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THE OPTIMAL POLICY MIX TO ACHIEVE PUBLIC DEBT CONSOLIDATION

Published online by Cambridge University Press:  19 July 2018

Roberta Cardani ,
Lorenzo Menna  and
Patrizio Tirelli
Roberta Cardani*
Affiliation:
University of Milano-Bicocca
Lorenzo Menna
Affiliation:
Banco de Mexico
Patrizio Tirelli
Affiliation:
University of Milano-Bicocca and Griffith University
*
Address correspondence to: Roberta Cardani, Department of Economics, Management and Statistics (DEMS), University of Milano-Bicocca, Piazza dell’Ateneo Nuovo, 1, 20126 Milano, Italy; e-mail: roberta.cardani@unimib.it
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Abstract

In this paper, we adopt a Ramsey optimal approach to identify the combination of income taxes, public expenditure, and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure-based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.

Keywords

Fiscal ConsolidationLimited Asset Market ParticipationRamsey Fiscal Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Special Issue 1: Macroeconomic Modeling and Empirical Evidence in the Wake of the Crisis , January 2020 , pp. 113 - 129
Copyright
© Cambridge University Press 2018 

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Footnotes

R. Cardani and P. Tirelli gratefully acknowledge financial support from EC project 320278-RASTANEWS. We thank the anonymous referees, as well as participants at numerous conferences and seminars, for helpful comments and suggestions. The views expressed are those of the individual author and do not necessarily reflect official positions of Banco de Mexico.

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