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Political Disagreement, Lack of Commitment and the Level of Debt

  • Ricardo Nunes

    (Federal Reserve Board)

  • Davide Debortoli

    (University of California, San Diego)

We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to quantify the effects of imperfect commitment, political disagreement and political turnover. Imperfect commitment drives the long-run level of debt to zero. With political disagreement debt is a sizeable fraction of GDP. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with and rationalize much of the existing empirical evidence. Finally, we find that political disagreement reduces the welfare gains of building commitment.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 127.

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Date of creation: 2011
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Handle: RePEc:red:sed011:127
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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