Sustainable Plans and Mutual Default
This paper presents a model of optimal taxation in which private agents and the government can default on debt. As a benchmark, the authors consider Ramsey equilibria in which the government can precommit to its policies at the beginning of time bu t in which private agents can default. They then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. The authors show that when there is sufficiently little discounting and government consumption fluctuates enough, the Ramsey allocations can be supported by a sustainable equilibrium. Copyright 1993 by The Review of Economic Studies Limited.
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Volume (Year): 60 (1993)
Issue (Month): 1 (January)
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