By Roland Demmel
The creation of the thesis includes 4 components: first, we inspire our selected macroeconomic environment via a few genuine global phenomena. For a greater knowing of those phenomena, we argue that the mutual dynamic interactions among flScal coverage and fiscal markets must be heavily tested in a macroeconomic framework. moment, we assessment various strands of the commercial literature in an effort to convey that almost all of the literature has to this point completely centred both on fmancial marketplace dynamics or on flScal coverage matters. We finish extra built-in version environment is termed for which will clarify the dynamic interactions saw in fact. 3rd, we talk about at size the industrial assumptions underlying our version. This avoids a number of repetition afterward. eventually, we define the constitution of the thesis and the targets we pursue within the various chapters. 1. 1 Motivation financial coverage and monetary marketplace reactions are more and more receiving international huge awareness. the latest examples are the Maastricht standards approximately flScal keep watch over, the South-East Asia monetary challenge and the ensuing IMF coverage stance, the excessive point of public debt in constructed and constructing international locations and the impact on rates of interest and fiscal progress. unlike the nonetheless underdeveloped theoretical literature on those dynamic hyperlinks, discovering empirical proof that helps the life of those hyperlinks isn't really a really challenging task.
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Extra info for Fiscal Policy, Public Debt and the Term Structure of Interest Rates
33 dt 4. 2b) The rate of return on short-term government bonds is identical to the shortterm interest rate which will be determined in equilibrium later on. We can already conjecture that the rate of return on both assets, capital and government bonds, will be the same. The reason is that in absence of transaction costs and risk, both assets will be perceived to be perfect substitutes. The third asset 'class' consists of private bonds of arbitrary maturity that are only held by private households.
2, we evaluate the transversality condition explicitly. 20) constrains governmental tax policy. The tax rate has to be smaller than the rate of return on capital plus a term reflecting the private sector's preferences regarding present and future consumption. If tax policy violates this constraint, then the private sector is unable to achieve an intertemporal optimum. The governmental leeway in setting the tax rate is smaller the bigger y or the smaller p is. This is because a higher elasticity of substitution y or a lower rate of time preferences p leads to lower discounted marginal utility.
In a stagnating economy, it sinks more slowly than output and private income. 36) shows that the debt ratio depends on the tax rate while being the equilibrium transition path. 39) Increasing the tax rate raises the debt ratio. This implies that debt grows less strongly than output. 37b). 34): an increase in 't immediately increases the primary deficit, thereby 'steepening' its curvature. It also leads to a decrease in the 55 growth rate of primary deficits and hence to a flatter course in its time path.
Fiscal Policy, Public Debt and the Term Structure of Interest Rates by Roland Demmel