Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary...

Recent attempts to incorporate optimal fiscal policy into New Keynesian models subject to nominal inertia, have tended to assume that policy makers are benevolent and have access to a commitment technology. A separate literature, on the New Political Economy, has focused on real economies where...

The paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain. Drawing on the evidence in Alesina and Ardagna (2010), we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts. We find that the...

We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model...

Fiscal consolidations, episodes where governments make large discretionary improvements in their fiscal positions, have received considerable attention, especially in EMU. The existing literature demonstrates that the composition of consolidations is a crucial determinant of their success. We...

Cross-country evidence on sub-central governments’ responses to cuts in grants received from central government shows the typical response is to adjust expenditure rather than offset cuts by raising ‘own’ revenues. Spending cuts are focused on the wage bill and, disproportionately, on...

This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a...

Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of...

The potential importance of fiscal policy in influencing inflation has recently been highlighted, following Woodford (1998), under the heading of the ‘Fiscal Theory of the Price Level’ (FTPL). Some authors have suggested that this theory provides a rationale for the Pact for Stability and...

Time-inconsistency is an essential feature of many policy problems (Kydland and Prescott, 1977). This paper presents and compares three methods for computing Markov-perfect opti- mal policies in stochastic nonlinear business cycle models. The methods considered include value function iteration,...