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 APRIL 20, 20 Introduction ACTIVE VS. PASSIVE POLICY Core iue: there are limit or retriction that each policy-etting authority place on the action of the other Analyi o far: the period-t choice of one policy authority retrict choice of other policy authority (i.e., in hort run) Pg B = T P B M M Period-t conolidated GBC A more realitic view: the period-t choice of one policy authority may retrict the choice of the other policy authority and/or period t and/or period t2 and/or period t3, Emphaize that the limit may not e realized immediately, ut can occur later (in the economy /government lifetime) Require analyzing the preent dicounted value (PDV) verion of the conolidated GBC (aka lifetime conolidated GBC) April 20, 20 2

2 Preent-Value Conolidated GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B = T P B M M Period-t conolidated GBC Divide y P t to put in real term B T P B M M gt = P P P P t t t t t t t t t t April 20, 20 3 Preent-Value Conolidated GBC SEIGNORAGE REVENUE Pg B = T P B M M Period-t conolidated GBC B T P B M gt = P P P Divide y P t to put in real term t t t t t t t t t M P t r t Definition: eignorage revenue i the real quantity of reource the government raie for itelf through the act of money creation Areviate r t Printing money i a ource of income for the government! Unimportant in the U.S. (le than % of government revenue) and other developed countrie But can e important in developing countrie (ecaue of poorlydeveloped tax collection ytem and corruption) Play an important role in how fical-monetary interaction affect exchange rate ytem (Chapter 6, which we will not tudy) April 20,

3 Preent-Value Conolidated GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B = T P B M M Period-t conolidated GBC REAL value of government det that mut e repaid at tart of period t Bt Tt Pt Bt gt = rt P P P t t t B = r t g P Divide y P t to put in real term Define t = B t /P t, t t = T t /P t, and rearrange term ( ) t t t t t t Pt Revenue generated y monetary authority action Revenue generated y fical authority action Period-t conolidated GBC April 20, 20 5 Preent-Value Conolidated GBC DERIVING THE LIFETIME CONSOLIDATED GBC Pg B = T P B M M Period-t conolidated GBC REAL value of government det that mut e repaid at tart of period t Bt Tt Pt Bt gt = rt P P P t t t B = r t g P Divide y P t to put in real term Define t = B t /P t, t t = T t /P t, and rearrange term ( ) t t t t t t Pt Period-t conolidated GBC Revenue generated y monetary authority action Bt P t Revenue generated y fical authority action ( ) = r t g P t t t t t Comine Period-t conolidated GBC (ame thing, jut update ucript) Complete mathematical derivation in Chapter 5 Ue Fiher equation Sutitute in t2 and t3 and t4, etc. udget contraint Ue Fiher equation Comine April 20,

4 Preent-Value Conolidated GBC LIFETIME CONSOLIDATED GBC B t g r t t t = Pt = = rt = = rt Preent-value conolidated GBC Real value of maturing government det at tart of 20 B tax g tax g tax g = ( tax g )... P r ( r )( r ) ( r )( r )( r ) r r203 r204 r20 r ( r)( r203) ( r)( r203)( r2... ) April 20, 20 7 PDV of fical urplue/deficit in 20 and eyond PDV of eignorage revenue in 20 and eyond LIFETIME CONSOLIDATED GBC REAL value of government det that mut e repaid at tart of period t B t g r t t t = Pt = = rt = = rt Preent-Value Conolidated GBC Preent-value Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting conolidated GBC The period-t real value of maturing government det mut e repaid y either period-t and/or later fical urplue (t g i real fical urplu in any given year recall from Chapter 7) or year-t and/or later eignorage revenue or oth Or later implie rolling over maturing det Borrowing anew to repay det that i due Real value of maturing government det at tart of 20 B tax g tax g tax g = ( tax g )... P r ( r )( r ) ( r )( r )( r ) r r203 r204 r20 r ( r)( r203) ( r)( r203)( r2... ) April 20, 20 8 PDV of fical urplue/deficit in 20 and eyond PDV of eignorage revenue in 20 and eyond 4

5 Preent-Value Conolidated GBC LIFETIME CONSOLIDATED GBC REAL value of government det that mut e repaid at tart of period t B t g r t t t = Pt = = rt = = rt Preent-value Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting conolidated GBC The period-t real value of maturing government det mut e repaid y either period-t and/or later fical urplue (t g i real fical urplu in any given year recall from Chapter 7) or year-t and/or later eignorage revenue or oth Or later implie rolling over maturing det Borrowing anew to repay det that i due Key idea: preent value conolidated GBC indicate that oth fical adjutment and money creation policie can e ued to pay government det But money creation typically park inflation Expanion of money upply value of each unit of money fall (i.e., price of good rie) April 20, 20 9 Long-Run Interaction RICARDIAN VS. NON-RICARDIAN POLICY In conidering dynamic (i.e., over many period) interaction etween fical and monetary policy, mot relevant cae i uually when fical authority i active (i.e., the leader ) Definition: A Ricardian fical policy i in place if the fical authority et it planned equence of tax and pending policy to enure that preent-value conolidated GBC i atified Definition: A non-ricardian fical policy i in place if the fical authority et it planned equence of tax and pending policy without regard for whether preent-value conolidated GBC i atified What matter i The fical authority entire plan for t t, t t, t t2, t t3, t t4,. The fical authority entire plan for g t, g t, g t2, g t3, g t4,. Whether and when the monetary authority react to what the fical authority chooe April 20,

6 Long-Run Interaction: Cae RICARDIAN CHANGES IN FISCAL POLICY B t g r t t t Pt = = 0 rt = = 0 rt Preent-value conolidated GBC REAL value of government det that mut e repaid at tart of period t Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting Start of analyi: Fical authority ha in place entire planned equence for t and g Monetary authority ha planned equence for r (i.e., money creation) Fical authority then change the precie timing of t collection ut doe o in a Ricardian way i.e., make ure it change t collection o a to atify the preentvalue conolidated GBC April 20, 20 Long-Run Interaction: Cae RICARDIAN CHANGES IN FISCAL POLICY B t g r t t t Pt = = 0 rt = = 0 rt Preent-value conolidated GBC REAL value of government det that mut e repaid at tart of period t Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting Start of analyi: Fical authority ha in place entire planned equence for t and g Monetary authority ha planned equence for r (i.e., money creation) Fical authority then change the precie timing of t collection ut doe o in a Ricardian way i.e., make ure it change t collection o a to atify the preentvalue conolidated GBC Quetion: What i the impact on monetary policy (i.e., on r collection)??... (The ai for Ricardian Equivalence from Chapter 7 ) April 20,

7 FISCAL THEORY OF INFLATION (FTI) Long-Run Interaction: Cae 2 B t g r t t t Pt = = 0 rt = = 0 rt Preent-value conolidated GBC REAL value of government det that mut e repaid at tart of period t Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting Start of analyi: Fical authority ha in place entire planned equence for t and g Monetary authority ha planned equence for r (i.e., money creation) Fical authority then change the precie timing of t collection ut doe o in a non-ricardian way Quetion: What i the impact on monetary policy (i.e., on r collection)? April 20, 20 3 FISCAL THEORY OF INFLATION (FTI) Long-Run Interaction: Cae 2 B t g r t t t Pt = = 0 rt = = 0 rt Preent-value conolidated GBC REAL value of government det that mut e repaid at tart of period t Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting Start of analyi: Fical authority ha in place entire planned equence for t and g Monetary authority ha planned equence for r (i.e., money creation) Fical authority then change the precie timing of t collection ut doe o in a non-ricardian way Quetion: What i the impact on monetary policy (i.e., on r collection)? If monetary authority alter it plan for r (i.e., money creation), it ha reacted ( paive ) to enure preent-value conolidated GBC hold Money-creation lead to inflation (monetarit link of Chapter 4) Terminology Fical Theory of Inflation April 20,

8 Long-Run Interaction: Cae 3 FISCAL THEORY OF THE PRICE LEVEL (FTPL) B t g r t t t Pt = = 0 rt = = 0 rt Preent-value conolidated GBC REAL value of government det that mut e repaid at tart of period t Preent-dicounted value of all fical urplue tarting Preent-dicounted value of all eignorage revenue tarting Start of analyi: Fical authority ha in place entire planned equence for t and g Monetary authority ha planned equence for r (i.e., money creation) Fical authority then change the precie timing of t collection ut doe o in a non-ricardian way Quetion: What i the impact on monetary policy (i.e., on r collection)? If monetary authority doe not alter it r plan the entire adjutment mut come via a change in the period-t price level A one-time change in price, not a utained increae in price April 20, 20 5 Monetary-Fical Interaction MONETARY-FISCAL INTERACTIONS Doe Congre act in a way to enure long-run udget alance? Sometime eem ye ometime eem no If not, then inflationary finance (FTI or FTPL) an important concern When would effect of inflationary finance e felt in economy? Timing not at all clear FTI: effect of inflationary finance felt a a long and utained (though not necearily very harp) rie in inflation In period t and/or in future period FTPL: effect of inflationary finance felt a a hort-lived ut very harp rie in inflation A one-time (i.e., ) change in price, ut no further inflation in future period Many hitorical epiode in developing countrie of FTPL Little empirical evidence for developed countrie April 20,