Debt stabilization in a non-Ricardian economy
In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate...
| Main Authors: | , , |
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| Format: | Working paper |
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University of Oxford
2011
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| _version_ | 1797062846784208896 |
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| author | Wren-Lewis, S Leith, C Moldovan, I |
| author_facet | Wren-Lewis, S Leith, C Moldovan, I |
| author_sort | Wren-Lewis, S |
| collection | OXFORD |
| description | In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and consumption) in these economies is likely to be sub-optimally low, and reducing government debt will 'crowd in' additional capital. Using an elaborated version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1985), we derive the optimal steady state level of government assets. We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes. |
| first_indexed | 2024-03-06T20:51:26Z |
| format | Working paper |
| id | oxford-uuid:37b82348-f01a-458d-801c-89ca49ed82c9 |
| institution | University of Oxford |
| last_indexed | 2024-03-06T20:51:26Z |
| publishDate | 2011 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:37b82348-f01a-458d-801c-89ca49ed82c92022-03-26T13:45:42ZDebt stabilization in a non-Ricardian economyWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:37b82348-f01a-458d-801c-89ca49ed82c9Bulk import via SwordSymplectic ElementsUniversity of Oxford2011Wren-Lewis, SLeith, CMoldovan, IIn models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk. This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate of time preference such that it may be optimal to reduce debt today to reduce distortionary taxation in the future. Moreover, the level of the capital stock (and therefore output and consumption) in these economies is likely to be sub-optimally low, and reducing government debt will 'crowd in' additional capital. Using an elaborated version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1985), we derive the optimal steady state level of government assets. We show how and why this level of government assets falls short of the level of debt that achieves the optimal capital stock and the level that eliminates income taxes. |
| spellingShingle | Wren-Lewis, S Leith, C Moldovan, I Debt stabilization in a non-Ricardian economy |
| title | Debt stabilization in a non-Ricardian economy |
| title_full | Debt stabilization in a non-Ricardian economy |
| title_fullStr | Debt stabilization in a non-Ricardian economy |
| title_full_unstemmed | Debt stabilization in a non-Ricardian economy |
| title_short | Debt stabilization in a non-Ricardian economy |
| title_sort | debt stabilization in a non ricardian economy |
| work_keys_str_mv | AT wrenlewiss debtstabilizationinanonricardianeconomy AT leithc debtstabilizationinanonricardianeconomy AT moldovani debtstabilizationinanonricardianeconomy |