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Our Research Catalogue contains grants and outputs data up until April/May 2014.

New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic Level

Grant reference: RES-062-23-1436

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Discussion paper details

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 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, possibly, consumption) in these economies is likely to be sub-optimally low, and reducing government debt will ‘crowd in’ additional capital. Using an elaborate version of the model of perpetual youth developed by Blanchard (1985) and Yaari (1965), 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.
English

Primary contributor

Author Campbell Leith

Additional contributors

Co-author Ioana Moldovan
Co-author Simon Wren-Lewis

Additional details

542
1471-0498
01 March 2011
35
Oxford
Department of economics discussion paper