Public Debt and Redistribution with Borrowing Constraints

42 Pages Posted: 28 Sep 2012

See all articles by Florin Ovidiu Bilbiie

Florin Ovidiu Bilbiie

University of Oxford

Tommaso Monacelli

Bocconi University - Department of Economics

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Date Written: August 2012

Abstract

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the present-value multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

Keywords: borrowing constraint, public debt, redistribution, tax cuts

JEL Classification: E44, E62

Suggested Citation

Bilbiie, Florin Ovidiu and Monacelli, Tommaso and Perotti, Roberto, Public Debt and Redistribution with Borrowing Constraints (August 2012). CEPR Discussion Paper No. DP9088. Available at SSRN: https://ssrn.com/abstract=2153538

Florin Ovidiu Bilbiie (Contact Author)

University of Oxford ( email )

Oxford
United Kingdom

Tommaso Monacelli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Roberto Perotti

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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