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Procyclical Debt as Automatic Stabilizer

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Listed author(s):
  • Wesselbaum, D.

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 new 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 striking consequence is that classical Keynesian fiscal policy destabilizes the business cycle in our framework.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_444_2013.pdf
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Paper provided by Banque de France in its series Working papers with number 444.

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Length: 35 pages
Date of creation: 2013
Handle: RePEc:bfr:banfra:444
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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Keywords: Debt; Fiscal Rules; Non-Ricardian Agents; SVAR.;

Find related papers by 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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  8. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  9. Leeper, Eric M. & Walker, Todd B. & Yang, Shu-Chun S., 2010. "Government investment and fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1000-1012, November.
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  11. Leeper, Eric M. & Yang, Shu-Chun Susan, 2008. "Dynamic scoring: Alternative financing schemes," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 159-182, February.
  12. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
  13. Edward C. Prescott & Rajnish Mehra, 2005. "Recursive Competitive Equilibrium: The Case Of Homogeneous Households," World Scientific Book Chapters,in: Theory Of Valuation, chapter 11, pages 357-371 World Scientific Publishing Co. Pte. Ltd..
  14. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages 93-108, March.
  15. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  16. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
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