The Sustainability of Budget Deficits in a Stochastic Economy (Revised: 17-91)
The paper derives the government budget constraint and studies the sustainability of deficits in a stochastic, dynamically efficient economy. Contrary to the intuition based on certainty models, policies with permanent expected primary deficits can be sustainable. Even an infinite string of realized primary deficits does not necessarily provide evidence against sustainability. Moreover, one has to be careful in discounting future fiscal variables. Even if the government finances deficits by issuing safe debt, the safe interest rate cannot be used in transversality conditions and in computing present values. The stochastic setting allows one to reconcile dynamic efficiency with a safe interest rate below the average rate of economic growth. Evidence that the U.S. government has run average primary deficits and that government bond returns have been below the growth rate over long periods combined with evidence on dynamic efficiency from Abel et.al. (1989) suggests that the sustainability results for the stochastic, dynamic efficient economy are highly relevant for assessing U.S. fiscal policy.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:|
|Contact details of provider:|| Postal: 3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367|
Phone: (215) 898-7616
Fax: (215) 573-8084
Web page: http://finance.wharton.upenn.edu/~rlwctr/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:06-90. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.