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Fiscal Policy and Debt Management with Incomplete Markets

Author

Listed:
  • Anmol Bhandari
  • David Evans
  • Mikhail Golosov
  • Thomas J. Sargent

Abstract

A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets. We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. The asymptotic mean of the planner's portfolio minimizes a measure of fiscal risk. We obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, the invariant distribution of debt is very dispersed, and mean reversion is slow.

Suggested Citation

  • Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2017. "Fiscal Policy and Debt Management with Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 132(2), pages 617-663.
  • Handle: RePEc:oup:qjecon:v:132:y:2017:i:2:p:617-663.
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    File URL: http://hdl.handle.net/10.1093/qje/qjw041
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    References listed on IDEAS

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    1. Buera, Francisco & Nicolini, Juan Pablo, 2004. "Optimal maturity of government debt without state contingent bonds," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 531-554, April.
    2. Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
    3. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1105-1131.
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    Cited by:

    1. Yongsung Chang & Yena Park, 2017. "Optimal Taxation with Private Insurance," Working papers 2017rwp-105, Yonsei University, Yonsei Economics Research Institute.
    2. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2018. "Optimal Taxation and Debt Management without Commitment," NBER Working Papers 24522, National Bureau of Economic Research, Inc.
    3. repec:eee:reecon:v:71:y:2017:i:3:p:373-383 is not listed on IDEAS

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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