Non-Linear Fiscal Regimes and Interest Rate Policy

Alessandro Piergallini

MPRA Paper from University Library of Munich, Germany

Abstract: Much empirical evidence finds that governments react to fiscal imbalances in a non-linear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that non-linear fiscal regimes alter equilibria under active and passive monetary-fiscal policies. The Fisher equation combined with non-linear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state at which fiscal policy is active is locally saddle-path stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state which converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high debt equilibrium along which inflation is uniquely determined.

Keywords: Non-Linear Fiscal Rules; Interest Rate Policy; Multiple Equilibria; Global Dynamics (search for similar items in EconPapers)
JEL-codes: E31 E52 E63 (search for similar items in EconPapers)
Date: 2012-10-14
New Economics Papers: this item is included in nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42671

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