government debt government spending and private sector behavior comment in a recent issue of this review 1983 roger kormendi relied upon the work of martin bailey 1962 1971 and robert barro 1974 to develop an alternative approach to modeling private sector consumptionsaving behavior based on rational evaluation of the consequences of government fiscal policy p 995 briefly this approach involves determining to what extent government spending substitutes for private consumption and to what extent government debt is net wealth and thereby also affects private consumption this consolidated approach to examining private sector consumption is not only novel but appears at a time when there is widespread interest as well as controversy over the effects of government fiscal policy it therefore seems only appropriate to examine further the results obtained by kormendi not to criticize them but rather to explore their robustness this comment specifically explores the sensitivity of kormendi s results to alternative time periods of estimation to the differentiation between federal debt and state and local government debt and to the measurement of government debt particularly par vs market value

does it matter how monetary policy is implemented abstract in the u s existing monetary base measures add an adjustment factor for changes in reserve requirement ratios to high powered money implicitly the monetary base assumes that the economic effects of changes in reserve requirements are identical to those due to changes in high powered money theory however does not generally support the prediction that the two policy tools will have the same economic effects structural vars are estimated to compare the short run paths of inflation and output growth under two different types of policy shocks in doing so this analysis gives one a measure of the costs associated with this implicit equivalence assumption the evidence is consistent with the hypothesis that the federal reserve at least partially offsets reserve requirement changes with open market operations and the hypothesis that dynamic explanations of macroeconomic variables are improved by separating reserve requirement changes from other monetary policy moves

the market value of outstanding government debt 1919 1975 abstract several new series on the market value of outstanding government debt are reported and their methods of construction described the new series on federal debt are compared with other existing estimates and are shown to be markedly superior to them

bank lending channel in a dual banking system why are islamic banks so responsive we examine the interest rate sensitivity of both deposits and credits at islamic and conventional banks in turkey we find that the bank lending channel is especially operative for islamic banks impulse responses for conventional and islamic banks reveal that islamic bank depositors sensitivity to policy rate changes is substantially larger than that of conventional bank depositors next to heavily dependence on deposit funding we consider that inertia in islamic bank deposit rates impedes these banks to keep those depositors who consider the opportunity cost of monetary policy rates is unbearable on the lending side we obtain similar results implying that tight monetary policy leads to a larger contraction in islamic bank credits this finding is a reflection of the favourable attitude of islamic banks towards small and medium sized enterprise sme financing when similar relationships are analysed for currency and inflation shocks we again find larger responses for islamic banks showing the cyclical nature of sme credits

on avoiding bank runs abstract can bank runs be avoided and should they be avoided i analyze a banking environment where bank runs can occur as a result of negative signals about the bank s investments in this environment banks can make sure that runs do not occur by designing the deposit contract appropriately i show that there are conditions under which it is profit maximizing for the bank to avoid runs and others under which occasional runs are part of optimal bank behavior i also compare the banking arrangement to an arrangement based on trading in equity

applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

government debt government spending and private sector behavior revisited comment perhaps no issue has generated as much controversy among economists in the past decade as the proposition that an increase in the government deficit induces an equal offsetting increase in private saving the truth of this so called ricardian equivalence proposition is central to whether budget deficits reduce capital accumulation to the feasibility of expansionary tax reductions and to the effects of social security on private saving and aggregate capital accumulation although the basic idea that the future tax liabilities associated with government deficits and debt induce individuals to increase their saving has been around since the time of david ricardo and was treated explicitly by don patinkin 1965 martin bailey 1971 and levis kochin 1974 the current debate was launched by robert barro 1974 the voluminous theoretical literature of recent years has shown that complete ricardian equivalence would be expected to prevail only under very special conditions see douglas bernheim 1987 for an especially useful survey and analysis but the theoretical restrictiveness of the assumptions required for complete ricardian equivalence does not constitute a practical refutation defenders of ricardian equivalence can argue that the theory is only an approximation and can claim that although the stringent conditions required for complete ricardian equivalence do not hold the economy s behavior in practice is close to the predictions of ricardian equivalence there are two key empirical questions the first is whether a higher level of taxes with government spending constant induces individuals to reduce their spending on consumption as traditional theory holds or has no effect on consumer spending as the ricardian equivalence proposition predicts the second deals with the effect of government outlays on goods and services although the absence of a negative effect on consumer spending of such government outlays is clearly contrary to the ricardian equivalence proposition the existence of a moderate negative effect of government outlays on consumer spending is not in itself evidence in favor of the ricardian equivalence proposition that individuals increase their saving to finance anticipated debt service as feldstein 1982 explained consumers may correctly believe that a rise in current government spending is a good indicator of a higher level of future government spending once a program is launched or budgets increased the process is unlikely to be reversed an increase in current government spending is therefore a good indication that future taxes will have to be higher to finance a higher level of future government spending individuals may rationally reduce their own spending when government outlays increase without a concurrent increase in taxes because they anticipate higher future taxes to finance higher future government spending even if they give little or no weight to the debt service implications of the current deficit the strongest direct evidence in favor of ricardian equivalence is roger kormendi s 1983 article in the american economic review he presents consumption regression equations that relate an estimate of consumption to net national product wealth martin feldstein is professor of economics at harvard university and president of the national bureau of economic research douglas elmendorf is assistant professor of economics at harvard university we are grateful to greg mankiw and lawrence summers for comments on an earlier draft the research reported here is part of the nber study of the government budget and the private economy ikormendi defines consumption as the sum of current expenditures on services and nondurables plus 10

the economic consequences of federal deficits an examination of the net wealth and instability issues there is currently disagreement over the economic consequences of federal deficits some economists argue that deficits put upward pressure on real interest rates and thereby crowd out interest sensitive private spending others argue that deficits stemming from lump sum tax cuts do not raise interest rates because the response of individuals will be to increase their saving by the full amount of the resulting deficit to enable future generations to service i e make interest and principal payments on the additional debt without curtailing their consumption in other words individuals view debt and taxes as perfect substitutes because debt financed tax cuts imply higher taxes in the future to service that debt this effectively means that there really is no permanent tax cut so there is no increase in private net wealth current consumption or interest rates stated another way the debt that is issued to finance a tax cut does not add to private net wealth because it implies an offsetting future tax liability but if debt is not viewed as implying future tax increases then debt and taxes are not perfect substitutes and increases in debt resulting from tax cuts will indeed add to private net wealth stimulate consumption and raise interest rates 2

the market value of u s government debt monthly 1942 1980 abstract the market value of outstanding united states treasury debt is calculated on a monthly basis using price and par value data from the treasury bulletin separate series for treasury bills bonds certificates of indebtedness notes and total treasury debt are presented along with estimates of privately held treasury debt and gross federal debt the calculated market value series is compared to par value and an existing annual market value series

the u s evidence on optimal taxation over time abstract this paper considers a tax rule in which a uniform tax rate over time becomes optimal its implications are that 1 changes in the tax rate should arise only when there are changes in permanent government expenditures and 2 no variable other than permanent government expenditures should be of any value in predicting the tax rate these implications are tested using u s data for 1937 82 empirical results of the tests reveal that in addition to responding to permanent government expenditures the tax rate also responds to temporary defense purchases the general price level and a time trend

the behavior of treasury securities monthly 1942 1984 abstract the monthly market value statistics on outstanding united states treasury debt are reported for the 1981 1984 period in addition a monthly series on privately held gross federal debt is reported for the extended 1942 1984 period together with monthly security price indices for various federal debt aggregates examination of the stochastic structure of t bill prices indicates that the riskiness of t bills has increased dramatically in recent years

the effects of general price controls in the united states during world war ii this paper estimates a general equilibrium model of suppressed inflation using quarterly u s data for the sample period 1942 iv 48 ii it finds that the pricelevel was reduced by at least 30 4 percent and that this suppression of inflation reduced employment by at least 11 7 percent and output by at least 7 1 percent it also finds that monetary policy could have been equally successful in combating inflation but would not have had the side effect of reducing employment and output

u s deficits since world war i the tax smoothing theory suggests that deficits would respond particularly to recession temporarily high government spending and anticipated inflation my empirical estimates indicate that a relation of this type is reasonably stable in the u s since at least 1916 in particular the statistical evidence does not support the idea that there has been a shift toward a fiscal policy that generates either more real public debt on average or that generates larger deficits in response to recessions further the deficits for 1982 3 and popular projections formed in 1984 for 1984 5 are consistent with the previous structure the high values of these deficits reflect the customary response to substantial recession interacting with big government and to expected inflation

oil prices and rural migration the dutch disease goes south abstract we construct a two period general equilibrium model to evaluate policies affecting agricultural migration and exports the model is applied to mexico for the period 1986 1987 to obtain certain qualitative policy conclusions related to the dutch disease brought about by oil price increases dutch disease phenomena can be brought about both as the result of real exchange rate changes as well as price changes caused by migration out of agriculture in the short run it may be possible to use fiscal policy such as value added subsidies to agriculture to at least partially negate the effects of an oil price increase on agricultural exports jel f31 f41

domestic bank runs and speculative attacks on foreign currencies abstract the paper extends the international transmission of financial crisis literature by illustrating how a domestic bank run can cause a speculative attack on foreign currencies the idea is that when domestic banks invest abroad a domestic bank run will give way to a repatriation of foreign capital if the repatriation causes a depletion of the foreign central bank s foreign exchange reserves then the foreign currency will be devalued as such a devaluation will render domestic banks insolvent in the rational equilibrium domestic bank runs will 1 cause a speculative attack on the foreign currency and 2 be self justified

the fiscal role of conscription in the u s world war ii effort an often overlooked role of conscription is as a method of lump sum taxation in times of war conscription of military personnel allows the fiscal authority to minimize wartime government expenditure and hence minimize tax distortions associated with war finance this paper presents a simple dynamic general equilibrium model to articulate this view and calibrates the model to the u s world war ii experience analysis of the calibrated model indicates that the welfare value of conscription as a fiscal policy tool is quantitatively large despite the fact that the american involvement lasted only four years conscription is worth approximately 2 of annual aggregate consumption in perpetuity

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

deficits and the demand for money in recent years the large budget deficits of the federal government have renewed interest in the effects of government debt on private sector behavior to date empirical research has focused on the relationship between debt and two key variables consumption and interest rates by contrast empirical research on the effects of government debt on other variables of interest to macroeconomists is limited this paper examines the relationship between government debt and one such variable real money balances the neglect of government debt as a determinant of money demand is surprising many traditional macroeconomic models such as blinder and solow s 9 influential work include government debt as an argument to the money demand function moreover macroeconomic theorists have long been aware that a government debt money demand relationship has important implications for the efficacy of fiscal policy 2 this paper examines the relationship between government debt and real money holdings over the 1950 1990 period a positive money debt relationship was previously noted by butkiewicz 12 and deravi hegji and moberly 15 hereafter referred to as dhm our work improves upon this research in two ways first in contrast to butkiewicz 12 and dhm 15 we investigate the time series properties stationarity cointegration of relevant variables second we distinguish between supply side and demand side explanations of the debt money relationship the explanation advanced by butkiewicz 12 and dhm 15 is that an increase government debt is perceived by the private sector as an increase in net wealth and hence should increase money demand 3 this explanation ignores a potentially important connection between government debt and money supply if the federal reserve monetizes debt and if the private sector s adjustment to this monetization is lagged then debt and real money balances will exhibit a positive correla

government deficits and aggregate demand abstract the evidence presented in this paper indicates that changes in government spending transfers and taxes can have substantial effects on aggregate demand the estimates also indicate that the promise of future social security benefits significantly reduces private saving each the basic implications of the so called ricardian equivalence theorem is contradicted by the data the results are consistent with the more general view of the effects of fiscal actions and fiscal expectations that is described in the paper

an empirical investigation into the impact of us federal government budget deficits on the real interest rate yield on intermediate term treasury issues 1972 2012 this study provides new empirical evidence on the impact of the federal budget deficit on the real interest rate yields on intermediate term debt issues of the us treasury represented herein by the ex post real interest rate yields on 3 year treasury notes and 7 year treasury notes two interest rate measures that have received essentially no attention in the economics and finance literature in recent years this study is couched within a loanable funds model that includes two ex post real interest rate yields the monetary base as a per cent of gdp the change in per capita real gdp net financial capital inflows as a per cent of gdp and the budget deficit as a per cent of gdp this study uses annual data for the study period 1972 to 2012 a time period that includes quantitative easing monetary policies by the federal reserve two stage least squares estimations reveal that the federal budget deficit expressed as a per cent of gdp exercised a positive and statistically significant impact on the ex

high growth and low consumption in east asia how to improve welfare while avoiding financial failures this paper analyzes certain policies that are typical of a number of rapidly growing east asian countries in which a fixed exchange rate combined with a surplus labor market has made domestic assets relatively inexpensive generating high rates of fdi as well as domestic capital formation this investment hunger can lead to unanticipated declines in the returns to investment and resulting financial insolvencies private consumption remains low and there are concerns that high savings rates cannot be sustained we construct a dynamic general equilibrium model and apply it to a stylized asian economy loosely based upon china we calibrate a benchmark equilibrium and carry out various counterfactual simulations to analyze alternative policies in particular tax cuts and exchange rate revaluations as instruments in increasing private consumption while avoiding bank failures

are reserve requirements relevant for economic stabilization abstract the level of the required reserve ratio and the payment of interest on required reserves are irrelevant for economic stability 1 when the central bank appropriately adjusts its interest elasticity of supply of reserves or currency to offset changes in the required reserve ratio or in the interest rate paid on required reserves or 2 when economic agents form their price level expectations rationally conditional on the current interest rate

fiscal insurance and debt management in oecd economies assuming the role of debt management is to provide hedging against fiscal shocks we consider i what indicators can be used to assess the performance of debt management ii how well historical debt management policies have performed iii how performance is affected by variations in debt issuance using oecd data between 1970 and 2000 we propose performance indicators for debt management which we evaluate using monte carlo analysis those based on the relative persistence of debt perform best there is only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns

interest rates and expected future budget deficits in the united states several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits one possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits in this paper i investigate whether this explanation is valid finding no evidence that it is section ii briefly formulates and discusses the hypothesis under consideration stating some of its implications section iii presents the results of regressing the commercial paper rate moody s aaa bond rate and the ex post real commercial paper rate on current and past government spending budget deficits and real money supplies the regressions have been fitted to the entire sample of monthly data spanning the period between june 1908 and march 1984 and to 11

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

are consumers ricardian when some are liquidity constrained evidence for the united states this paper formulates and estimates a revised specification of evans 1988 test for ricardian equivalence which incorporates the possible presence of liquidity constrained consumers if liquidity constrained consumers are significant in number tests using aggregate consumption data may tend to reject the ricardian equivalence hypothesis when the model allows for liquidity constraints a test which incorporated liquidity constrained consumers could not reject ricardian equivalence over the sample period 1946 91 while the proportion of aggregate consumption which is liquidity constrained is found to be significant it does not appear large enough to affect the test for ricardian equivalence

on the importance of the measurement of consumption in tests of ricardian equivalence abstract the contradictory results in the ricardian equivalence literature may be due largely to the use of alternative consumption measures within kormendi s 1983 empirical framework changing the empirical treatment of the service flow from consumer durables has dramatic effects

sensitivity of consumption to income and to government purchases some specification and estimation issues the paper derives a nonlinear error correction model ecm for consumption and shows that existing models that are based on quadratic utility combine permanent income and current income consumption and nest or could nest the hypothesis of substitutability between private consumption and government purchases are special cases of the ecm the importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using us aggregate quarterly data 1953 1 1992 4 the evidence suggests that the ecm produces more reliable estimates than do the existing restrictive models

u s federal indebtedness and the conduct of fiscal policy abstract this paper examines whether the conduct of u s fiscal policy since the 1920s has been influenced by constraints on the accumulated stock of outstanding federal debt the evidence is affirmative during most of the inter and post war period policy in effect stabilized the federal debt relative to gnp but after 1981 large debt and debt service costs failed to produce deficit reductions consistent with the pattern of previous decades

the market value of government of canada debt a comment on the importance of correct valuation of non marketable debt previous attempts to provide market value estimates for both u s and canadian government debt have included nonmarketable debt items specifically savings bonds as part of total marketable debt inclusion of nonmarketable debt items as part of marketable debt presents a significant valuation problem this article demonstrates that previous studies on the market value of canadian government debt used valuation methodologies that significantly underestimated the value of nonmarketable debt a more accurate valuation methodology is provided

reserve requirements and economic stability reserve requirements have become a common institutional feature of our monetary systems they are widely held to be indispensable for zfficient control of the financial sector of the economy yet relatively little analysis has been directed at the question of what constitutes an optimal level and structure of reserve requirements in the traditional literature the major exceptions concetn some discussions of the extreme values of 100 percent or zero requirements especially the former see e g 1 5 6 7 10 for a zero required reserve proposal see 3 in recent years some newer studies dealing with these issues have appeared see e g 8 9 11 12 15 in all of these studies the focus is almost exclusively on money stock control generally speaking their results support the 100 percent reserves idea though such a scheme is usually seen as infeasible for political or institutional reasons leading to recommendations to set requirements as high as possible against deposits included in the money stock subject to whatever constraints of this nature are perceived the underlying idea of course is that this minimizes the influence of private sector disturbances on the money stock by lowering the money multiplier and making it equal to one in the extreme case of a 100 percent requirement reserve requirements are comparable to a tax on a particular economic activity namely the production of deposit accounts as such they have efficiency effects similar to those of a tax on other types of activities although this has always been

ricardian equivalence and the public and private saving nexus in india abstractthis study tests the ricardian equivalence theorem ret and examines the responsiveness of private saving to public saving in india most estimators do not provide support for the empirical validity of ret and long run cointegration between public and private saving the increases in household saving hhs seem to have been engendered by the provision of saving incentives institution of saving schemes self driven motivation to save and the precautionary accumulations induced by uncovered uncertainties in incomes rather than by ricardian behaviour of households the self imposed aversion to debt and debt bequest borrowing and liquidity constraints and the intertemporal smoothing of consumption have been the added catalysts that contributed to the increases in hhs the households with binding borrowing constraints inadequate or no insurance and uncovered uncertainties in incomes seem to have been saving more to pay for higher inflation tax the fiscal consolidation and generation of public s

finite horizons infinite horizons and the real interest rate finite horizons infinite horizons and the real interest rate using an overlapping generations model in which households may have either finite or infinite horizons i derive the implications of each horizon for the steady state real interest rate i then formulate an econometric model of the steady state real interest rate and devise tests that can distinguish between finite and infinite horizons these tests are applied to annual and quarterly u s data which span the period 1875 1988 the results are inconsistent with finite horizons and broadly consistent with infinite horizons i introduction in conventional macroeconomic analysis government budget deficits raise perceived wealth and stimulate aggregate demand because households are modeled as having finite horizons if households are instead modeled as having infinite horizons budget deficits need not stimulate aggregate demand and hence need not affect output employment interest rates and the price level the reason is that households with infinite horizons do not view the government debt as net wealth thus they may treat budget deficits i e future taxes and current taxes as equivalent ricardian equivalence is said to hold if households treat budget deficits as equivalent to current taxes 1 three reasons are typically advanced for assuming households have finite horizons first the individuals who comprise current households have finite lifetimes second some households face binding liquidity constraints either now or in the future 2 third boundedly rational households may choose to behave myopically acting as if their current decisions do not affect allocations occurring beyond some horizon 3 these three reasons however do not necessitate modeling households as having finite horizons first barro 1974 has shown that finite lifetimes need not imply finite horizons second hayashi 1987 and yotsuzuka 1987 have shown that lenders may impose liquidity constraints that vary one for one with the government debt in such an environment the government debt relaxes no liquidity constraints third because bounded rationality assumes fixed costs of decision making it may be able to explain why aggregate demand would respond to small short term budget deficits but cannot explain why aggregate demand would respond to large or long term budget deficits because logically consistent reasons can be adduced for modeling households as having either finite or infinite horizons the issue of which is the better modeling strategy should ultimately be decided by empirical analysis this paper offers such an analysis it investigates the implications of finite and infinite horizons for the steady state behavior of the real interest rate the evidence reported here is inconsistent with finite horizons and broadly consistent with infinite horizons the rest of the paper is organized as follows using barro s 1974 overlapping generations model i derive its implications for the steady state real interest rate in section ii these implications differ according to whether households have inoperative bequest motives and finite horizons or operative bequest motives and infinite horizons in section iii i formulate an econometric model that encompasses the implications of the theoretical model of section ii for both of these cases in sections iv v vi and vii i test these implications using u s data in section viii i investigate whether the real interest rate evidences any short term departures from ricardian equivalence finally in section ix i draw some tentative conclusions ii an overlapping generations model of the steady state in this section i lay out barro s overlapping generations model which is the simplest model in which one can derive the implications of finite and infinite horizons for the steady state real interest rate

macroeconomic activity and monetary policy actions some preliminary evidence monetary policy is conducted through open market operations loans at the discount window and changes in the reserve requirement structure the purpose of this paper is to formally investigate the notion that the effect of changes in reserve requirement ratios is different from the effect of other policy tools this is accomplished by decomposing the monetary base into those changes caused by changes in reserve requirement ratios and those caused by other monetary policy actions some preliminary evidence suggesting differential real effects from the policy tools is provided copyright 1992 by ohio state university press

the effects of lower reserve requirements on money market volatility in late 1990 the federal reserve eliminated reserve requirements on nonpersonal time deposits and required reserves fell by about 10 billion an almost 20 percent reduction in early 1992 reserve requirements against transaction accounts were lowered from 12 percent to 10 percent releasing an additional 3 5 billion of required reserves 1 these reductions by lowering total reserve balances potentially could increase reserve market volatility impeding the implementation of monetary policy and possibly spilling over into other markets this paper examines the effects of reserve requirements on market volatility and on the central bank s ability to achieve shortrun policy objectives although a number of earlier studies have examined the effects of reserve requirements on the effectiveness of monetary policy our approach differs in two important respects first we focus on the ability to achieve short run objectives second we provide empirical estimates of the likely effects of lower reserve requirements the central bank cannot directly achieve its long run objectives of output and price stability so it uses policy rules to set shortand intermediate run targets for certain economic variables such as interest rates or monetary aggregates consistent with its long term goals 2 the central bank cannot however perfectly control shortor intermediate run targets so it also relies on a set of operational rules operational rules are used to set instruments such as reserve requirements the discount rate and openmarket operations in order to achieve the shorter run targets previous studies such as ira kaminow 1977 jeremy siegel 1981 ernst baltensperger 1982 richard t froyen and kenneth j kopecky 1983 and brian r horrigan 1988 focused exclusively on longer term objectives of monetary policy in contrast we focus on the shortterm goals of monetary policy in addition we provide empirical estimates of the impact that changes in reserve requirements are likely to have on volatility in the money market previous studies were largely theoretical and therefore could only show that the impact of a change in policy depended on various unknown parameters of a particular model

excess reserves monetary policy and financial volatility abstract this paper examines the real and financial effects of reserves in a dynamic stochastic general equilibrium dsge model with monopoly banking and credit market imperfections the framework explicitly accounts for the fact that commercial banks hold excess reserves and they incur costs in holding these assets the model also accounts for imperfect substitutability between bank funding sources and it shows that this feature is an important channel through which reserve requirement shocks can affect real variables numerical experiments show that an increase in reserve requirements creates a countercyclical effect for real economic activity the results also indicate that the combination of an augmented taylor rule which responds to excess reserves and a countercyclical reserve requirement rule is optimal to mitigate macroeconomic and financial volatility associated with liquidity shocks

exogenous shocks contagion and bank soundness a macroeconomic framework abstract in a model where all banks are initially solvent an exogenous shock affects confidence causing a flight from deposits into domestic and foreign currency real interest rates increase unexpectedly affecting firms and raising the share of the banks nonperforming assets this contagion causes a bank run simulations show that compensatory monetary policy mitigates the bank run but causes macroeconomic imbalances combining compensatory monetary policy with tight fiscal policies slows the bank run and mitigates insolvency a devaluation combined with compensatory monetary policy reduces insolvencies and increases the growth of real income but at the cost of increased inflation

alternative modes of deficit financing and endogneous monetary and fiscal policy in the u s a 1923 1982 this paper first investigates the effects of alternative modes of deficit financing on the unemployment rate the inflation rate and the real interest rate within the framework of a small complete macroeconomic model secondly it examines the nature of monetary and fiscal reaction functions the two periods 1923 1960 and 1961 1982 are considered with substantial differences in behaviour and policy being shown to exist between them the most important conclusion is that long run monetary neutrality properties shown to exist over the latter period are not intrinsic to the u s economy but rather are the result of the stabilization policies being conducted over that period

fiscal insurance and public debt management evidence for a large emerging economy abstract this paper is a contribution to the analysis concerning fiscal insurance and public debt management we built fiscal indicators and present empirical evidence for the effect of the public debt management on the fiscal insurance based on the brazilian economy the analysis is based on two steps the first builds fiscal indicators and analyzes their performance over time and the second presents regressions of the main variables regarding public debt management on the fiscal insurance indicators the findings denote that there was a reduction in the fiscal vulnerability but the public debt management was not effective in increasing fiscal insurance

debt and deficit fluctuations and the structure of bond markets we analyse the implications of optimal taxation for the stochastic behaviour of debt we show that when a government pursues an optimal fiscal policy under complete markets the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase by contrast under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit data for us government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness

the macroeconomic effects of war finance in the united states world war ii and the korean war during world war ii government expenditures were financed primarily by issuing debt during the korean war expenditures were financed almost exclusively by higher taxes reflecting president truman s preference for balanced budgets this paper evaluates quantitatively the economic effects of the different policies used to finance these two wars counterfactual experiments are used to explore the implications of financing world war ii like the korean war and financing the korean war like world war ii the author finds that using a korean war policy during world war ii would have resulted in much lower output and welfare relative to the actual policy copyright 1997 by american economic association

bank failures and fiscal austerity policy prescriptions for a developing country abstract this work employs a dynamic general equilibrium model to evaluate the causes and implications of bank insolvencies we apply the model to stylized data from bangladesh a country whose banking system is currently suffering from large stocks of non performing assets the model is used to derive positive conclusions about alternative policy instruments designed to alleviate the impact of these insolvencies a benchmark case is simulated using historical exogenous parameters we then generate a bank failure by assuming that firms cannot service their debt if their interest obligations rise above their anticipated return on capital the public withdraws deposits from the banking system in reaction to worries about defaulting bank assets if banks optimize by restricting credit to risky borrowers these failures can be partially avoided such bank behavior is often prohibited in developing countries so we investigate an active monetary policy that compensates banks for withdrawn deposits the resulting outcome indicates that such a policy can slow the pace of bank failures although at the cost of certain macro imbalances our final simulation imposes a reduction in public spending in order to tighten fiscal policy and thereby reduce budgetary pressure the resulting decline in interest rates eliminates all investor defaults and bank failures we conclude that the combination of compensating monetary policy and restrictive fiscal policy may offer the best way of responding to a bank crisis

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental