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

Political Disagreement, Lack of Commitment and the Level of Debt

Contents:

Author Info

  • Ricardo Nunes

    (Federal Reserve Board)

  • Davide Debortoli

    (University of California, San Diego)

Abstract

We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to quantify the effects of imperfect commitment, political disagreement and political turnover. Imperfect commitment drives the long-run level of debt to zero. With political disagreement debt is a sizeable fraction of GDP. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with and rationalize much of the existing empirical evidence. Finally, we find that political disagreement reduces the welfare gains of building commitment.

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://www.economicdynamics.org/meetpapers/2011/paper_127.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 127.

as in new window
Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:127

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

Other versions of this item:

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. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper, Federal Reserve Bank of Richmond 00-02, Federal Reserve Bank of Richmond.
  2. Díaz-Giménez, Javier & Giovannetti, Giorgia & Marimon, Ramon & Teles, Pedro, 2007. "Nominal Debt as a Burden on Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6595, C.E.P.R. Discussion Papers.
  3. Marco Battaglini & Stephen Coate, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1441, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
  5. Ernst Schaumburg & Andrea Tambalotti, 2003. "An investigation of the gains from commitment in monetary policy," Staff Reports, Federal Reserve Bank of New York 171, Federal Reserve Bank of New York.
  6. Klein, Paul & Krusell, Per & Ríos-Rull, José-Víctor, 2004. "Time Consistent Public Expenditures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4582, C.E.P.R. Discussion Papers.
  7. Faraglia, Elisa & Marcet, Albert & Scott, Andrew, 2010. "In search of a theory of debt management," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(7), pages 821-836, October.
  8. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers, Society for Economic Dynamics 1233, Society for Economic Dynamics.
  9. 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.
  10. Luisa Lambertini, 2003. "Are Budget Deficits Used Strategically?," Boston College Working Papers in Economics, Boston College Department of Economics 578, Boston College Department of Economics.
  11. Alt, James E. & Lassen, David Dreyer, 2006. "Fiscal transparency, political parties, and debt in OECD countries," European Economic Review, Elsevier, Elsevier, vol. 50(6), pages 1403-1439, August.
  12. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262510944, December.
  13. Huber, Gerald & Kocher, Martin G. & Sutter, Matthias, 2003. "Government strength, power dispersion in governments and budget deficits in OECD-countries. A voting power approach," Munich Reprints in Economics, University of Munich, Department of Economics 18164, University of Munich, Department of Economics.
  14. Martin Ellison & Neil Rankin, 2005. " Optimal Monetary Policy When Lump-Sum Taxes Are Unavailable: A Reconsideration of the Outcomes under Commitment and Discretion," CDMA Conference Paper Series, Centre for Dynamic Macroeconomic Analysis 0501, Centre for Dynamic Macroeconomic Analysis.
  15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  16. Song, Zheng & Storesletten, Kjetil & Zilibotti, Fabrizio, 2007. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," Memorandum, Oslo University, Department of Economics 05/2008, Oslo University, Department of Economics.
  17. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  18. Rogers, Carol Ann, 1989. " Debt Restructuring with a Public Good," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 91(1), pages 117-30.
  19. Reis, Catarina, 2006. "Taxation without Commitment," MPRA Paper 2071, University Library of Munich, Germany.
  20. Cuadra, Gabriel & Sapriza, Horacio, 2008. "Sovereign default, interest rates and political uncertainty in emerging markets," Journal of International Economics, Elsevier, Elsevier, vol. 76(1), pages 78-88, September.
  21. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," CEP Discussion Papers, Centre for Economic Performance, LSE dp1055, Centre for Economic Performance, LSE.
  22. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(2), pages 333-350, April.
  23. Salvador Ortigueira & Joana Pereira, 2007. "Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets," Economics Working Papers, European University Institute ECO2007/41, European University Institute.
  24. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers, Federal Reserve Bank of Minneapolis 538, Federal Reserve Bank of Minneapolis.
  25. de Haan, Jakob & Sturm, Jan-Egbert, 1994. " Political and Institutional Determinants of Fiscal Policy in the European Community," Public Choice, Springer, Springer, vol. 80(1-2), pages 157-72, July.
  26. de Haan, Jakob & Sturm, Jan-Egbert, 1997. "Political and economic determinants of OECD budget deficits and government expenditures: A reinvestigation," European Journal of Political Economy, Elsevier, Elsevier, vol. 13(4), pages 739-750, December.
  27. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 903-933, May.
  28. 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.
  29. Dominguez, Begona, 2007. "Public debt and optimal taxes without commitment," Journal of Economic Theory, Elsevier, Elsevier, vol. 135(1), pages 159-170, July.
  30. Volkerink, Bjorn & De Haan, Jakob, 2001. " Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, Springer, vol. 109(3-4), pages 221-42, December.
  31. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  32. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 916, Board of Governors of the Federal Reserve System (U.S.).
  33. Fernando M. Martin, 2004. "A Positive Theory of Government Debt," Macroeconomics, EconWPA 0408013, EconWPA, revised 12 Oct 2004.
  34. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  35. Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  36. Marina Azzimonti Renzo, 2004. "On the dynamic inefficiency of governments," 2004 Meeting Papers, Society for Economic Dynamics 228, Society for Economic Dynamics.
  37. Salvador Ortigueira, 2006. "Markov-Perfect Optimal Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 153-178, January.
  38. Skilling, David & Zeckhauser, Richard J., 2002. "Political competition and debt trajectories in Japan and the OECD," Japan and the World Economy, Elsevier, Elsevier, vol. 14(2), pages 121-135, April.
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. Campbell Leith & Simon Wren-Lewis, 2008. "Electoral uncertainty and the deficit bias in a New Keynesian Economy," Working Papers, Business School - Economics, University of Glasgow 2009_11, Business School - Economics, University of Glasgow, revised Feb 2009.
  2. Nunes, Ricardo, 2008. "Delegation and Loose Commitment," MPRA Paper 11555, University Library of Munich, Germany.
  3. Davide Debortoli & Ricardo Nunes, 2008. "The macroeconomic effect of external pressures on monetary policy," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 944, Board of Governors of the Federal Reserve System (U.S.).
  4. Marina Azzimonti, 2013. "The dynamics of public investment under persistent electoral advantage," Working Papers 13-43, Federal Reserve Bank of Philadelphia.
  5. Leith, Campbell & Wren-Lewis, Simon, 2009. "Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-08, Scottish Institute for Research in Economics (SIRE).
  6. Bodenstein, Martin & Hebden, James & Nunes, Ricardo, 2012. "Imperfect credibility and the zero lower bound," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(2), pages 135-149.
  7. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 916, Board of Governors of the Federal Reserve System (U.S.).

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:red:sed011:127. 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: (Christian Zimmermann).

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.