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Debt Restructuring with a Public Good

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  • Rogers, Carol Ann

Abstract

Endogenous government expenditure is introduced into Lucas and Stokey's (1983) model of optimal wage taxation. So long as the government can precommit to taxes or to expenditures, a debt maturity structure that keeps the value of the debt invariant to interest rate changes will make the optimal policies time- consistent. In the absence of partial precommitment, debt restructuring cannot enforce time-consistency, but it can still limit the costs of time-inconsistency. Numerical examples show (1) average debt is smaller than under the precommitment solution; (2) the debt structure is much larger than under partial precommitment; and (3) restricting the government to one-period debt overstates the welfare losses from time-inconsistency. Copyright 1989 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Rogers, Carol Ann, 1989. " Debt Restructuring with a Public Good," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(1), pages 117-130.
  • Handle: RePEc:bla:scandj:v:91:y:1989:i:1:p:117-30
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    References listed on IDEAS

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    Cited by:

    1. Michael Kumhof & Ricardo Nunes & Irina Yakadina, 2010. "Simple Monetary Rules under Fiscal Dominance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 63-92, February.
    2. Barseghyan, Levon & Battaglini, Marco, 2016. "Political economy of debt and growth," Journal of Monetary Economics, Elsevier, pages 36-51.
    3. Chari V. V. & Kehoe Patrick J., 1993. "Sustainable Plans and Debt," Journal of Economic Theory, Elsevier, vol. 61(2), pages 230-261, December.
    4. repec:oup:qjecon:v:132:y:2017:i:1:p:55-102. is not listed on IDEAS
    5. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2017. "Optimal Time-Consistent Government Debt Maturity," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 55-102.
    6. Ricardo Nunes & Davide Debortoli, 2007. "Political Disagreement, Lack of Commitment and the Level of Debt," 2007 Meeting Papers 725, Society for Economic Dynamics.
    7. Begona Dominguez Manzano, 2005. "Reputation in a Model with a Limited Debt Structure," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 600-622, July.
    8. Debortoli, Davide & Nunes, Ricardo, 2010. "Fiscal policy under loose commitment," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1005-1032, May.
    9. Levon Barseghyan & Marco Battaglini, 2012. "Growth and fiscal policy: a positive theory," Working Papers 1418, Princeton University, Department of Economics, Econometric Research Program..

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