1 / 22

Fiscal consolidation: Dr Pangloss meets Mr Keynes

Fiscal consolidation: Dr Pangloss meets Mr Keynes. Marcus Miller and Lei Zhang 19 th June 2013. Debt unsustainability and measure to correct this. Variables used may be defined as follows:. b. B. Debt sustainability and government expenditure. Tax take. Bond Accumulation. A 2. A 0.

jariah
Download Presentation

Fiscal consolidation: Dr Pangloss meets Mr Keynes

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Fiscal consolidation: Dr Pangloss meets Mr Keynes Marcus Miller and Lei Zhang 19thJune 2013

  2. Debt unsustainability and measure to correct this Variables used may be defined as follows:

  3. b B Debt sustainability and government expenditure Tax take Bond Accumulation A2 A0 A1 A b0 E b* r-γ B g* g θ

  4. From a point such as A1, where the sum of expenditure and growth-adjusted interest charges exceeding the tax base, debt will grow unsustainably unless some action is taken. Such action may include: • reducing expenditure or raising tax rates; • debt reduction via inflation or explicit repudiation; • financial repression, i.e. lowering the rate of interest paid; • increasing the growth rate • a debt equity swap • or some combination of the above.

  5. Let the plan for fiscal consolidation be to adjust the structural deficit, S, so as to hit a target of δ*, where S is defined as . b*; so = b*. The baseline model can then be summarised in two equations: FC B where . Or in matrix form:

  6. b B Fiscal consolidation with capacity output: the baseline model F r Tax take A A' E b* r-γ F B g* g θ' θ δ*

  7. Different speeds of consolidation

  8. b Fiscal fatigue defines an upper debt limit B “Fiscal fatigue” of Barr et al. Tax take F r A' A E b* r-γ F B g* θ θ' g δ*

  9. b Fiscal stabilisation works, but with temporary recession B M Recession No Recession B′ Higher debt with lower tax take F r C A Tax take at capacity output E b* r-γ M F B θ′ g* θ g δ*

  10. Simulation results which converge to full employment in the long-run With endogenous taxes Non-cyclically adjusted Baseline case

  11. Fiscal consolidation with endogenous income and taxation: flattens BB to left of MM so equilibrium shifts up FF.

  12. b Fiscal consolidation – waiting and hoping Regime switches B M D Temporary recession No recession F r Tax take at capacity output C A' E' A E b* X D M r-γ B F g* g θ' θ δ*

  13. With endogenous taxes Simulations during the period of waiting and hoping Non-cyclically adjusted Baseline case

  14. b Tightening fiscal policy to hit the debt target, b* B M Recession No Recession B' F' F r Tax take at capacity output E' ED E b* B' B F' g* gD M F g θ' θ δ*

  15. Non-cyclically adjusted Simulations showing the effect of the tightening of structural deficits With endogenous taxes Baseline case

  16. Fiscal consolidation defeated by high interest rates b U Explosive path of debt F r B′ S A E S B′ F U g θ′ θ δ*

  17. b F Failed attempts to stabilise M Z B′ A S Z b* E S M F g* θ θ′ g δ*

  18. b B DeLong and Summers: stabilisation delays fiscal consolidation M D C F r A E´ F b** b* E r-γ M B F θ g* g θ′ θ′′ δ*

  19. Different types of stability bonds

  20. Private Investors BEFORE: Investors holds sovereign bonds - but are prone to switch LuckySovereigns “Flight to safety” UnluckySovereigns Unlucky sovereigns face high spreads

  21. LuckySovereigns UnluckySovereigns Private Investors AFTER: Stability and growth fund pools sovereign debt - and diversifies types of bond  Stability and Growth Fund Stability bonds Growth bonds

  22. Balance sheet of SPV

More Related