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DEBT AND DEFICIT FLUCTUATIONS IN A TIME-CONSISTENT SETUP

Published online by Cambridge University Press:  24 September 2015

Daryna Grechyna
Daryna Grechyna*
Affiliation:
Middlesex University London
*
Address correspondence to: Daryna Grechyna, Department of Economics, Middlesex University London, Business School, Hendon Campus, The Burroughs, London NW4 4BT, UK; e-mail: [email protected].
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Abstract

This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment by the government (Ramsey problem) and no commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that the cyclical properties of fiscal variables are similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent) and to different sets of the parameters. The cyclical properties of fiscal variables, regardless of commitment assumptions, can be determined by the parameters of the utility function.

Keywords

Optimal TaxationTime-Consistent PolicyMarket Incompleteness
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 7 , October 2016 , pp. 1771 - 1794
Copyright
Copyright © Cambridge University Press 2015 

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