Debt Restructuring with a Public Good
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.
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Volume (Year): 91 (1989)
Issue (Month): 1 ()
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