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Economic and Politico-Economic Equivalence

We extend "economic equivalence" results, like the Ricardian equivalence proposition, to the political sphere where policy is chosen sequentially. We derive conditions under which a policy regime (summarizing admissible policy choices in every period) and a state are "politico-economically equivalent" to another such pair, in the sense that both pairs give rise to the same equilibrium allocation. We apply the conditions in the context of politico-economic theories of government debt as a means to i) deliver intergenerational transfers or ii) smooth tax distortions. We find that certain politico-economic models of social security or variants thereof can be re-interpreted as novel politico-economic theories of debt while other models cannot, possibly explaining the political conflict surrounding social security reform. We also find that in environments with distorting taxes, economic equivalence relations between policies with different levels of debt do not extend to the political sphere.

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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 12.02.

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Length: 35 pages
Date of creation: May 2012
Handle: RePEc:szg:worpap:1202
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  1. Niepelt, Dirk, 2008. "Debt Maturity without Commitment," CEPR Discussion Papers 7093, C.E.P.R. Discussion Papers.
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  4. Marco Bassetto & Narayana Kocherlakota, 2010. "On the Irrelevance of Government Debt When Taxes are Distortionary," Levine's Working Paper Archive 506439000000000295, David K. Levine.
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  8. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign risk and secondary markets," Economics Working Papers 998, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2009.
  9. Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2012. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," CEPR Discussion Papers 8738, C.E.P.R. Discussion Papers.
  10. Martín Gonzalez-Eiras & Dirk Niepelt, 2012. "Economic and Politico-Economic Equivalence," Working Papers 12.02, Swiss National Bank, Study Center Gerzensee.
  11. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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  14. Ghiglino, Christian & Shell, Karl, 1998. "The economic effects of restrictions on government budget deficits," Working Papers 03-1998, Copenhagen Business School, Department of Economics.
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  18. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  19. Brooks,Robin & Razin,Assaf (ed.), 2005. "Social Security Reform," Cambridge Books, Cambridge University Press, number 9780521844956, December.
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  21. Martin Gonzalez-Eiras, 2011. "Social security as Markov equilibrium in OLG models: a note," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 549-552, July.
  22. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  23. Martin Feldstein & Horst Siebert, 2002. "Social Security Pension Reform in Europe," NBER Books, National Bureau of Economic Research, Inc, number feld02-2.
  24. Niepelt, Dirk, 2004. "Social Security Reform: Economics and Politics," Seminar Papers 732, Stockholm University, Institute for International Economic Studies.
  25. Pierre Yared, 2010. "Politicians, Taxes and Debt," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 806-840.
  26. Lorenzo Forni, 2005. "Social Security as Markov Equilibrium in OLG Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 178-194, January.
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