Bank Of Greece Sa · ATHEX:TELL
Bank Of Greece Sa — Technical Presentation (September 2022)
24 slides from Bank Of Greece Sa's technical presentation, Sep 30, 2022
Slide 1: Passive Monetary Policy and Active Fiscal Policy in a Monetary Union
Passive Monetary Policy and Active Fiscal Policy in a Monetary Union Bartosz Maćkowiak Sebastian Schmidt European Central Bank & CEPR European Central Bank & CEPR Athens, 30 September 2022 The views expressed here are solely those of the authors 1 / 23
Slide 2: Question and motivation
Question and motivation How is the price level in a monetary union determined when the central bank keeps the nominal interest rate constant for a long time and buys, or stands ready to buy, government bonds? After the financial crisis of 2008, the ECB cut its policy rates sharply. The policy rates
Slide 3: More motivation: Fiscal backing for price stability in a monetary union
More motivation: Fiscal backing for price stability in a monetary union It is interesting to study active fiscal policy also because “for the price level to be uniquely determined, fiscal policy must be seen to ‘back’ the price level” (Del Negro and Sims, 2015). “Fiscal backing” is the idea that fis
Slide 4: What we do
What we do We extend the fiscal theory of the price level to the case of a heterogenous monetary union. The common central bank pursues passive monetary policy, and fiscal policy at the level of the union is active. Different configurations of national fiscal policies and a common fiscal policy with
Slide 5: Literature
Literature FTPL classics: Leeper (1991), Sims (1994), Woodford (1994), and Cochrane (2022) who writes: “The ECB is becoming a more classic fiscal theory of the price level operation, money backed by collective general government surpluses (...).” Very few FTPL papers study a homogenous monetary unio
Slide 6: Model: Consumption baskets and price levels
Model: Consumption baskets and price levels I > 1 countries with a common central bank, in each country i there is a representative household and a fiscal authority. Household i receives an endowment of good i, Yit , in every period t. The I goods are traded. The consumption basket allows for home b
Slide 7: Model: Flow budget constraints
Model: Flow budget constraints National fiscal authority i: (1 + ρi Qit ) Bit−1 = Wit Sit +Wit Zit + Qit Bit , where Bit = ∑ BHjit + BCB it j The central bank: ∑i (1 + ρi Qit ) BCB CB it−1 − Rt−1 ∑i Hit−1 = ∑i Wit Zit + ∑i Qit Bit − ∑i Hit Sometimes, it is helpful to think of the previous equation a
Slide 8: Model: Intertemporal budget constraint of the public sector in the union
Model: Intertemporal budget constraint of the public sector in the union Let P̃it ≡ Pit /Pt and Θitk ≡ β k (λit+k /λit ) P̃it /P̃it+k , where k ≥ 0, β ∈ (0, 1), and λit is the period t marginal value of wealth to household i. Household i optimization implies that transversality condition holds " !#
Slide 9: Benchmark passive-money active-fiscal configuration
Benchmark passive-money active-fiscal configuration The central bank chooses an inflation target Π ≥ 1 and pays a time-invariant interest rate on reserves Rt = R consistent with this target, R = Π/β . National fiscal authority i sets S̃it = S̃i > 0, except that in period 0 there may be a one-time un
Slide 10: Analytical result and parameterization
Analytical result and parameterization We focus on the case I = 2 and Yit = Yi . When θ = 1 (a unit trade elasticity), we prove that there exists a unique equilibrium path {Pt , Pit ,Wit , Qit ,Cit }. More generally, we solve the model numerically. Let us assume that the two countries symmetric (n1
Slide 11: Baseline (no shocks) and symmetric fiscal expansion
Baseline (no shocks) and symmetric fiscal expansion 1.06 1.06 1.0005 1.0005 1.04 1.04 1.0000 1.0000 1.02 1.02 1.00 1.00 0.9995 0.9995 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0.004 0.004 0.5005 0.5005 0.002 0.002 0.5000 0.5000 0.000 0.000 -0.002 -0.002 0.4995 0.4995 -0.004 -0.004 0 2 4 6 8 0 2 4 6 8
Slide 12: Asymmetric fiscal expansion
Asymmetric fiscal expansion 1.06 1.06 1.0005 1.0005 1.04 1.04 1.0000 1.0000 1.02 1.02 1.00 1.00 0.9995 0.9995 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0.004 0.004 0.5005 0.5005 0.002 0.002 0.5000 0.5000 0.000 0.000 -0.002 -0.002 0.4995 0.4995 -0.004 -0.004 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 Line
Slide 13: Benchmark passive-money active-fiscal configuration: Summary
Benchmark passive-money active-fiscal configuration: Summary In a monetary union, the benchmark passive-money active-fiscal policy mix determines a unique price level for the union and a unique price level for each country. Fiscal expansions or contractions move the price level of the union. When th
Slide 14: Configuring national policies and a common fiscal authority
Configuring national policies and a common fiscal authority National fiscal authority i: Qit−1 Bit−1 S̃it = φit + φB , φB > β −1 − 1 Pt−1 A common fiscal authority with Eurobonds: (1 + ρQt ) Ft−1 /Pt = S̃tF + Qt Ft /Pt , S̃tF ≡ ∑i S̃itF ∑i Qit−1 Bit−1 S̃itF = ni S̃tF , S̃tF = φtF − φB Pt−1 ∑i S̃it +
Slide 15: Asymmetric fiscal expansion with Eurobonds
Asymmetric fiscal expansion with Eurobonds 1.0005 1.0005 1.06 1.06 1.04 1.04 1.0000 1.0000 1.02 1.02 0.9995 0.9995 1.00 1.00 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0.004 0.004 0.5005 0.5005 0.002 0.002 0.5000 0.5000 0.000 0.000 -0.002 -0.002 0.4995 0.4995 -0.004 -0.004 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8
Slide 16: Asymmetric fiscal expansion with Eurobonds
Asymmetric fiscal expansion with Eurobonds 1.0005 1.0005 1.06 1.06 1.04 1.04 1.0000 1.0000 1.02 1.02 0.9995 0.9995 1.00 1.00 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0.004 0.004 0.5005 0.5005 0.002 0.002 0.5000 0.5000 0.000 0.000 -0.002 -0.002 0.4995 0.4995 -0.004 -0.004 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8
Slide 17: Model with Eurobonds: Summary
Model with Eurobonds: Summary The national fiscal policies are standard and passive, and a modestly-sized common fiscal authority leans against the national policies appropriately. This yields price level determinacy. Asymmetric deficits or surpluses do not produce cross-country wealth transfers or
Slide 18: Additional analysis in the paper
Additional analysis in the paper Extensions: The central bank follows a passive feedback rule for interest rate setting. The central bank holds private debt instead of government debt. The monetary base consists of reserves and currency that provides liquidity services. The national fiscal authoriti
Slide 19: Conclusion
Conclusion We extended the fiscal theory of the price level to the case of a heterogenous monetary union. In a monetary union, there are different ways to implement active fiscal policy and the effects of fiscal policy can be very different depending on how active fiscal policy is implemented. A key
Slide 20: Euro area interest rates and inflation, 2008Q1-2021Q4
Euro area interest rates and inflation, 2008Q1-2021Q4 back 5 Main refinancing rate Deposit facility rate Percent per annum 4 Inflation rate 3 2 1 0 -1 2008 2010 2012 2014 2016 2018 2020 19 / 23
Slide 21: Definition of perfect foresight equilibrium
Definition of perfect foresight equilibrium back A perfect foresight equilibrium is a sequence of allocations {Cit } and prices Pt , P̃it , W̃it , Qit , i = 1, 2, t ≥ 0, that solves the following system of equations: ∑ j 1 + ρ j Q j0 ∑i BH ! i j,−1 + R−1 ∑i Hi,−1 ∞ = ∑ β k ∑ S̃ik P0 k=0 i H ∑ j 1 +
Slide 22: Balance of payments identity
Balance of payments identity back Solving forward the balance of payments identity of country 1, assuming for simplicity that BCB i jt = 0 for j 6= i and t ≥ 0 (NCB i holds only debt of fiscal authority i), we obtain: (1 + ρ2 Q2 ) BH H 12t−1 + RT12t−1 − (1 + ρ1 Q1 ) B21t−1 Pt T H H T Q2 B12t+T + T12
Slide 23: Extension with default on bonds in equilibrium
Extension with default on bonds in equilibrium The policy mix is the benchmark passive-money active-fiscal configuration, but we abandon perfect foresight. In period 0, agents learn that in period T ≥ 1 country 2 will run a deficit. With probability d the country will default, with probability 1 − d
Slide 24: Asymmetric fiscal expansion with default risk
Asymmetric fiscal expansion with default risk Lines with points: baseline, no shocks. Lines with circles: expansion in country 2 with no default. Lines with squares: same expansion with default. 23 / 23
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