Optimal Fiscal and Monetary Policy, Debt Crisis and Management

Cristiano Cantore, Paul Levine (), Giovanni Melina and Joseph Pearlman

No 2017/078, IMF Working Papers from International Monetary Fund

Abstract: The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds–under commitment–the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.

Keywords: WP; monetary policy; Optimal fiscal-monetary policy; debt consolidation; long-term debt; fiscal limits; government debt; GDP ratio; debt-deflating inflation volatility; GDP scenario; debt shock; Bonds; Debt management; Global (search for similar items in EconPapers)
Pages: 44
Date: 2017-03-30
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: OPTIMAL FISCAL AND MONETARY POLICY, DEBT CRISIS, AND MANAGEMENT (2019)
Working Paper: Optimal Fiscal and Monetary Policy, Debt Crisis and Management (2017)
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