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A Positive Theory of Government Debt Author info | Abstract | Publisher info | Download info | Related research | Statistics Fernando Martin (Simon Fraser University)
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A government that cannot commit to future policy choices faces a trade-off that explains the level of debt. On the one hand, there is an incentive to increase debt and delay taxation, so as to reduce current distortions. On the other hand, inflating current prices lowers the real value of nominal debt and so there is a motive to reduce it now. The size of long-run debt will depend on the interaction of these two opposing incentives. The critical determinant is the willingness of households to substitute away from goods being taxed by inflation. Numerical simulations show that the model matches some qualitative and quantitative properties of U.S. policy variables, including the fact that wars are frequently financed with a mix of instruments. The theory interprets the unusual post-World War II inflation and fast liquidation of accumulated debt as being due to higher long-run debt and expenditure in the period leading up to the war. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics .
Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 608-631
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Handle: RePEc:red:issued:07-47Contact details of provider: Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101 Fax: 1-860-486-4463 Email: Web page: http://www.EconomicDynamics.org/review.htm More information through EDIRC
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Keywords: Government debt ; Time-consistency ; Markov-perfect equilibrium ; Other versions of this item:
Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
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[Downloadable!] (restricted)
Other versions:
Ramon Marimon & Javier Díaz-Giménez & Giorgia Giovannetti & Pedro Teles, 2007.
"Nominal Debt as a Burden on Monetary Policy ,"
NBER Working Papers
13677, National Bureau of Economic Research, Inc.
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"Nominal Debt as a Burden to Monetary Policy ,"
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