the dynamic effects of personal and corporate income tax changes in the united states comment abstract mertens and ravn 2013 estimate impulse response functions irfs from income tax changes in a structural vector autoregression svar by using narrative accounts of tax liability changes

state level implications of federal tax policies abstract the united states federal fiscal policy has differential impact across states we construct a new quarterly state level dataset that we use to analyze the impact of unexpected changes in federal personal and corporate income taxes we find substantial heterogeneity across states with more than half having no significant response to the tax cuts in addition less capital intensive states have larger responses to corporate tax cuts although puzzling in standard models a model with corporate and non corporate sectors is consistent with this evidence overall our results suggest the importance of variation and reallocation across states in evaluating federal policy

commitment versus discretion in a political economy model of fiscal and monetary policy interaction abstract does price commitment result in lower welfare i pair an independent monetary authority controlling nominal bonds with a fiscal authority microfounded by the political economy model of battaglini and coate 2008 without price commitment time inconsistency is alleviated by interaction between the benevolent monetary authority and the politically distorted fiscal authority with price commitment nominal bonds will be used for wasteful spending by the politically distorted fiscal authority price commitment results in lower welfare because it eliminates monetary control over fiscal decisions

uncertainty across volatility regimes we propose a nonrecursive identification scheme for uncertainty shocks that exploits breaks in the volatility of macroeconomic variables and is novel in the literature on uncertainty this approach allows us to simultaneously address two major questions in the empirical literature is uncertainty a cause or effect of decline in economic activity does the relationship between uncertainty and economic activity change across macroeconomic regimes results based on a small scale vector autoregression with us monthly data suggest that i uncertainty is an exogenous source of decline of economic activity and ii the effects of uncertainty shocks amplify in periods of economic and financial turmoil

a model of currency depreciation and the debt inflation spiral abstract this paper shows how a government that cannot make credible policy commitments might manage its exchange rate and fiscal stance in a world of rational expectations the dynamic game model developed here potentially can generate diverse patterns of macroeconomic behavior patterns that differ as a result of assumed differences in government objectives under some types of government the ongoing strategic interaction between the public and private sectors leads to a disinflationary outcome other governments may push the economy into a spiral of rising debt and inflation

safe debt risky capital the author extends the diamond 1965 model of national debt in two directions she first introduces technological uncertainty and then she allows the stock of debt to vary the author studies the dynamical equilibria of the resulting stochastic system and she establishes conditions for the existence of stationary states that are expressed in terms of invariant distributions since conditions that ensure the existence of a stochastic stationary state with positive debt are very restrictive in this model financial instability is a pervasive phenomenon and allocations are in general dynamically inefficient copyright 1994 by the london school of economics and political science

systematic variation in yield spreads for tax exempt general obligation bonds in recent years much research has centered upon whether yield differentials between bonds which differ in default risk vary systematically over the business cycle theory suggests that during a cyclical upswing the yield differential or risk premium narrows while during a downswing the differential widens the cyclical behavior of yield spreads is well documented in the corporate bond market 4 8 12 16 this effect has only recently been given attention in the tax exempt bond market 1 11 in addition the municipal bond market may be segmented if tax exempt borrowers and investors are unable to substitute between tax exempt securities of varying default risk changes in the relative supply of and demand for these classes of securities could produce systematic fluctuations in tax exempt yield differentials these effects could be produced by regulatory statutes which require that banks purchase high grade securities and the fixed nature of bond ratings

local fiscal policies default risk and municipal borrowing costs abstract this paper provides an empirical study of the effects that a local government s fiscal decisions exert on its cost of borrowing using a sample of new jersey municipalities the results are consistent with the view that current period fiscal decisions do impact the cost of borrowing a one standard deviation increase in the amount borrowed is associated with a 66 basis point increase in the annual yield furthermore that the standard approach of treating current period policy variables as exogenous regressors leads to a downward bias in the effect of additional borrowing on the interest rate

marginal tax rates and income new time series evidence this paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the united states over the 1950 2010 period after isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach i find large positive effects of tax cuts in the top 1 of the income distribution in contrast to earlier findings based on tax return data i also find large effects in other income percentile brackets a hypothetical tax reform cutting marginal rates only for the top 1 leads to sizeable increases in top 1 incomes and has a positive effect on real gdp there are also spillover effects to incomes outside of the top 1 but top marginal rate cuts lead to greater inequality in pre tax incomes

time consistent fiscal policy and government cash flow abstract this short paper provides an interpretation and some extensions of lucas and stokey s results on optimal fiscal policy the discussion relies heavily on the concept of government cash flow which is related but not equal to the budget surplus time consistency of the optimal policy requires that a positive cash flow is used to buy up some debt of each maturity and contingency

money as a unit of account we develop a theory that rationalizes the use of a dominant unit of account in an economy agents enter into non contingent contracts with a variety of business partners trade unfolds sequentially in credit chains and is subject to random matching by using a dominant unit of account agents can lower their exposure to relative price risk avoid costly default and create more total surplus we discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account and the optimal choice of currency areas when there is variation in the intensity of trade within and across regions

regional heterogeneity and the refinancing channel of monetary policy we argue that the time varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing using detailed loan level data we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but these effects vary over time with changes in the regional distribution of house price growth we build a heterogeneous household model of refinancing with mortgage borrowers and lenders and use it to explore the monetary policy implications arising from our regional evidence we find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts thus dampening aggregate stimulus and increasing regional consumption inequality whereas the opposite occurred in some earlier recessions taken together our results strongly suggest that monetary policy makers should track the regional distribution of equity over time

delphic and odyssean monetary policy shocks evidence from the euro area abstract what drives the reaction of financial markets to central bank communication on the days of policy decisions we highlight the role of two factors that we identify from high frequency monetary surprises news on future macroeconomic conditions delphic shocks and news on future monetary policy shocks odyssean shocks these two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations they also have a different impact on macroeconomic outcomes so that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve

indexing and inflation abstract much of the opposition to indexation as a means of adapting to ongoing inflation arises from the view that indexation is itself inflationary this paper examines the basic for that view in a simple macroeconomic model in which budget deficits are in part financed through the printing of money it is shown that all aspects of indexing wage indexation bond indexation and tax indexation tend to increase the impact on the price level of any inflationary shock however this association between indexation and inflation is in large part a consequence of the monetary and fiscal policies being followed by the government evidence from a cross section of forty countries on the effects of indexation on the inflationary impact of the oil price shock of 1973 1974 suggests that indexation did not in general increase the inflationary impact of the oil shock the evidence is further consistent with the view that the absence of an excess inflationary effect of indexation is a result of the countries with substantial indexation not having accommodated the oil price shock as much as other countries

intertemporal solvency and indexed debt evidence from brazil 1976 1991 abstract this paper examines domestically held government debt financial indexation inflation and intertemporal solvency in brazil an error correction model is used to examine the temporal causality of expenditures taxation and real indexation evidence shows that for the 1986 1991 period reductions in real indexation followed increases in government spending such reductions while generally associated with anti inflation plans served as implicit defaults the policy was largely unrelated to foreign factors of course such a policy cannot be sustained in the long run accordingly brazil recently ended backward looking financial indexation

the impact of uncertainty shocks under measurement error a proxy svar approach a growing literature considers the impact of uncertainty using svar models that include proxies for uncertainty shocks as endogenous variables in this paper we consider the impact of measurement error in these proxies on the estimated impulse responses we show via a monte carlo experiment that measurement error can result in attenuation bias in impulse responses in contrast the proxy svar that uses the uncertainty shock proxy as an instrument does not suffer from this bias applying this latter method to the bloom 2009 data set results in impulse responses to uncertainty shocks that are larger in magnitude and more persistent than those obtained from a recursive svar

incomplete credit markets and monetary policy abstract we study monetary policy when private credit markets are incomplete the macroeconomy we study has a large private credit market in which participant households use non state contingent nominal contracts nscnc a second small group of households only uses cash supplied by the monetary authority and cannot participate in the credit market there is an aggregate shock we find that despite the substantial heterogeneity the monetary authority can provide for optimal risk sharing in the private credit market and thus overcome the nscnc friction via a counter cyclical price level rule the counter cyclical price level rule is not unique to pin down a unique monetary policy rule we consider two secondary goals for the monetary authority i expected inflation targeting and ii nominal gdp targeting we examine the impact of each of these approaches on the price level rule and other nominal variables in the economy

tax and spending shocks in the open economy are the deficits twins abstract we present evidence on the open economy consequences of us fiscal policy shocks identified through proxy instrumental variables tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits in particular the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects moreover we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures historically a much larger share of current account dynamics has been due to tax shocks than to government spending shocks

seigniorage old and new policy issues introduction abstract seigniorage is at the crossroad of many avenues of research a summary survey of older and more recent developments from the static allocative approach in the differential taxation framework to policy analyses of the effects of joining the ems for high deficit countries shows that there may be some disorderly traffic and that definite policy conclusions can hardly be drawn from models which so often neglect relevant markets and variables and in particular the financial sectors and financial assets

risk premia and the pricing of primary issue bonds abstract researchers investigating the impact of various economic or regulatory changes on debt securities have generally employed two types of bond pricing models the absolute yield or the relative yield model this paper explores the behavioral implications of these two models and provides a theoretical and empirical examination of the contrasting specifications evidence is presented that suggests the relative yield model to be the more appropriate specification

monetary policy transmission in the united kingdom a high frequency identification approach abstract this paper investigates the impact of monetary policy shocks on macroeconomic and financial variables in the united kingdom using a new series of high frequency monetary policy surprises employing our surprises as an instrument in a monthly svar over the uk s inflation targeting period we show that a monetary policy tightening induces a decline in economic activity and in cpi an appreciation of the pound a reduction in bank credit and a significant increase in mortgage and corporate bond spreads uk monetary policy also affects foreign credit spreads consistent with the extensive presence of large international players in the uk financial intermediation sector we finally propose a novel test of overidentifying restrictions which exploits the availability of the narrative series of monetary policy shocks constructed by cloyne and hurtgen 2016 and find that our high frequency monetary policy surprises are not significantly affected by non monetary news

the analytics of svars a unified framework to measure fiscal multipliers ticities implied by the identification schemes generate a large dispersion in the estimates of tax and spending multipliers second i estimate fiscal multipliers consistent with prior distributions of the elasticities computed by a variety of empirical strategies and by employing a simple dynamic stochastic general equilibrium model i document three findings for the u s for the period 1947 2010 first the impact tax multiplier is close to 0 second the impact spending multiplier ranges between 0 35 and 1 third there is a large uncertainty in the estimates of fiscal multipliers at longer horizons yet the probability that the spending multiplier is larger than the tax multiplier is above 0 65 for up to three years after policy interventions

tarnishing the golden and empire states land use restrictions and the u s economic slowdown abstract this paper studies the impact of state level land use restrictions on u s economic activity focusing on how these restrictions have depressed macroeconomic activity since 2000 we use a variety of state level data sources together with a general equilibrium spatial model of the united states to systematically construct a panel dataset of state level land use restrictions between 1950 and 2014 we show that these restrictions have generally tightened over time particularly in california and new york we use the model to analyze how these restrictions affect economic activity and the allocation of workers and capital across states counterfactual experiments show that deregulating existing urban land from 2014 regulation levels back to 1980 levels would have increased us gdp and productivity roughly to their current trend levels california new york and the mid atlantic region expand the most in these counterfactuals drawing population out of the south and the rustbelt general equilibrium effects particularly the reallocation of capital across states account for much of these gains

money financial stability and efficiency most analyses of banking crises assume that banks use real contracts however in practice contracts are nominal and this is what is assumed here we consider a standard banking model with aggregate return risk aggregate liquidity risk and idiosyncratic liquidity shocks we show that with non contingent nominal deposit contracts the first best efficient allocation can be achieved in a decentralized banking system what is required is that the central bank accommodates the demands of the private sector for fiat money variations in the price level allow full sharing of aggregate risks an interbank market allows the sharing of idiosyncratic liquidity risk in contrast idiosyncratic bank specific return risks cannot be shared using monetary policy alone real transfers are needed

time consistency of monetary policy in the open economy abstract this paper shows that in an open economy time consistency problems are created not only by nominal government debt but also by nominal private debt to foreigners given any external nominal debt inflation redistributes wealth between domestic residents and foreigners a government that cares about the welfare of its residents will be tempted to inflate whenever it or its residents have issued nominal debt to foreigners an analysis of the u s net investment position shows that these international considerations have become increasingly relevant for the united states because the recent external deficits have largely been financed in nominal terms

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

nominal sovereign debt i show that reputation alone can sustain nominal sovereign debt which is subject to both the risks of default and opportunistic devaluations nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete thus the loss of either repayment or monetary reputation severely affects the government s ability to smooth consumption the model offers a simple explanation for the bulow and rogoff critique while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies the model also helps explain why many governments borrow and save at the same time

market segmentation and the term structure of municipal yields an issue of considerable controversy in recent years is whether segmentation exists in the municipal bond market the presence of market segmentation suggests that securities can be subdivided into distinct groups according to some characteristic and there exists a lack of substitution between these groups on the part of borrowers and or investors 1 4 8 hendershott and kidwell 4 for example found evidence that market segmentation affected yields between regionally and nationally marketed municipal bond issues others contend that the municipal bond market is relatively efficient and no permanent segmentation effects can exist 2 9 most recently campbell 2 examined possible segmentation resulting from the large acquisitions of municipal securities by commercial banks and found that bank demand for municipal securities had no significant influence on the yield spreads between municipal bonds which differed in default risk term to maturity and tax treatment this is consistent with the argument that the combination of progressive personal income tax rates and fixed corporate income tax rates induces corporations to issue an amount of debt such that the marginal investor in taxable and tax exempt securities pays taxes at the full corporate rate 9 if segmentation does not exist two peculiar features of the term structure of municipal yields cannot be fully explained for one municipal yields have almost always increased monotonically with maturity this is true both for market averages of similarly rated municipal securities and for reoffering yields on individual serial

inflationary finance under discrepion and rules inflationary finance involves first the tax on cash balances from expected inflation and second a capital levy from unexpected inflation from the standpoint of minimizing distortions these capital levies are attractive ex post to the policymaker in a full equilibrium two conditions hold 1 the monetary authority optimizes subject to people s expectations mechanisms and 2 people form expectations rationally given their knowledge of the policymaker s objectives the outcomes under discretionary policy are contrasted with those generated under rules in a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices under an enforced rule it becomes possible to make some guarantees hence the links between monetary actions and inflationary expectations can be internalized there is a distinction between fully contingent rules and rules of simple form a simple rule allows the internalization of some connections between policy act ion and inflationary expectations but discretion permits some desirable flexibility of monetary growth this abstract was borrowed from another version of this item

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

an analysis of the stability and growth pact we use a stylised model to analyse the stability and growth pact for countries that have formed the european monetary union emu in our model shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully therefore while governments have no incentive to sign a stability pact in the absence of a monetary union they do so with monetary union to restrain this externality with uncertainty a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy with differences in initial conditions conflicts of interest arise we study the nash bargaining solution

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

a comparison of nominal and indexed debt under fiscal constraints this paper makes a welfare comparison between the issuance of price indexed and nominal public debt in the presence of fiscal constraints viz a debt constraint a deficit constraint and a combination of both distortionary taxes or public consumption are regulated to avoid the violation of the relevant fiscal constraint s under a debt constraint indexed debt is generally preferred while under a deficit constraint the results are more mixed introducing inflation persistence and raising the maturity of the debt tend to increase the magnitude of the welfare differences between the two types of debt welfare differences are further affected by the degree to which public consumption and tax revenues are indexed to actual versus structural nominal gdp

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

the resiliency of the high yield bond market the ltv default this paper investigates the resiliency of the new issue high yield bond market by examining the changes in implied default rates of such bonds before and after the largest high yield bond default i e the ltv bankruptcy specifically the paper compares implied default probabilities of high yield bonds during the post ltv period calculated from actual new issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred a comparison of these probabilities reveals that the market s perception of default on the hjgh risk segment of the bond market increased significantly after the ltv bankruptcy however the effect was transitory lasting only six months thus the market was resilient to a major default in recent years high yield debt has become a significant segment of the corporate bond market the main source of the growth has come from new issues of high yield corporate bonds rather than an increase in fallen angels 1 the driving force behind this new breed of high yield debt growth has been its use as a means to tap the capital markets to finance increasingly common leveraged buyouts hostile takeovers and major corporate restructurings the market acceptance of high yield bonds was further enhanced by empirical evidence that net returns on a diversified portfolio of low grade bonds exceeded those on highgrade bonds while the volatility of their monthly returns was no greater 2 the frenzied pace of growth in the high yield debt market however has been accompanied by increasing concerns from various quarters 3 critics have char

nominal versus indexed debt a quantitative horse race abstract the main arguments in favor and against nominal and indexed debts are the incentive to default through inflation versus hedging against unforeseen shocks we model and calibrate these arguments to assess their quantitative importance we use a dynamic equilibrium model with tax distortion government outlays uncertainty and contingent debt service our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment thus the benefits of unexpected inflation are tempered by higher interest rates we obtain that costs from inflation more than offset the benefits from reducing tax distortions we further discuss sustainability of nominal debt in developing volatile countries

bond market clienteles the yield curve and the optimal maturity structure of government debt we propose a clientele based model of the yield curve and optimal maturity structure of government debt clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy an optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing if agents are more risk averse than log then an increase in the long horizon clientele raises the price and optimal supply of long term bonds but while a welfare maximizing government caters to clienteles it does not accommodate fully their demand and limits issuance of long term bonds to a level where these earn negative expected excess returns

exogenous uncertainty and the identification of structural vector autoregressions with external instruments we provide necessary and sufficient conditions for the identification of structural vector autoregressions svars with external instruments considering the case in which r instruments are used to identify g structural shocks of interest r g 1 novel frequentist estimation methods are discussed by considering both a partial shocks identification strategy where only g structural shocks are of interest and are instrumented and in a full shocks identification strategy where despite g structural shocks are instrumented all n structural shocks of the system can be identified under certain conditions the suggested approach is applied to empirically investigate whether financial and macroeconomic uncertainty can be approximated as exogenous drivers of u s real economic activity or rather as endogenous responses to first moment shocks or both we analyze whether the dynamic causal effects of non uncertainty shocks on macroeconomic and financial uncertainty are signicant in the period after the global financial crisis

sovereign debt portfolios bond risks and the credibility of monetary policy we document that governments whose local currency debt provides them with greater hedging benefits actually borrow more in foreign currency we introduce two features into a government s debt portfolio choice problem to explain this finding risk averse lenders and lack of monetary policy commitment a government without commitment chooses excessively countercyclical inflation ex post which leads risk averse lenders to require a risk premium ex ante this makes local currency debt too expensive from the government s perspective and thereby discourages the government from borrowing in its own currency

the behavior of the interest rate differential between tax exempt revenue and general obligation bonds a test of risk preferences and market segmentation this paper presents evidence that the yield differential between revenue bonds and similar general obligation bonds varies contracyclically with the level of economic activity the evidence also indicates that significant investor borrower induced market segmentation exists in the municipal bond market an increase in the relative demand by commercial banks for tax exempt securities and or an increase in the supply of revenue bonds relative to the supply of general obligation bonds increase the yield spread between the two classes of debt these findings were the result of a series of empirical tests with both macroeconomic and microeconomic data it is well documented that yield differentials between bonds which differ only in default risk vary systematically over the business cycle 1 8 10 13 evidence suggests that yield differentials widen during economic downturns and narrow during periods of economic prosperity a similar situation should exist with the interest rate differentials between tax exempt revenue bonds and comparable general obligation bonds it is generally believed that revenue bonds as a class are inherently more risky than general obligation bonds and as a result carry relatively higher interest rates 4 7 11 12 13 if this is true we would expect the interest rate differentials between these two classes of debt also to vary systematically over time in a study especially relevant to this question swenson 12 concluded that even though revenue bonds carried higher interest rates than did similar general obligation bonds their interest rate differential showed no evidence of cyclical variation we find this result surprising given the above cited studies we believe that in the tax exempt bond market two underlying factors should cause cyclical variation in the interest rate differential between revenue and similar general obligation bonds first interest rate differentials should vary inversely with the level of economic activity as the actual and perceived default risk underlying each type of bond changes second because investors and borrowers do not view revenue and general obligation bonds as close substitutes in their portfolios interest rate differentials should vary with changes in the supply of or demand for both types of debt thus the market for tax exempt securities may be

enhanced debt management solving the eurozone crisis by linking debt management with fiscal and monetary policy abstract unconventional approaches to suit unusual circumstances have become acceptable in monetary policy a formerly highly conservative discipline in this paper it is argued that unconventional approaches should also be considered in sovereign debt management in order to contribute to resolving the eurozone sovereign debt crisis first the troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard imf post crisis lending the main difference and shortcoming is the unsustainable character of the eurozone approach due to the omission of demand stimulation components to address this and other shortcomings the features of an ideal alternative funding tool are identified it would solve the funding problems of affected sovereigns help stabilise the banking system but most of all stimulate domestic demand and hence end the vicious downward spiral it is found that this funding method can be implemented as part of enhanced public debt management by each nation s debt management office

optimal maturity of nominal government debt an infinite horizon model the role of debt maturity is analyzed in a framework that blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities three conclusions emerge 1 nominal debt leads policymakers to resort to inflation even though in equilibrium inflation collects no revenue 2 when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment and 3 management of debt maturity is an essential component of the equilibrium policy copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

private saving and public debt a review essay private saving and public debt edited by m j boskin and s gorini basil blackwell oxford u k 1987 and based on the proceedings of a conference held in italy in 1985 is a well documented policy oriented guide to the analysis of recent fiscal developments several strands of research are represented in the volume some contributions provide a description of empirical and institutional facts while others analyze the theoretical foundations of different aspects of the public debt problem its impact on financial markets its connection with private saving behavior its international repercussions its effects on inflation and tax policy a unifying theme in the debate is an attempt to shift the focus of the analysis away from the keynesian emphasis on short run finetuning and towards a long run growth oriented perspective the most important issues addressed in the volume are the sustainability of public debt and the effects of government deficits on private saving

real time forecasting with a mixed frequency var this article develops a vector autoregression var for time series which are observed at mixed frequencies quarterly and monthly the model is cast in state space form and estimated with bayesian methods under a minnesota style prior we show how to evaluate the marginal data density to implement a data driven hyperparameter selection using a real time dataset we evaluate forecasts from the mixed frequency var and compare them to standard quarterly frequency var and to forecasts from midas regressions we document the extent to which information that becomes available within the quarter improves the forecasts in real time this article has online supplementary materials

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

the financial structure of government debt in oecd countries an examination of the time consistency issue abstract this paper analyzes the financial structure of government debt in the oecd countries from the perspective of time consistency problems with a focus on debt held by financial institutions testable implications from a theoretical time consistency model are derived and incorporated into the framework of a cost minimizing model for public debt service the approach is tested for a sample of 15 oecd countries over the period 1974 1989 the theoretical analysis and the empirical results show how in addition to maturity ownership of government debt in those oecd countries with debt accumulation problems can be related to time consistency considerations

the effect of three mile island on utility bond risk premia a note could be expected to react to the possibility of losses related to nuclear accidents and to the prospect of larger marginal costs associated with compliance with stricter regulation by public utility commissions this study tests for the effects of the tmi accident on bond risk premia in the public utility industry the following four null hypotheses are tested 1 bond risk premia did not increase in the industry as a whole because of the accident at tmi 2 bond risk premia were not affected by a firm s commitment to generate nuclear power 3 bond risk premia were not affected by the extent of the firm s commitment to nuclear power generation 4 bond risk premia were not influenced by the brand of reactor operated section i of the study briefly reviews the research that documents the effects of tmi on utility equities and considers previous models of bond risk premia based on those findings section ii specifies the null hypotheses in a testable form using a model of the risk premium that is consistent with the previous bond risk literature and is designed to control for bond specific factors and for the state of the economy results of the hypothesis testing appear in section iii section iv contains the study s conclusions

inflation linked public debt in emerging economies abstract this study reports a set of stylized facts about inflation linked il public debt in emerging economies on average emerging economies issue 23 of their local currency lc public debt linked to inflation il debt issuance is countercyclical increases in periods of nominal exchange rate depreciations and substitutes foreign currency fc and non indexed local currency debt a two sector small open economy model of public debt composition can deliver the business cycle properties of il debt and shows that during crises amid nominal exchange rate depreciations il debt becomes cheaper to issue the study finds evidence of il rates decreasing in about half of the most recent crises in emerging economies finally the study compares il rates to fc and lc rates and concludes that for some countries il rates are below lc rates even after accounting for expected inflation

fiscal inconsistencies and high inflation abstract this paper presents a simple model of steady state inflationary financing the discrepancy between the target level of spending and a fixed taxing capacity indicates the degree of fiscal pressures this variable need not be monotonically related to the measured deficit since actual expenditures are endogenous large fiscal inconsistencies generate unique steady states located on the bad side of the inflation tax laffer curve there high inflation may coexist with low observed deficits and the revenue constraint results in repressed spending such situations correspond qualitatively with the loss of control over fiscal policies typical of high inflation economies

interest costs and the optimal maturity structure of government debt the government faces a trade off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio the article solves for optimal policies in an incomplete markets model where the government uses two debt instruments long term and short term non contingent nominal bonds in this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long term debt the resulting welfare gains are close to what the government could achieve with complete markets significant welfare gains are possible even in the presence of leverage constraints

a positive theory of foreign currency debt abstract this paper makes a case for foreign currency debt as a hedging device in an open economy subject to stochastic shocks to output a government can reduce uncertainty in wealth and in consumption by issuing foreign or domestic currency debt if unexpected domestic and foreign inflation are negatively correlated with domestic output foreign currency debt is desirable in comparison to domestic currency debt if growth rates of output of both countries are closely related and if domestic inflation is relatively uncertain it has an additional advantage if domestic debt creates time consistency problems