Advanced Search
MyIDEAS: Login to save this paper or follow this series

Debt reduction and automatic stabilisation

Contents:

Author Info

  • Paul Hiebert

    ()
    (European Central Bank)

  • Javier J. Pérez

    ()
    (Centro de Estudios Andaluces)

  • Massimo Rostagno

    ()
    (European Central Bank)

Abstract

This paper presents an optimal fiscal policy response to address the basic tradeoff between the automatic stabilisation properties of budgets and the long run fiscal positions. The framework is an overlapping generations model `a la Weil (1989), extended to account for stochastic endowments and borrowing constrained households. A benign government chooses over the optimal degree of responsiveness of net taxes to individual incomes, an optimal measure of long-run public debt, or both, in order to smooth households’ consumption across states of nature. In the presence of a deficit constraint for the government, the results unambiguously point to the desire for lower debt levels than those currently prevailing in order to enable a more effective hedging of personal income uncertainty by means of more active fiscal stabilisers. Citizens in economies exhibiting more pronounced cycles will favour less automatic stabilisation combined with a more aggressive policy of debt reduction.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://public.centrodeestudiosandaluces.es/pdfs/E200212.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/12.

as in new window
Length: 32 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:cea:doctra:e2002_12

Contact details of provider:
Postal: c/ Bailén 50. 41001 Sevilla
Phone: (34) 955 055 210
Fax: (34) 955 055 211
Email:
Web page: http://www.centrodeestudiosandaluces.es
More information through EDIRC

Related research

Keywords: Public debt; Automatic stabilisation; Borrowing constraints; Consumption;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Richard H. Clarida, 1984. "Consumption, Liquidity Constraints and Asset Accumulation in the Presence of Random Income Fluctuations," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 705R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1985.
  2. Hayashi, Fumio, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1083-1113, November.
  3. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report, Federal Reserve Bank of Minneapolis 160, Federal Reserve Bank of Minneapolis.
  4. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
  5. Detken, Carsten, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series, European Central Bank 0003, European Central Bank.
  6. Robert B. Barsky & N. Gregory Mankiw & Stephen P. Zeldes, 1987. "Ricardian Consumers With Keynesian Propensities," NBER Working Papers 1400, National Bureau of Economic Research, Inc.
  7. Marcet, Albert & Scott, Andrew, 2001. "Debt and Deficit Fluctuations and the Structure of Bond Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3029, C.E.P.R. Discussion Papers.
  8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  9. Giuseppe Bertola & Allan Drazen, 1991. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," NBER Working Papers 3844, National Bureau of Economic Research, Inc.
  10. Blanchard, Olivier Jean & Mankiw, N Gregory, 1988. "Consumption: Beyond Certainty Equivalence," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 173-77, May.
  11. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
  12. Peter N. Ireland, 2001. "The Real Balance Effect," Boston College Working Papers in Economics, Boston College Department of Economics 491, Boston College Department of Economics.
  13. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, Econometric Society, vol. 59(5), pages 1221-48, September.
  14. Clarida, Richard H, 1990. "International Lending and Borrowing in a Stochastic, Stationary Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 543-58, August.
  15. Andrew B. Abel, 1988. "Consumption and Investment," NBER Working Papers 2580, National Bureau of Economic Research, Inc.
  16. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
  17. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 867-896, October.
  18. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 895-916, October.
  19. Christopher D Carroll & Miles S Kimball, 2001. "Liquidity Constraints and Precautionary Saving," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 455, The Johns Hopkins University,Department of Economics.
  20. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 151-166, December.
  21. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(3), pages 23-45, Summer.
  22. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  23. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 382-88, May.
  24. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  25. Willem H. Buiter, 1998. "The Young Person's Guide to Neutrality, Price Level Indeterminacy, Interest Rate Pegs, and Fiscal Theories of the Price Level," NBER Working Papers 6396, National Bureau of Economic Research, Inc.
  26. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
  27. R. Glenn Hubbard & Kenneth L. Judd, 1985. "Social Security and Individual Welfare: Precautionary Saving, LiquidityConstraints, and the Payroll Tax," NBER Working Papers 1736, National Bureau of Economic Research, Inc.
  28. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 630-46, September.
  29. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  30. Martin Floden, 2000. "The Effectiveness of Government Debt and Transfers as Insurance," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1013, Econometric Society.
  31. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, Elsevier, vol. 38(2), pages 183-198, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Francesco Caprioli & Pietro Rizza & Pietro Tommasino, 2012. "Optimal fiscal policy when agents fear government default," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 859, Bank of Italy, Economic Research and International Relations Area.
  2. Dinga, Emil & Ionescu, Cornel & Padurean, Elena, 2010. "Discretionary Policy versus Non-Discretionary Policy in the Economic Adjustment Process," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 184-207, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cea:doctra:e2002_12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Teresa Rodríguez).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.