The sustainability of budget deficits with lump-sum and with income-based taxation
The paper examines the substantiality of fiscal policies in a stochastic economy with a particular focus on two benchmark policies, balanced budgets and tax smoothing. These policies are typically sustainable if lump-sum taxes are available, but they are generally not sustainable in a stochastic environment, if taxation is constrained by the size of the economy. The sustainability problems arise because the debt-income ratio becomes excessive whenever there are sufficiently low realizations of aggregate income. I also compute the probability of reaching high debt-income ratios with different policies and I discuss the role of debt management for sustainability. It turns out that balanced budgets can be sustained forever with very high probability (but less than one), but so can policies with permanent primary or with-interest deficits. I argue that debt management is important for sustainability in a stochastic environment and show that the use state-contingent government liabilities can be helpful in designing sustainable versions of tax-smoothing and balanced budget policies.
(This abstract was borrowed from another version of this item.)
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Volume (Year): (1991)
Issue (Month): ()
|Contact details of provider:|| Postal: 1455 East 6th St., Cleveland OH 44114|
Web page: http://www.clevelandfed.org/
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedcpr:y:1991:p:580-612. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lee Faulhaber)
If references are entirely missing, you can add them using this form.