The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure...

In the context of a sticky price DSGE model subject to government expenditure and preference shocks where governments issue only nominal non-contingent bonds we examine the implications for optimal inflation of changes in the level and average maturity of government debt. We analyse these...

We show how to model portfolio models in the presence of long bonds. Specifically we study optimal fiscal policy under incomplete markets where the government issues bonds of maturity N 1. Assuming the existence of long bonds introduces an additional intertemporal mechanism that makes taxes...

In earlier work we documented two episodes in which a sharp fiscal consolidation was associated with a surprisingly large expansion in private domestic demand. In this paper we draw on further evidence to investigate if and when fiscal policy changes can have such non-Keynesian effects. In the...

A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market...

This paper is a first attempt to evaluate the economic effects of the Marshall Plan. We find that US aid had a significant impact on Europe's recovery from World War II. The recipients of large amounts of Marshall aid recovered significantly faster than other industrial countries. Strikingly,...

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of...

The post-World War II reconstruction of Western Europe was one of the greatest economic and foreign policy successes of this century. `Folk wisdom' assigns much of the credit to the Marshall Plan, which transferred some $13 billion of US aid to Europe between 1948 and 1951. We examine the...

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically,...

A central tenet of the Maastricht Treaty is that a successful European Monetary Union requires sustainable public finances of its member states. Yet there is no clear definition of sustainability. The economist’s common use of the term builds on the concept of an intertemporal budget...