M t 1. - nominal interest payments on outstanding bonds T t tax revenue (lump sum) (M t M t-1 ) money created in t

Transcription

1 6. Fiscal policy 6. Governmen bude consrain G V R B where =T M M B B (6.) price level G overnmen expendiures (such as public oods) V ransfer paymens (lump sum) R B - nominal ineres paymens on ousandin bonds T ax revenue (lump sum) (M M - ) money creaed in B B - bonds issued in Governmen defici will be posiive if G > (T -V ) can finance defici in wo ways: i) in M sock, (M M - )>0 ii) in bond issues, B B Deficis 6.2. Nominal defici: M M B B which can be re-wrien as M B M B (6.2) This will be equal o he sum of overnmen expendiures, ransfers, ineres paymens, less ax revenues: G V R B T Accounin for price chanes The real defici can be wrien as: M B M B (6.3) we can hen re-wrie he nominal defici, iven price levels in he curren period:

2 M B P M B, if we sub in =, his becomes M B M B (6.4) The poin of his? (6.4) is much less han (6.2) when here is hih inflaion. 6.3Public savin, pricae savin, naional savin Public savin is jus he (-) of he bude defici: Real public savin = M B M B (6.5) We will consider various insrumens for privae savin: overnmen bonds f forein bonds B privae bonds B money M capial K B We already know ha B = 0; here is no areae privae savins hrouh privae bonds. Real privae savin: M B f B M B f B K K (6.6) Households can save by i) accumulain money (if M M ) ii) accumulain forein bonds, and iii) invesin in capial. Real naional savin = real privae savin + real public savin f B f B K K (6.8) Money and overnmen bond posiions sum o zero when privae and public secor are combined; naional savins occurs only hrouh capial accumulaion (as before) and he accumulaion of forein bonds.

3 6.4 Public deb and he household bude consrain How does a chane in public deb affec household wealh, and hrouh chanes in wealh, household behavior? We will consider he impac of a curren period ax reducion on he PV of real axes Some echnical assumpions o make he example more simple: consan P, M exoenous G Zero ransfer paymens no iniial overnmen deb, B 0 =0 overnmen bude consrain: G R B = T B B if he overnmen runs a balanced bude in every period, B B =0, and he consrain reduces o G = T Now suppose he overnmen rus a defeci of in period. - T falls by - hh income in period rises by - B = To repay he deb, he overnmen mus raise axes in fuure periods. In a simple wo-period world, if T = -, T 2 = (+R)() Chane in he PV of real axes? P [T R T ] 2 P [ R] R P [ ]=0 No areae wealh effecs for househlods, and herefore no effec on consumpion decisions Aens know ha curren ax cu mus be offse by fuure ax rises buy bonds o hede aains fuure ax increases

4 This is an example of Ricardian Equivalence Ricardian Equivalence holds even if he principal is never repaid. In his case, he overnmen jus pays ineres R each period, and B = B 2 =...= Chane in he PV of real axes? P [ R R R R...] 2 P [ R R R...] 2 P [ R R R R ] P [ ]=0 Once aain, shifs beween axes and defeci do no enerae areae wealh effecs 6.5 When does Ricardian Equivalence no hold? violaions of "concepual assumpions". Finie horizons Alive for ax cu, bu do no expec o be for fuure increase here will be a wealh effec Or do aens make decisions in conex of infiniely lived exended families? if so, inereneraional ransfers will occur o offse ax increases suffered by fuure eneraions 2. Imperfec loan markes Some aens have hiher borrowin coss (hiher R) han he overmen if so, defici financed ax cu can increase he PV of wealh, as he ov can borrow a a lower rae han possible for aens

5 3. Non lump-sum axes If T = τy, where 0<τ<, T if Y, and T if Y This reduces uncerainy over fuure disposable income Y-T, which resuls in a posiive wealh effec