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Sustainable Plans and Mutual Default

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  • Chari, V V
  • Kehoe, Patrick J

Abstract

This paper presents a model of optimal taxation in which private agents and the government can default on debt. As a benchmark, the authors consider Ramsey equilibria in which the government can precommit to its policies at the beginning of time bu t in which private agents can default. They then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. The authors show that when there is sufficiently little discounting and government consumption fluctuates enough, the Ramsey allocations can be supported by a sustainable equilibrium. Copyright 1993 by The Review of Economic Studies Limited.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 60 (1993)
Issue (Month): 1 (January)
Pages: 175-95

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Handle: RePEc:bla:restud:v:60:y:1993:i:1:p:175-95

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  1. Brunner, Karl & Meltzer, Allan H., 1977. "Optimal policies, control theory and technology exports," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 1-11, January.
  2. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  3. Fudenberg, Drew & Kreps, David M & Maskin, Eric S, 1990. "Repeated Games with Long-run and Short-run Players," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 555-73, October.
  4. Prescott, Edward C., 1977. "Should control theory be used for economic stabilization?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 7(1), pages 13-38, January.
  5. Martin L. Weitzman, 1973. "Duality Theory for Infinite Horizon Convex Models," Management Science, INFORMS, vol. 19(7), pages 783-789, March.
  6. Chari V. V. & Kehoe Patrick J., 1993. "Sustainable Plans and Debt," Journal of Economic Theory, Elsevier, vol. 61(2), pages 230-261, December.
  7. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
  8. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," NBER Working Papers 1412, National Bureau of Economic Research, Inc.
  9. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  11. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
  12. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  13. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  15. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
  16. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  17. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, vol. 55(6), pages 1419-31, November.
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