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Procyclical Debt as Automatic Stabilizer

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  • Dennis Wesselbaum

    (University of Otago)

Abstract

This paper shows that government debt creates a so far neglected wealth effect that has sizable effects on business cycle fluctuations. We present a channel through which governments can influence cyclical fluctuations generated by any type of shock and contribute to macroeconomic stability. We provide evidence for the United States that debt moves procyclical with output. Then, we build a Real Business Cycle model with Non-Ricardian agents and use rules to describe fiscal policy. We show that procyclical debt generates smaller fluctuations compared to countercyclical debt. The consequence is that classical Keynesian fiscal policy destabilizes the business cycle in our framework.

Suggested Citation

  • Dennis Wesselbaum, 2020. "Procyclical Debt as Automatic Stabilizer," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(1), pages 81-102, March.
  • Handle: RePEc:spr:jqecon:v:18:y:2020:i:1:d:10.1007_s40953-019-00174-y
    DOI: 10.1007/s40953-019-00174-y
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    More about this item

    Keywords

    Debt; Fiscal rules; Non-Ricardian agents;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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