UBC Theses and Dissertations
Essays on fiscal and monetary policy during economic crises Guzman, Federico Ezequiel
Chapter 2 studies the interaction between a discretionary central bank and a fiscal authority. The analysis focuses on repeated liquidity trap episodes requiring the central bank to rely on forward guidance. Confirming earlier literature, I show that forward guidance policies can be made credible using reputation built during repeated liquidity traps. The key contribution of this chapter is to investigate how the presence of fiscal stabilization policy affects the credibility of the central bank. I show that an increase in the effectiveness of fiscal stabilization policy reduces the range of credible forward guidance announcements that the central bank can implement. Finally, I show that forward guidance can crowd out fiscal effort and result in a loose monetary-tight fiscal policy mix during recessions. Chapter 3 investigates the role of debt maturity within a model of self-fulfilling debt crises. Using one-period bonds, we characterize an interval of debt levels where creditors' panic can force a government to default, and numerically show that the government optimally lowers debt to reduce its vulnerability to this type of crises. After switching to a model with long-term debt repayable with an infinite stream of coupons, we show that the bounds of the interval where crises are self-fulfilling shift upward with higher debt maturity. Finally, we numerically show that the government decreases debt levels faster with long-term debt, therefore rising the economy's welfare compared to the short-term debt case. Fiscal devaluations are policies that can serve as stabilization tools when countries cannot implement nominal devaluations – e.g., within a monetary union. While it has been argued that fiscal policy lags can affect the impact of fiscal devaluations, chapter 4 specifically explores the incidence of implementation lags in fiscal policy in the Euro Area. My findings suggest that fiscal policy in the Eurozone is subject to considerable lags during recessions and expansions. Analysis carried out for Spain shows similar patterns. When fiscal policy cannot adjust at the business cycle frequency, I use a two-period model of tradable and nontradable goods with nominal rigidities and show how lags reduce welfare attained via fiscal devaluations.
Item Citations and Data
Attribution-NonCommercial-NoDerivatives 4.0 International