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Public Debt and Redistribution with Borrowing Constraints

  • Florin Bilbiie
  • Tommaso Monacelli
  • Roberto Perotti

The effects of public debt and redistribution are intimately related. We illustrate this in a model with heterogenous agents and imperfect credit markets. Our setup di¤ers from the classic Savers-Spenders model of ?scal policy in that all agents engage in intertemporal optimization, but a fraction of them is subject to a borrowing limit. We show that, despite the credit frictions, Ricardian equivalence holds under flexible prices if the steady-state distribution of wealth is degenerate: income effects on labor supply deriving from a tax redistribution are entirely symmetric across agents. When the distribution of wealth is non-degenerate, a tax cut is, somewhat paradoxically, contractionary. Conversely, sticky prices generate empirically plausible deviations from Ricardian equivalence, even in the case of degenerate wealth distribution. A revenue-neutral redistribution from unconstrained to constrained agents is expansionary, while debt?nanced tax cuts have effects that go beyond their redistributional component: the present-value multiplier of a tax cut is positive due to an interplay of intertemporal substitution by those who hold the public debt and income effects on those who do not.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 435.

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Date of creation: 2012
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Handle: RePEc:igi:igierp:435
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  1. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  2. N. Gregory Mankiw, 1999. "The Savers-Spenders Theory of Fiscal Policy," Harvard Institute of Economic Research Working Papers 1888, Harvard - Institute of Economic Research.
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