Kiel Working Papers, Kiel Institute for World Economics
No 1676:
Exit Strategies
Ignazio Angeloni, Ester Faia and Roland Winkler
Abstract: We study alternative scenarios for exiting the post-crisis
fiscal and monetary accommodation using the model of Angeloni and Faia
(2010), that combines a standard DSGE framework with a fragile banking
sector, suitably modified and calibrated for the euro area. Credibly
announced and fast fiscal consolidations dominate – based on simple
criteria – alternative strategies incorporating various degrees of
gradualism and surprise. The fiscal adjustment should be based on spending
cuts or else be relatively skewed towards consumption taxes. The phasing
out of monetary accommodation should be simultaneous or slightly delayed.
We also find that, contrary to widespread belief, Basel III may well have
an expansionary macroeconomic effect
Keywords: exit strategies, debt consolidation, fiscal policy, monetary policy, capital requirements, bank runs; (follow links to similar papers)
JEL-Codes: E63; (follow links to similar papers)
54 pages, January 2011
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