Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-24T07:21:07.940Z Has data issue: false hasContentIssue false
  • English
  • Français

PUBLIC DEBT IN A POLITICAL ECONOMY

Published online by Cambridge University Press:  15 June 2016

Sigrid Röhrs
Sigrid Röhrs*
Affiliation:
Goethe-University Frankfurt
*
Address correspondence to: Sigrid Röhrs, Department of Money and Macroeconomics, Goethe-University Frankfurt, Office HOF 3.52, Grüneburgplatz 1, D-60323 Frankfurt am Main, Germany; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes the determination of public debt in a dynamic politico-economic model with overlapping generations. Sizeable levels of public debt can be rationalized in this model. The elasticity of substitution between public and private consumption determines the size of public debt and could explain differences of debt across countries. I compare the optimal policies under commitment and in a “political equilibrium” without commitment. Public debt can be higher or lower when commitment is absent, depending on the elasticity of substitution between public and private consumption. Consequently, under certain conditions, the no-commitment debt level can be closer to a normative benchmark with higher weight for future generations.

Keywords

Government DebtFiscal PolicyPolitical EconomyMarkov Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 5 , July 2016 , pp. 1282 - 1312
Copyright
Copyright © Cambridge University Press 2016 

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

Aiyagari, S. Rao, Marcet, Albert, Sargent, Thomas J., and Seppälä, Juha (2002) Optimal taxation without state-contingent debt. Journal of Political Economy 110, 1220–1254.Google Scholar
Battaglini, Marco and Coate, Stephen (2008) A dynamic theory of public spending, taxation and debt. American Economic Review 98, 201–236.Google Scholar
Cukierman, Alex and Meltzer, Allan H. (1989) A political theory of government debt and deficits in a neo-Ricardian framework. American Economic Review 79, 713–732.Google Scholar
Debortoli, Davide and Nunes, Ricardo (2010) Fiscal policy under loose commitment. Journal of Economic Theory 145, 1005–1032.CrossRefGoogle Scholar
Debortoli, Davide and Nunes, Ricardo (2013) Lack of commitment and the level of debt. Journal of the European Economic Association 11, 1053–1078.Google Scholar
Farhi, Emmanuel and Werning, Iván (2007) Inequality and social discounting. Journal of Political Economy 115, 365–402.CrossRefGoogle Scholar
Fidora, Michael, Fratzscher, Marcel, and Thimann, Christian (2007) Home bias in global bond and equity markets: The role of real exchange rate volatility. Journal of International Money and Finance 26, 631–655.Google Scholar
Klein, Paul, Krusell, Per, and Ríos-Rull, José-Víctor (2008) Time-consistent public policy. Review of Economic Studies 75, 789–808.CrossRefGoogle Scholar
Laubach, Thomas (2009) New evidence on the interest rate effects of budget deficits and debt. Journal of the European Economic Association 7, 858–885.Google Scholar
Lindbeck, Assar and Weibull, Jörgen (1987) Balanced budget redistribution as the outcome of political competition. Public Choice 52, 273–297.Google Scholar
Lucas, Robert E. and Stokey, Nancy L. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12, 55–93.Google Scholar
Mateos-Planas, Xavier (2010) Demographics and the politics of capital taxation in a life-cycle economy. American Economic Review 100, 337–363.Google Scholar
Meltzer, Allan H. and Richard, Scott F. (1981) A rational theory of the size of government. Journal of Political Economy 89, 914–927.Google Scholar
Reinhart, Carmen and Rogoff, Kenneth (2011) The forgotten history of domestic debt. Economic Journal 121, 319–350.Google Scholar
Song, Zheng, Storesletten, Kjetil, and Zilibotti, Fabrizio (2012) Rotten parents and disciplined children: A politico-economic theory of public expenditure and debt. Econometrica 80, 2785–2803.Google Scholar
Yared, Pierre (2010) Politicians, taxes and debt. Review of Economic Studies 77, 806–840.Google Scholar