Debt stabilization in a Non-Ricardian economy
In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where, the equilibrium interest rate may differ from the policy-maker’s rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and, possibly, consumption) in these economies is likely to be sub-optimally low, and reducing government debt will ‘crowd in’ additional capital. Using an elaborate version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1965), we derive the optimal steady state level of government assets. We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes.
|Date of creation:||Oct 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Adam Smith Building, Glasgow G12 8RT|
Phone: 0141 330 4618
Fax: 0141 330 4940
Web page: http://www.gla.ac.uk/schools/business/research/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Campbell Leith & Simon Wren‐Lewis, 2013.
"Fiscal Sustainability in a New Keynesian Model,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 45(8), pages 1477-1516, December.
- Campbell Leith & Simon Wren-lewis, 2006. "Fiscal Sustainability in a New Keynesian Model," WEF Working Papers 0006, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
- Simon Wren-Lewis & Campbell Leith, 2007. "Fiscal Sustainability in a New Keynesian Model," Economics Series Working Papers 310, University of Oxford, Department of Economics.
- Leith, Campbell & Wren-Lewis, Simon, 2012. "Fiscal Sustainability in a New Keynesian Model," SIRE Discussion Papers 2012-84, Scottish Institute for Research in Economics (SIRE).
- Campbell Leith & Simon Wren-Lewis, 2006. "Fiscal Sustainability in a New Keynesian Model," Working Papers 2006_11, Business School - Economics, University of Glasgow, revised Nov 2008.
- Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-32, March.
- Barro, Robert J., 1979.
"On the Determination of the Public Debt,"
3451400, Harvard University Department of Economics.
- Agresti, Anna Maria & Mojon, Benoît, 2001. "Some stylised facts on the euro area business cycle," Working Paper Series 0095, European Central Bank.
- Ascari, Guido & Rankin, Neil, 2007.
"Perpetual youth and endogenous labor supply: A problem and a possible solution,"
Journal of Macroeconomics,
Elsevier, vol. 29(4), pages 708-723, December.
- Ascari, Guido & Rankin, Neil, 2004. "Perpetual youth and endogenous labour supply: a problem and a possible solution," Working Paper Series 0346, European Central Bank.
- Leith, Campbell & Wren-Lewis, Simon, 2011.
"Discretionary policy in a monetary union with sovereign debt,"
European Economic Review,
Elsevier, vol. 55(1), pages 93-117, January.
- Campbell Leith & Simon Wren-Lewis, 2010. "Discretionary policy in a monetary union with sovereign debt," Working Papers 2010_23, Business School - Economics, University of Glasgow.
- Leith, Campbell & Wren-Lewis, Simon, 2010. "Discretionary Policy in a Monetary Union with Sovereign Debt," SIRE Discussion Papers 2010-74, Scottish Institute for Research in Economics (SIRE).
- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
"Optimal Taxation without State-Contingent Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 110(6), pages 1220-1254, December.
- Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
- Campbell Leith & Jim Malley, 2002.
"Estimated General Equilibrium Models for the Evaluation of Monetary Policy in the US and Europe,"
CESifo Working Paper Series
699, CESifo Group Munich.
- Leith, Campbell & Malley, Jim, 2005. "Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe," European Economic Review, Elsevier, vol. 49(8), pages 2137-2159, November.
- Campbell leith & Jim Malley, 2002. "Estimated General Equilibrium Models for the Evaluation of Monetary Policy in the US and Europe," Working Papers 2001_16, Business School - Economics, University of Glasgow.
- Andres Erosa & Martin Gervais, 2001. "Optimal taxation in infinitely-lived agent and overlapping generations models : a review," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 23-44.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2011_23. 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: (Jeanette Findlay)
If references are entirely missing, you can add them using this form.