Procyclical Debt as Automatic Stabilizer
AbstractThis paper shows that government debt creates a so far neglected wealth effect that has sizable effects on business cycle fluctuations. We present a new channel through which governments can influence cyclical fluctuations generated by any type of shock and contribute to macroeconomic stability. We provide evidence for the United States that debt moves procyclical with output. Then, we build a Real Business Cycle model with Non-Ricardian agents and use rules to describe fiscal policy. We show that procyclical debt generates smaller fluctuations compared to countercyclical debt. The striking consequence is that classical Keynesian fiscal policy destabilizes the business cycle in our framework.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 444.
Length: 35 pages
Date of creation: 2013
Date of revision:
Debt; Fiscal Rules; Non-Ricardian Agents; SVAR.;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-13 (All new papers)
- NEP-DGE-2013-09-13 (Dynamic General Equilibrium)
- NEP-MAC-2013-09-13 (Macroeconomics)
- NEP-PBE-2013-09-13 (Public Economics)
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