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Political Disagreement, Lack of Commitment and the Level of Debt

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  • Ricardo Nunes

    (Federal Reserve Board)

  • Davide Debortoli

    (University of California, San Diego)

Abstract

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.

Suggested Citation

  • Ricardo Nunes & Davide Debortoli, 2011. "Political Disagreement, Lack of Commitment and the Level of Debt," 2011 Meeting Papers 127, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:127
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    Cited by:

    1. Nunes, Ricardo, 2008. "Delegation and Loose Commitment," MPRA Paper 11555, University Library of Munich, Germany.
    2. Bodenstein, Martin & Hebden, James & Nunes, Ricardo, 2012. "Imperfect credibility and the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 135-149.
    3. Cambell Leith & Simon Wren-Lewis, 2008. "Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy," CDMA Conference Paper Series 0803, Centre for Dynamic Macroeconomic Analysis.
    4. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    5. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
    6. Qamar Abbas & Li Junqing & Muhammad Ramzan & Sumbal Fatima, 2021. "Role of Governance in Debt-Growth Relationship: Evidence from Panel Data Estimations," Sustainability, MDPI, vol. 13(11), pages 1-19, May.
    7. Rieth, Malte, 2017. "Capital taxation and government debt policy with public discounting," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 1-20.
    8. Davide Debortoli & Ricardo Nunes, 2008. "The macroeconomic effect of external pressures on monetary policy," International Finance Discussion Papers 944, Board of Governors of the Federal Reserve System (U.S.).

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