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Sustainable Plans and Debt

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Author Info

  • Chari V. V.
  • Kehoe Patrick J.

Abstract

This paper presents a simple general equilibrium model of optimal taxation similar to that of Lucas and Stokey (1983), except that we let the government default on its debt. As a benchmark, we consider Ramsey equilibria in which the government can precommit its policies at the beginning of time. We then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. We concentrate on trigger mechanisms which specify reversion to the finite horizon equilibrium after deviations by the government. The main result is that no Ramsey equilibrium with positive debt can be supported by such trigger mechanisms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 61 (1993)
Issue (Month): 2 (December)
Pages: 230-261

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Handle: RePEc:eee:jetheo:v:61:y:1993:i:2:p:230-261

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Web page: http://www.elsevier.com/locate/inca/622869

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  1. 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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  9. 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.
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  12. Drew Fudenberg & David Kreps & Eric Maskin, 1988. "Repeated Games with Long-Run and Short-Run Players," Working papers 474, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
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  17. 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.
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  19. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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