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Political Disagreement, Lack of Commitment and the Level of Debt

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  • 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.

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Bibliographic Info

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

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Date of creation: 2011
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Handle: RePEc:red:sed011:127

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Cited by:
  1. Marina Azzimonti, 2011. "The dynamics of public investment under persistent electoral advantage," Working Papers 11-23, Federal Reserve Bank of Philadelphia.
  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 944, Board of Governors of the Federal Reserve System (U.S.).
  4. Leith, Campbell & Wren-Lewis, Simon, 2009. "Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy," SIRE Discussion Papers 2009-08, Scottish Institute for Research in Economics (SIRE).
  5. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
  6. Bodenstein, Martin & Hebden, James & Nunes, Ricardo, 2012. "Imperfect credibility and the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 135-149.

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