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Optimal Debt Management

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  • Robert J. Barro

Abstract

Optimal debt management can be thought of in three stages. First, if taxes are lump sum and the other conditions for Ricardian equivalence hold, then the division of government financing between debt and taxes is irrelevant, and the whole level of public debt is indeterminate from an optimal-tax standpoint. Second, if taxes are distorting, then the timing of taxes will generally matter; for example, it may be desirable to smooth tax rates over time. This consideration makes determinate the levels of debt at various dates, but does not pin down the composition of the debt, say by maturity. Finally, if there is uncertainty about real interest rates, levels of public outlay, GDP, and so on, then the relation of tax rates to states of nature becomes important. In some cases, optimal taxation dictates the smoothing of tax rates over states of nature, and this element may pin down the composition of the debt. For example, the maturity structure can be designed to insulate the government's financing costs from shifts in real interest rates. This paper studies dynamic optimal taxation in an equilibrium model that yields a form of tax smoothing as a basis for debt management. The main analysis uses a tractable form of the one-sector stochastic growth model. The type of taxation that yields the clearest results on tax smoothing is a proportional levy on consumption. In a simple benchmark case, optimal debt management entails the issue of indexed consols. More generally, payouts on debt would also be contingent on aggregate consumption and the level of government spending.

Suggested Citation

  • Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5327 Note: EFG PE EFG
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    References listed on IDEAS

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    1. Alberto Alesina & Alessandro Prati & Guido Tabellini, 1989. "Public Confidence and Debt Management: A Model and A Case Study of Italy," NBER Working Papers 3135, National Bureau of Economic Research, Inc.
    2. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 1-19.
    3. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-652, August.
    4. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    6. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-1230, December.
    7. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
    8. F. Giavazzi & M. Pagano, 1989. "Confidence Crises and Public Debt Management," Working Papers 73, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    10. John Y. Campbell, 1996. "Consumption and the Stock Market: Interpreting International Experience," Harvard Institute of Economic Research Working Papers 1763, Harvard - Institute of Economic Research.
    11. Barro, Robert J, 1992. " World Interest Rates and Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(2), pages 323-342.
    12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    13. John Y. Campbell, 1996. "Consumption and the Stock Market: Interpreting International Experience," Harvard Institute of Economic Research Working Papers 1763, Harvard - Institute of Economic Research.
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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