Debt Stabilization in a Non-Ricardian Economy
AbstractIn models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk.� This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future.� Moreover, the level of the capital stock (and therefore output and consumption) in these economies is likely to be sub-optimally low, and reducing government debt will 'crowd in' additional capital.� Using an elaborated version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1985), we derive the optimal steady state level of government assets.� We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 542.
Date of creation: 01 Mar 2011
Date of revision:
Non-Ricardian consumers; Macroeconomic stability; Distortionary taxes;
Other versions of this item:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-19 (All new papers)
- NEP-DGE-2011-03-19 (Dynamic General Equilibrium)
- NEP-MAC-2011-03-19 (Macroeconomics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
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by Mainly Macro in Mainly Macro on 2013-01-11 18:11:00
- Optimal Debt Policy for Ireland (Warning: Wonkish)
by John McHale in The Irish Economy on 2013-02-12 22:22:43
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