Political Disagreement, Lack of Commitment and the Level of Debt

FRB International Finance Discussion Paper No. 938

49 Pages Posted: 1 Nov 2008

See all articles by David Debortoli

David Debortoli

University of California, San Diego

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: July 30, 2008

Abstract

We analyze how public debt evolves when successive policymakers have different policy goals and cannot make credible commitments about their future policies. We consider several cases to be able to disentangle and quantify the respective effects of imperfect commitment and political disagreement. Absent political turnover, imperfect commitment drives the long-run level of debt to zero. With political disagreement, debt is a sizeable fraction of GDP and increasing in the degree of polarization among parties, no matter the degree of commitment. The frequency of political turnover does not produce quantitatively relevant effects. These results are consistent with much of the existing empirical evidence. Finally, we find that in the presence of political disagreement the welfare gains of building commitment are lower.

Keywords: Time-consistency, political disagreement

JEL Classification: C61, E61, E62, P16

Suggested Citation

Debortoli, David and Nunes, Ricardo Cavaco, Political Disagreement, Lack of Commitment and the Level of Debt (July 30, 2008). FRB International Finance Discussion Paper No. 938, Available at SSRN: https://ssrn.com/abstract=1292405 or http://dx.doi.org/10.2139/ssrn.1292405

David Debortoli

University of California, San Diego

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

Ricardo Cavaco Nunes (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

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