CARLO AMBROGIO FAVERO

This course allows students to understand the constraints set on fiscal policy by the need to ensure the sustainability of public debt, the role that fiscal policy an public debt management can play within those constraints to support economic activity, and the institutions that can strengthen fiscal policy credibility, including fiscal rules, medium-term fiscal programs and spending reviews. Case studies and class exercises will be used to illustrate these issues.

Course Requirements:

• Attending Students: Students who attend will work in groups to prepare and deliver a presentation. Each group will submit presentation slides and a supporting report. Although initial readings are provided, students are encouraged to expand upon the reading list to enrich their presentations. Final grades for attending students will be calculated as an equally weighted average of their presentation and written exam scores.
• Not-Attending Students: Evaluation for not-attending students will be based solely on their written exam performance.

Pre-Requisites: To feel comfortable in this course, students should be familiar with basic macroeconomics.
Teaching Assistant: the Teaching Assistant  will follow students both on projects and on exercises
Dev Srivastava, dev.srivastava@unibocconi.it

Lecture 1: Course presentation and overview of the topics for students presentations
Slides

 Why are Government debts increasing ?
Yared, P. (2019). Rising government debt: Causes and solutions for a decades-old trend. Journal of Economic Perspectives, 33(2), 115-140. 

Fiscal Policy in Modern Macro: from the Ricardian Equivalence to Self Sustaining Deficits 
Barro, Robert J.(1974)  Are government bonds net wealth?. Journal of Political Economy, 1974, 82.6: 1095-1117.
Angeletos, G-M, Chen Lian and C.K. Wolf (2024) Can Deficits Finance Themselves ?, Econometrica, forthcoming 

 Modern Monetary Theory
Kelton S.(2020) The Deficit Myth, Hachette Book Group, New York

 The Fiscal Theory of Price Level
Cochrane, J. (2023). The fiscal theory of the price level, Princeton University Press 
Sims, C. A. (2024, May). Origins of US Inflation. In AEA Papers and Proceedings (Vol. 114, pp. 90-94). 2014 Broadway, Suite 305, Nashville, TN 37203: American Economic Association.

Government Debt Management 
The World Bank(2017) Government Debt Management: Designing Debt Management Strategies

Fiscal Rules and the SGP 
Blanchard, O. (2023). Fiscal policy under low interest rates. MIT press., Chapter 4, Debt Sustainability 
Menguy, S. (2024). Reform of the Stability and Growth Pact: Which changes for the governments?. Journal of Government and Economics, 100120. 

The case for retirement bonds 
Muralidhar, A., Galli, F., & Fano, G. (2023). Investi Nel Tuo Futuro e Nel Futuro del'Italia (Investing in the Future of Italy through a BTPPI Retirement Bond). Available at SSRN 4486371 

The debate on the possibility of a global government debt crisis 
Is a Serious Global Debt Crisis Possible: A symposium of Views (2024) 
Benigno P. and Reviglio E.(2024) European Safe Assets


Lectures 2-5: Two very different views on Fiscal Policy

• The Neoclassical View

  Public Debt Sustainability
  The Intertemporal Consumers' Budget Constraint
  The Consumption Function
  Ricardian Equivalence
  From Ricardian Equivalence to Expansionary Austerity
  The Government Intertemporal Budget Constraints

• The Keynesian View
  Fiscal Policy and Aggregate Demand
  The Possibility of Self-financing Expenditure

• A Discussion of the Two Views
  The Horizon of Consumers and Government
  Liquidity Constraints
  The Role of Demand and Supply
  Two Different Channels

• Reassessing the Two Views
  More Chances for the Keynesian View in a Neoclassical World
  More Chances for Expansionary Austerity
  Some Interesting Empirical Evidence

Slides 
The Optimal Consumption Path 
Torfs Brauer "A Very Short Intro to R" , SOLUTIONS FOR the Torfs-Brauer TO DO LIST
A class exercise,  solution (including an R code) 

Lectures 6: The Intertemporal Government  Budget Constraint
The IGBC at market prices and at face-value
Roll-over risk and GFN
The IGBC  in the data
Debt Sustainability,  Simulating debt dynamics in R  
Debt and Inflation: The role of money financing,
Money,Seignoage and the Inflation Tax
Simulating debt dynamics with seignorage in R 
Lecture Notes, Slides 

A Class Exercise on simulating the IGBC
Exercise Text, a code with a solution 

Lectures 7-8: Fiscal Multipliers and the Austerity Debate
Could fiscal expansions pay for themselves ? 
The Estimation of Fiscal Multipliers 
Endogeneity: the problem and the solutions
Narrative identification of fiscal plans
Simulation of fiscal plans and the austerity debate

Alesina, A., C. Favero and F.Giavazzi  (2019). Austerity: When it Works and when it Doesn't, Princeton University Press  

Lectures 9-10: Fiscal Policy Under Low Interest Rates
uncertainty and debt sustainability 
fiscal rules and stochastic debt sustainability analysis 
debt and welfare
Public Investment and debt sustainability 
Blanchard, O. (2023). Fiscal policy under low interest rates. MIT press.  

Lectures 11-12: Debt Instruments 
Bond Returns: Yields to maturity and holding period returns
Zero-Coupon Bonds and Coupon Bonds 
The Term Structure of Interest Rates
Nominal and Inflation Protected Bonds
Lecture Notes, Slides 

Lecture 13: Class Exercise on investing in nominal and real bonds: BTP vs BTP Italia 
Exercise text, a code with a solution 

Lectures 14-15:  Bond Mispricing and Debt Dynamics, the case for Eurobonds and a European Debt Agency
Multiple Equilibria and excessive fluctuations on bond pricing
The Role of the ECB 
The Role of Eurobonds and a European Debt Agency 
Lecture Notes, Slides

Amato, M., Belloni, E., Favero, C. A., Gobbi, L., & Priviero, L. (2024). European sovereign debt risk management: The role of a European Debt Agency. Journal of Government and Economics, 15, 100118. 
Ando, S., Dell'Ariccia, G., Gourinchas, P. O., Lorenzoni, G., Peralta-Alva, A., & Roch, F. (2023). Revisiting the Case for Debt Mutualization in the Euro Area: A Quantitative Exploration.
D’Amico, L., Giavazzi, F., Guerrieri, V., & Lorenzoni, G. (2023). Future challenges to European sovereign debt markets. The Making of the European Monetary Union 30 Years Since the ERM Crisis.
D’Amico, L., Giavazzi, F., Guerrieri, V., Lorenzoni, G., & Weymuller, C. (2021). Revising the European Fiscal Framework. URL: https://voxeu. org/article/revising-european-fiscal-framework-part-1-rules (accessed: 14.01. 2022).

Lectures 16-24:  Students' Presentations, Guest Lecture, and Final Revisions