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Economic and Politico-Economic Equivalence

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Abstract

We extend "economic equivalence" results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are "politico-economically equivalent" to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. We apply the conditions in the context of politico-economic theories of government debt as a means to i) deliver intergenerational transfers or ii) smooth tax distortions. We find that certain politico-economic models of social security or variants thereof can be re-interpreted as novel politico-economic theories of debt while other models cannot, possibly explaining the political conflict surrounding social security reform. We also find that in environments with distorting taxes, economic equivalence relations between policies with different levels of debt do not extend to the political sphere.

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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 12.02.

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Length: 35 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:szg:worpap:1202

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  1. 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.
  2. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  3. Martin Gonzalez-Eiras & Dirk Niepelt, 2007. "The Future of Social Security," Working Papers, Swiss National Bank, Study Center Gerzensee 07.02, Swiss National Bank, Study Center Gerzensee.
  4. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," NBER Working Papers 12783, National Bureau of Economic Research, Inc.
  5. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(1), pages 135-160, February.
  6. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195102680, October.
  7. Zheng Song, 2009. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," 2009 Meeting Papers, Society for Economic Dynamics 94, Society for Economic Dynamics.
  8. Niepelt, Dirk, 2008. "Debt Maturity without Commitment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7093, C.E.P.R. Discussion Papers.
  9. Martin Gonzalez-Eiras, 2011. "Social security as Markov equilibrium in OLG models: a note," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 549-552, July.
  10. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  11. Bassetto, Marco & Kocherlakota, Narayana, 2004. "On the irrelevance of government debt when taxes are distortionary," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 299-304, March.
  12. Ghiglino, Christian & Shell, Karl, 1998. "The economic effects of restrictions on government budget deficits," Working Papers, Copenhagen Business School, Department of Economics 03-1998, Copenhagen Business School, Department of Economics.
  13. Martin Feldstein & Horst Siebert, 2002. "Social Security Pension Reform in Europe," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number feld02-2.
  14. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  15. Niepelt, Dirk, 2004. "Social Security Reform: Economics and Politics," Seminar Papers, Stockholm University, Institute for International Economic Studies 732, Stockholm University, Institute for International Economic Studies.
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Cited by:
  1. Martín Gonzalez-Eiras & Dirk Niepelt, 2011. "Ageing, Government Budgets, Retirement, and Growth," CESifo Working Paper Series 3352, CESifo Group Munich.

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