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Government Debt Dynamics Under Discretion

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  • Occhino Filippo

    () (Federal Reserve Bank of Cleveland)

Abstract

This paper studies the dynamics of state-contingent government debt in the case that the fiscal authority cannot commit to a future policy. As is well known, optimal policy under commitment calls for letting debt follow a stationary process, with values that depend on the initial conditions. In contrast, when the fiscal authority lacks the ability to commit, it manipulates its policy tools, i.e. the tax rate and government spending, in order to reduce the intertemporal price of current consumption goods, i.e. the real interest rate, and the intertemporal value of its current outstanding liabilities. If the economy converges, in any steady state the government has either no incentive or no ability to reduce the real interest rate any longer.

Suggested Citation

  • Occhino Filippo, 2012. "Government Debt Dynamics Under Discretion," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-28, July.
  • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:19
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    References listed on IDEAS

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    Cited by:

    1. Grechyna, Daryna, 2016. "Debt And Deficit Fluctuations In A Time-Consistent Setup," Macroeconomic Dynamics, Cambridge University Press, vol. 20(7), pages 1771-1794, October.
    2. Anastasios Karantounias, 2019. "A dynamic theory of the excess burden of taxation," 2019 Meeting Papers 1356, Society for Economic Dynamics.
    3. Barseghyan, Levon & Battaglini, Marco, 2016. "Political economy of debt and growth," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 36-51.
    4. Karen Kopecky & Anastasios Karantounias, 2015. "Optimal time-consistent taxation with default," 2015 Meeting Papers 1297, Society for Economic Dynamics.
    5. 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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