hei peience) oneay Economic Lecue 0 Ocobe 20 4/25

5 oneay Economic Lecue 0 Ocobe 20 5/25 Sagen Wallace Unpleaan oneai Aihmeic Vey Simple odel Quaniy Theoy of oney ovenmen Budge Conainfi.....in em of owh Rae of oney k D D ) ( µ k D D µ ) (

6 oneay Economic Lecue 0 Ocobe 20 6/25 Sagen Wallace Unpleaan oneai Aihmeic Inegaing Fowad ha, given a conan level of budge defici and he conan eal inee ae, can be ewien a : The Choice of he Cenal Bank: chooe he ime pofile of money gowh ( ) k D µ ( ) k D µ

7 oneay Economic Lecue 0 Ocobe 20 7/25 Sagen Wallace Unpleaan oneai Aihmeic Cenal Bank oblem Soluion: conan inflaion ae : Any ohe pah would be ubopimal. Conide fo example a bank waning o mainain zeo inflaion up o ime T. A ime T Deb would be equal o And inflaion equal o ( ) L CB 2 µ β D k µ ( ) D D T T T ) ( ( ) ( ) D k D k T T T µ

8 Sagen Wallace Unpleaan oneai Aihmeic "Wihou help fom he fical auhoiie, fighing cuen inflaion wih igh moneay policy mu evenually lead o highe fuue inflaion. The inoducion of aional expecaion ha he effec of anicipaing he inflaionay peue a ime zeo, hen eliminaing even he poibiliy o chooe he deied ime pofile of inflaion conien wih long un olvency of he public eco Highly influenial Reul Fical Cieia bon fom hi analyi The policy conflic beween fical and moneay policy can be eolved imply aigning policy leadehip o he Cenal Bank. oneay Economic Lecue 0 Ocobe 20 8/25

9 oblem Thi analyi come fom a Ricadian view of fical policy. If Fical policy i ineffecive, i hould be pu unde conol The cii how ha fical policy have an impoan pa o play expecially when moneay policy ha lo cenaliy (zeo lowe bound) Bu fical policy i complex (many diffeen axe and pending inumen, iue of deb managemen, dynamic behaviou cenal and unceain, belief mae, effec ae vey long) Fical olicy i poliical (axe and pending have diec diibuional effec) need o epaae poliical deciion fom he non-poliical pa of fical policy Aemp o a new heoy of fical and moneay policy ineacion (Woodfod, Leepe among many ohe) oneay Economic Lecue 0 Ocobe 20 9/25

10 Fical Theoy of he pice level The govenmen budge conain a an equilibium condiion B ( τ g ) ( kµ ) Thee i nohing ha foce he govenmen o adju axe o money gowh o aify he elaion. If anyhing ele will, pice will. Two egime oneay egime moneay policy age pice and fical policy age budge Fical egime fical policy deemine pice and moneay policy mainain value of deb oneay Economic Lecue 0 Ocobe 20 0/25

11 oneay Economic Lecue 0 Ocobe 20 /25 Fical Theoy of he pice level Inoducing he idea in a nomal conume poblem (Sim 2000) 0 log log ) ( max, B C C E C U µ β ( ) B i B C τ ( ) ( ) B i B τ Subjec o Nominal ovenmen Budge Conain ovenmen mu deemine wo of he five vaiable: he ohe will be deemine by pivae eco fi ode condiion

12 oneay Economic Lecue 0 Ocobe 20 2/25 Fical Theoy of he pice level FOC : C U δ δ C λ : B U δ δ ( ) C E i C β : U δ δ C i i µ

13 oneay Economic Lecue 0 Ocobe 20 3/25 Fical Theoy of he pice level ( ) ( ) C C C C B i C C i C B τ ( ) ( ) [ ] E E B B E β µ τ β ( ) ( ) [ ] E E B µ β µ τ β β Suppoe govenmen follow a policy of nominal inee ae ageing and fixe i and he level of axe. Then he govenmen budge conain divided by C i given by: Taking he expecaion and uing he pivae eco FOC and he fac ha in equilibium i C, we have: Unable diffeence equaion if he gowh of income i no big enough o inceae he demand of eal moneay balance o much o wipe ou he deb. Ohewie he only able oluion i:

14 Fical Theoy of he pice level iven he level of axe and he nominal inee ae, hee i only one level of eal deb compaible wih he olvency of he public eco. Subiuing hi equilibium value, called Φ, i i poible o expe he movemen in pice epec he ohe eal vaiable in he model: Φ τ ( i ) Φ ( µ βµ ) oneay Economic Lecue 0 Ocobe 20 4/25

15 Fical Theoy of he pice level Figue : Simulaed Coelaion Beween ice and Income Accoding o Equaion (0) ()/(-) () Wih a fix inee ae (zeo lowe bound) only gowh can guaanee he conol of pice in he face of fical unceainy oneay Economic Lecue 0 Ocobe 20 5/25

16 Applicaion : Fical olicy and Ae ice Hypohei Balance Budge Rule o-cyclical olicie Auomaic Sabilize effec of axe and expendiue eveed. Inceae vaiabiliy which affec ae valuaion Balance Shee Appoach o Fical olicy Effec Budge Suplue affec pivae eco pofolio choice. See Schmi-ohe and Uibe (2000) fo analyi of eal and nominal abiliy unde balance budge ule oneay Economic Lecue 0 Ocobe 20 6/25

17 Balance Budge Rule and emanen Suplue How i Balance Budge Achieved Claical ublic Finance allow defici pending only in cae of emegency (Wa) no elaion wih buine cycle bu dimenion of he govenmen wa mall, buine cycle effec wee mall a well udenial Behaviou (collec befoe pending) Suplu Bia oneay Economic Lecue 0 Ocobe 20 7/25

18 Ex Ane Balance Budge Rule Ignoing eignoage, wih income axe, Nominal ov. Budge i equal o ( i) B B τ Balance budge ule B B τ B ( i) Bu a he beginning of he peiod and ae unknown, heefoe τ B b ( i ) E ( ) E oneay Economic Lecue 0

19 oneay Economic Lecue 0 Ocobe 20 9/25 Ex Ane Balance Budge Rule ( ) ( ) ( ) 0, cov,,, 2 2 < σ σ σ Than If ( ) Ω b τ ( ) ( ) ( ) b b b E σ σ τ Ω Size of he fical uplu neceay o guaanee fical abiliy (and moneay dominance), which i a funcion of he oupu unceainy and he eniiviy of fical policy o he cycle

20 Ex Ane Balance Budge Rule ovenmen (Expeced) Budge Dynamic B π B ΩE ( ) Tendency fo he ovenmen o accumulae uplue Hypohei: In he FTD (o any non Ricadian fical heoy) hi policy pu downwad peue on pice iven he moneay egime, hi educe he eal inee ae (Expeced inflaion doe no change) and boo oupu oiive effec on Ae ice muliplied if downwad peue on pice peien oneay Economic Lecue 0 Ocobe 20 20/25

21 Calibaing Fical oneay olicy and Ae ice Woodfod 996 Conol of ublic Deb: A Requiemen fo ice Sabiliy? oneay Economic Lecue 0 Ocobe 20 2/25

22 Fical and oneay olicy Ineacion in a FTD model 0 Inflaion 0.05 Oupu i nominal 0.25 ae pice No Fical olicy W ih Fical olicy Repone o a oduciviy Shock wih and wihou Fical Channel Fical olicy adjumen inceae volailiy of ae pice and inflaion oneay Economic Lecue 0 Sepembe /25

23 Fical olicy Sabilizaion Effec 0 d 0.2 e 0 i m p q x Fical olicy Dicipline Conibue o Ae ice Boom oneay Economic Lecue 0 Ocobe 20 23/25

24 I Fical olicy he Second Inumen? x 0-3 Inflaion Oupu i nominal x ae pice baeline ae ageing F No likely Fical Repone oo low I inoduce oo much vaiabiliy in pice and budge pocee oneay Economic Lecue 0 Ocobe 20 24/25

25 Concluion Fical olicy Cenal in olicy ix Theoy lagging behind Tadiional Ine-empoal appoach oo eicive Ineeing new developmen Fical Theoy of he ice Level oneay Economic Lecue 0 Ocobe 20 25/25

The Global Trade and Environment Model: GTEM

The Global Trade and Environment Model: GTEM The Global Tade and Envionmen Model: A pojecion of non-seady sae daa using Ineempoal GTEM Hom Pan, Vivek Tulpulé and Bian S. Fishe Ausalian Bueau of Agiculual and Resouce Economics OBJECTIVES Deive an