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Hyperbolic discounting, public debt and balanced budget rules

  • Huber, Bernd
  • Runkel, Marco

This paper considers a government that chooses its tax and borrowing policy in order to minimize the present value of the excess burden caused by taxation. In doing so, the government uses hyperbolic discounting. It turns out that public deficits are positive even if public expenditures are constant over time. With cyclical expenditures, the government chooses an asymmetric debt policy, i.e., in bad times it borrows more than it repays in good times. In contrast to tax smoothing and political economy theories of public debt, the welfare effects of a balanced budget rule are ambiguous.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19391.

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Date of creation: 2008
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Publication status: Published in Scottish Journal of Political Economy 5 55(2008): pp. 543-560
Handle: RePEc:lmu:muenar:19391
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