inflation and the fiscal limit abstract we use a rational expectations framework to assess the implications of rising debt in an environment with a fiscal limit the fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt we give households a joint probability distribution over the various policy adjustments that may occur as well as over the timing of when the fiscal limit is hit one policy option that stabilizes debt is a passive monetary policy which generates a burst of inflation that devalues the existing nominal debt stock the probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target the distribution of outcomes for the path of future inflation has a fat right tail revealing that only a small set of outcomes imply dire inflationary scenarios avoiding these scenarios however requires the fiscal authority to renege on some share of future promised transfers

policy variability and economic growth this paper explores the effect of policy variability or frequency of regime switching on economic growth and welfare we study a one sector growth model where investment can be subsidized at either a positive rate or not subsidized at all we find that the lack of persistence in policies per se need not be welfare reducing and that it is likely to decrease growth higher variability implies more frequent changes in consumption and investment but by creating a stronger intertemporal link across regimes variability reduces the fluctuation in investment rates thus decreasing the magnitude of changes in consumption and increasing welfare

unfunded liabilities and uncertain fiscal financing we develop a rational expectations framework to study the consequences of alternative means to resolve the unfunded liabilities problem the projected exponential growth in federal social security medicare and medicaid spending with no known plan for financing the transfers resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century beliefs based on that distribution determine the existence of and the nature of equilibrium we consider policies that in expectation combine reaching a fiscal limit some distorting taxation modest inflation and some reneging on the government s promised transfers in the equilibrium inflation targeting monetary policy and debt targeting tax policy cannot anchor expectations on those target variables expectational effects are always present but need not have large impacts on inflation and interest rates in the short and medium runs in the economy s stationary distribution the capital stock may grow or shrink and substantial probability falls on little or no reneging

mitigating america s demographic dilemma by pre funding social security abstract financing social security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current us demographic developments using a general equilibrium overlapping generations model with realistic patterns of fertility and lifespan extension this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes which crowd out savings and slow real wage growth below the rate of technological progress a faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them addressing the financing problem by reducing social security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees by contrast a pre funding of social security financed with consumption taxes more evenly spreads the welfare losses across generations and it helps future generations especially the poor by stimulating capital formation

aging and deflation from a fiscal perspective negative correlations between inflation and demographic aging were observed across developed nations recently to understand the phenomenon from a politico economic perspective we embed the fiscal theory of the price level into an overlapping generations model in the model successive short lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments the model sheds new light on the traditional debate about the burden of national debt because of price adjustments the accumulation of government debt does not become a burden on future generations our analysis reveals that the effects of aging depend on its causes aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate numerical simulation shows that aging over the past 40 years in japan generated deflation of about 0 6 percentage points annually

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

identifying fiscal inflation abstract fiscal theorists warn about the risk of future inflation as a consequence of fiscal imbalances in the us because actual inflation remains historically low and data on inflation expectations do not corroborate such risks warnings for fiscal inflation are often ignored in policy and academic circles this paper shows that a canonical nk dsge model enables identifying an anticipated component of inflation expectations that is closely related to fiscal policy estimation results suggest that fiscal inflation concerns have induced a 1 6 points increase in long run inflation since 2001 the model also rationalizes why data on inflation expectations do not reveal such concerns outright

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

fiscal risk in a monetary union diverse fiscal policies which are subject to fiscal limits and stochastic shocks can threaten price stability in a monetary union the fiscal limits arise due to distortionary taxation and political will stochastic shocks are random and could push a fiscally sound policy towards its limit in equilibrium agents refuse to lend along a path which violates the fiscal limits creating a crisis the crisis requires a policy response to restore lending we focus on two responses default and policy switching both of which must be designed to restore fiscal solvency under the assumption that agents know the policy response we show that default poses no risk to price stability but that policy switching does we simulate the model to quantify fiscal risk in the european monetary union with fiscal variables at end of 2009 values we find that the probability of a fiscal crisis in greece and italy countries whose debt relative to gdp had strayed far above the 60 percent limit is positive but small however a small increase in debt can lead to a large increase in risk

fair trade or trade fair international food trade and cross border macronutrient flows abstract this study examines global food trade from a nutritional perspective paying particular attention to its implications for food security in low income countries by describing food trade in terms of the quantities of three essential macronutrients carbohydrates lipids and proteins embedded in food the analysis goes beyond a simple description of trade values quantities or caloric content as is common in the literature furthermore the study provides estimates of the implicit price of each macronutrient their evolution over time and their implications in terms of north south food trade the data show that over the 1996 2014 period the volume of macronutrients exchanged on international markets has more than doubled with carbohydrates accounting for over 60 of trade flows but proteins and lipids growing at a faster pace proteins were found to be the most expensive macronutrient followed by lipids and carbohydrates in general macronutrients embedded in animal and processed products are more expensive than those in vegetal and unprocessed food the results also suggest that the participation in international food trade has positive effects on low income countries aggregate food availability and food access two pillars of food security indeed low income countries register a net inflow of all macronutrients and take advantage of nutritional arbitrages available on international food markets due to macronutrients price differentials

vat tariffs and withholding border taxes and informality in developing countries abstract this paper explores the implications of a distinctive feature of the value added tax vat that is stressed by practitioners but has been largely overlooked by theorists that it functions in part as a tax on the purchases of informal operators from formal sector businesses and not least on their imports it also stresses the potential importance of the withholding taxes that are levied by many developing countries which have also been ignored it is shown in a simple model of informality that if both of these instruments are optimally deployed then the usual prescription that a small economy should not deploy tariffs remains valid even in the presence of an informal sector and a simple strategy is established generalizing the standard prescription developed in models without informality for deploying these instruments so as to preserve government revenue and increase welfare in the face of efficiency improving tariff cuts conditions are established under which a vat alone is fully optimal precisely because it is in part a tax on informal sector production but they are restrictive in general an efficient tax structure requires deploying both a vat and withholding taxes

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

financial fragility sovereign default risk and the limits to commercial bank bail outs we show that with intertwined weak banks and weak sovereigns bank recapitalizations become much less effective we construct a dsge model with leverage constrained banks lending to firms and holding domestic government bonds bond prices reflect endogenously generated sovereign risk this introduces a negative amplification cycle after a credit crisis output losses increase more because higher interest rates trigger lower bond prices and subsequent losses at banks this further tightens bank leverage constraints and causes interest rates to rise further also bank recapitalizations are then much less effective recaps involve swaps of newly issued sovereign bonds for bank equity the new debt increases sovereign debt discounts leading to capital losses for the banks on their holdings of sovereign debt that partially offset the impact of the recapitalization the favorable macroeconomic effects of bank recaps on the recovery after a financial crisis are correspondingly lower

do the markets care about the 2 4 trillion u s deficit if the u s federal government properly accounted for its explicit and promised liabilities it would record a national debt of 64 trillion and a national deficit of 2 4 trillion in 2006 although capital markets seem to care about the officially reported budget deficit a metric that is backward looking and quite misleading the markets have done little more than yawn at the federal government s mammoth and growing forward looking budget imbalance are investors uninformed they should remember that the common belief that capital markets cannot fail is precisely the reason why they can

equilibrium in a production economy with an income tax this paper develops a method to study an infinite horizon production economy distorted by a state dependent income tax this setting permits taxes to depend on the capital stock an endogenous state variable and thus captures situations where the evolution for capital and taxes is jointly determined to solve this model the consumption function is represented as a fixed point of a nonlinear monotone operator that is defined such that its nth iteration computes the consumption function n steps away from the horizon for a corresponding finite horizon economy the oparator s monotonicity is exploited in proving the existence of and constructing an equilibrium copyright 1991 by the econometric society

opting out of social security abstract the liability facing a pay as you go social security system can be calculated in several ways many conversions including that which took place in chile and in many plans to convert the u s system assume the largest measure known as the shutdown liability this measure pays many workers who have contributed to the public system more money than the public system is actually worth to them thereby placing a larger burden on future generations but other liability measures are hard to implement due to an information asymmetry between the government and individuals about an individual s skill level this paper demonstrates that a very simple reform plan simply letting people opt out of social security generates a truthful revelation equilibrium in which agents reveal private information about their skill levels the new assumed liability measure is much smaller since it more accurately assigns a liability to each individual a smaller liability therefore is passed onto future generations which also generates quicker transition paths it also does a better job protecting the welfare of the initial elderly when general revenue is used to pay for the transition simulation evidence is provided using a large scale lifecycle model with heterogeneous skill levels

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

monetary policy bond returns and debt dynamics abstract using the government s intertemporal budget constraint we quantify the contribution of returns paid on the u s government s debt portfolio to the evolution of the debt to gdp ratio we show that announcements of unconventional monetary policy measures by the federal reserve between 2008 iv and 2012 as a part of macroeconomic stabilization were associated with a sizable increase in returns and debt to gdp ratios and contributed to fiscal imbalances we use the federal reserve s portfolio composition as a proxy for unconventional monetary policy measures and show that it is significantly related to future bond returns and fiscal balances

the expectations hypothesis of the term structure tests on us german french and uk euro rates abstract this paper tests the expectations hypothesis of the term structure on us german french and uk euro rates three tests are examined the first is based on forward rates and the other two are based on the interest rates spread first we show that the sign puzzle highlighted by campbell and shiller campbell j y shiller r j 1991 yield spreads and interest rate movements a bird s eye view review of economic studies 58 495 514 for us data does not arise in the cases of french and uk short term rates second we propose tests for the expectations hypothesis based on error correction models with these tests the sign puzzle disappears but the country puzzle remains

inflationary consequences of anticipated macroeconomic policies budget deficits implying an unbounded present value of government debt are infeasible and hence induce expectations of a future policy change we study how expectations of a policy switch whose timing or mix between expenditure cuts tax increases or increases in money growth rates may be uncertain affect economic dynamics before the switch takes place we are especially concerned with the correlation between changes in the deficit and inflation of particular interest is our finding that timing uncertainty may induce fluctuations in the rate of inflation that seem to be unrelated to the budget deficit at a time when the budget deficit is responsible for inflation

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association