Hostname: page-component-8448b6f56d-jr42d Total loading time: 0 Render date: 2024-04-25T04:10:54.844Z Has data issue: false hasContentIssue false
  • English
  • Français

THE OPTIMAL POLICY MIX TO ACHIEVE PUBLIC DEBT CONSOLIDATION

Published online by Cambridge University Press:  19 July 2018

Roberta Cardani ,
Lorenzo Menna  and
Patrizio Tirelli
Roberta Cardani*
Affiliation:
University of Milano-Bicocca
Lorenzo Menna
Affiliation:
Banco de Mexico
Patrizio Tirelli
Affiliation:
University of Milano-Bicocca and Griffith University
*
Address correspondence to: Roberta Cardani, Department of Economics, Management and Statistics (DEMS), University of Milano-Bicocca, Piazza dell’Ateneo Nuovo, 1, 20126 Milano, Italy; e-mail: roberta.cardani@unimib.it
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we adopt a Ramsey optimal approach to identify the combination of income taxes, public expenditure, and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure-based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.

Keywords

Fiscal ConsolidationLimited Asset Market ParticipationRamsey Fiscal Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Special Issue 1: Macroeconomic Modeling and Empirical Evidence in the Wake of the Crisis , January 2020 , pp. 113 - 129
Copyright
© Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

R. Cardani and P. Tirelli gratefully acknowledge financial support from EC project 320278-RASTANEWS. We thank the anonymous referees, as well as participants at numerous conferences and seminars, for helpful comments and suggestions. The views expressed are those of the individual author and do not necessarily reflect official positions of Banco de Mexico.

References

Aizenman, Joshua and Marion, Nancy (2011) Using inflation to erode the US public debt. Journal of Macroeconomics 33, 524–541.CrossRefGoogle Scholar
Alesina, Alberto, Favero, Carlo, and Giavazzi, Francesco (2015) The output effect of fiscal consolidation plans. Journal of International Economics 96 (S1), 19–42.CrossRefGoogle Scholar
Apostolis, Philippopoulos, Varthalitis, Petros, and Vassilatos, Vanghelis (2015) Optimal fiscal and monetary policy action in a closed economy. Econonomic Modelling 48, 175–188.Google Scholar
Blanchard, Oliver, Giovanni, Dell’Ariccia, and Paolo, Mauro (2010) Rethinking macroeconomic policy. Journal of Money, Credit and Banking 42, 199–215.CrossRefGoogle Scholar
Cantore, Cristiano, Levine, Paul L., Melina, Giovanni, and Pearlman, Joseph G. (2017) Optimal fiscal and monetary policy, debt crisis and management. Macroeconomic Dynamics 1, 1–39.Google Scholar
Coenen, Günter, Matthias, Mohr, and Straub, Roland (2008) Fiscal consolidation in the Euro Area: Long-run benefits and short-run costs. Economic Modelling 25, 912–932.CrossRefGoogle Scholar
Colciago, Andrea (2011) Rule-of-thumb consumers meet sticky wages. Journal of Money, Credit and Banking 43, 325–353.CrossRefGoogle Scholar
Correia, Isabel (2010) Consumption taxes and redistribution. American Economic Review 100, 1673–1694.CrossRefGoogle Scholar
Cournde, Boris Goujard, Antoine and Pina, Álvaro (2013) How to Achieve Growth- and Equity-Friendly Fiscal Consolidation? A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries. OECD Economics Department working paper 1088.Google Scholar
Erosa, Andrés and Ventura, Gustavo (2002) On inflation as a regressive consumption tax. Journal of Monetary Economics 49, 761–795.CrossRefGoogle Scholar
European Commission (2018) Vade Mecum on the Stability and Growth Pact. EC institutional paper 075.Google Scholar
Fall, Falilou and Fournier, Jean-Marc (2015) Macroeconomic Uncertainties, Prudent Debt Targets and Fiscal Rules. OECD Economics Department working paper 1230.Google Scholar
Ferrara, Maria and Tirelli, Patrizio (2014) Fiscal Consolidations: Can We Reap the Gain and Escape the Pain?. University of Milano-Bicocca DEMS working paper 283.Google Scholar
Forni, Luca, Andrea, Gerali, and Pisani, Massimiliano (2010) Macroeconomic effects of greater competition in the service sector: The case of Italy. Macroeconomic Dynamics 14, 677–708.CrossRefGoogle Scholar
Forni, Luca and Pisani, Massimiliano (2018) Sovereign restructuring vs. fiscal adjustment in a monetary union: Macroeconomic effects from model-based simulations. Macroeconomic Dynamics 22, 470–500.CrossRefGoogle Scholar
Galí, Jordi, López-Salido, David, and Vallés, Javier (2004) Rule-of-thumb consumers and the design of interest rate rules. Journal of Money, Credit and Banking 36, 739–764.CrossRefGoogle Scholar
Galí, Jordi, pez-Salido, David Ló, and Vallés, Javier (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5, 227–270.CrossRefGoogle Scholar
Glomm, Gerharad, Jung, Juergen, and Tran, Chung (2018) Fiscal austerity measures: Spending cuts vs. tax increases. Macroeconomic Dynamics 22, 501–540.CrossRefGoogle Scholar
Krusell, Per Quadrini, Vincenzo and Rios-Rull, José-Víctor (1996) Are consumption taxes really better than income taxes? Journal of Monetary Economics 37, 475–503.CrossRefGoogle Scholar
Menna, Lorenzo and Tirelli, Patrizio (2017) Optimal inflation to reduce inequality. Review of Economic Dynamics 24, 79–94.CrossRefGoogle Scholar
Motta, Giorgio and Tirelli, Patrizio (2012) Optimal simple monetary and fiscal rules under limited asset market participation. Journal of Money, Credit and Banking 44, 1351–1374.CrossRefGoogle Scholar
Motta, Giorgio and Tirelli, Patrizio (2015) Money targeting, heterogeneous agents, and dynamic instability. Macroeconomic Dynamics 14, 677–708.Google Scholar
Nickel, Christiane, Rother, Phillipp, and Zimmermann, Lilli (2010) Major Public Debt Reductions. Lessons from the Past, Lessons for the Future. Working paper series no. 1241, European Central Bank.Google Scholar
OECD (2013), How Much Scope for Growth and Equity-Friendly Fiscal Consolidation?. OECD Economics Department policy notes 20.Google Scholar
Perotti, Roberto (2013) The ‘Austerity Myth’: Gain without pain? In Alesina, A. and Giavazzi, F. (eds.), Fiscal Policy After the Financial Crisis, pp. 307–354. Chicago, IL and London: National Bureau of Economic Research and Chicago University Press.Google Scholar
Rotemberg, J. J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2004) Optimal fiscal and monetary policy under sticky prices. Journal of Economic Theory 114, 198–230.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2012) An OLS approach to computing Ramsey equilibria in medium-scale macroeconomic models. Economics Letters 115, 128–129.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2010) The optimal rate of inflation. In Friedman, B. M. and Woodford, M. (eds.), Handbook of Monetary Economics, 653–722. Amsterdam: Elsevier.CrossRefGoogle Scholar
Stähler, Nikolai and Thomas, Carlos (2012) FiMod – A DSGE model for fiscal policy simulations. Economic Modelling 29, 239–261.CrossRefGoogle Scholar
Sutherland, Douglas, Hoeller, Peter, and Merola, Rossana (2012) Fiscal Consolidation: How Much is Needed to Reduce Debt to a Prudent Level? OECD Economics Department working paper 932.CrossRefGoogle Scholar