Essays on Macroeconomic Dynamics

Abstract

This dissertation is comprised of three papers devoted to several recent macroeconomic problems. The first two chapters are devoted to the questions of optimal fiscal policy, in particular, to the issues of optimal public debt and deficit under the conditions of aggregate uncertainty and governmental imperfections. The problem of optimal public debt regulation is of particular importance nowadays, when seemingly developed countries face threads of unsustainable debt levels. The first chapter explains different, persistent and large public debt levels in developed countries by the presence of public corruption in these countries. The second chapter studies stochastic behavior of public debt and deficit in the time-consistent setup. The third chapter is devoted to not the least important problem of periodic financial crises that hit developed economies. It proposes evidence in favor of cautious attitude towards too fast financial development of the economies, which are not characterized by corresponding development in other, productive sectors. The first chapter proposes a possible explanation of different and positive government debt levels observed in developed economies. It builds a simple model that relates the level of government debt to the degree of corruptness of the public officials in the country, using neoclassical economy framework with discretionary and non-benevolent government. Public corruption results in higher public debt levels in the steady state. The model reproduces about 76\% of variation in debt-to-GDP levels in a sample of advanced OECD countries as a function of the measure of public corruption in these countries. In the empirical part the assumptions and predictions of the model are tested in a panel of OECD member states. The second chapter considers the implications of optimal taxation for the stochastic behavior of debt and deficit in the economy with discretionary government, focusing on Markov perfect equilibria. It concludes that in such time-consistent setup in case of market incompleteness the properties of the variables are very similar to those in the full commitment case. Moreover, debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit, which is in accordance with empirical evidence from U.S. data. This result, in contrast to the full commitment case, holds regardless whether the government pursues its optimal fiscal policy under complete markets, or under incomplete markets. The third chapter, based on the joint work with Lorenzo Ductor, investigates possible negative influence of financial development on economic growth. It defines excess finance as a level of the difference between the growth in financial sector and growth in productive sector of the economy, under which the aggregate output decreases. Based on panel data for 33 OECD economies, it is shown, that for smooth economic development the equilibrated growth of both productive (real) and financial sectors is required. Whenever financial development exceeds the development of productive industries by 4.5\% (when measured in terms of growth rates of the two sectors output), there is a thread of reaching the productive capacity bound of the economy, with consequent "financial" crisis. The existence of excess financial development may be justified by the theory of informational overshooting.