Download Linking Data to Optimal Policy Campbell Leith March 2016 Glasgow

Linking Data to Optimal Policy
Campbell Leith
Glasgow
March 2016
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
1 / 16
Agenda - Linking Data to Optimal Policy
Q: Can we explain evolution of debt AND ‡uctuations in the
monetary/…scal policy mix?
A: Yes, but need to add political economy elements to the policy
problem.
Q: What are the relevant political economy mechanisms we need to
add?
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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The Data and the Policy Mix
Davig and Leeper (2006), Bianchi (2012), Bianchi and Ilut(2015) and
Chen, Leeper and Leith (2015) - relatively frequent switches between
active/passive monetary and …scal policies.
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Explaining the Data/Policy Mix
Leeper and Leith(2016) - Optimal monetary …scal/monetary policy in
std. (but non-linear) new Keynesian model.
Ramsey/Commitment policy too e¤ective in controlling in‡ation to
explain the data even with longer-term debt.
Time-consistent policy can generate far greater volatility.
Dependence of policy mix on debt levels and maturity may help
explain some variation in the observed policy mix
conventional assignment - with low debt/long maturities monetary
policy stabilizes in‡ation, taxation stabilizes debt.
unconventional assignment - with high debt/short maturities roles are
reversed.
Leith and Liu(2016) - Strategic Interactions between time-consistent
monetary/…scal policy also important.
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March 2016
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Explaining the Data/Policy Mix
Chen, Leeper and Leith(2016)
Linearised New Keynesian Model
Fiscal Policy - Switches between active/passive rules and Stackelberg
leader.
Monetary Policy - Switches between more/less conservative follower.
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March 2016
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Explaining the Data/Policy Mix
US Debt/GDP and Active/Passive/Optimal Policy
140.0
120.0
Optimal Fiscal
Policy
100.0
80.0
Debt/GDP
Debt-GDP Ratio
60.0
40.0
20.0
0.0
1945
1955
1965
1975
1985
1995
2005
Year
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Linking Data to Optimal Policy
March 2016
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Explaining the Data/Policy Mix
US Debt/GDP and Active/Passive/Optimal Policy
140.0
120.0
Optimal Fiscal
Policy
Passive Fiscal
Policy
100.0
80.0
Debt/GDP
Debt-GDP Ratio
60.0
40.0
20.0
0.0
1945
1955
1965
1975
1985
1995
2005
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Explaining the Data/Policy Mix
US Debt/GDP and Active/Passive/Optimal Policy
140.0
120.0
Optimal Fiscal
Policy
Passive Fiscal
Policy
Less Conservative
Monetary Policy
100.0
80.0
Debt/GDP
Debt-GDP Ratio
60.0
40.0
20.0
0.0
1945
1955
1965
1975
1985
1995
2005
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Political Economy
Alesina and Passalaqua(2016) survey possible explanations of the
de…cit bias:
De…cits and Elections - …scal illusion/political business cycles.
Social Con‡ict - wars of attrition.
Debt as a Strategic Variable.
Bargaining in the Legislature.
Intergenerational Redistribution.
Rent Seeking/Lobbyists.
Political Scientists:
Elite (not Popular) Polarization - Barber and McCarty (2013, chpt 2).
Inequality - .McCarty(2016)
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March 2016
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Political Economy - US
US Debt/GDP & Party of President
140.0
120.0
100.0
80.0
Debt/GDP
60.0
40.0
20.0
Dem
0.0
1945
Rep
1955
Dem
1965
Rep
Dem
1975
Rep
Dem
1985
1995
Rep
2005
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Political Economy - US
US Debt/GDP, Party of President and Roll-Call Polarisation
Conservative
140.0
120.0
Mean House
Republican
100.0
80.0
Debt/GDP
Mean House
Democrat
60.0
40.0
20.0
Dem
0.0
1945
Rep
1955
Dem
1965
Rep
Dem
1975
Rep
Dem
1985
1995
Rep
2005
Liberal
Year
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March 2016
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Political Economy - US
US Debt/GDP, Party of President and Income Inequality
Quintile Ratio=19
140.0
120.0
100.0
80.0
Debt/GDP
Debt-GDP Ratio
60.0
40.0
Inequality
20.0
Dem
0.0
1945
Rep
1955
Dem
1965
Rep
Dem
1975
Rep
Dem
1985
1995
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
Rep
2005Quintile
Ratio = 0.5
March 2016
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Political Economy - UK
UK Debt/GDP & Party of Government
250
200
Lab
Con
Lab
1955
1965
Con
Con
Lab
Lab
150
Debt/GDP
100
50
0
1945
1975
1985
1995
2005
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Political Economy - UK
UK Debt/GDP, Party of Government & Manifesto Polarisation
Right
250
200
Conservative Manifesto
150
Debt/GDP
100
Labour Manifesto
50
Lab
Con
Lab
Con
Lab
Con
1975
1985
Lab
0
1945
1955
1965
1995
2005
Left
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Political Economy - UK
UK Debt/GDP, Party of Government & Income Inequality
250
Quintile Ratio =5
200
Lab
Con
Lab
Con
Con
Lab
Lab
150
Inequality
Debt/GDP
Debt-GDP
Ratio
100
50
Quintile Ratio = 0
0
1945
1955
1965
1975
1985
1995
2005
Year
Campbell Leith (Glasgow)
Linking Data to Optimal Policy
March 2016
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Conclusions
Time-consistent optimal policy can begin to explain evolution of
debt/policy mix when we allow for
nominal debt
debt maturity structure
endogenous state-dependent change in policy mix
strategic interactions between monetary and …scal policy makers.
Political economy issues may also be important.
What changed with President Reagan?
Why the di¤erence between US Republicans and UK Conservatives?
Is it Divided Government vs Parliamentary system? i.e. bargaining vs
median voter?
Is there a role for polarization and/or inequality?
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March 2016
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