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Public Debt and Redistribution with Borrowing Constraints

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  • Florin Bilbiie
  • Tommaso Monacelli
  • Roberto Perotti

Abstract

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the presentvalue multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 448.

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Date of creation: 2012
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Handle: RePEc:igi:igierp:448

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  1. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
  2. Florin O. Bilbiie & Roland Straub, 2013. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 377-392, May.
  3. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
  4. Karel Mertens & Morten O. Ravn, 2009. "Empirical evidence on the aggregate effects of anticipated and unanticipated US tax policy shocks," Working Paper Research 181, National Bank of Belgium.
  5. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  6. Florin O. Bilbiie & André Meier & Gernot J. Müller, 2008. "What Accounts for the Changes in U.S. Fiscal Policy Transmission?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1439-1470, October.
  7. Tommaso Monacelli & Roberto Perotti, 2011. "Tax Cuts, Redistribution, and Borrowing Constraints," Working Papers 408, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Jeffrey R. Campbell & Zvi Hercowitz, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," NBER Working Papers 11330, National Bureau of Economic Research, Inc.
  9. Den Haan, Wouter, 2008. "Comparison of Solutions to the Incomplete Markets Model with Aggregate Uncertainty," CEPR Discussion Papers 7019, C.E.P.R. Discussion Papers.
  10. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  11. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
  12. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  13. Florin O. Bilbiie & Roland Straub, 2004. "Fiscal Policy, Business Cycles and Labor-Market Fluctuations," MNB Working Papers 2004/6, Magyar Nemzeti Bank (the central bank of Hungary).
  14. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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Cited by:
  1. Kaszab, Lorant, 2012. "Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound," Cardiff Economics Working Papers E2012/13, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2013.

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