Fiscal Policy, Public Debt and... | Buy

The book discusses the dynamic interactions between fiscal policy and financial markets in a setting of stochastic growth and general equilibrium. In so doing, two important strands of literature are integrated: macroeconomic dynamics and mathematical finance. This enables the development of the dynamics of important financial market variables completely within the model, thus freeing the analyst from arbitrarily assuming them. Moreover, it becomes possible to analyze the influence of fiscal policy on interest rate dynamics explicitly. The effect of the interest rate dynamics on the evolution of growth and the feedback effects between public debt and interest rate dynamics are also examined in detail.

Introduction

1

(30)

Motivation

1

(4)

Brief review of the literature

5

(12)

Review of the literature on interest rate dynamics and the term structure of interest rates

6

(5)

Review of the macroeconomic literature on fiscal policy, public debt and economic growth

11

(4)

Resume

15

(2)

General discussion of the basic model assumptions

17

(5)

Structure of the thesis

22

(9)

Appendix 1.1

25

(3)

Appendix 1.2

28

(1)

Appendix 1.3

29

(2)

The basic deterministic macroeconomic model

31

(42)

Introduction

31

(1)

Basic structure of the economy and the financial market

32

(1)

Decision problem of the representative household

33

(5)

Fiscal policy

38

(1)

General equilibrium

39

(4)

Capital accumulation, viability and economic growth

43

(9)

Public debt and deficit dynamics

52

(4)

Short summary

56

(17)

Appendix 2.1

58

(2)

Appendix 2.2

60

(1)

Appendix 2.3

61

(7)

Appendix 2.4

68

(2)

Appendix 2.5

70

(3)

The basic stochastic macroeconomic model and the short-term interest rate dynamics

73

(58)

Introduction

73

(1)

Basic structure of the economy and the financial market

74

(2)

Decision problem of the representative household

76

(5)

Fiscal policy

81

(1)

Stochastic general equilibrium

81

(8)

Stochastic dynamics and boundary behavior of the short-term interest rate

89

(11)

Transitional and asymptotic analysis of the short-term interest rate

100

(11)

Short summary

111

(20)

Appendix 3.1

113

(5)

Appendix 3.2

118

(2)

Appendix 3.3

120

(1)

Appendix 3.4

121

(1)

Appendix 3.5

122

(2)

Appendix 3.6

124

(1)

Appendix 3.7

125

(3)

Appendix 3.8

128

(3)

Term structure of interest rates and fiscal policy

131

(38)

Introduction

131

(2)

Derivation and discussion of the bond price valuation equation

133

(6)

Term structure and fiscal policy analysis

139

(14)

The term structure relation

139

(4)

Conditions for the most characteristic term structure slopes

143

(4)

Structural impact of fiscal policy on the term structure

147

(6)

A numerical example

153

(5)

Short summary

158

(11)

Appendix 4.1

159

(10)

Economic growth and fiscal policy

169

(36)

Introduction

169

(2)

Local and global behavior of the capital output ratio and implications for economic growth

171

(17)

Short and long run effects of fiscal policy and interest rates on capital output and growth

188

(7)

Short run effects

188

(3)

Long run effects

191

(4)

Short summary

195

(10)

Appendix 5.1

196

(6)

Appendix 5.2

202

(3)

Public debt dynamics

205

(24)

Introduction

205

(1)

Local and global behavior of the debt ratio

206

(12)

Short and long run effects of fiscal policy and interest rates on the debt ratio

218

(8)

Short run effects

218

(3)

Long run effects

221

(5)

Short summary

226

(3)

Appendix 6.1

227

(2)

Summary, conclusions and outlook on future research

229

(14)

Summary of the main results

229

(6)

Assessment of the model results

235

(4)

A first step to close the gap between macroeconomics and finance literature

235

(2)

Fiscal policy, growth and endogenous financial market reactions

237

(2)

Outlook on future research

239

(4)

Suggestions for empirical applications

239

(1)

Suggestions for theoretical extensions

240

(3)

A General appendix 1: Brownian motion and stochastic integration

243

(6)

1.1 Brownian motion

243

(2)

1.2 Stochastic integration: The Ito integral

245

(4)

B General appendix 2: Stochastic differential equations and diffusion processes

249

(10)

2.1 Stochastic differential equations

249

(6)

2.2 Diffusion processes

255

(4)

C General appendix 3: Stochastic optimization and dynamic programming

259

(6)

Bibliography

265

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