Solving Boundary Value Problems in the Fiscal Theory of the Price Level

Baruch Gliksberg ()
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Baruch Gliksberg: Department of Economics, University of Haifa

No WP2013/2, Working Papers from University of Haifa, Department of Economics

Abstract: This paper specifi es determinacy regions in the parameter space of monetary and fiscal policy interactions in economies with finance and tax distortions. It shows that the initial valuation of government debt is the fixed point of a continuous mapping that takes a closed interval on the real line into itself. It implements the Krasnoselski-Mann-Baily theorem to compute the equilibrium real value of nominal government debt. This computation indicates whether policy interactions are sustainable or lead to a default. The model exhibits nominal determinacy if and only if it exhibits real determinacy. Distorting taxes have dramatic effect on determinacy regions. Admissible monetary- scal policy interactions vary as the economy approaches the peak of its Laffer curve: the range of active scal responses to government debt narrows,whereas passive fiscal stances become inconsistent with equilibrium. Furthermore, policy targets vary when regimes switch from passive fiscal stances to active fiscal stances. Whereas passive fiscal stances focus entirely on secondary defi cits, active fi scal stances should focus mainly on primary de ficits.

Keywords: Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium (search for similar items in EconPapers)
JEL-codes: C62 C68 E42 E62 E63 H60 (search for similar items in EconPapers)
Pages: 74
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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