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Fiscal policy, debt constraint and expectations-driven volatility

Abstract : Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectations-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.
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Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Friday, February 3, 2017 - 11:58:34 PM
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Kazuo Nishimura, Thomas Seegmuller, Alain Venditti. Fiscal policy, debt constraint and expectations-driven volatility. Journal of Mathematical Economics, Elsevier, 2015, 61 (C), pp.305--316. ⟨10.1016/j.jmateco.2015.09.003⟩. ⟨hal-01456115⟩



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