The Optimal Policy Mix to Achieve Public Debt Consolidation

Cardani, Roberta; Menna, Lorenzo; Tirelli, Patrizio

doi:10.2139/ssrn.2893025

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The Optimal Policy Mix to Achieve Public Debt Consolidation

University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 356

19 Pages Posted: 5 Jan 2017

See all articles by Roberta Cardani

Roberta Cardani

European Union - JRC-Ispra, European Commision

Lorenzo Menna

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: December 29, 2016

Abstract

In this paper we adopt a Ramsey-optimal approach to identify the combination of income taxes, public expenditure and inflation designed to achieve a fiscal consolidation. In contrast with empirical contributions that emphasize the benefits of expenditure based consolidations, the optimal policy calls for increases in taxes and inflation. Strong monetary accommodation is quite beneficial relative to a situation where the Central Bank is only concerned with inflation stability and the inflation target is defined as a ceiling, as in the Eurozone.

Keywords: Fiscal Consolidation, Limited Asset Market Participation, Ramsey Fiscal Policy

JEL Classification: E32, E62, E63

Suggested Citation: Suggested Citation

Cardani, Roberta and Menna, Lorenzo and Tirelli, Patrizio, The Optimal Policy Mix to Achieve Public Debt Consolidation (December 29, 2016). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 356, Available at SSRN: https://ssrn.com/abstract=2893025 or http://dx.doi.org/10.2139/ssrn.2893025