Abstract
This thesis consists of four chapters that provide a macroeconomic analysis of fiscal policy and public debt, which have gained significant attention in Europe and the United States in recent times. The first chapter introduces a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for examining the impact of fiscal policy changes on economic aggregates. It reviews the existing DSGE framework in literature on fiscal policy with distortionary taxation. Additionally, the chapter compares the economic impact of fiscal shocks under different fiscal rules. The simulation results are compared with existing literature, showing consistency with previous findings regarding the effects of fiscal policy on output, consumption, labour, wages, and investment. Inflation is minimally affected. The results concerning the impact of fiscal shocks are consistent across different fiscal rules, except for the tax on capital. The second chapter, a joint work with Aicha Kharazi, examines the effects of income taxation on the labour market and its role in explaining hours worked dynamics. We construct a Real Business Cycle (RBC) model with two agents. Through impulse response functions, we show that a shock to income taxes affects differently the two agents, suggesting a heterogeneous and negative response of labour supply. To test these results, the chapter provides microeconomic evidence from the US Current Population Survey, which indicates that high-income individuals are taxed proportionally less than low-income individuals. Additionally, we find that the labour elasticity with respect to income tax is positive. The third chapter is a joint work with Marco Lorusso and Francesco Ravazzolo. In this chapter we quantitatively evaluate an alternative way of public debt financing. Specifically, we develop and estimate a New Keynesian model to analyse the effects of a fiscal stimulus that is financed through money supply. As a result, the public debt does not increase. Through our impulse response analysis, we find a positive impact of monetary-financing on economic aggregates. The chapter contributes to the literature by providing a quantitative counterfactual analysis of utilising the money supply to finance fiscal stimuli. The fourth chapter, a joint work with Stefan Franz Schubert, explores the relationship between the public debt-to-GDP ratio and the velocity of money zero maturity (MZM) in the United States. Our findings suggest that the public debt-to-GDP ratio Granger-causes velocity from 1959Q1 to 2019Q4. To further investigate these findings, we analyse this relationship through the lens of a New Keynesian model with fiscal policy shocks. This analysis contributes to literature by introducing a determinant of money velocity, offering insights into the transmission mechanisms of fiscal policy shocks.