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 based on the lecture notes made available. Each group will submit presentation slides to be shared in Blackboard. 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  for the course is Dev Srivastava, dev.srivastava@unibocconi.it
 

MOCK EXAM May 13th 2025 with solutions , EXAM May 2025 with solutions, 

Lecture 1: Course presentation
Lecture Notes, Slides
Blanchard O.(2025) What About Fiscal Policy ?, Keynote Speech at the Central Bank of Chile 

Lecture 2: The Neoclassical View Lectures Notes 2&3

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

Lecture 3

• 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

Lecture 4: Class Exercise 1 (Fiscal Multiplier in the K world)
Text of the Exercise at the end of Lecture Notes, 

Lecture 5: Class Exercise 2 (Optimal Consumption in the NC world)

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

Lecture 6: The Intertemporal Government  Budget Constraint Lecture Notes for Lectures 6&7
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  

Lecture 7: IGBC with money financing
Debt and Inflation: The role of money financing,
Money, Seignoage and the Inflation Tax
Simulating debt dynamics with seignorage in R 
 

Lecture 8: Class Exercise 3 (on simulating the IGBC)
Text of the Exercise at the end of Lecture Notes,  Code

Lecture 9: Measuring the Effect of Fiscal Policy (Part I) Lecture Notes for 9&10

Simple Model
Identification and Exogeneity
Weak Exogeneity

Lecture 10: Measuring the Effect of Fiscal Policy (Part II)

Strong Exogeneity
Policy Simulation
Realistic Model
Measuring Fiscal Multiplier

Lecture 11: Class Exercise 4 (Multipliers with simulations)

Text of the Exercise at the end of Lecture Notes, code

 Lecture 12: Empirical Evidence on Fiscal Multipliers Lecture Notes

Estimates
Tax and Transfer Multipliers
 Central Bank models

Lecture 13: Stochastic Debt Sustainability Analysis (SDSA)

The dynamics of (r-g)
Blanchard book model
Application to Italian data
Fiscal rules and stochastic debt sustainability analysis(SDSA) 

Lecture notes on SDSA, an R code for basic SDSA, a simple application of SDSA with R, the data for the simple application, Running SDSA with the Blanchard Model in Rshiny 

Lecture 14: Class Exercise 5 (SDSA)

Text of the Exercise at the end of Lecture Notes, Solution (code)

Lecture 15: Why Government Debt Keeps Rising Lecture Notes for 15&16

Normative Theories
Political Economy
Dynamic Inefficiency

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

Lecture 16: Demographic Dynamics and Public Debt

Demographic Dynamics ad Debt Dynamics

Lecture 17: Class Exercise 6

Text of the Exercise at the end of Lecture Notes, Solution , Code

Lectures 18: Debt Instruments Lecture Notes for 18&19
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 19: Optimal Debt Management

Lecture 20: Class Exercise 7 (investing in nominal and real bonds: BTP vs BTP Italia )

Text of the Exercise at the end of Lecture Notes, an R code to help you to solve the exercise  

Lectures 21-22:  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, 

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).