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This paper considers optimal fiscal policy in a deterministic Lucas and Stokey (1983) economy in the absence of government commitment. In every period, the government chooses a labor income tax and issues any unconstrained maturity structure of debt as a function of its outstanding debt portfolio. We find that the solution under commitment cannot always be sustained through the appropriate choice of debt maturities, a result which contrasts with previous conclusions in the literature. This is because a government today cannot commit future governments to a particular side of the Laffer curve, even if it can commit them to future revenues. We find that the unique stable debt maturity structure under no commitment is flat, with the government owing the same amount of resources to the private sector at all future dates. We present examples in which the maturity structure converges to such a flat distribution over time. In cases where the commitment and no-commitment solutions do not coincide, debt converges to the natural debt limit.

Zonder onderwerpscode: economie

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Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.

Banks and banking, Central. --- Banker's banks --- Banks, Central --- Central banking --- Central banks --- Banks and banking --- Inflation --- Labor --- Macroeconomics --- Production and Operations Management --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Central Banks and Their Policies --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Macroeconomics: Production --- Price Level --- Deflation --- Wages, Compensation, and Labor Costs: General --- Demand and Supply of Labor: General --- Labour --- income economics --- Output gap --- Wages --- Production growth --- Labor markets --- Production --- Prices --- Economic theory --- Labor market --- United States --- Income economics

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