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Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt

  • Song, Zheng Michael
  • Storesletten, Kjetil
  • Zilibotti, Fabrizio

This paper proposes a dynamic politico-economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, i.e., low taxes and low debt accumulation. The paper characterizes the Markov-perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8738.

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Date of creation: Jan 2012
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Handle: RePEc:cpr:ceprdp:8738
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