Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-28T15:06:03.507Z Has data issue: false hasContentIssue false
  • English
  • Français

DEEP HABITS AND THE MACROECONOMIC EFFECTS OF GOVERNMENT DEBT

Published online by Cambridge University Press:  13 March 2013

Rym Aloui
Rym Aloui*
Affiliation:
HEC Montréal
*
Address correspondence to: Rym Aloui, HEC Montréal, Institute of Applied Economics, 3000, chemin de la Côte-Sainte-Catherine, Montréal, Québec H3T 2A7, Canada; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we study the effects of government debt on macroeconomic aggregates in a non-Ricardian framework. We develop a microfounded framework that combines time-varying markups, endogenous labor supply, and overlapping generations based on infinitely lived families. The main contribution of this paper is to provide a new transmission mechanism for public debt through the countercyclical markup movements induced by external deep habits. We analyze the effects of a positive shock to public debt. We show that the interest rate rises, entailing higher markups and a fall in employment and consumption. Interestingly, even without capital, a crowding-out effect of government debt is obtained in the long run. In addition, we show that when prices are sticky, public debt has a short-run expansionary effect, which is strengthened by the presence of deep habits.

Keywords

Wealth EffectsPublic Debt ShockDeep HabitsOverlapping Generations
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 8 , December 2013 , pp. 1659 - 1686
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abel, Andrew B. (1990) Asset prices under habit formation and catching up with the Joneses. American Economic Review 80, 38–42.Google Scholar
Aloui, Rym and Guillard, Michel (2009) A Simple “Public Debt-Deflation” Theory: Leeper Revisited. EPEE working papers 09-11.Google Scholar
Annicchiarico, Barbara (2007) Government deficits, wealth effects and the price level in an optimizing Euro-model. Journal of Policy Modeling 29, 15–28.CrossRefGoogle Scholar
Ascari, Guido and Rankin, Neil (2007) Perpetual youth and endogenous labor supply: A problem and a possible solution. Journal of Macroeconomics 29, 708–723.CrossRefGoogle Scholar
Bernheim, Douglas B. (1989) A neoclassical perspective on budget deficits. Journal of Economic Perspectives 3, 55–72.CrossRefGoogle Scholar
Bils, Mark (1989) Pricing in customer market. Quarterly Journal of Economics 104, 699–718.CrossRefGoogle Scholar
Blanchard, Olivier J. and Kahn, Charles M. (1980) The solution of linear difference models under rational expectations. Econometrica 48 (5), 1305–1311.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (1998) Monetary policy rules in practice: Some international evidence. European Economic Review 42, 1033–1067.CrossRefGoogle Scholar
Devereux, Michael B. (2010) Fiscal Deficits, Debt, and Monetary Policy in a Liquidity Trap. Working paper 44 Federal Reserve Bank of Dallas.CrossRefGoogle Scholar
Elmendorf, Douglas W. and Mankiw, Gregory N. (1999) Government debt. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, 1st ed., vol. 1, pp. 1615–1669. Elsevier.CrossRefGoogle Scholar
Fisher, Walter H. and Heijdra, Ben J. (2009) Keeping up with the ageing Joneses. Journal of Economic Dynamics and Control 33, 53–64.CrossRefGoogle Scholar
Fitoussi, Jean-Paul and Cacheux, Jacques Le (1988) Macroeconomic implications of price setting in open economy. American Economic Review 78, 335–340.Google Scholar
Fitoussi, Jean-Paul and Phelps, Edmund S. (1988) The Slump in Europe. Oxford, UK: Basil Blackwell.Google Scholar
Greenwood, Jeremy, Hercowitz, Zvi, and Huffman, Gregory W. (1988) Investment, capacity utilization and the real business cycle. American Economic Review 78, 402–417.Google Scholar
Juillard, Michel (2004) DYNARE Manual. CEPREMAP.Google Scholar
Kim, Soyoung (2003) Structural shocks and the fiscal theory of the price level in the sticky price model. Macroeconomic Dynamics 7, 759–782.CrossRefGoogle Scholar
Ravn, Morten O., Schmitt-Grohe, Stephanie, and Uribe, Martin (2006), Deep habits. Review of Economic Studies 73 (1), 195–218.CrossRefGoogle Scholar
Ravn, Morten O., Schmitt-Grohe, Stephanie, Uribe, Martin, and Uusküla, Lenno (2010) Deep habits and the dynamic effects of monetary policy shocks. Journal of Japanese and International Economies 24, 236–258.Google Scholar
Rotemberg, Julio J. (1982) Monopolistic price adjustment and aggregate output. Review of Economic Studies 49, 517–531.CrossRefGoogle Scholar
Rotemberg, Julio J. and Woodford, Michael (1991) Markups and the business cycle. NBER Macroeconomics Annual 6, 63–140.CrossRefGoogle Scholar
Weil, Philippe (1987) Permanent budget deficits and inflation. Journal of Monetary Economics 20, 393–410.CrossRefGoogle Scholar
Weil, Philippe (1991) Is money net wealth? International Economic Review 32, 37–53.CrossRefGoogle Scholar
Wendner, Ronald (2010) Growth and keeping up with the Joneses. Macroeconomic Dynamics 14, 176–199.CrossRefGoogle Scholar
Woodford, Michael (1999) Optimal monetary policy inertia. Journal of Monetary Economics 37, 573–605.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar