Ebook: Fiscal Policy, Public Debt and the Term Structure of Interest Rates

The introduction of the thesis consists of four parts: first, we motivate our chosen macroeconomic setting by looking at some real world phenomena. For a better understanding of these phenomena, we argue that the mutual dynamic interactions between flScal policy and financial markets need to be closely examined in a macroeconomic framework. Second, we review different strands of the economic literature in order to show that most of the literature has so far exclusively concentrated either on fmancial market dynamics or on flScal policy issues. We conclude that a more integrated model setting is called for in order to explain the dynamic interactions observed in reality. Third, we discuss at length the economic assumptions underlying our model. This avoids multiple repetition later on. Finally, we outline the structure of the thesis and the objectives we pursue in the different chapters. 1. 1 Motivation Fiscal policy and financial market reactions are increasingly receiving world­ wide attention. The most recent examples are the Maastricht criteria about flScal control, the South-East Asia financial crisis and the resulting IMF policy stance, the high level of public debt in developed and developing countries and the effect on interest rates and economic growth. In contrast to the still underdeveloped theoretical literature on these dynamic links, finding empirical evidence that supports the existence of these links is not a very hard task.

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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.

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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.
Content:
Front Matter....Pages I-X
Introduction....Pages 1-29
The basic deterministic macroeconomic model....Pages 31-71
The basic stochastic macroeconomic model and the short-term interest rate dynamics....Pages 73-129
Term structure of interest rates and fiscal policy....Pages 131-168
Economic growth and fiscal policy....Pages 169-203
Public debt dynamics....Pages 205-228
Summary, conclusions and outlook on future research....Pages 229-241
Back Matter....Pages 265-282

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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.
Content:
Front Matter....Pages I-X
Introduction....Pages 1-29
The basic deterministic macroeconomic model....Pages 31-71
The basic stochastic macroeconomic model and the short-term interest rate dynamics....Pages 73-129
Term structure of interest rates and fiscal policy....Pages 131-168
Economic growth and fiscal policy....Pages 169-203
Public debt dynamics....Pages 205-228
Summary, conclusions and outlook on future research....Pages 229-241
Back Matter....Pages 265-282
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