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Journal Article
Monetary Policy and the Output Gap
Overestimating how far the economy is away from its potential unnecessarily risks delaying the end of unusual monetary accommodation.
Journal Article
Sovereign debt: a modern Greek tragedy
The authors of this article provide a general introduction to the concept of sovereign debt?including the seductive nature of borrowing and the strategies associated with default?before analyzing the current debt crises in Europe. They focus on Greece?s current woes but also discuss Portugal, Ireland, Italy, and Spain. The authors also discuss the environment in the United States, which has a high debt burden of its own, and present fiscal choices for policymakers and taxpayers.
Journal Article
Economic Realities and Consequences of the COVID-19 Pandemic—Part II: The Economy and Fiscal Policy
The economy is showing both positive and negative reactions to shutdown measures.
What Are the Risks for Future Inflation?
U.S. inflation has surged in recent months. What are some of the upside and downside risks for future inflation?
Working Paper
How to Starve the Beast: Fiscal and Monetary Policy Rules
Societies often rely on simple rules to restrict the size and behavior of governments. When fiscal and monetary policies are conducted by a discretionary and profligate government, I find that revenue ceilings vastly outperform debt, deficit and monetary rules, both in effectiveness at curbing public spending and welfare for private agents. However, effective revenue ceilings induce an increase in deficit, debt and inflation. Under many scenarios, including recurrent adverse shocks, the optimal ceiling on U.S. federal revenue is about 15% of GDP, which leads to welfare gains for private ...
Working Paper
How to Starve the Beast: Fiscal Policy Rules
Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of revenue, deficit and debt rules when governments are discretionary and profligate. The optimal prescription is a revenue ceiling coupled with a balance budget requirement. For the U.S., the optimal revenue ceiling is about 15% of output, 3 percentage points below the postwar average. Most of the benefits can still be reaped with a milder constraint or escape clauses during adverse times. Imposing a single fiscal ...
Working Paper
Government policy in monetary economies
I study how the general and specific details of a micro founded monetary framework affect the determination of policy when the government has limited commitment. The conduct of policy depends on the interaction between the incentive to smooth distortions intertemporally and a time-consistency problem. In equilibrium, fiscal and monetary policies are distortionary, but long-run policy is not afflicted by time-consistency problems. Policy variables in specific applications of the general framework react similarly to variations in fundamentals. Nevertheless, resolving certain environment ...
Working Paper
Fiscal Dominance
Who prevails when fiscal and monetary authorities disagree about the value of public expenditure and how much to discount the future? When the fiscal authority sets debt as its main policy instrument it achieves fiscal dominance, rendering the preferences of the central bank, and thus its independence, irrelevant. When the central bank sets the nominal interest rate it renders fiscal impatience (its debt bias) irrelevant, but still faces its expenditure bias. I find that the expenditure bias has a major impact on welfare through higher public spending, while the effect on other policies is ...
Working Paper
Policy Rules and Large Crises in Emerging Markets
Emerging countries have increasingly adopted rules to discipline government policy. The COVID-19 shock lead to widespread suspension and modification of these rules. We study rules and flexibility in a sovereign default model with domestic fiscal and monetary policies and long-term external debt. We find welfare gains from adopting monetary targets and debt limits during normal times. Though government policy cannot itself counteract fundamental shocks hitting the economy, the adoption of rules has a significant impact on policy, macroeconomic outcomes and welfare during large, unexpected ...
Working Paper
The Economic Impact of COVID-19 around the World
For over two years, the world has been battling the health and economic consequences of the COVID-19 pandemic. This paper provides an account of the worldwide economic impact of the COVID-19 shock, measured by GDP growth, employment, government spending, monetary policy, and trade. We find that the COVID-19 shock severely impacted output growth and employment in 2020, particularly in middle-income countries. The government response, mainly consisting of increased expenditure, implied a rise in debt levels. Advanced countries, having easier access to credit markets, experienced the highest ...