Essays in dynamic macroeconomics: public policy, household savings, and lack of commitment
Joost Röttger, Technische Universität Dortmund, Technische Universität Dortmund
2015
This dissertation consists of three chapters that study how public and private agents make decisions in the absence of commitment. Chapter 1 investigates how the option to default on debt payments affects the conduct of public policy when the government lacks commitment. It studies optimal monetary and fiscal policy without commitment for a cash-credit good economy that is extended by incorporating a discrete default choice. When the government can default on its debt, public policy is shown to
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... change in the short and the long run relative to a scenario without default option. The risk of default increases the volatility of interest rates, impeding the government's ability to smooth tax distortions across states. It also limits public debt accumulation and reduces the government's incentive to implement high inflation in the long run. Chapter 2 is also dedicated to the interaction between monetary and fiscal policy in the absence of commitment but studies the consequences of delegating monetary policy to an inflation conservative central banker. In particular, it develops a model of a small open economy that faces incomplete financial markets, risk of default and political distortions. These frictions matter for many emerging economies and might adversely affect the effectivity and desirability of monetary policy delegation. In the model, monetary and fiscal policy is set by two different authorities. Fiscal policy is chosen by a fiscal authority that exhibits a deficit bias due to political economy frictions and cannot commit to future policies, including debt repayment. Monetary policy is set by a central bank which also lacks commitment and might place a higher value on price stability than society. Despite increasing the average debt burden, the frequency of default and the volatility of fiscal policy, inflation conservatism leads to net welfare gains by successfully implementing lower and more stable inflation. Chapter 3 develops a model of a two-person household whose individual members are altruistic towar [...]
doi:10.17877/de290r-16415
fatcat:ba535dmb3ngqbid24anffgk4di