Fiscal Policy, Public Debt and the Term Structure of Interest Rates

by Roland Demmel

Overview

The introduction of the thesis consists of four parts: first, we motivate our chosen macroeconomic setting by looking at some real world phenomena. For a better understanding of these phenomena, we argue that the mutual dynamic interactions between flScal policy and financial markets need to be closely examined in a macroeconomic framework. Second, we review different strands of the economic literature in order to show that most of the literature has so far exclusively concentrated either on fmancial market dynamics or on flScal policy issues. We conclude that a more integrated model setting is called for in order to explain the dynamic interactions observed in reality. Third, we discuss at length the economic assumptions underlying our model. This avoids multiple repetition later on. Finally, we outline the structure of the thesis and the objectives we pursue in the different chapters. 1. 1 Motivation Fiscal policy and financial market reactions are increasingly receiving world­ wide attention. The most recent examples are the Maastricht criteria about flScal control, the South-East Asia financial crisis and the resulting IMF policy stance, the high level of public debt in developed and developing countries and the effect on interest rates and economic growth. In contrast to the still underdeveloped theoretical literature on these dynamic links, finding empirical evidence that supports the existence of these links is not a very hard task.

Product Details

ISBN-13:	9783540662433
Publisher:	Springer Berlin Heidelberg
Publication date:	10/18/1999
Series:	Lecture Notes in Economics and Mathematical Systems , #476
Edition description:	1999
Pages:	282
Product dimensions:	6.10(w) x 9.25(h) x 0.36(d)

Table of Contents

1 Introduction.- 1.1 Motivation.- 1.2 Brief review of the literature.- 1.3 General discussion of the basic model assumptions.- 1.4 Structure of the thesis 22 Appendix 1.1 25 Appendix 1.2 28 Appendix 1.3.- 2 The basic deterministic macroeconomic model.- 2.1 Introduction.- 2.2 Basic structure of the economy and the financial market.- 2.3 Decision problem of the representative household.- 2.4 Fiscal policy.- 2.5 General equilibrium.- 2.6 Capital accumulation, viability and economic growth.- 2.7 Public debt and deficit dynamics.- 2.8 Short summary 56 Appendix 2.1.- Appendix 2.2.- Appendix 2.3.- Appendix 2.4.- Appendix 2.5.- 3 The basic shastic macroeconomic model and the short-term interest rate dynamics.- 3.1 Introduction.- 3.2 Basic structure of the economy and the financial market.- 3.3 Decision problem of the representative household.- 3.4 Fiscal policy.- 3.5 Shastic general equilibrium.- 3.6 Shastic dynamics and boundary behavior of the short-term interest rate.- 3.7 Transitional and asymptotic analysis of the short-term interest rate.- 3.8 Short summary.- Appendix 3.1.- Appendix 3.2.- Appendix 3.3.- Appendix 3.4.- Appendix 3.5.- Appendix 3.6.- Appendix 3.7.- Appendix 3.8.- 4 Term structure of interest rates and fiscal policy.- 4.1 Introduction.- 4.2 Derivation and discussion of the bond price valuation quation.- 4.3 Term structure and fiscal policy analysis.- 4.4 A numerical example.- 4.5 Short summary.- Appendix 4.1.- 5 Economic growth and fiscal policy.- 5.1 Introduction.- 5.2 Local and global behavior of the capital output ratio and implications for economic growth.- 5.3 Short and long run effects of fiscal policy and interest rates on capital output and growth.- 5.4 Short summary.- Appendix 5.1.- Appendix 5.2.- 6 Public debt dynamics.- 6.1 Introduction.-6.2 Local and global behavior of the debt ratio.- 6.3 Short and long run effects of fiscal policy and interest rates on the debt ratio.- 6.4 Short summary.- Appendix 6.1.- 7 Summary, conclusions and outlook on future research.- 7.1 Summary of the main results.- 7.2 Assessment of the model results.- 7.2.1 A first step to close the gap between macroeconomics and finance literature.- 7.3 Outlook on future research.- 7.3.1 Suggestions for empirical applications.- 7.3.2 Suggestions for theoretical extensions.- A General appendix 1: Brownian motion and shastic integration.- 1.1 Brownian motion.- 1.2 Shastic integration: The Ito integral.- B General appendix 2: Shastic differential equations and diffusion processes.- 2.1 Shastic differential equations.- 2.2 Diffusion processes.- C General appendix 3: Shastic optimization and dynamic programming.