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The economic effects of restrictions on government budget deficits

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  • Ghiglino, Christian

    (Department of Economics, Copenhagen Business School)

  • Shell, Karl

    (Department of Economics, Copenhagen Business School)

Abstract

In overlapping-generations economies with perfect financial markets and lumpsum taxation, restrictions on the government budget deficits do not limit the set of achievable allocations. For economies in which tax instruments are distortionary and limited in number, deficits are irrelevant only in the unrealistic case in which the number of tax instruments is large relative to the number of policy goals. In particular, if the government can use only anonymous consumption taxes, then achieving the prescribed deficits without changing the equilibrium allocation will typically be impossible when the number of consumers exceeds the number of commodities. A similar result holds if consumer credit is (exogenously) restricted. Surprisingly, in this case, distortionary taxes may be more likely than lump-sum taxes to lead to the irrelevance of government deficits. Journal of Economic Literature Classification Numbers: D51, D91, E32. Keywords: Balanced Budget, Balanced-Budget Amendment, Burden of the Public Debt, Comparative Statics, Consumption Taxes, Credit Restrictions, Distortionary Taxes, Economic Policy, Government Budget Deficit, Maastricht Treaty, Optimal Taxation, Overlapping Generations.

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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 03-1998.

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Length: 39 pages
Date of creation: 01 Jan 1998
Date of revision:
Handle: RePEc:hhs:cbsnow:1998_003

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Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Phone: 38 15 25 75
Fax: 38 15 34 99
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Web page: http://www.cbs.dk/departments/econ/
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  1. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  2. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
  3. Auerbach, Alan J & Gokhale, Jagadeesh & Kotlikoff, Laurence J, 1992. " Generational Accounting: A New Approach to Understanding the Effects of Fiscal Policy on Saving," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 303-18.
  4. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
  5. Keister, Todd, 1998. "Money Taxes and Efficiency When Sunspots Matter," Journal of Economic Theory, Elsevier, vol. 83(1), pages 43-68, November.
  6. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
  7. Grandmont, Jean-Michel, 1986. "Stabilizing competitive business cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 57-76, October.
  8. Henning Bohn & Robert P. Inman, 1996. "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States," NBER Working Papers 5533, National Bureau of Economic Research, Inc.
  9. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  10. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  11. Goenka, Aditya, 1994. "Fiscal Rules and Extrinsic Uncertainty," Economic Theory, Springer, vol. 4(3), pages 401-16, May.
  12. James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
  13. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  14. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer, vol. 4(3), pages 327-44.
  15. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
  16. Heller, Walter P & Shell, Karl, 1974. "On Optimal Taxation with Costly Administration," American Economic Review, American Economic Association, vol. 64(2), pages 338-45, May.
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Citations

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Cited by:
  1. Bhattacharya, Joydeep & Guzman, Mark G. & Shell, Karl, 1998. "Price Level Volatility: A Simple Model of Money Taxes and Sunspots," Journal of Economic Theory, Elsevier, vol. 81(2), pages 401-430, August.
  2. Gonzalez-Eiras, Martin & Niepelt, Dirk, 2012. "Economic and Politico-Economic Equivalence," CEPR Discussion Papers 9203, C.E.P.R. Discussion Papers.
  3. Chari, V. V., 2000. "Limits of Markets and Limits of Governments: An Introduction to a Symposium on Political Economy," Journal of Economic Theory, Elsevier, vol. 94(1), pages 1-6, September.
  4. Laurence J. Kotlikoff, 2001. "Generational Policy," NBER Working Papers 8163, National Bureau of Economic Research, Inc.
  5. Martín Gonzalez-Eiras & Dirk Niepelt, 2012. "Economic and Politico-Economic Equivalence of Fiscal Policies," CESifo Working Paper Series 3718, CESifo Group Munich.
  6. Gaetano Antinolfi & Todd Keister, 2001. "Dollarization as a monetary arrangement for emerging market economies," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 29-40.
  7. Evans, Richard W. & Phillips, Kerk L., 2010. "OLG fife cycle model transition paths: alternate model forecast method," MPRA Paper 24548, University Library of Munich, Germany.
  8. Huberto Ennis & Todd Keister, 2001. "Optimal policy with probabilistic equilibrium selection," Working Paper 01-03, Federal Reserve Bank of Richmond.

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