Temporarily Unstable Government Debt and Inflation
Tóm tắt
Many advanced economies are heading into an era of fiscal stress: populations are aging and governments have made substantially more promises of old-age benefits than they have made provisions to finance. This paper models the era of fiscal stress as stemming from growing promised government transfers that initially are fully honored, being financed by new sales of government debt that bring forth higher future income taxes. As debt levels and tax rates rise, the population's tolerance for taxation declines and the probability of reaching the fiscal limit increases. At the limit a fixed tax rate is adopted, adjustments in taxes no longer stabilize debt, and, temporarily, debt grows rapidly. Eventually, a new stabilizing combination of policies is adopted. We examine how, in the period before the fiscal limit, rapidly rising debt interacts with expectations of how and when policies will adjust. If households believe it is possible that in the future monetary policy will shift from targeting inflation to stabilizing debt, then temporarily explosive debt feeds directly into the path of inflation. News that reduces expected primary surpluses can bring future inflation into the present, well before the news shows up in fiscal measures. This paper makes the point that even if long-run policies give monetary policy perfect control over inflation, in the transition to that long run, monetary policy can spectacularly lose control.
Tài liệu tham khảo
Battaglini, M., and S. Coate, 2008, “A Dynamic Theory of Public Spending, Taxation, and Debt,” American Economic Review, Vol. 98, No. 1, pp. 201–236.
Bi, H., 2011, “Sovereign Default Risk Premia, Fiscal Limits and Fiscal Policy,” Bank of Canada Working Paper 2011-10, March, Ottawa.
Black, F., 1972, “Active and Passive Monetary Policy in a Neoclassical Model,” Journal of Finance, Vol. 27, No. 4, pp. 801–814.
Buiter, W.H., 2002, “The Fiscal Theory of the Price Level: A Critique,” Economic Journal, Vol. 112, No. 481, pp. 459–480.
Cagan, P., 1956, “The Monetary Dynamics of Hyperinflation,” in Studies in the Quantity Theory of Money, ed. by M. Friedman (Chicago, University of Chicago Press), pp. 25–117.
Chari, V.V., P.J. Kehoe, and E.R. McGrattan, 2000, “Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?” Econometrica, Vol. 68, No. 5, pp. 1151–1179.
Cochrane, J.H., 1999, “A Frictionless View of U.S. Inflation,” in NBER Macroeconomics Annual 1998, Vol. 14, ed. by B.S. Bernanke and J.J. Rotemberg (Cambridge, MA, MIT Press), pp. 323–384.
Cochrane, J.H., 2011, “Determinacy and Identification with Taylor Rules”, Journal of Political Economy, forthcoming.
Congressional Budget Office, 2009, An Analysis of the President's Budgetary Proposals for Fiscal Year 2010 (Washington, DC, CBO), June.
Congressional Budget Office, 2010, The Long-Term Budget Outlook (Washington, DC, CBO), June.
Davig, T., and E.M. Leeper, 2006, “Fluctuating Macro Policies and the Fiscal Theory,” in NBER Macroeconomics Annual 2006, Vol. 21, ed. by D. Acemoglu, K. Rogoff, and M. Woodford (Cambridge, MA, MIT Press), pp. 247–298.
Davig, T., and E.M. Leeper, 2011, “Monetary-Fiscal Policy Interactions and Fiscal Stimulus,” European Economic Review, Vol. 55, No. 2, pp. 211–227.
Davig, T., E.M. Leeper, and T.B. Walker, 2010, “Unfunded Liabilities and Uncertain Fiscal Financing,” Journal of Monetary Economics, Vol. 57, No. 5, pp. 600–619.
Davig, T., E.M. Leeper, and T.B. Walker, 2011, “Inflation and the Fiscal Limit,” European Economic Review, Vol. 55, No. 1, pp. 31–47.
Drazen, A., and E. Helpman, 1990, “Inflationary Consequences of Anticipated Macroeconomic Policies,” Review of Economic Studies, Vol. 57, No. 1, pp. 147–164.
Eaton, J., and M. Gersovitz, 1981, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies, Vol. 48, No. 2, pp. 289–309.
Eusepi, S., and B. Preston, 2011, “Debt, Policy Uncertainty and Expectations Stabilization,” Journal of the European Economic Association, forthcoming.
Friedman, M., 1948, “A Monetary and Fiscal Framework for Economic Stability,” American Economic Review, Vol. 38, No. 2, pp. 245–264.
Friedman, M., 1960, A Program for Monetary Stability (New York, Fordham University Press).
Galí, J., 2008, Monetary Policy, Inflation, and the Business Cycle (Princeton, Princeton University Press).
Ghosh, A., and others, 2011, “Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies,” NBER Working Paper No. 16782, February.
Gokhale, J., and K. Smetters, 2007, “Do the Markets Care About the $2.4 Trillion U.S. Deficit?” Financial Analysts Journal, Vol. 63, No. 2, pp. 37–47.
International Monetary Fund, 2009, “Fiscal Implications of the Global Economic and Financial Crisis,” IMF Staff Position Note SPN/09/13.
Leeper, E.M., 1991, “Equilibria Under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies,” Journal of Monetary Economics, Vol. 27, No. 1, pp. 129–147.
Leeper, E.M., 2010, “Monetary Science, Fiscal Alchemy,” forthcoming in Federal Reserve Bank of Kansas City's Jackson Hole Symposium, Macroeconomic Challenges: The Decade Ahead.
Leeper, E.M., 2011, “Anchors Aweigh: How Fiscal Policy Can Undermine ‘Good’ Monetary Policy,” in Monetary Policy Under Financial Turbulence, ed. by L.F. Céspedes, R. Chang, and D. Saravia (Santiago, Banco Central de Chile), pp. 411–453.
McCallum, B.T., 2001, “Indeterminacy, Bubbles, and the Fiscal Theory of Price Level Determination,” Journal of Monetary Economics, Vol. 47, No. 1, pp. 19–30.
Obstfeld, M., and K. Rogoff, 1983, “Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?” Journal of Political Economy, Vol. 91, No. 4, pp. 675–687.
Olivera, J.H., 1970, “On Passive Money,” Journal of Political Economy, Vol. 78, No. 4, Part II, pp. 805–814.
Rotemberg, J.J., and M. Woodford, 1997, “An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy,” in NBER Macroeconomics Annual, Vol. 12, ed. by B.S. Bernanke and J.J. Rotemberg (Cambridge, MA, MIT Press), pp. 297–346.
Rudebusch, G., and L.E.O. Svensson, 1999, “Policy Rules for Inflation Targeting,” in Monetary Policy Rules, ed. by J.B. Taylor (Chicago, University of Chicago Press), pp. 203–246.
Samuelson, P.A., 1967, “Stabilization Policies in the Contemporary U.S. Economy,” in Monetary Process and Policy: A Symposium, ed. by G. Horwich and D. Richard (Homewood, IL, Irwin), pp. 3–11.
Sargent, T.J., 1986, “Reaganomics and Credibility,” in Rational Expectations and Inflation, Vol. 2, ed. by T.J. Sargent (New York, Harper & Row), pp. 19–35.
Sargent, T.J., and N. Wallace, 1981, “Some Unpleasant Monetarist Arithmetic,” Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 5, (fall), pp. 1–17.
Simons, H.C., 1936, “Rules versus Authorities in Monetary Policy,” Journal of Political Economy, Vol. 44, No. 1, pp. 1–30.
Sims, C.A., 1994, “A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy,” Economic Theory, Vol. 4, No. 3, pp. 381–399.
Sims, C.A., 2011, “Stepping on a Rake: The Role of Fiscal Policy in the Inflation of the 1970's,” European Economic Review, Vol. 55, No. 1, pp. 48–56.
Taylor, J.B., 1993, “Discretion versus Policy Rules in Practice,” Carneige-Rochester Conference Series on Public Policy, Vol. 39, pp. 195–214.
Taylor, J.B., ed. 1999, Monetary Policy Rules (Chicago, University of Chicago Press).
Trabandt, M., and H. Uhlig, 2009, “How Far Are We From the Slippery Slope? The Laffer Curve Revisited,” NBER Working Paper No. 15343.
United Nations, 2008, World Population Prospects: The 2008 Revision (New York, United Nations).
Woodford, M., 1995, “Price-Level Determinacy Without Control of a Monetary Aggregate,” Carneige-Rochester Conference Series on Public Policy, Vol. 43, pp. 1–46.
Woodford, M., 1998, “Control of the Public Debt: A Requirement for Price Stability?” in The Debt Burden and Its Consequences for Monetary Policy, ed. by G. Calvo and M. King (New York, St. Martin's Press), pp. 117–154.
Woodford, M., 2001, “Fiscal Requirements for Price Stability,” Journal of Money, Credit, and Banking, Vol. 33, No. 3, pp. 669–728.
Woodford, M., 2003, Interest and Prices: Foundations of a Theory of Monetary Policy (Princeton, NJ, Princeton University Press).