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A note on optimal fiscal policy in an economy with private borrowing limits

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  • Azzimonti, Marina
  • Yared, Pierre

Abstract

We consider the implications for optimal fiscal policy when taxes are non-distortionary and households are heterogeneous and borrowing constrained. The main result is that optimal policy keeps some households borrowing constrained in order to reduce interest rates on government debt.

Suggested Citation

  • Azzimonti, Marina & Yared, Pierre, 2017. "A note on optimal fiscal policy in an economy with private borrowing limits," Economics Letters, Elsevier, vol. 151(C), pages 62-65.
    • Handle: RePEc:eee:ecolet:v:151:y:2017:i:c:p:62-65
    DOI: 10.1016/j.econlet.2016.12.007
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
    3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    4. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 925-967.
    5. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-388, May.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    7. Marco Bassetto, 2014. "Optimal fiscal policy with heterogeneous agents," Quantitative Economics, Econometric Society, vol. 5(3), pages 675-704, November.
    8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    9. Pierre Yared, 2013. "Public Debt Under Limited Private Credit," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 229-245, April.
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    Cited by:

    1. Chen, Yunmin & Chien, YiLi & Wen, Yi & Yang, C.C., 2021. "Are unconditional lump-sum transfers a good idea?," Economics Letters, Elsevier, vol. 209(C).
    2. François Le Grand & Xavier Ragot, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," Sciences Po Economics Discussion Papers 2017-03, Sciences Po Departement of Economics.
    3. Marco Bassetto & Thomas J. Sargent, 2020. "Shotgun Wedding: Fiscal and Monetary Policy," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 659-690, August.
    4. repec:hal:wpspec:info:hdl:2441/6bl2553ksc9vlq1fltjs9h1cht is not listed on IDEAS
    5. Marco Bassetto & Wei Cui, 2020. "A Ramsey Theory of Financial Distortions," Working Papers 775, Federal Reserve Bank of Minneapolis.
    6. YiLi Chien & Yi Wen, 2022. "Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 124-160, October.
    7. Chien, YiLi & Wen, Yi, 2021. "Time-inconsistent optimal quantity of debt," European Economic Review, Elsevier, vol. 140(C).
    8. Chien, YiLi & Wen, Yi, 2022. "The determination of public debt under both aggregate and idiosyncratic uncertainty," Journal of Economic Theory, Elsevier, vol. 203(C).
    9. YiLi Chien & Yi Wen, 2023. "Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies," Working Papers 2023-009, Federal Reserve Bank of St. Louis.
    10. Christian Myohl, 2018. "Optimal Fiscal Policy and Private Sector Borrowing Constraints," Diskussionsschriften dp1822, Universitaet Bern, Departement Volkswirtschaft.
    11. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    12. repec:hal:spmain:info:hdl:2441/6bl2553ksc9vlq1fltjs9h1cht is not listed on IDEAS

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    More about this item

    Keywords

    Optimal taxation; Debt management; Income distribution;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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