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Government Debt Bias

Author

Listed:
  • Michael Kumhof

    (Bank of England)

  • Irina Yakadina

    (International Monetary Fund)

Abstract

Almost all governments issue large stocks of debt. Optimal taxation theory typically concludes that they should hold large stocks of assets. To reconcile facts and theory, we introduce two simple modifications into an otherwise standard optimal taxation model with commitment: government impatience and continuous debt limits. Two results are obtained. First, positive government debt is optimal for even minimal government impatience. Second, the optimality of negative government debt disappears even without impatience if discrete debt limits are replaced by very wide but continuous debt limits. We go on to quantify the implications for debt, interest rates and business cycle dynamics.

Suggested Citation

  • Michael Kumhof & Irina Yakadina, 2017. "Government Debt Bias," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(4), pages 675-703, November.
    • Handle: RePEc:pal:imfecr:v:65:y:2017:i:4:d:10.1057_s41308-017-0035-3
    DOI: 10.1057/s41308-017-0035-3
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    More about this item

    Keywords

    E61; E62;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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