Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-09T01:18:59.176Z Has data issue: false hasContentIssue false

A NOTE ON NONLINEAR FISCAL REGIMES AND INTEREST RATE POLICY

Published online by Cambridge University Press:  21 October 2014

Alessandro Piergallini*
Affiliation:
University of Rome Tor Vergata
*
Address correspondence to: Alessandro Piergallini, Department of Economics, Law and Institutions, University of Rome Tor Vergata, Via Columbia 2, 00133 Rome, Italy; e-mail: [email protected]; URL: http://www.economia.uniroma2.it/piergallini.

Abstract

Much empirical evidence finds that governments react to fiscal imbalances in a nonlinear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that nonlinear fiscal regimes alter equilibria under active and passive monetary–fiscal policies. The Fisher equation combined with nonlinear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state in which fiscal policy is active is locally saddlepath stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state that converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high-debt equilibrium along which inflation is uniquely determined.

Type
Notes
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Arestis, Philip, Cipollini, Andrea, and Fattouh, Bassam (2004) Threshold effects in the U.S. budget deficit. Economic Inquiry 42, 214222.Google Scholar
Arghyrou, Michael G. and Fan, Jingwe (2013) UK fiscal policy sustainability, 1955–2006. Manchester School 81, 961991.Google Scholar
Arghyrou, Michael G. and Luintel, Kul B. (2007) Government solvency: Revisiting some EMU countries. Journal of Macroeconomics 29, 387410.Google Scholar
Bajo-Rubio, Oscar, Diaz-Roldan, Carmen, and Esteve, Vicente (2004) Searching for threshold effects in the evolution of budget deficits: An application to the Spanish case. Economics Letters 82, 239243.Google Scholar
Bajo-Rubio, Oscar, Diaz-Roldan, Carmen, and Esteve, Vicente (2006) Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain. Journal of Macroeconomics 28, 596608.Google Scholar
Benassy, Jean-Pascal (2008) The fiscal theory of the price level puzzle: A non-Ricardian view. Macro-economic Dynamics 12 (S1), 3144.CrossRefGoogle Scholar
Benhabib, Jess, Schmitt-Grohé, Stephanie, and Uribe, Martin (2001) Monetary policy and multiple equilibria. American Economic Review 91, 167186.CrossRefGoogle Scholar
Bohn, Henning (1998) The behavior of U.S. public debt and deficits. Quarterly Journal of Economics 113, 949963.Google Scholar
Brock, William A. (1974) Money and growth: The case of long-run perfect foresight. International Economic Review 15, 750777.Google Scholar
Canzoneri, Matthew B., Cumby, Robert E., and Diba, Behzad T. (2011) The interaction between monetary and fiscal policy. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 935999. Amsterdam: North-Holland.Google Scholar
Chortareas, Georgios, Kapetanios, George, and Uctum, Merih (2008) Nonlinear alternatives to unit root tests and public finances sustainability: Some evidence from Latin American and Caribbean countries. Oxford Bulletin of Economics and Statistics 70, 645663.CrossRefGoogle Scholar
Cipollini, Andrea, Fattouh, Bassam, and Mouratidis, Kostas (2009), Fiscal readjustments in the United States: A nonlinear time-series analysis. Economic Inquiry 47, 3454.CrossRefGoogle Scholar
Considine, John and Gallagher, Liam A. (2008) UK debt sustainability: Some nonlinear evidence and theoretical implications. Manchester School 76, 320335.CrossRefGoogle Scholar
Leeper, Eric M. (1991) Equilibria under “active” and “passive” monetary and fiscal policies. Journal of Monetary Economics 27, 129147.Google Scholar
Legrenzi, Gabriella D. and Milas, Costas (2012a) Nonlinearities and the sustainability of the government's intertemporal budget constraint. Economic Inquiry 50, 988999.Google Scholar
Legrenzi, Gabriella D. and Milas, Costas (2012b) Fiscal Policy Sustainability, Economic Cycle and Financial Crises: The Case of the GIPS. CESifo working paper 4001.Google Scholar
Rossi, Raffaele (2014) Designing monetary and fiscal policy rules in a New Keynesian model with rule-of-thumb consumers. Macroeconomic Dynamics 18, 395417.Google Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 11871211.CrossRefGoogle Scholar
Sarno, Lucio (2001) The behavior of US public debt: A nonlinear perspective. Economics Letters 74, 119125.Google Scholar
Surico, Paolo (2008) The cost channel of monetary policy and indeterminacy. Macroeconomic Dynamics 12, 724735.CrossRefGoogle Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195214.Google Scholar
Woodford, Michael (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar