The Sustainability of Budget Deficits in a Stochastic Economy
The transversality condition on government debt requires a zero limit of discounted future debt. The paper shows that, in a stochastic economy, the relevant discount rate depends on the probability distribution of future debt over states of nature. Discount rates on future government debt, spending, and taxes are generally not related to the rates of return on government debt. The correct choice of discount rates is important because debt discounted at the safe interest rate may well diverge to infinity under sustainable policies. This result raises questions about some recent empirical papers testing the sustainability of U.S. fiscal policy. Copyright 1995 by Ohio State University Press.
Volume (Year): 27 (1995)
Issue (Month): 1 (February)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879|
When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:257-71. 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: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.