|
|
|
|
||||
|
||||
Debt and Deficit Fluctuations and the Structure of Bond MarketsAndrew ScottLondon Business School - Department of Economics; Centre for Economic Policy Research (CEPR) Albert MarcetUniversitat Pompeu Fabra - Faculty of Economic and Business Sciences; Centre for Economic Policy Research (CEPR) May 25, 2001 London Business School Economics Discussion Paper No. DP 2001/3 Abstract: The aim of this paper is to test for the extent of incompleteness in the market for U.S government debt. We show that when a government pursues an optimal tax policy and issues a full set of contingent claims, the value of debt has the same or less persistence than other variables in the economy and declines in response to higher government expenditure shocks. Examining US data however reveals that debt is substantially more persistent than other variables and increases in response to adverse expenditure shocks. We show that this behaviour is best accounted for by a model of incomplete markets, where governments only issue one-period risk free bonds. We discuss the implications of this for the optimality of debt limits, debt management and assessing the sustainability of fiscal policy.
Number of Pages in PDF File: 44 working papers seriesDate posted: November 6, 2001Suggested CitationContact Information
|
|
|||||||||||||||||||||||||||||||||
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
FAQ
Terms of Use
Privacy Policy
Copyright
This page was processed by apollo5 in 0.406 seconds
