We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union’s members to pursue lax nonmonetary policies that in...

Fiscal policy restrictions are often criticized for limiting the ability of governments to react to business cycle fluctuations. Therefore, the adoption of quantitative restrictions is viewed as inevitably leading to increased macroeconomic volatility. In this paper we use data from 48 U.S. states to investigate how budget rules affect fiscal policy outcomes. Our key findings are that (1) stric...

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 mark-ups this implies can result in government spending crowding-in private consumption in the short run. We...

We consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life and homothetic CES preferences. Assuming gross substitutability and a capital intensive consumption good, we prove that when dynamic efficiency holds, local indeterminacy and sunspot fluctuations occur with low enough values for the sectoral elasticities of capital-labor ...

The persistence of fiscal deficits in many industrial democracies has spawned a vast theoretical literature in political economy on why nations run budget deficits, along with a sharp policy debate concerning fiscal institutions that might reduce these deficits. The debate on fiscal institutions, such as proposed balanced budget amendments for the federal government, involves relatively little ...

This paper proposes an empirical framework to study the effects of a policy regime change defined as an unpredictable and permanent change in the policy parameters. In particular I show how to make conditional forecast and perform impulse response functions and counterfactual analysis. As an application, the effects of changes in fiscal policy rules in the US are investigated. I find that discr...

This paper studies the validity of the Modigliani and Miller Irrelevance proposition in the presence of incomplete markets and portfolio restrictions. If the economy is originally in equilibrium and the firm changes its financial plan, we show that there exist state-dependent trading limits under which financial policy is always irrelevant. In addition, the no short-selling constraint usually i...

It is a great pleasure for me to discuss the essay by Karl Brunner; this continues a tradition of discussing each other’s work that dates back at least a decade. Much of Brunner’s massive survey is admirable, reflecting a deep and careful analysis of central issues in fiscal policy, and the way events have changed perceptions of fiscal policy. The comprehensive and up-to-date reference list add...