50 %
50 %
Information about indiafiscal

Published on April 13, 2008

Author: Tatlises


Slide1:  New monetary economics Commitment Rules (Taylor) Fiscal theory Research and Regimes Regimes Peg? Currency board? Dollarize? Float? Interest rate rule (Taylor)? Exchange rate rule? Banks lender of last resort? Borrow domestic or foreign? Slide2:  Money demand Phillips curve “Gov’t budget constraint” Foreign or indexed debt + Nominal debt/price level = PV of future primary surpluses Or Price level shows up in two places And (1) (2) Was: (1) drives P, (2) follows along. Now: (2) can drive P, (1) follows along. Especially for developing countries Slide3:  Debt + # shares x price per share = E pv future earnings Nominal debt (including currency) is like corporate equity. Real (foreign, indexed) debt is like corporate debt. If s declines: Nominal debt (= equity): P rises Real debt (= debt): Explicit default (2) Is a valuation equation, can determine P from B,M,s, just like stock value. Dramatic implications for monetary economics: Passive M↔B (real bills), interest rate targets ok! Price level ok even in a cashless, frictionless economy (M=0)! Only government M, B matter. Private M (checks), foreign M (dollarized), private B (“liquidity”) do not matter for P. Exchange rate reflects “faith in government,” not money stocks, and is volatile. Inflation still feels like excess “aggregate demand” or “money chasing goods.” Fiscal-dominant regime for price level (2) Slide4:  Empirical example: 1997 Asia. Large prospective (not current) deficits led to crashes. Bad loans, governments will bail out banks. Can’t (won’t) raise taxes. →“Default’’ (via devaluation/inflation) on outstanding nominal debt. Fiscal roots of inflation/devaluation Source: Burnside, Eichenbaum, Rebelo JPE 2001 Fiscal roots: Could any open market operation (exchange money for nominal debt) have saved East Asia 1997, Russia 1998, Argentina 2002? IMF view. Note: danger of conventional accounting. Inflation tax not on books. Korea “paid” for bank crisis by devaluing won salaries. (BER 2002). Slide5:  Monetary regimes 1. Maximize inflation tax regime Primary surplus s = tax – spending + nominal interest x monetary base Characteristics: Own country fiat money (not dollarize, peg, gold standard, etc.) Chronic high inflation Legal restrictions to boost demand for base money Currency controls, then trade controls (Hold M, not $) Banking, finance, interest rate controls (Hold M, not bank deposits, stocks) Anti- “hoarding”, “speculation” measures. (Hold M instead!) Price controls, then quantity allocation Occurs when tax < spending Wars. (US too.) Communist countries. Developing countries. “Bad” (huge distortions), but … Must solve underlying fiscal problem to get away from it! Low High Slide6:  2. Interest rate rules (Taylor) Characteristics: Fiat currency, floating exchange rate, large or closed economy. Advantage: 1. Can, in principle, smooth real shocks Difficulties: 1. (US) Must raise interest rate more than 1-1 with inflation -Even in bad times – tempted always to “fight recession” →Time consistency, rules, central bank independence, inflation targets,… 2. Theory a mess. Does it really stabilize inflation? 3. (Developing) Needs lots of fiscal slack. - Fiscal equation is still there, tax/spend (s) must adjust to follow P. - Example: Suppose central bank deflates. Treasury must raise taxes to pay off outstanding nominal debt! - Will not solve fiscal temptation to inflate (“default” on debt). - Not an option for countries with intractable fiscal problems Even if commitment problem is solved Monetary regimes Low High Slide7:  3. Exchange rate peg, currency board Reserves do not matter! The ability to borrow reserves (against future taxes) is all that matters! Good s? Can borrow reserves Bad s? Must eventually “Default” on M,B, grab reserves, even if 100% Peg: reserve crises, “speculative attack”? Currency board: all MB 100% backed by dollar assets. What could be safer? Absent primary surpluses s, board/peg must collapse sooner or later! Argentina: Explicit default on Bf, abrogate board to “default” on B,M. Monetary regimes Low High Slide8:  4. Dollarization Pro: 1. Hard to go back. 2. No money or nominal debt to devalue. → Solves commitment problem and fiscal temptation to inflate! 3. Use global standard units. Makes trade, capital much easier. Con: 1. (Traditional) Can’t offset real shocks. But…How many hyperinflations/crashes is this ability worth? “If depreciating the currency were the key to prosperity, Brazil would be the richest country in the world.” Solution: Dollarize transactions (including clearing). “Government equity.” Reserve currency, or variable coupon debt. “Stock” advantages, dollarization advantages. Monetary regimes 2. (Fiscal -- Sims) No shock absorber. In trouble? Must explicitly default. Like a debt-only firm. Stock (nominal debt) is good! Optimal currency area depends on fiscal transfers. - US states. EU? Low High Slide9:  Money and nominal debt are like corporate equity. Foreign or real debt are like corporate debt. 2. “Stock value” can drive inflation. Composition effects (money vs. nominal debt) under central bank control can be secondary. 3. Fiscal considerations and “debt/equity” drive choice and structure of monetary regime! Low High Monetary regimes Inflation tax Taylor rule Board Dollarize Peg Summary

Add a comment

Related presentations

Related pages

India Fiscal deficit - Latest News on India Fiscal deficit ...

India Fiscal deficit - Get latest news on India Fiscal deficit. Read Breaking News on India Fiscal deficit updated and published at Zee News
Read more

India Fiscal deficit: Latest News & Videos, Photos about ...

India Fiscal deficit Latest Breaking News, Pictures, Videos, and Special Reports from The Economic Times. India Fiscal deficit Blogs, Comments and Archive ...
Read more

India fiscal health - Latest News on India fiscal health ...

India fiscal health - Get latest news on India fiscal health. Read Breaking News on India fiscal health updated and published at Zee News
Read more

India Fiscal Policy: Latest News, Photos, Videos on India ...

Find India Fiscal Policy Latest News, Videos & Pictures on India Fiscal Policy and see latest updates, news, information from NDTV.COM. Explore more on ...
Read more

What is Fiscal Year in India? - TaxPaisa

What is Fiscal Year in India? July 11, 2014 by CA. Prashant Gupta Leave a Comment. ... In India Fiscal year start from 1 st April and ends on 31 st March.
Read more

Report on the Observance of Standards and Codes: India ...

REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC) India. I. Fiscal Transparency. Prepared by the Fiscal Affairs Department. February 23, 2001. Contents
Read more

Indian Fiscal Rules: Framework and Critical Review of ...

The challenge of reining in large fiscal deficits has re-emerged in India and elsewhere. Since the mid-2000s, India’s federal and state governments have ...
Read more

Fiscal Decentralisation to Local Governments in India

Fiscal Decentralisation to Local Governments in India, Edited by M. A. Oommen This book first published 2008 by Cambridge Scholars Publishing
Read more