Core issue: there are limits or restrictions that each policy-setting authority places on the actions of the other

Transcription

1 FISCAL AND MONETARY INTERACTIONS: PRESENT-VALUE ANALYSIS NOVEMBER 20, 2014 Inroducion CONSOLIDATED GOVERNMENT BUDGET Core issue: here are limis or resricions ha each policy-seing auhoriy places on he acions of he oher Analysis so far: he period- choices of one policy auhoriy resric choices of oher policy auhoriy in period (i.e., in shor run) Pg B T P B M M 1 1 Novemer 20,

2 Inroducion CONSOLIDATED GOVERNMENT BUDGET Core issue: here are limis or resricions ha each policy-seing auhoriy places on he acions of he oher Analysis so far: he period- choices of one policy auhoriy resric choices of oher policy auhoriy in period (i.e., in shor run) Pg B T P B M M 1 1 A more realisic view: he period- choices of one policy auhoriy may resric he choices of he oher policy auhoriy in period and/or period +1 and/or period +2 and/or period +3, Emphasizes ha he limis may no e realized immediaely, u can occur laer (in he economy s/governmen s lifeime) Requires analyzing he presen discouned value (PDV) version of he (aka lifeime ) Novemer 20, Curren Evens IN THE NEWS Changes implemened o pre-2014 U.S. fiscal plans Suppose new fiscal plans are announced for 2014 and eyond Planned expendiures g 2014, g, g 2016, Planned ax collecions T 2014, T, T 2016, Moneary policy plans in place for 2014 and eyond Perhaps an explici announcemen of ineres rae/money supply policy, or jus markes eliefs/expecaions of how moneary policy migh evolve Novemer 20,

3 Curren Evens IN THE NEWS Changes implemened o pre-2014 U.S. fiscal plans Suppose new fiscal plans are announced for 2014 and eyond Planned expendiures g 2014, g, g 2016, Planned ax collecions T 2014, T, T 2016, Moneary policy plans in place for 2014 and eyond Perhaps an explici announcemen of ineres rae/money supply policy, or jus markes eliefs/expecaions of how moneary policy migh evolve Are he moneary plans and fiscal plans consisen wih each oher? i.e., do hey saisfy he consolidaed udge consrain? Markes eliefs of wheher hey do or no refleced in prices (of goods, onds, foreign currency (Chaper 16)) and expeced fuure prices (i.e., inflaion) Novemer 20, Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 Divide y P o pu in real erms B T P B M M g P 1 1 Novemer 20,

4 Presen-Value Consolidaed GBC SEIGNORAGE REVENUE Pg B T P B M M 1 1 B T P B M g Divide y P o pu in real erms 1 1 M P sr Definiion: seignorage revenue is he real quaniy of resources he governmen raises for iself hrough he ac of money creaion Areviae sr Prining money is a source of income for he governmen! Novemer 20, Presen-Value Consolidaed GBC SEIGNORAGE REVENUE Pg B T P B M M 1 1 B T P B M g Divide y P o pu in real erms 1 1 M P sr Definiion: seignorage revenue is he real quaniy of resources he governmen raises for iself hrough he ac of money creaion Areviae sr Prining money is a source of income for he governmen! Unimporan in he U.S. (aou 1% of governmen revenue, u has een rising.) and oher developed counries Bu can e imporan in developing counries (ecause of poorlydeveloped ax collecion sysems and corrupion) Plays an imporan role in how fiscal-moneary ineracions affec exchange rae sysems (Chaper 16, which we will no sudy) Novemer 20,

5 Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 B 1 T P B g sr Divide y P o pu in real erms Novemer 20, Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 REAL value of governmen de ha mus e repaid a sar of period B 1 T P B g sr B sr g P 1 P Revenue generaed y moneary auhoriy acions Divide y P o pu in real erms Define = B /P, = T /P, and rearrange erms Revenue generaed y fiscal auhoriy acions Novemer 20,

6 Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 REAL value of governmen de ha mus e repaid a sar of period B 1 T P B g sr B sr g P 1 P Revenue generaed y moneary auhoriy acions B P 1 Divide y P o pu in real erms Define = B /P, = T /P, and rearrange erms Revenue generaed y fiscal auhoriy acions sr g P Period-+1 (same hing, jus updae suscrips) Novemer 20, Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 REAL value of governmen de ha mus e repaid a sar of period B 1 T P B g sr B sr g P 1 P Revenue generaed y moneary auhoriy acions B P P P 1 Divide y P o pu in real erms Define = B /P, = T /P, and rearrange erms Revenue generaed y fiscal auhoriy acions sr g P Period-+1 (same hing, jus updae suscrips) Novemer 20,

7 Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 REAL value of governmen de ha mus e repaid a sar of period B 1 T P B g sr B sr g P 1 P Divide y P o pu in real erms Define = B /P, = T /P, and rearrange erms Revenue generaed y moneary auhoriy acions 1 1 Revenue generaed y fiscal auhoriy acions sr g P Period-+1 (same hing, jus updae suscrips) Novemer 20, Presen-Value Consolidaed GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B T P B M M 1 1 REAL value of governmen de ha mus e repaid a sar of period B 1 T P B g sr B sr g P 1 P Divide y P o pu in real erms Define = B /P, = T /P, and rearrange erms Revenue generaed y moneary auhoriy acions 1 1 Revenue generaed y fiscal auhoriy acions sr g P Comine Period-+1 (same hing, jus updae suscrips) Complee mahemaical derivaion in Chaper 15 Use Fisher equaion Susiue in +2 and +3 and +4, ec. udge consrains Use Fisher equaion Comine Novemer 20,

8 Presen-Value Consolidaed GBC LIFETIME CONSOLIDATED GBC B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period The period- real value of mauring governmen de mus e repaid y Real value of mauring governmen de a sar of 2014 B ax g ax g ax g ( ax g )... P 1 r (1 r )(1 r ) (1 r )(1 r )(1 r ) sr sr2016 sr2017 sr r (1 r)(1 r2016) (1 r2016)(1 r2016)(1 r2... ) Novemer 20, PDV of fiscal surpluses/deficis in 2014 and eyond PDV of seignorage revenue in 2014 and eyond LIFETIME CONSOLIDATED GBC Presen-Value Consolidaed GBC B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period The period- real value of mauring governmen de mus e repaid y eiher period- and/or laer fiscal surpluses ( g is real fiscal surplus in any given year recall from Chaper 7) or year- and/or laer seignorage revenues or oh Real value of mauring governmen de a sar of 2014 B ax g ax g ax g ( ax g )... P 1 r (1 r )(1 r ) (1 r )(1 r )(1 r ) sr sr2016 sr2017 sr r (1 r)(1 r2016) (1 r2016)(1 r2016)(1 r2... ) Novemer 20, PDV of fiscal surpluses/deficis in 2014 and eyond PDV of seignorage revenue in 2014 and eyond 8

9 Presen-Value Consolidaed GBC LIFETIME CONSOLIDATED GBC B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period The period- real value of mauring governmen de mus e repaid y eiher period- and/or laer fiscal surpluses ( g is real fiscal surplus in any given year recall from Chaper 7) or year- and/or laer seignorage revenues or oh Or laer implies rolling over mauring de Borrowing anew o repay de ha is due Real value of mauring governmen de a sar of 2014 B ax g ax g ax g ( ax g )... P 1 r (1 r )(1 r ) (1 r )(1 r )(1 r ) sr sr2016 sr2017 sr r (1 r)(1 r2016) (1 r2016)(1 r2016)(1 r2... ) Novemer 20, PDV of fiscal surpluses/deficis in 2014 and eyond PDV of seignorage revenue in 2014 and eyond LIFETIME CONSOLIDATED GBC Presen-Value Consolidaed GBC B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period The period- real value of mauring governmen de mus e repaid y eiher period- and/or laer fiscal surpluses ( g is real fiscal surplus in any given year recall from Chaper 7) or year- and/or laer seignorage revenues or oh Or laer implies rolling over mauring de Borrowing anew o repay de ha is due Key idea: presen value indicaes ha oh fiscal adjusmen and money creaion policies can e used o pay governmen de Bu money creaion ypically sparks inflaion Expansion of money supply value of each uni of money falls (i.e., price of goods rises) Novemer 20,

10 Presen-Value Consolidaed GBC LIFETIME CONSOLIDATED GBC REAL value of governmen de ha mus e repaid a sar of year = PDV of all curren and fuure fiscal surpluses saring in year + PDV of all curren and fuure seignorage revenues saring in year Key idea: presen-value shows ha governmen de can e paid for y Fiscal adjusmen (a real paymen ) Money creaion policies (a nominal paymen ) Money creaion ypically sparks inflaion (Friedman effec) Expansion of money supply value of each uni of money falls (i.e., price of goods rises) Novemer 20, Long-Run Ineracions RICARDIAN VS. NON-RICARDIAN POLICY In considering dynamic (i.e., over many periods) ineracions eween fiscal and moneary policy, mos relevan case is usually when fiscal auhoriy is acive (i.e., he leader ) Novemer 20,

11 Long-Run Ineracions RICARDIAN VS. NON-RICARDIAN POLICY In considering dynamic (i.e., over many periods) ineracions eween fiscal and moneary policy, mos relevan case is usually when fiscal auhoriy is acive (i.e., he leader ) Definiion: A Ricardian fiscal policy is in place if he fiscal auhoriy ses is planned sequence of ax and spending policy o ensure ha presen-value is alanced Definiion: A non-ricardian fiscal policy is in place if he fiscal auhoriy ses is planned sequence of ax and spending policy wihou regard for wheher presen-value is alanced Wha maers is The fiscal auhoriy s enire plan for, +1, +2, +3, +4,. The fiscal auhoriy s enire plan for g, g +1, g +2, g +3, g +4,. Wheher and when he moneary auhoriy reacs o wha he fiscal auhoriy chooses Novemer 20, Long-Run Ineracions: Case 1 RICARDIAN CHANGES IN FISCAL POLICY B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a Ricardian way i.e., makes sure i changes collecion so as o alance he presenvalue Novemer 20,

12 Long-Run Ineracions: Case 1 RICARDIAN CHANGES IN FISCAL POLICY B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a Ricardian way i.e., makes sure i changes collecion so as o alance he presenvalue Quesion: Wha is he impac on moneary policy (i.e., on sr collecion)? NONE, ecause fiscal policy is eing conduced in Ricardian way (The asis for Ricardian Equivalence from Chaper 7) Novemer 20, FISCAL THEORY OF INFLATION (FTI) Long-Run Ineracions: Case 2 B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a non-ricardian way Quesion: Wha is he impac on moneary policy (i.e., on sr collecion)? Novemer 20,

13 FISCAL THEORY OF INFLATION (FTI) Long-Run Ineracions: Case 2 B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a non-ricardian way Quesion: Wha is he impac on moneary policy (i.e., on sr collecion)? If moneary auhoriy alers is plan for sr (i.e., money creaion), i has reaced ( passive ) o ensure presen-value holds Money-creaion leads o inflaion (monearis link of Chaper 14) Terminology Fiscal Theory of Inflaion Novemer 20, Long-Run Ineracions: Case 3 FISCAL THEORY OF THE PRICE LEVEL (FTPL) B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a non-ricardian way Quesion: Wha is he impac on moneary policy (i.e., on sr collecion)? If moneary auhoriy does no aler is sr plan Novemer 20,

14 Long-Run Ineracions: Case 3 FISCAL THEORY OF THE PRICE LEVEL (FTPL) B g sr 1 s s s s s P s0 x 1 rx s0 x 1 rx REAL value of governmen de ha mus e repaid a sar of period all fiscal surpluses saring in period saring in period Sar of analysis: Fiscal auhoriy has in place enire planned sequence for and g Moneary auhoriy has planned sequence for sr (i.e., money creaion) Fiscal auhoriy hen changes he precise iming of collecion u does so in a non-ricardian way Quesion: Wha is he impac on moneary policy (i.e., on sr collecion)? If moneary auhoriy does no aler is sr plan he enire adjusmen mus come via a change in he period- price level A one-ime change in prices, no a susained increase in prices Novemer 20, Moneary-Fiscal Ineracions MONETARY-FISCAL INTERACTIONS Does Congress ac in a way o ensure long-run udge alance? Someimes seems yes someimes seems no If no, hen inflaionary finance (FTI or FTPL) an imporan concern When would effecs of inflaionary finance e fel in economy? Timing no a all clear FTI: effecs of inflaionary finance fel as a long and susained (hough no necessarily very sharp) rise in inflaion In period and/or in fuure periods FTPL: effecs of inflaionary finance fel as a shor-lived u very sharp rise in inflaion A one-ime (i.e., in period ) change in prices, u no furher inflaion in fuure periods Many hisorical episodes in developing counries of FTPL Lile empirical evidence for developed counries Novemer 20,