325_Lecture22_April20

325_Lecture22_April20 - FISCAL AND MONETARY INTERACTIONS:...

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1 F ISCAL AND M ONETARY I NTERACTIONS: P RESENT- V ALUE A NALYSIS A PRIL 20, 2011 April 20, 2011 2 A CTIVE VS. P ASSIVE P OLICY Introduction ± Core issue: there are limits or restrictions that each policy-setting authority places on the actions of the other ± Analysis so far: the period- t choices of one policy authority restrict choices of other policy authority in period t (i.e., in short run) ± A more realistic view: the period- t choices of one policy authority may restrict the choices of the other policy authority in period t and/or period t+ 1 and/or period t +2 and/or period t+ 3, … ± Emphasizes that the limits may not be realized immediately, but can occur later (in the economy’s/government’s lifetime) ± Requires analyzing the present discounted value (PDV) version of the consolidated GBC (aka lifetime consolidated GBC) 11 b tt t t t t t t P gB TP BMM ± ± ² ² ² ± Period- t consolidated GBC
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2 April 20, 2011 3 D ERIVING THE L IFETIME C ONSOLIDATED GBC Present-Value Consolidated GBC Divide by P t to put in real terms 11 b tt t t t t t t P gB TP BMM ± ± ² ² ² ± Period- t consolidated GBC b t t t t t tt t t BT P B M M g PPP P ± ± ± ² ² April 20, 2011 4 S EIGNORAGE R EVENUE ± Definition : seignorage revenue is the real quantity of resources the government raises for itself through the act of money creation ± Abbreviate sr t ± Printing money is a source of income for the government! ± Unimportant in the U.S. (less than 1% of government revenue) and other developed countries ± But can be important in developing countries (because of poorly- developed tax collection systems and corruption) ± Plays an important role in how fiscal-monetary interactions affect exchange rate systems (Chapter 16, which we will not study) Divide by P t to put in real terms b t t t t P ± ± ² ² ± Period- t consolidated GBC 1 1 b t t t t t t t P B g PP MM P P ± ± ± ² ² sr t
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3 April 20, 2011 5 D ERIVING THE L IFETIME C ONSOLIDATED GBC Present-Value Consolidated GBC Divide by P t to put in real terms 11 b tt t t t t t t P gB TP BMM ± ± ² ² ² ± Period- t consolidated GBC 1 b t t tt t BT P B g sr PPP ± ² ² ² Define b t = B t / P t , t t = T t / P t , and rearrange terms ³´ 1 b t tttt t t B s rtgP b P ± ²±² Revenue generated by monetary authority actions Revenue generated by fiscal authority actions REAL value of government debt that must be repaid at start of period t Period- t consolidated GBC April 20, 2011 6 D ERIVING THE L IFETIME C ONSOLIDATED GBC Divide by P t to put in real terms b t t t t P ± ± ² ² ± Period- t consolidated GBC 1 b t t P B g sr ± ² ² ² Define b t = B t / P t , t t = T t / P t , and rearrange terms 1 b t t t B s b P ± Revenue generated by monetary authority actions Revenue generated by fiscal authority actions REAL value of government debt that must be repaid at start of period t Period- t consolidated GBC 1111 1 1 b t t t B s b P ²²²² ² ² Combine Use Fisher equation Substitute in t +2 and t+ 3 and t +4, etc…. budget constraints Combine Use Fisher equation Complete mathematical
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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325_Lecture22_April20 - FISCAL AND MONETARY INTERACTIONS:...

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