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Public Debt and Redistribution with Borrowing Constraints

  • Florin O. Bilbiie
  • Tommaso Monacelli
  • Roberto Perotti

The effects of public debt and redistribution are intimately related. We illustrate this in a model with heterogenous agents and imperfect credit markets. Our setup di¤ers from the classic Savers-Spenders model of ?scal policy in that all agents engage in intertemporal optimization, but a fraction of them is subject to a borrowing limit. We show that, despite the credit frictions, Ricardian equivalence holds under flexible prices if the steady-state distribution of wealth is degenerate: income effects on labor supply deriving from a tax redistribution are entirely symmetric across agents. When the distribution of wealth is non-degenerate, a tax cut is, somewhat paradoxically, contractionary. Conversely, sticky prices generate empirically plausible deviations from Ricardian equivalence, even in the case of degenerate wealth distribution. A revenue-neutral redistribution from unconstrained to constrained agents is expansionary, while debt?nanced tax cuts have effects that go beyond their redistributional component: the present-value multiplier of a tax cut is positive due to an interplay of intertemporal substitution by those who hold the public debt and income effects on those who do not.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): (2013)
Issue (Month): (02)
Pages: F64-F98

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Handle: RePEc:ecj:econjl:v::y:2013:i::p:f64-f98
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