Optimal Fiscal and Monetary Policy, Debt Crisis and Management

Cristiano Cantore, Paul Levine (), Giovanni Melina and Joseph Pearlman

No 217, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds – under commitment – the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.

JEL-codes: E52 E62 H12 H63 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg and nep-mac
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: OPTIMAL FISCAL AND MONETARY POLICY, DEBT CRISIS, AND MANAGEMENT (2019)
Working Paper: Optimal Fiscal and Monetary Policy, Debt Crisis and Management (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0217

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