The Ricardian equivalence under collateral constraints
This paper investigates the Ricardian Equivalence (RE) under collateralized debt, default, transaction costs and incomplete markets. The public debt is neutral and the RE holds only if the collateral-transfer cost depends linearly on the lump-sum tax and is fully offset. Lenders and borrowers shoul...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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Universidade de São Paulo
2023-12-01
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| Series: | Estudos Econômicos |
| Subjects: | |
| Online Access: | https://www.revistas.usp.br/ee/article/view/210413 |
| _version_ | 1797385768019165184 |
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| author | José Angelo Divino Jolivê Santana Filho Jaime Orrillo |
| author_facet | José Angelo Divino Jolivê Santana Filho Jaime Orrillo |
| author_sort | José Angelo Divino |
| collection | DOAJ |
| description |
This paper investigates the Ricardian Equivalence (RE) under collateralized debt, default, transaction costs and incomplete markets. The public debt is neutral and the RE holds only if the collateral-transfer cost depends linearly on the lump-sum tax and is fully offset. Lenders and borrowers should enter in a voluntary agreement to compensate for any transfer cost under default. However, any perturbation in the assumed affine relation undermines the debt neutrality. It is not the transaction cost per se that invalidates the RE, but rather how this cost affects the households’ indebtedness and budget constraint. The underlying mechanism is the credit channel of the fiscal policy. Whenever the transfer cost is not fully offset, there is a net tax balance leftover that affects the budget set and real allocations. This is fundamentally different from a liquidity constrained economy because the credit channel of the fiscal policy is binding and uncompensated transaction costs lead to the RE failure.
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| first_indexed | 2024-03-08T21:59:01Z |
| format | Article |
| id | doaj.art-769672e41a1b4963accc5df16218fc9f |
| institution | Directory Open Access Journal |
| issn | 0101-4161 1980-5357 |
| language | English |
| last_indexed | 2024-03-08T21:59:01Z |
| publishDate | 2023-12-01 |
| publisher | Universidade de São Paulo |
| record_format | Article |
| series | Estudos Econômicos |
| spelling | doaj.art-769672e41a1b4963accc5df16218fc9f2023-12-19T16:11:48ZengUniversidade de São PauloEstudos Econômicos0101-41611980-53572023-12-01534The Ricardian equivalence under collateral constraintsJosé Angelo Divino0Jolivê Santana Filho1Jaime Orrillo2Universidade Católica de BrasíliaInstituto Federal de GoiásUniversidade Católica de Brasília This paper investigates the Ricardian Equivalence (RE) under collateralized debt, default, transaction costs and incomplete markets. The public debt is neutral and the RE holds only if the collateral-transfer cost depends linearly on the lump-sum tax and is fully offset. Lenders and borrowers should enter in a voluntary agreement to compensate for any transfer cost under default. However, any perturbation in the assumed affine relation undermines the debt neutrality. It is not the transaction cost per se that invalidates the RE, but rather how this cost affects the households’ indebtedness and budget constraint. The underlying mechanism is the credit channel of the fiscal policy. Whenever the transfer cost is not fully offset, there is a net tax balance leftover that affects the budget set and real allocations. This is fundamentally different from a liquidity constrained economy because the credit channel of the fiscal policy is binding and uncompensated transaction costs lead to the RE failure. https://www.revistas.usp.br/ee/article/view/210413Ricardian EquivalenceCollateral constraintsDebt neutrality |
| spellingShingle | José Angelo Divino Jolivê Santana Filho Jaime Orrillo The Ricardian equivalence under collateral constraints Estudos Econômicos Ricardian Equivalence Collateral constraints Debt neutrality |
| title | The Ricardian equivalence under collateral constraints |
| title_full | The Ricardian equivalence under collateral constraints |
| title_fullStr | The Ricardian equivalence under collateral constraints |
| title_full_unstemmed | The Ricardian equivalence under collateral constraints |
| title_short | The Ricardian equivalence under collateral constraints |
| title_sort | ricardian equivalence under collateral constraints |
| topic | Ricardian Equivalence Collateral constraints Debt neutrality |
| url | https://www.revistas.usp.br/ee/article/view/210413 |
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