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A NOTE ON NONLINEAR FISCAL REGIMES AND INTEREST RATE POLICY

Published online by Cambridge University Press:  21 October 2014

Alessandro Piergallini
Alessandro Piergallini*
Affiliation:
University of Rome Tor Vergata
*
Address correspondence to: Alessandro Piergallini, Department of Economics, Law and Institutions, University of Rome Tor Vergata, Via Columbia 2, 00133 Rome, Italy; e-mail: alessandro.piergallini@uniroma2.it; URL: http://www.economia.uniroma2.it/piergallini.
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Abstract

Much empirical evidence finds that governments react to fiscal imbalances in a nonlinear way, through an increasing marginal response of primary surpluses to changes in debt. This paper shows that nonlinear fiscal regimes alter equilibria under active and passive monetary–fiscal policies. The Fisher equation combined with nonlinear fiscal policies leads to multiple steady states. Under passive interest rate rules, even if the steady state in which fiscal policy is active is locally saddlepath stable, there exist infinite equilibrium paths originating in the neighborhood of that steady state that converge into a high-debt trap. Under active interest rate rules, even if the steady state at which fiscal policy is active is locally unstable, there exists a saddle connection with the high-debt equilibrium along which inflation is uniquely determined.

Keywords

Nonlinear Fiscal RulesInterest Rate PolicyMultiple EquilibriaGlobal Dynamics
Type
Notes
Information
Macroeconomic Dynamics , Volume 20 , Issue 3 , April 2016 , pp. 832 - 844
Copyright
Copyright © Cambridge University Press 2014 

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