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Procyclical Debt as Automatic Stabilizer

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  • Wesselbaum, D.

Abstract

This 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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File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT-444_01.pdf
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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 444.

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Length: 35 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bfr:banfra:444

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Web page: http://www.banque-france.fr/
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Keywords: Debt; Fiscal Rules; Non-Ricardian Agents; SVAR.;

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