Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model

Schmitt–Grohé, Stephanie; Uribe, Martı́n

doi:10.1086/ma.20.3585431

Cited by 169 publications

(63 citation statements)

References 60 publications

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“…Model (3) in Table 2 reports the results for modeling wage rigidities in the spirit of Uhlig (2007). Differently, in Models (4) and (5) wage rigidities are modeled as in Schmitt-Grohe and Uribe (2006). The household's impossibility to react freely to productivity shocks amplifies the overall level of risk.…”

Section: Resultsmentioning

confidence: 99%

Labor market dynamics, endogenous growth, and asset prices

Donadelli

Grüning

2016

Economics Letters

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h i g h l i g h t s• We introduce endogenous labor decisions into the Kung and Schmid (2015) economy.• Moreover, two variants of wage rigidities are added.• Pro-cyclical labor generates a rise in the equity risk premium of 250 basis points.• Wage rigidities produce sufficiently volatile labor hours and smooth wages. a r t i c l e i n f o a b s t r a c tWe extend the endogenous growth model of Kung and Schmid (2015) by adding endogenous labor dynamics and two variants of wage rigidities. This leads to an increase of 250-350 basis points in the risk premia, depending on the model specification. Additionally, it brings labor market quantities much closer to their empirical counterparts. In particular, wage rigidities generate an increase of around 60-250 basis points in labor growth volatility, which depends on how wage rigidities are modeled.

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Section: Resultsmentioning

confidence: 99%

Labor market dynamics, endogenous growth, and asset prices

Donadelli

Grüning

2016

Economics Letters

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“…The first wave of DSGE papers studied fiscal policy alongside monetary policy and focussed on how the stability properties of monetary policy rules are influenced by fiscal policy, basically building on Leeper's (1991) active and passive monetary policy (see e.g. Lubik, 2003, Kremer, 2004, Railavo, 2004, Schmitt-Grohé and Uribe, 2006, Leith and von Thadden, 2008, and Stehn and Vines, 2008. Another strand of literature on fiscal policy in DSGE models has tended to focus on the cyclical impact rather than debt feedback (as, for example, also in, Taylor, 2000, Auerbach, 2002, and Favero and Monacelli, 2005, while only recently, the discussion about simple stabilizing fiscal rules related to debt, their optimal design and, partly, their strategic interaction with monetary policy has been taken up (see e.g.…”

Section: Related Literaturementioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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Abstract:In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.Keywords: fiscal policy, debt brake, welfare, dsge.JEL classification: E 32, G 61, E 62. Non-technical summaryThe possibilities and limits of fiscal policy regarding economic stabilization have moved center stage lately, certainly also prompted by the current economic downturn. In this context, it is continuously stressed that it is necessary to assure sustainability of public finances and the confidence therein. This can be achieved not least by reliable consolidation after the crisis, and -at least in normal times -by rule-based budget requirements. For example, the International Monetary Fund recently identified a possible positive role for rule-based fiscal policy emphasizing that is must be sustainable and reliable if countercyclical fiscal policy is to unfold its desired effects. While in the 1970s, there seemed to be confidence in somewhat active discretionary fiscal policy, further developments have shown that rule-based actions are needed because of reasons revealed in the political economic literature. This insight is also the basis for the fiscal framework of the European (monetary) union.The focus of the present paper is on the analysis of a rule-based fiscal policy, in particular, the "debt brake", which is expected to be introduced in Germany soon and has already been implemented in Switzerland. The discussion about the introduction of the debt brake has to be seen in the context of European fiscal rules, namely the European Stability and Growth Pact (SGP). As a rule, the SGP demands roughly balanced budgets in structural terms, while letting the automatic stabilizers take effect. The corrective arm of the pact is called on particularly if the 3% deficit ceiling is violated. The 60% debt ceiling also plays a role. As German national budgetary rules have not been consistent with the European framework, and they were largely assessed as being inappropriate with a view to limiting the increase in public debt, this was the hour of birth of the "Förderalismuskommission II" (federalism reform commission), which recently agreed on a proposal for the DB.Similar to the SGP, the debt brake demands (almost) structurally balanced budgets and, thus, ties cyclically adjusted government spending (including interest on outstanding debt) to cyclically adjusted trend revenues raised by the government and, therefore, acts as an automatic stabilizer since the government finances some of its expenditures from deficits in "bad times" while accumulating surpluses...

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“…Schmitt-Grohé and Uribe (2005Uribe ( , 2007), we transform some variables and introduce some new ones.…”

Section: Transformed Variablesmentioning

confidence: 99%

Fiscal consolidation and its cross-country effects

Philippopoulos

Varthalitis

Vassilatos

2017

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We build a new Keynesian DSGE model consisting of two heterogeneous countries participating in a monetary union. We study how public debt consolidation in a country with high debt (like Italy) affects welfare in a country with solid public finances (like Germany). Our results show that debt consolidation in the high-debt country benefits the country with solid public finances over all time horizons. By constrast, in Italy, namely the country that takes the consolidation measures, such a policy is productive only in the medium and long term. Thus, although there is a conflict of national interests in shorter horizons, there is a common interest in the medium and long term. All this is with optimized feedback policy rules. By contrast, debt consolidation is welfare inferior to non-consolidation for both countries and all the time, if it is implemented in an ad hoc way, like an increase in income taxes. Therefore, the policy mix is important. Terms of use: Documents inJEL-Codes: E600, F300, H600.

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Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model

Abstract: 4Non-technical summary 5

Cited by 169 publications

References 60 publications

Labor market dynamics, endogenous growth, and asset prices

Labor market dynamics, endogenous growth, and asset prices

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Fiscal consolidation and its cross-country effects

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