Browsing by Subject "Redistribution"
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Item Essays on Fiscal Policies in Open Economies(2020-07) Tran Xuan, MonicaThis dissertation consists of three chapters. A unifying theme across all chapters is the interaction between government's motive for redistribution and its commitment to repay debt. The first chapter studies optimal taxation in an open economy in which the government has a redistributive motive and faces self-enforcing debt constraints that arise from its limited commitment. Redistributive policies are proportional taxes on labor and domestic saving. Optimal labor taxes decrease over time and eventually converge to a non-zero limit, and the optimal capital tax is positive in the limit. The efficient contract features front-loading distortion and back-loading efficiency, allowing the government to borrow more in the future. The model's numerical exercise shows that a stronger redistributive motive requires greater tax distortions at the beginning of time as well as a higher external debt level in the long run. The second chapter, in turn, proposes a theory of external debt sustainability based on the government’s motive for redistribution. Given the endogenous debt constraints, the value of financial autarky determines the sustainable level of debt. Financial autarky is endogenously costly because redistribution requires high labor taxes, which distort labor supply and reduce the economy's efficiency. Having access to external financing allows the government to have more redistribution, measured as the differences in individual utilities than in financial autarky at the same level of efficiency cost. Quantitatively, the theory can account for the external debt’s recent buildup in Italy and is consistent with the positive correlation between pre-tax income inequality and external debt across countries and time periods. In response to a negative productivity shock, the optimal austerity policies are increasing external borrowing and redistribution while reducing redistribution to repay debt in the future. The magnitude of these responses varies with the underlying wage inequality. The third chapter examines how income inequality affects the sovereign default risk. I study fiscal policies in a sovereign default model with heterogeneous agents and distortionary taxation. I quantify the model in the case of Spain and find that inequality worsens the debt crisis by increasing the government's incentive to default.Item Essays on International Private Debt(2021-05) Arce Munoz, FernandoThis dissertation consists of three chapters. A unifying theme across all chapters is the interaction between international private debt and government's policies. The first chapter argues that excessive international private debt increases the frequency and severity of sovereign debt crises. I develop a quantitative theory of private and public debt that allows me to measure the level of private overborrowing and its effect on the interest rate spread on public debt. In an environment where private credit is constrained by the market value of income, individually optimal private borrowing decisions are inefficient at the aggregate level. High private debt increases the probability of a financial crisis, characterized by a large deleveraging in private debt and a contraction in consumption. During such crises, the drop in consumption is amplified trough the endogenous decline in the market value of collateral. To counter this reduction, the government responds with fiscal bailouts financed with risky external public debt. This response may cause a sovereign debt crisis, which is characterized by high interest rates spreads, and in some cases, default. I find that the theory is quantitatively consistent with the evolution of international private debt, international public debt, and sovereign spreads in Spain from 1999 to 2015. I estimate that excessive private debt raised the interest rate spread on public bonds by at least 3.8 percentage points at its peak in 2012. The second chapter, in turn, proposes a theory of foreign reserves as macroprudential policy. This Chapter was written in collaboration with Julien Bengui and Javier Bianchi. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory can explain the empirical patterns of public and private international capital flows, both in the cross-section and over time. The third chapter examines the interaction between international debt and inequality. This chapter was written in collaboration with Monica Tran-Xuan. We introduce household heterogeneity in a standard model of sudden stop crises. We find that although there is overborrowing at the aggregate level this result is not true for all types of households. While high income households overborrow, low income households underborrow. In future versions of this paper we would like to study the implications of this result for the redistributional consequences of macroprudential policies.