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Fiscal policy and price stability: the case of Italy, 1992–98
Many authorities at home and abroad questioned Italy's ability to meet the strict criteria to join the European Monetary Union. The author looks at the interaction between fiscal policy and monetary policy in Italy between 1992, when it exited the European Exchange Rate Mechanism, and 1998, when an official announcement was made that it would join the union.
Report
A Monetary-Fiscal Theory of Sudden Inflations
This paper posits an information channel as the explanation for sudden inflations. Consumers saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumers' behavior and prices. This setting explains why there can be long stretches of time during which government surpluses ...
Journal Article
What is the relationship between large deficits and inflation in industrialized countries?
Examining industrialized countries, the authors find that large deficits are not associated with higher inflation contemporaneously, nor are they associated with the emergence of higher inflation in subsequent years. This finding suggests that countries that can afford large deficits have built solid reputations and institutions supporting a sound monetary policy and the reversion to a stable fiscal regime.
Journal Article
On the Mechanics of Fiscal Inflations
The goal of this paper is twofold. First, we wish to better explain the relationship between Sargent and Wallace’s (1981) unpleasant monetarist arithmetic, the closely connected fiscal theory of the price level (FTPL), and the monetarist view of inflation. Second, we discuss how the recent inflationary episode has contributed to redistributing real resources from holders of government debt to the public purse. In particular, financial prices before the onset of the COVID pandemic suggest that investors viewed an inflationary shock such as the one we experienced as extremely unlikely, so the ...
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A Ramsey Theory of Financial Distortions
The return on government debt is lower than that of asset with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.
Working Paper
Politics and efficiency of separating capital and ordinary Government budgets
We analyze the democratic politics and competitive economics of a ?golden rule? that separates capital and ordinary account budgets and allows a government to issue debt to finance only capital items. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. We study an economy with a growing population of overlapping generations of long-lived but mortal agents. Each period, majorities choose durable and nondurable public goods. In a special limiting case with demographics that make Ricardian equivalence prevail, the golden rule does nothing to ...
Working Paper
Forward Guidance: Communication, Commitment, or Both?
A policy of forward guidance has been suggested either as a form of commitment ("Odyssean") or as a way of conveying information to the public ("Delphic"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank ...
Journal Article
Government investment and the European stability and growth pact
The authors analyze whether it makes sense to treat public investment spending differently from other government spending when applying the deficit constraints mandated within the single European currency area. Given the low rates of population growth, mobility, and mortality in European countries, they find that excluding public investment from the computation of the deficit ceiling has only moderate implications for the current generations? spending choices. They also show that excluding net investment yields better outcomes than excluding gross investment.
Working Paper
The Interplay Between Financial Conditions and Monetary Policy Shocks
We study the interplay between monetary policy and financial conditions shocks. Such shocks have a significant and similar impact on the real economy, though with different degrees of persistence. The systematic fed funds rate response to a financial shock contributes to bringing the economy back towards trend, but a zero lower bound on policy rates can prevent this from happening, with a significant cost in terms of output and investment. In a retrospective analysis of the U.S. economy over the past 20 years, we decompose the realization of economic variables into the contributions of ...
Working Paper
Is Inflation Default? The Role of Information in Debt Crises
We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset ("government debt") after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, but ...