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 

 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. 

 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 negative rates 
Grading the Negative Rate Experiments: A symposium of Views (2024) 


Lectures 2-3: Fiscal Policy in a world without frictions and Rational Forward Looking Agents
The Intertemporal dimension of Fiscal Policy
Fiscal Policy and Consumption
Ricardian Equivalence
Liquidity Constraints and the limits to Ricardian Equivalence

Lectures 3-4: The Intertemporal Government  Budget Contraint
The IGBC at market prices and at face-value
The IGBC  in the data Simulating debt dynamics 
The role of money financing, Simulating debt dynamics with money financing 

Lecture 5:  A Class Exercise on simulating the IGBC
Exercise Text, a code with a solution 

Lectures 6-7: 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 8-10: Fiscal Policy Under Low Interest Rates
Debt, Deficits and interest rates
r<g,
uncertainty debt sustainability 
fiscal rules and stochastic debt sustainability analysis 
debt and welfare
Fiscal Policy in action 

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 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 

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