the strategy proof provision of public goods under congestion and crowding preferences we examine the strategy proof provision of excludable public goods when agents care not only about the level of provision of a public good but also the number of consumers we show that on such domains strategy proof and efficient social choice functions satisfying an outsider independence condition must be rigid in that they must always assign a fixed number of consumers regardless of individual desires to participate the fixed number depends on the attitudes of agents regarding group size being small when congestion effects dominate individuals prefer to have fewer other consumers and large when cost sharing effects dominate agents prefer to have more consumers a hierarchical rule selects which consumers participate and a variation of a generalized median rule to selects the level of the public good under heterogeneity in agents views on the optimal number of consumers strategy proof efficient and outsider independent social choice functions are much more limited and in an important case must be dictatorial

monetary and fiscal policies in an open economy the central theme of this paper is that international linkages between national economies influence in fundamentally important ways the effectiveness and proper conduct of national macroeconomic policies specifically our purpose is to summarize the implications for the conduct of macroeconomic policies in open economies of both the traditional approach to open economy macroeconomics as developed largely by james meade robert mundell and j marcus fleming and of more recent developments our discussion is organized around three key linkages between national economies through commodity trade through capital mobility and through exchange of national monies these linkages have important implications concerning the effects of macroeconomic policies in open economies that differ from the effects of such policies in closed economies recent developments in the theory of macroeconomic policy have established conditions for the effectiveness of policies in influencing output and employment which emphasize the distinction between anticipated and unanticipated policy actions the importance of incomplete information and the consequences of contracts that fix nominal wages and prices over finite intervals in this paper we shall not analyze how these conditions are modified in an open economy however since our concern is with macro economic policy a principal objective of which is to influence output and employment we shall assume that requisite conditions for such influence are satisfied this abstract was borrowed from another version of this item

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

economic news exchange rates and interest rates the paper esamines the post october 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen us macroeconomic series illarkets respond primarily to monetary news but also to news about the trade deficit domestic inflation and variables that reflect the state of the business cycle for all fifteen macroeconomic variables an increase decrease in interest rates is accompanied by an appreciation depreciation of the dollar which is consistent with models that stress price rigidity and absence of purchasing power parity the effect of economic news on asset prices has received increasing attention in the economic literature because an outcome of the efficient markets rational expectations hypothesis is that flesible asset prices change the moment new information about future fundamentals arrives in the market in the exchange rate literature the role of news has gained importance because structural models have failed to predict most of the variation in exchange rates during the 1970s see imeese and rogoff 1983 researchers were naturally led to investigate the types of news that make exchange rates so volatile and to utilize news in order to test which model of exchange rate determination is consistent with the floating eschange rate experience notable studies are those of dornbusch 1980 frenkel 1981 edwards 1982a b 1983 copeland 1984 and rose 1984 in this paper i also examine the effects of macroeconomic news on eschange rates but i adopt a different more direct strategy one that complements previous work avoids some of its shortcomings and promises interesting conclusions i examine the instantaneous response of exchange rates the moment a piece of economic news hits the market if one can isolate the exact time during a business day when news arrives it is straightforward to examine the response of exchange rates because financial data are continuously available the advantages of the present methodology are many first it is possible to identify the exact types of economic news and how they affect exchange rates second the simultaneity bias which plagues the previous literature on exchange rates and news is not present here the independent variables that represent news can be interpreted as causal the paper was presented at the 1985 meeting ofthe american economic association the author wishes to thank sebastian edwards r w hafer nicholas karamouzis andrew rose and two anonymous referees for helpful comments kim rupert of the money market services for providing the survey data soo kounne for able research assistance and barnard college for research support

interest rates and exchange rates some new empirical results abstract this paper presents indirect evidence on the behavior on the real interest rate by studying the correlations between changes in nominal interest rates and in exchange rates these correlations are examined both before and after october 6 1979 the empirical evidence supports the views that monetary shocks affect the real rate and that the change in fed monetary policy on october 6 led to greater variation in the real rate

equilibrium in a finite local public goods economy abstract this paper examines the existence of a noncooperative equilibrium in a finite local public goods economy where consumers have quasi linear preferences jurisdictions consist of consumers who chose the same public project and finance the cost of production of public goods through either a proportional income tax or a poll tax we show that under a proportional income tax scheme a nash equilibria may fail to exist under a poll tax scheme an equilibrium always exists but in general nash equilibria violate a very weak efficiency condition we conclude by commenting on the stabilizing effect of zoning policies journal of economic literatureclassification number c71

efficiency and consistency for locating multiple public facilities abstract in the problem of locating multiple public facilities studied by barbera and bevia self selection consistent functions j econ theory 105 2002 263 277 locating public facilities by majority stability consistency and group formation games econ behav 56 2006 185 200 we offer simple necessary and sufficient conditions for efficiency decentralizability of efficient decisions in a game of community division and local public goods provision and a constructive algorithm for efficient and consistent decisions

government debt management the long and the short of it standard optimal debt management dm models prescribe a dominant role for long bonds and advocate against issuing short bonds they require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue r r new ones these features of dm are inconsistent with u s data we introduce incomplete markets via small transaction costs which serves to make optimal dm more closely resemble the data r r are negligible short bond issuance substantial and persistent and short and long bonds positively co vary intuitively long bonds help smooth taxes over states and short bonds over time solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions

comparing solution methods for dynamic equilibrium economies this paper compares solution methods for dynamic equilibrium economies the authors compute and simulate the stochastic neoclassical growth model with leisure choice using undetermined coefficients in levels and in logs finite elements chebyshev polynomials second and fifth order perturbations and value function iteration for several calibrations the authors document the performance of the methods in terms of computing time implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

on the correlation of exchange rates and interest rates abstract this note shows that a negative correlation between the price of foreign currency and nominal interest rates in not necessarily an indication of movements in the real rate of interests such a correlation could be consistent with a monetarist model in which the real rate is constant

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

household search and the aggregate labor market we develop a theoretical model with labour market frictions incomplete financial markets and with households which have two members households face unemployment risks but their members adjust their labour supplies to insure against unemployment we use the model to explain the cyclical properties of aggregate employment and participation as in the u s data the model predicts that the participation rate the fraction of individuals that want jobs is not strongly correlated with aggregate economic activity this property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions when we assume bachelor households or households with infinitely many members complete markets in the two member household model and in the data primary earners are always in the labour force secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate their behaviour insures the household against unemployment risks

the safe asset share we document that the percentage of all u s assets that are safe has remained stable at about 33 percent since 1952 this stable ratio is a rare example of calm in a rapidly changing financial world over the same time period the ratio of u s assets to gdp has increased by a factor of 2 5 and the main supplier of safe financial debt has shifted from commercial banks to the shadow banking system we analyze this pattern of stylized facts and offer some tentative conclusions about the composition of the safe asset share and its role within the overall economy

imperfect information and the comovement of the exchange rate and the interest rate a signal extraction approach this paper analyzes the joint determination of the exchange rate and the interest rate in a signal extraction framework in principle a given disturbance should generate a systematic relationship between the exchange rate and the interest rate as two endogenous variables in the context of any specified economic model when expectations matter however the introduction of imperfect information would weaken the comovement between the two endogenous variables that results from a given disturbance this simple point is demonstrated in a flexible price model of a small economy

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

quantitative easing auctions of treasury bonds abstract the federal reserve uses reverse auctions to implement its purchases of treasury bonds in quantitative easing qe to evaluate dealers offers across multiple bonds the fed relies on its internal yield curve model fitted to secondary market bond prices from november 2010 to september 2011 a one standard deviation increase in the cheapness of a treasury bond how much the market price of the bond is below a model implied value increases the fed s purchase quantity of that bond by 276 million and increases the auction costs on that bond by 2 6 cents per 100 par value controlling for standard covariates our results suggest that the fed harvests gains from trades by purchasing undervalued bonds but strategic dealers extract some profits because the fed s relative values can be partly inferred from price data

international interest rates exchange rates and the stochastic structure of supply in a dual currency flexible exchange rate model both nominal and real foreign exchange premia depend on investor risk attitudes consumption parameters and the stochastic structure of currency and commodity supplies when supplies are random their joint correlation structure determines the sign of the premia if the money supplies are identically distributed then all foreign exchange premia regardless of the currency of denomination are zero a positive correlation between the value of a country s currency and its nominal interest rate need not indicate real interest rate movements relative bond prices can be negatively correlated with the terms of trade recently there has been a great deal of interest in the construction and use of general equilibrium models of an international economy subject to random disturbances 1 however with the exceptions of stulz 1984 domowitz and hakkio 1985 hodrick and srivastava 1986 and stockman and svensson 1987 little effort has been devoted to expressing the relationships examined in these models in terms of parameters describing the underlying stochastic processes of the exogenous variables 2 stockman and svensson incorporated international capital flows into the model of svensson 1985 and calculated covariances between investment the current account the exchange rate and the terms of trade in terms of exogenous money and commodity supplies focusing more on financial market issues domowitz and hakkio and hodrick and srivastava simplified the case in advance model of lucas 1982 by assuming that the exogenous variables are independently lognormal and that investors have loglinear utility functions a procedure which allowed them to relate the premium required on forward exchange contracts to money supply variances stulz obtained similar results in a continuous time model where real money balances enter the utility function this paper employs a model similar to that developed by domowitz and hakkio 1985 and hodrick and srivastava 1986 but its emphasis and objectives are quite different those authors were concerned only with demonstrating that a time varying risk premium is a theoretical possibility prior to conducting a series of empirical tests only loosely related to the model itself consequently they did

locating public facilities by majority stability consistency and group formation abstract we consider the following allocation problem a fixed number of public facilities must be located on a line society is composed of n agents who must be allocated to one and only one of these facilities agents have single peaked preferences over the possible location of the facilities they are assigned to and do not care about the location of the rest of facilities there is no congestion we show that there exist social choice correspondences that choose locations and assign agents to them in such a way that 1 these decisions are condorcet winners whenever one exists 2 the majority of the users of each facility supports the choice of its location and 3 no agent wishes to become a user of another facility even if that could induce a change of its present location by majority voting

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices

optimal time consistent government debt maturity this paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt as the literature has established if the government can perfectly commit to fiscal policy it fully insulates the economy against government spending shocks by purchasing short term assets and issuing long term debt these positions are quantitatively very large relative to gdp and do not need to be actively managed by the government our main result is that these conclusions are not robust when lack of commitment is introduced under lack of commitment large and tilted debt positions are very expensive to finance ex ante since they ex post exacerbate the government s problem stemming from a lack of commitment in contrast a flat maturity structure minimizes the cost entailed by a lack of commitment though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions we show that the optimal time consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility thus under lack of commitment the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols

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

optimal taxation and oecd labor taxes abstract we derive simple expressions for optimal labor taxes under different assumptions about government bond markets we use these to examine oecd labor taxes estimate the excess burden of taxation and assess the ability of optimal tax models to match the data optimal labor taxes are driven by i a term reflecting ramsey considerations which makes labor taxes vary positively with employment and ii a martingale component reflecting the excess burden of tax which shows persistent responses to shocks to the government s intertemporal budget constraint under complete markets when governments can issue a full set of contingent securities only the first factor is relevant we find substantial evidence that incorporating incomplete markets into the optimal taxation model is critical for empirical success however we find strongest support for the martingale component and only weak evidence for the ramsey component

capital taxation and ownership when markets are incomplete this paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets the model features a representative agent economy with linear taxes on labor and capital i first allow the government to trade only a real risk free bond optimal policy has the following features labor taxes fluctuate very little capital taxes are volatile and feature a positive negative spike after a negative positive shock to the government budget and capital taxes average to roughly zero across periods i then consider the implications of allowing the government to trade capital

optimal debt management in a liquidity trap we study optimal debt management in the face of shocks that can drive the economy into a liquidity trap and call for an increase in public spending in order to mitigate the resulting recession our approach follows the literature of macroeconomic models of debt management which we extend to the case where the zero lower bound on the short term interest rate may bind we wish to identify the conditions under which removing long maturity government debt from the secondary market can be an optimal policy outcome we show that the optimal debt management strategy is to issue short term debt if the government faces a sizable exogenous increase in public spending and if its initial liability is not very large in this case our results run against the standard prescription of the debt management literature in contrast if the initial debt level is high then issuing long term government bonds is optimal finally we find a role for revisions in the debt management strategy during lt episodes whereby the government actively manages the maturity structure in some cases removing long bonds from the secondary market

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

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

price pressure in the government bond market what determines the term structure of interest rates standard economic theory links the interest rate for maturity t to the willingness of a representative agent to substitute consumption between times 0 and t the standard model contrasts sharply with a more informal view based on investors preferred habitat proposed by john culbertson 1957 and franco modigliani and richard sutch 1966 according to the preferred habitat view there are investor clienteles with preferences for specific maturities and the interest rate for a given maturity is influenced by the demand of the corresponding clientele and the supply of bonds with that maturity for example the typical clientele for long term bonds are pension funds an increase in their demand would be expected to raise prices of long term bonds and thus lower long term interest rates in short preferred habitat implies that there is price pressure in the bond market while the preferred habitat view has intuitive appeal it has not entered into the academic mainstream typically being relegated to a paragraph in mba level textbooks one reason for this is the mixed findings in early empirical studies of the term structure specifically between 1962 and 1964 the us treasury and federal reserve raised the supply of short term government debt while simultaneously lowering the supply of long term debt this program known as operation twist aimed to raise shortterm interest rates and so improve the balance of payments while also lowering long term rates to stimulate private investment a number of papers evaluated operation twist and while they reached different conclusions none found strong evidence that the operation was effective in flattening the term structure e g modigliani price pressure in the government bond market

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

the debt burden and debt maturity at low and moderate levels of government debt there appears to be little relation between the level of debt and its maturity but at high levels of debt a strong inverse relation emerges we start the paper by documenting this inverse relation for those oecd countries which have reached very high levels of debt we then provide a theory of the joint movements of debt and maturity which can explain both sets of facts it is based on the idea that at high levels of debt the government may need to decrease the maturity of the debt as debt increases in order to maintain the credibility of its anti inflation stance this abstract was borrowed from another version of this item

anticipated and repeated shocks in liquid markets we show that treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after this price pattern implies a large issuance cost for the treasury department which is estimated to be between 9 and 18 basis points of the auction size for example this cost amounts to over half a billion dollars for issuing treasury notes alone in 2007 our results appear to be consistent with the hypothesis of primary dealers limited risk bearing capacity and the imperfect capital mobility of end investors in the treasury market e g federal agencies sovereign wealth funds pension funds and etc highlighting the important role of capital mobility even in the most liquid financial markets

fiscal hedging with nominal assets abstract we analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes nominal rigidities nominal debt of various maturities and short selling constraints optimal policy prescribes the almost exclusive use of long term debt such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

self selection consistent functions abstract this paper studies collective choice rules whose outcomes consist of a collection of simultaneous decisions each one of which is the only concern of some group of individuals in society the need for such rules arises in different contexts including the establishment of jurisdictions the location of multiple public facilities or the election of representative committees we define a notion of allocation consistency requiring that each partial aspect of the global decision taken by society as a whole should be ratified by the group of agents who are directly concerned with this particular aspect we investigate the possibility of designing efficient allocation consistent rules we also explore whether such rules may in addition respect the condorcet criterion journal of economic literature classification numbers d7 d71

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

stable coalition structures with a unidimensional set of alternatives abstract we identify a class of economic and political environments that admit an s equilibrium where both free mobility and free entry are allowed we further study the relationship between the set of s equilibria and the sets of strong and coalition proof nash equilibria in the noncooperative coalition formation game which is closely related to the one originally studied by j von neumann and o morgenstern theory of games and economic behaviour princeton univ press princeton nj 1944 we also show that the set of s equilibria induces a proper subset of the coalition structure core of the corresponding characteristic function form journal of economic literature classification numbers c71 c72

optimal fiscal and monetary policy with sticky prices in this paper i consider the role of state contingent inflation as a fiscal shock absorber in an economy with nominal rigidities i study the ramsey equilibrium in a monetary model with distortionary taxation nominal non state contingent debt and sticky prices with sticky prices the ramsey planner must balance the shock absorbing benefits of state contingent inflation against the associated resource misallocation costs for government spending processes resembling post war experience introducing sticky prices generates striking departures in optimal policy from the case with flexible prices for even small degrees of price rigidity optimal policy displays very little volatility in inflation tax rates display greater volatility compared to the model with flexible prices with sticky prices tax rates and real government debt exhibit behavior similar to a random walk for government spending processes resembling periods of intermittent war and peace optimal policy displays extreme inflation volatility even when the degree of price rigidity is large as the variability in government spending increases smoothing tax distortions across states of nature becomes increasingly important and the shock absorber role of inflation is accentuated

fiscal policy with limited time commitment we propose a theory of optimal fiscal policy consistent with the observation that governments typically inherit their predecessors plans and formulate their policies over a finite future horizon we use this framework which we call limited time commitment ltc to make two contributions first in a general stochastic model we show that under an intuitive sufficient condition a chain of successive governments with ltc sustains the full commitment fc ramsey equilibrium this equivalence result clarifies in which cases existing recursive methods to solve for fc plans have a positive interpretation based on partial commitment we apply this result in two benchmark models of optimal fiscal policy with and without capital in which the fc policy is time inconsistent second we investigate the implications of ltc in a model of capital taxation in which the fc outcome cannot be achieved with finite commitment we show that the internalisation of near future tax distortions represents a key distinction with respect to the literature on no commitment nc in a calibrated version of the model we find that a single year of fiscal commitment leads to large welfare gains approximately a third of the difference between fc and nc finally we use ltc to analyse commitment to different fiscal instruments and to study the importance of state contingency in fiscal plans

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

multiple public goods lexicographic preferences and single plateaued preference rules abstract we study the problem of providing a menu of identical public goods for a group of agents with single peaked preferences over 0 1 a decision rule selects for each preference profile and for each public good a location in miyagawa 1998a phd dissertation an agent consumes of each menu without rivalry only his most preferred public good we extend preferences from 0 1 to the set of alternatives lexicographically we identify a certain agent who might leave and require population monotonicity only if he leaves the entire population when we provide two public goods we characterize the class of single plateaued preference rules by pareto optimality anonymity and population monotonicity

in search of a theory of debt management the complete market approach to government debt management argues that a portfolio of non contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits however this approach recommends huge fluctuations in positions enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications these extreme volatile and unstable features are undesirable for two reasons firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model secondly for even miniscule transaction costs governments prefer a balanced budget rather than the large positions complete markets recommends the complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness e g transaction costs liquidity effects robustness etc and which need to be explicitly incorporated into the portfolio problem