Redeem or Revalue? Some Public-Debt Calculus

Baruch Gliksberg and Avner Bar Ilan ()
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Avner Bar Ilan: Department of Economics, University of Haifa, http://econ.haifa.ac.il/~bar-ilan

No WP2016/1, Working Papers from University of Haifa, Department of Economics

Abstract: This paper studies the fiscal-monetary response to a sharp increase in the level of the public debt. To that end, we employ a general equilibrium model with distortionary income tax, distortionary financing, and endogenous capital accumulation. The model is calibrated to the US and EU economies. A main result is that in both economies the QE is superior, welfare-wise, to other policy prescriptions to the problem of explosive debt. A major difference between the EU and the US is that a Taylor rule of tight monetary and fiscal policy could reduce the US public debt, but given the fundamental properties of the EU economy, this policy cannot achieve this goal in Europe.

Keywords: Distorting Taxes; Fiscal Solvency; Laffer curve in a monetary economy; Liquidity; Rate of self financing of tax cuts; Quantitative Easing (search for similar items in EconPapers)
JEL-codes: E44 E47 E58 E63 H30 H63 (search for similar items in EconPapers)
Pages: 24
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ger, nep-mac, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:haf:huedwp:wp201601

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