Monetary Policy and Fiscal Limits with No-Default

Baruch Gliksberg

No WP2012/6, Working Papers from University of Haifa, Department of Economics

Abstract: This paper discusses monetary and fiscal interactions in fiscal stress with no outright default. Two distortions prevail in the economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include: a ceiling on the equilibrium Debt-to-GDP ratio; zero elasticity of tax revenues; a political intolerance of rising tax rates; A Laffer curve emerges endogenously. In equilibrium, fiscal solvency is brought about through adjustments to the level of nominal prices. Three regimes achieve this goal: FC - an interaction of a fiscal rule that targets both output and public debt with a neutral monetary policy; FD - an interaction of a fiscal rule that targets the primary deficit with an active monetary policy; FDA - an interaction of an austere fiscal rule with a passive monetary policy.

Keywords: Distorting Taxes; Finance Constraint; Fiscal Limits; Fiscal Rules; Fiscal Theory of Prices (search for similar items in EconPapers)
JEL-codes: E42 E62 E63 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cba, nep-dge, nep-mac and nep-mon
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Journal Article: Monetary policy and fiscal limits with no-default (2013)
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