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Creator: Kehoe, Patrick J. and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 543 Abstract:
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies
Palavra-chave: Fiscal externalities, Cross-country externalities, International transfers, Optimal currency area, Cross-country transfers, International financial markets, and Cross-country insurance Sujeito: G28 - Financial Institutions and Services: Government Policy and Regulation, F33 - International Monetary Arrangements and Institutions, F38 - International Financial Policy: Financial Transactions Tax; Capital Controls, F42 - International Policy Coordination and Transmission, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, G33 - Bankruptcy; Liquidation, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G15 - International Financial Markets, and F35 - Foreign Aid
Creator: Aguiar, Mark and Amador, Manuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 518 Abstract:
We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and the domestic households are impatient relative to the international interest rate. The front loading of tax distortions allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism, providing a link with the closed-economy literature that has explored disagreement between the government and its citizens regarding inter-temporal tradeoffs.
Palavra-chave: Limited commitment, Fiscal policy, and Sovereign debt Sujeito: F34 - International Lending and Debt Problems, F38 - International Financial Policy: Financial Transactions Tax; Capital Controls, E62 - Fiscal Policy, and F32 - Current Account Adjustment; Short-term Capital Movements