Fiscal consolidation dr pangloss meets mr keynes
Download
1 / 24

Fiscal consolidation: Dr Pangloss meets Mr Keynes - PowerPoint PPT Presentation


  • 61 Views
  • Uploaded on

Fiscal consolidation: Dr Pangloss meets Mr Keynes. by Marcus Miller and Lei Zhang. Debt unsustainability and measure to correct this. Variables used are defined as follows:. b. B. Debt sustainability and government expenditure. Tax take. Bond Accumulation. A 2. A 0. A 1. A. b 0.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Fiscal consolidation: Dr Pangloss meets Mr Keynes' - licia


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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Fiscal consolidation dr pangloss meets mr keynes

Fiscal consolidation: Dr Pangloss meets Mr Keynes

by

Marcus Miller and Lei Zhang


Debt unsustainability and measure to correct this
Debt unsustainability and measure to correct this

Variables used are defined as follows:


b

B

Debt sustainability and government expenditure

Tax take

Bond Accumulation

A2

A0

A1

A

b0

E

b*

r-γ-π

B

g*

g

θ


  • From a point such as A1, where the sum of expenditure and interest charges (adjusted for growth and inflation) exceeds 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.


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

The baseline model can then be summarised in two equations:

FC

B

where .

Or in matrix form:


b structural deficit, S, so as to hit a target of

B

Fiscal consolidation with capacity output: the baseline model

F

r

Tax take

A

A'

E

b*

r-γ-π

F

B

g*

g

θ'

θ

δ*


α = 0.4 structural deficit, S, so as to hit a target of

α = 1

α = 0.5

Different speeds of consolidation


b structural deficit, S, so as to hit a target of

Fiscal fatigue defines an upper debt limit

B

“Fiscal fatigue” of Barr et al.

Tax take

F

r

A'

A

E

b*

r-γ-π

F

B

g*

θ

θ'

g

δ*


Fiscal consolidation with endogenous structural deficit, S, so as to hit a target of income and taxation: BB flatter to left of MM; equil shifts up FF.


b structural deficit, S, so as to hit a target of

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-π

M

F

B

θ′

g*

θ

g

δ*


Simulation results which converge to full employment in the structural deficit, S, so as to hit a target of long-run

With endogenous

taxes

Not cyclically adjusted

Baseline case


b structural deficit, S, so as to hit a target of

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-π

B

F

g*

g

θ'

θ

δ*


With endogenous taxes structural deficit, S, so as to hit a target of

Simulations during the period of waiting and hoping

Not-cyclically adjusted

Baseline case


b structural deficit, S, so as to hit a target of

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*


Simulations showing the effect of the tightening of structural deficits

With endogenous taxes

Not cyclically adjusted

Baseline case


Fiscal consolidation structural 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*


b structural

F

Failed attempts to stabilise

M

Z

B′

A

S

Z

b*

E

S

M

F

g*

θ

θ′

g

δ*


b structural

B

DeLong and Summers: stabilisation delays fiscal consolidation, with higher taxes to cover debt interest

M

D

C

F

r

A

E´

F

b**

b*

E

r-γ-π

M

B

F

θ

g*

g

θ′

θ′′

δ*



Private structural Investors

BEFORE: Investors holds sovereign bonds - but are prone to switch

LuckySovereigns

“Flight to safety”

UnluckySovereigns

Unlucky sovereigns face high spreads


Lucky structural Sovereigns

UnluckySovereigns

Private Investors

AFTER: Stability and growth fund pools sovereign debt - and diversifies types of bond

 Stability and Growth Fund

Stability bonds

Growth bonds



Conclusion
Conclusion structural

  • Have used simple multiplier to capture private sector reaction to public sector consolidation.

  • Far preferable explicitly to model private and public sector behaviour as they engage in a dance of deleveraging, but…

  • Koo warns of balance sheet recession that will result.

  • Is it true that credibility rules out state contingent policy?


ad