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Public Debt and Redistribution with Borrowing Constraints

  • Bilbiie, Florin Ovidiu
  • Monacelli, Tommaso
  • Perotti, Roberto

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the present-value multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9088.

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Date of creation: Aug 2012
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Handle: RePEc:cpr:ceprdp:9088
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