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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 prone to overspending. 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 ...
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 ...
Journal Article
Fiscal policy in the Great Recession and lessons from the past
The recent behavior of key fiscal policy variables draws some parallels with the U.S. experience in the Civil War and the two world wars. A specific concern is the possibility of high inflation to finance the accumulated debt.
Journal Article
A Short History of Prices, Inflation since the Founding of the U.S.
To get an idea of the Fed?s impact on prices and inflation, look at the data before and after its creation in 1913. Learn about the gold standard?s role, too.
Is Inflation on the Way Out or Here to Stay?
An analysis suggests certain economic factors, such as excess savings, and stubborn price increases in services are risks that might delay or potentially reverse the decline in overall inflation.
Journal Article
A Closer Look at Federal Income Taxes
Tax cuts for the middle class, even minor ones, would imply big declines in revenue. Closing the deficit by taxing the rich would require major tax hikes.
2021: The Year of High Inflation
Inflationary pressure appears to have been widespread last year. And pent-up demand by consumers with plenty of savings may pressure prices further.
Journal Article
Making Ends Meet on the Federal Budget: Outlook and Challenges
With the advent of every new administration come numerous proposals to fix the federal budget, mostly involving tax code overhaul, entitlement reform and curbs on government debt. Invariably, these proposals get toned down during congressional review and often die before becoming a reality. With the various plans currently floating around, it seems like a good time to review the state and future of the federal government?s accounts.
Working Paper
Domestic Policies and Sovereign Default
A model with two essential elements, sovereign default and distortionary fiscal and monetary policies, explains the interaction between sovereign debt, default risk and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal tradeoffs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits, and increase inflation and currency depreciation rates, matching the patterns observed in the data for ...
Journal Article
Lessons from the recent recession: the faster they grow, the harder they fall
U.S. gross domestic product (GDP) contracted significantly and persistently during the recent financial crisis and recession. Lessons can be learned from comparing the U.S. experience with that of other industrialized countries.