Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence

Philippopoulos, A., Varthalitis, P. and Vassilatos, V. (2017) Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence. International Journal of Central Banking, 13(4), pp. 259-306.

Abstract

We welfare rank various tax-spending-debt policies in a New Keynesian model of a small open economy featuring sovereign interest-rate premia and loss of monetary policy independence. When we compute optimized state-contingent policy rules, our results are: (a) Debt consolidation comes at a short-term pain but the medium- and long-term gains can be substantial. (b) In the early phase of pain, the best fiscal policy mix is to cut public consumption spending to address the debt problem, and, at the same time, to cut income tax rates to mitigate the recessionary e¤ects of debt consolidation. (c) In the long run, the best way of using the fiscal space created is to reduce capital taxes.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Varthalitis, Dr Petros and Philippopoulos, Prof Apostolis
• Authors: Philippopoulos, A., Varthalitis, P., and Vassilatos, V.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: International Journal of Central Banking
• Publisher: The Association of the International Journal of Central Banking
• ISSN: 1815-4654
• ISSN (Online): 1815-7556
• Copyright Holders: Copyright © 2018 The Association of the International Journal of Central Banking
• First Published: First published in International Journal of Central Banking 13(4):259-306
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher