Download this Paper Open PDF in Browser

Government Debt Dynamics Under Discretion

17 Pages Posted: 14 May 2010  

Filippo Occhino

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: May 14, 2010

Abstract

This paper studies the dynamics of state-contingent government debt in the case that the fiscal authority cannot commit to a policy in the future. Under commitment, optimal policy calls for letting debt follow a stationary process and take values that depend on the initial outstanding liabilities. In contrast, in the case that the fiscal authority lacks the ability to commit, it modifies its policy tools, i.e. the tax rates and government spending, to lower the intertemporal price of consumption goods available in the current period, i.e. the real interest rate, with the aim of lowering the intertemporal value of its current outstanding liabilities. Over time, this drives government debt and the economy toward a region where no policy action by the fiscal authority can lower the real interest rate any longer.

Keywords: Commitment, Time-consistency, Ramsey equilibrium, Markov perfect equilibrium

JEL Classification: E62

Suggested Citation

Occhino, Filippo, Government Debt Dynamics Under Discretion (May 14, 2010). Available at SSRN: https://ssrn.com/abstract=1607963 or http://dx.doi.org/10.2139/ssrn.1607963

Filippo Occhino (Contact Author)

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

East 6th & Superior
Cleveland, OH 44101-1387
United States

Paper statistics

Downloads
33
Abstract Views
370